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LIBRARY
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MAY 0 b 1996
TREASURY DEPARTMENT

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Department of the Treasury
PRESS RELEASES

UBLIC

DEB~M)NEWS

Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

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I u55 0 LJ 0 7 9 4

CONTACT: Office of Financing
11 ;- ;-, TO:":: T :-i 1-1- f/::
'\ (' liD'./. 0 2 - 2 19 - 3 3 5 0
i_l4.""
fl. r

FOR IMMEDIATE RELEASE
July 3, 1995

/0.....

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RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,622 million of 13-week bills to be issued
July 6, 1995 and to mature October 5, 1995 were
accepted today (CUSIP: 912794V27).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.48%
5.54%
5.53%

Investment
Rate
5.65%
5.71%
5.70%

Price
98.615
98.600
98.602

$110,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 14%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$43,354,258

Accepted
$13,622,238

$37,881,762
1,355,163
$39,236,925

$8,149,742
1,355,163
$9',504,905

3,537,530

579,803
$43,354,258

579,803
$13,622,238

Type

Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $341,497 thousand of bills will be
issued to foreign official institutions for new cash.

5.46--98.620

RR-407

5.50--98.610

5.51--98.607

5.52--98.605

UBLIC

DEBT'(rN~WS

Department of the Treasury • Bureau of the PubUOlDf\1S'

cru-tJi1!1i DC 20239

Gc~Mf:.Trn:Q~h~ce

FOR IMMEDIATE RELEASE
July 3, 1995

,-,,0:)1,[

of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,648 million of 26-week bills to be issued
July 6, 1995 and to mature January 4, 1996 were
accepted today (CUSIP: 912794W42).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.45%
5.46%
5.46%

Investment
Rate
5.70%
5.71%
5.71%

Price
97.245
97.240
97.240

$1,075,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 60%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

Received
$47,616,817

Acce:gted
$13,647,519

$40,766,219
1,378,451
$42,144,670

$6,796,921
1,378,451
$ 8' , 175 , 3 72

3,500,000

1,972,147
$47,616,817

1,972,147
$13,647,519

An additional $1,162,353 thousand of bills will be
issued to foreign official institutions for new cash.

5.43

RR-408

97.255

OFFICE OF PUBliC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHING

FOR RELEASE AT 2:30 P.M.
July 3, 1995

U..(ft}N1tACT;i .·.;·Q#f::i.~e

of Financing

202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $27,200 million, to be issued July 13,
1995. This offering will provide about $1,675 million of new
cash for the Treasury, as the maturing weekly bills are
outstanding in the amount of $25,519 million.
Federal Reserve Banks hold $6,864 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $3,223 million as agents for
foreign and .international monetary authorities, which may be
refunded within the offering amount at the weighted' average
discount rate of accepted competitive tenders. Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000

Attachment

RB.-409

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JULY 13, 1995

July 3, 1995
Offering Amount . .

Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date .
Original issue date
Currently outstanding .
Minimum bid amount
Multiples .
...

$13,600 million

91-day bill
912794 V3 5
July 10, 1995
July 13, 1995
October 12, 1995
April 13, 1995
$11,662 million
$10,000
$ 1,000

182-day bill
912794 W5 9
July 10, 1995
July 13, 1995
January II, 1996
January 12, 1995
$17,351 million
$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .

Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date

PUBLIC DEBT NEWS
)epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
U BH/, ;~ '( fI 0 0 11 531 (J
Pet~r Hollenbach
JulCPQt¥.t;
'('l&i)~ttlJlJ;jntl 3

FOR IMMEDIATE RELEASE
July 5, 1995

DE Pr. GF T11 E l r,--.
r /',,)" (J' "P "./J

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY FLOODING IN VIRGINIA

The Bureau of Public Debt took action to assist victims of the flooding that struck Virginia
by expediting the replacement or payment of United States Savings Bonds for owners in the
affected areas. The emergency procedures are effective immediately for paying agents and
owners in those areas of Virginia hit by floods. These procedures are effective immediately
and will remain in effect through August 31, 1995.
Public Debt's action waives the normal six-month minimum holding period for Series EE
savings bonds presented to authorized paying agents for redemption by residents of the
affected area. Most financial institutions serve as paying agents for savings bonds.
The city of Buena Vista the counties of Greene, Madison, and Rockbridge are included in
the initial declaration. Should additional jurisdictions be declared disaster areas the
emergency procedures for savings bonds owners will go into effect for those areas.
The replacement of bonds lost or destroyed will also be expedited by Public Debt. Bond
owners should complete form PD-1048, available at most financial institutions or the
Federal Reserve Bank. Bond owners should include as much information as possible about
the lost bonds on the form. This information should include how the bonds were inscribed,
social security number, approximate dates of issue, bond denominations and serial numbers
if available. The completed form must be certified by a notary public or an officer of a
financial institution. Completed forms should be forwarded to Public Debt's Savings Bonds
Operations Office located at 200 Third St., Parkersburg, West Virginia 26106-1328. Bond
owners should write the word "Floods" on the front of their envelopes to help expedite the
processing of claims.

000

PA-187
(RR-410)

lREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

July 5, 1995

A LETTER BY TREASURY SECRETARY ROBERT RUBIN
REGARDING THE ACTIONS OF FEDERAL LAW ENFORCEMENT AGENCIES
AT WACO, TEXAS IN 1993

RR-411
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

SECRETARY OF THE TREASURY

July 5, 1995

Congressional committees will hold hearings this month to
investigate the actions of federal law enforcement agencies at
Waco, Texas in 1993.
The Department of the Treasury will
cooperate fully with Members of Congress as these hearings move
forward, and we are producing documents for their review.
Through these hearings, I am hopeful that we will -- once again - have a chance to present the truth to the American public.
Opponents of law enforcement have spread misinformation about
what happened at Waco.
We will set the record straight.
I am writing because I believe in the mission of the Bureau
of Alcohol, Tobacco & Firearms (ATF) and because the Department
is proud of the searching review conducted by Treasury after Waco
occurred. We will tell our story with confidence and with
conviction.
Before we do so, however, I wanted to give you a
copy of our thorough Waco report, which will give you an advance
look at the factual record.
I do this because I fear some may
try to use these hearings to serve another agenda: to erode
public support for federal firearms laws, like the Brady Act and
the assault weapons ban, by undermining public confidence in the
men and women who enforce those laws.
Our September 1993 report found the following:
First, law enforcement behaved lawfully and responsibly
by investigating David Koresh and his followers.
In June
1992, the McLennan County Sheriff's Department asked ATF to
look into possible firearms violations at the Branch
Davidian Compound.
A six month investigation gave ATF
reason to believe that Koresh and his colleagues were
committing two federal crimes: illegally manufacturing
machine guns, and illegally manufacturing destructive
devices, including bombs and grenades. A federal
Magistrate-Judge reviewed the evidence developed by ATF and

found that there was probable cause that federal crimes were
being committed.
The magistrate issued valid search and arrest
warrants, and those were the warrants ATF tried to serve on
February 28, 1993. Defense attorneys did not attack the validity
of the warrants at trial.
Second, almost an hour before the ATF agents arrived to
serve the court-issued warrants, Koresh learned that the
agents were coming.
Koresh could have chosen to permit the
search; instead he reacted violently by staging a deadly
ambush. And the Treasury report rebuts one of the critics'
most ill-founded charges -- that ATF investigated Koresh
because of his religious beliefs, or because of questions
about his abusive sexual contact with minors.
Koresh was
properly investigated for multiple violacions of federal
firearms and explosives laws. David Koresh was not the
victim in this tragedy, he was the villain.
Third, the danger in Waco to public safety originated
from the Davidians' illegal arsenal, not from ATF.
Consider
what was recovered from the Compound: dozens of machine
guns, numerous silencers, and explosives of various types,
all unlawfully possessed.
In total, the Texas Rangers
recovered over 300 legal and illegal firearms, firearms
components, grenades, and hundreds of thousands of rounds of
ammunition. Reviewing the evidence, a jury convicted eight
Davidians of crimes that included aiding and abetting
manslaughter, and firearms and explosives violations.
After the incident, Secretary Lloyd Bentsen, my predecessor,
instructed Ronald K. Noble, then Assistant Secretary of the
Treasury (designate), to set in motion an inquiry as to "whether
ATF's procedures, policies, and practices were adequate and
whether they were followed" at Waco.
To ensure that the review
was both impartial and comprehensive, the Secretary brought in
three individuals of prominence and integrity -- ?ulitzer Prize
winning journalist Edwin O. Guthman, former Watergate prosecutor
Henry S. Ruth Jr., and Los Angeles Police Department Chief Willie
L. Williams -- to provide guidance during the investigation,
review the findings, and assess the final report.
A team of talented people was assembled, inc~uding nearly
two dozen highly experienced investigators from t~e Secret
Service, the Customs Service, and the Internal Revenue Service.
They conducted over 500 interviews, and received unqualified
cooperation from the line agents who participated in the Waco
operation.
The investigators scrutinized countless videotapes,
audiotapes, and charts, and reviewed thousands of pages of
documents.
Treasury also consulted with two firearms experts and
two explosives experts to assess the quality of ATF's
investigation.
Six outside experts in tactical operations gave
independent evaluations of the raid plan and its ~xecution.

At every stage, Treasury's Inspector General reviewed and
approved the review team's investigation and final report.
The
independent reviewers also gave it their unqualified support.
Members of Congress on both sides of the aisle said the report
was "impartial, and self-effacing" and "thorough in its
findings."
Major newspapers speak for themselves.
The Wall Street
Journal characterized it as "extensively detailed."
The
Washington Pos t said it was a "thorough and candid account."
The
New York Times called it "brutally detailed."
"Despite all that
went wrong with the raid by the [ATF] on the Branch Davidian
Compound last February," the Los Angeles Times opined, "the
thorough and complete report released ... by the Treasury
Department shows that much in its aftermath is going right."
While the report applauded the heroism and courage of rank
and file agents, and found they did their best in the face of
relentless gunfire, it also criticized numerous aspects of the
operation.
It found that ATF too quickly selected a massive midmorning raid as the best enforcement option.
Plans to capture
Koresh off the compound were abandoned prematurely.
Intelligence
gathering and analysis were poor. The report candidly identified
errors in judgment by agents and commanders in the field, and
balanced that critique by highlighting inadequate supervision and
oversight in Washington.
Once the report was complete, numerous personnel actions
were taken both in the field and in Washington. The leadership
at ATF headquarters was replaced. Secret Service Director John
Magaw, a thirty-four year veteran of law enforcement and a known
reformer, succeeded retiring ATF Director Stephen Higgins.
The
Associate Director for Law Enforcement, the Deputy Associate
Director for Law Enforcement, and the Chief of the Intelligence
Division were placed on administrative leave. The two raid
commanders were relieved of their law enforcement duties; they no
longer wear badges, carry guns, or supervise line agents.
Those
disciplined broke no law in their attempt to execute lawful
warrants.
They were disciplined for errors in judgment and for
their false and misleading statements following the raid.
Further, Treasury and ATF made extensive changes in the
manner in which they conduct business.
Treasury's Office of
Enforcement exercises greater oversight of the enforcement
bureaus.
ATF has improved training for supervisory criminal
enforcement personnel, from headquarters to the field, in crisis
management.
Deficiencies in ATF's intelligence gathering and
operational security have been corrected.
New policies have been
established for major enforcement operations to ensure prompt and
effective coordination with the Department of Justice and other
agencies or experts.
Treasury and ATF learned from their
mistakes and have acted to correct them.
Although the subject will be Waco, the upcoming hearings
cannot be understood properly outside the contexL cf Oklahoma
City.
On April 19, the most extreme and violent act of domestic

terror ever to occur in America killed 168 of our fellow
citizens, including 19 children, and left the injured and the
survivors with their lives horribly shattered. Law enforcement
agencies, including ATF, acted with heroic speed to incarcerate a
suspect and identify possible co-conspirators.
The Oklahoma City investigation focused public attention on
the militia movement and the potential threat presented by some
of its adherents.
I am worried that investigating events at
Waco, without investigating the extreme activities of some
militias, seems to suggest that law enforcement agencies are the
real threat to the safety of American citizens.
Let us not forget that ATF is an effective law enforcement
agency that takes the most hardened criminals off the street.
In
the last decade, ATF investigated more than 50,000 cases
involving nearly aO,OOO suspects.
In the previous fiscal year,
ATF brought forward nearly 10,000 defendants for prosecution.
Almost half had prior felony records.
Nearly a third were armed
drug traffickers. A quarter had a history of violence.
We have
good reason to be proud of ATF agents and the work they do.
A fair and objective inquiry will show that the truth about
Waco has been told and that the appropriate changes have been
made.
We will remind people of the legitimate law enforcement
concerns that brought ATF to Waco, the extensive scrutiny this
operation received in the aftermath, and the corrective actions
taken once the Treasury report was released. We will also remind
people that this issue is about law and order, and standing with
our police and our federal law enforcement officials against
those who would take away our right to live in safety.
I hope you will take the time to read Treasury's report on
ATF's investigation of David Koresh.
Consider the story and the
review team's findings, and remember this:
Conway LeBleu, Todd
McKeehan, Robert Williams, and Steven Willis -- the men killed by
Branch Davidians -- joined ATF to serve their councry.
They
risked and, ultimately, lost their lives so that we could live in
safety.
We must not permit the yeopening of Waco ~o obscure
these facts or eclipse their sacyifice.
Si~cerely,

Robert E. Rubin

IREASURY

OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
L: -:1 1. f) :-;-1 ,,- -; i: . .... i. J.
-_ .

.~.

FOR IMMEDIATE RELEASE
July 6, 1995

Contact: Chris Peacock
Jon Murchinson
(202) 622-2960
MEDIA ADVISORY

The Treasury Department will honor the eight Treasury employees who lost their
lives in the Oklahoma City bombing in a ceremony at the Treasury Department this Monday,
July 10_
The ceremony will take place at 11 a.m. on the south steps of the building at Hamilton
Place_
Treasury Secretary Rubin and others are scheduled to speak at the ceremony. Secret
Service Director Eljay Bowron and Customs Service Director George Weise will represent
their bureaus. Six Secret Service and two Customs Service employees were lost in the
bombing.
Following the ceremony, Secretary Rubin and family members will unveil eight newly
inscribed names on a plaque memorializing fallen Treasury law enforcement personnel.
Treasury employees have been invited to attend the ceremony and view the plaque.
All cameras should be in place by 10:15 a.m. Media without Treasury, White House,
Defense, State Department or Congressional credentials must call Treasury Public Affairs at
(202) 622-2960 with the following information before 5 p.m. on Friday: name, organization,
date of birth, and social security or passport number.

This advisolY is

(01'

planning pUiposes only and is not

(01'

publication. A

supplemental advisory with additional details will be forthcoming.

RR-412

-30-

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
SECRETARY OF THE TREASURY

July 3, 1995

MEMORANDUM FOR ALL TREASURY EMPLOYEES

.«..

FROM:

Robert E. Rubin ~

SUBJECT:

Memorial Service for Treasury Employees

On July 10, 1995, the Treasury Department will honor the lives
and contributions of our eight colleagues who died in the bombing
of the Murrah Federal Building in Oklahoma City, Oklahoma.
I am
writing to invite you to the ceremony we have planned.
Treasury does not forget those whose lives are lost in the course
of fulfilling their duties.
The names of our colleagues who,
since 1907, gave this ultimate sacrifice are recorded on a
memorial plaque that hangs in a place of honor on the fourth
floor of Main Treasury. On the day of the ceremony, we will
unveil the newly inscribed names on the Treasury Memorial Plaque.
Family members who have lost a loved one in the bombing will
honor us with their presence; I hope that you will too.
The ceremony will begin at 11:00 am on the Hamilton Place steps
at the South Entrance of the building.
Following the service, I
invite each of you to file past the Memorial in honor of our
fallen colleagues.
Less than three months ago, we grieved
together as a Department; on July 10th I believe the healing
process will be advanced as we pause to remember the friends and
colleagues we lost to the tragedy in Oklahoma City.

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: 10

Author(s):
Title:

Date:

CNN "Evans & Novak", Topic: G-7 Summit and Clinton Balanced Budget Proposal, Guest:
Robert
Rubin, Secretary of the Treasury

1995-06-17

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

DEPARTMENT

THE

TREASURY

oo~t~lE W
omCE OF PUBliC AFFAIRS -1500 PENNSYLVAN

FOR IMMEDIATE RELEASE
July 6, 1995

---

.W., - :WASHINGTON, D.C. - 20220 - (202) 622-2960

Contact: Howard Schloss
(202) 622-2910

STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
Congressman Gephardt has always been a leader in tax reform and so any proposal he
makes deserves serious consideration. His proposal is a welcome addition to the tax reform
debate.
The Administration supports efforts to make the tax system simpler and fairer. In
evaluating any proposals for broad-based tax reform, we will look to see whether they are
fair, ensure discipline on the deficit, promote growth and job creation, and simplify the tax
system for average Americans.
We will also evaluate how transitional effects of tax reform and changes to deductions
and exemptions will affect working families and particular segments of the economy.

-30RR-413

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-204.0

DEPARTMENT

THE

TREASURY

OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGl?rr ~c.~\~~~~!Ul)~W822-2960

Contact: Howard Schloss
(202) 622-2910

FOR IMMEDIATE RELEASE
July 6, 1995

STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN
AND COUNCIL OF ECONOMIC ADVISERS CHAIR JOSEPH E. STIGLITZ
The Federal Reserve is independent and the Administration does not comment on
specific monetary policy actions taken by the Federal Reserve.
While the Administration is always concerned about the impact on working families
of even a temporary slowdown or moderation of economic growth, existing evidence
suggests a favorable outlook for the economy. Many of the factors behind the recent
weakness are likely to operate with less force in the future. Sales of homes show evidence of
a rebound; export growth should pick up in future months; the demand for capital goods
remains strong; and businesses appear to be well along in the process of paring inventories.
The Administration maintains its commitment to laying a foundation for longterm
economic growth and expanded opportunity for working families through strong investment
in education and training, a 10-year balanced budget plan, and further openings of foreign
markets to American goods.
-30-

RR-414

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

PUBLIC

DE T NEWS

)epartment of the Treasury • Bureau of the Public Debt .'

ngton, DC 20239

JUL I U$5 0 UiJ 8 2 0
FOR RELEASE AT 3:00 PM
July 7, 1995

Contact: Peter Hollenbach
. , hE Ir:,:.-ItSW.y
(202) 219-3302

D!. Pr

(I r

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR JUNE 1995
,

Treasury's Bureau of the Public Debt announced activity figures for the month of June 1995,
of securities within the Separate Trading of Registered Interest and Principal of Securities
program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$837,373,566

Held in Unstripped Form

$611,708,010

Held in Stripped Form

$225,665,556

Reconstituted in June

$15,748,065

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 Monthlv Statement of the Public Debt, entitled "Holdings of
Treasury Securities in Stripped Form."
Information about "Holdings of Treasury Securities in Stripped Form" is now available on the
Department of Commerce's Economic Bulletin Board (EBB). The EBB, which can be
accessed using personal computers, is an inexpensive service provided by the Department of
Commerce. For more information concerning this service call 202-482-1986.

000

PA-188
(RR-415)

TABLE VI- HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JUNE 30, 1995
(In thousands)

I Principal Amount Outstanding
Loan Description

Maturity Date

Total

Portion Held in

Unstripped Form

Stripped Form

I I
I 1
1I
I 1

0-1/2% Note C-1995 .....

08/15/95 ......

7955901 1

4869101 1

3086800

1-1/2% Note 0-1995 ......

11/15/95 ......

7318550 1

3347350 1

3971200

Reconstituted
This Month #1

4000

12800

Note A-1996 ......

02115/96 ......

8450609

6623409 1

1827200

28800

-3/8% Note C-1996 ......

05115/96 ......

20085643 1

16895243

8000

'-114% Note 0-1996 ......

11/15/96 ......

20258810

17504410

2754400

;..1/2% Note A-1997 ......

05/15/97 ......

9921237 1

8726037

I
I
I

3190400

1195200

5200

,-518% Note 8-1997 ......

08/15/97 ......

9362836 1

7646036 1

1716800

;..7/8% Note C-1997 ......

11115/97 ......

9808329

2600000

;..1/8% Note A-199B ......

02115/98 ......

9159068 1

7909148 1

1249920

1% Note 8-1998 ..........

05115/98 ......

9165387

2441200

9000

1-1/4% Note C-1998 ......

08/15/98 ......

8871446 1

2471200

46400

~7/8%

Note 0-1998 ......

11/15/98 ......

9902875

2761600

68800

~718%

Note A-1999 ......

02115/99 ......

9719623

1896000

30400

·118% Note 8-1999 ......

05/15/99 ......

10047103

I
I
I

3348800

% Note C-1999 ..........

08/15/99 ......

10163644

7928269 1

2235375

-718% Note 0-1999 ......

11/1RI99 ......

10773960

3238400

-1/2% Note A-2000 ......

02115/00 ......

10673033

I
I
I
I
I
I
I
I

~7/8%

I
I

11342646 1

I
I
I
I
I
I
I
I

7208329

6724187

7141275
7823623
6698303

7535560
8444633

-718% Note 8-2000 ......

05115/00 ......

10496230

-314% Note C-2000 ......

08/15/00 ......

11080646

-112% Note 0-2000 ......

11/15/00 .....

11519682

7518482

-3/4% Note A-2001 ......

02115/01... ...

11312802

9120802

% Note 8-2001 ..........

05115/01 ......

12398083

9673033

·7/8% Note C-2001 ......

08/15/01... ...

12339185

9902385

·112% Note 0-2001... ...

11/15/01.. ....

24226102

·1/2% Note A-2002 ......

05115/02 ......

·3/8% Note 8-2002 ......

5921830
6762726

2228400
4574400
4317920

I
I
I
I
I
I

67200

53475

I
I
I

83200
0
83200
0
4800

4001200 1

I I
I I
1I

131000

22018982 1

2207120 1 1

26800

11714397

10819517 1

894880 1 1

9200

08/15/02 ......

23859015

22439815 1

·1/4% Note A-2003 ......

02115/03 ......

23562691

·3/4% Note 8-2003 ......

08/15103 ......

28011028

27431028

·7/8% Note A-2004 ......

02115/04 ......

12955077

,1/4% Note 8-2004 ......

05/15/04 ......

14440372

1/4% Note C-2004 ......

08/15/04 ......

13346467

13315267

7/8% Note 0-2004 ......

11115/04 ......

14373760

14373760 1

112% Note A-2005 ......

02115/05 ......

13834754

13834754 1

1/2% Note 8-2005 ......

05/15/05 ......

14739504

14739504 1

1·5/8% Bond 2004 .......

11115/04 ......

8301806

5175406

3126400

~% Bond 2005 ...........

05/15/05 ......

4260758

2827208 1

1433550

8051313

I
I
I
I

1218400

3638080

2637916 1

4512000

I
I
I
I
I

3816000

2725050
2436800

56000

23007587 1

555104 1 1

64640

I
I

580000 1 1

oI I
oI I

)..3/4% Bond 2005 .......

08115/05 ......

9269713

3/8% Bond 2006 ........

02115/06 ......

4755916

4753164

-3/4% Bond 2009-14 ....

11/15/14 ......

6005584

2364784

-114% Bond 2015 .......

02/15/15 ......

12667799

9029719

-5/8% Bond 2015 .......

08/15/15 ......

7149916

2192000

r18% Bond 2015 ........

11/15/15 ......

6899859 1

3083859

114% Bond 2016 ........

02115/16 ......

7266854

14% Bond 2016 ........

05/15/16 ......

18823551

18524351

12% Bond 2016 ........

11/15/16......

18864448

I
I
I

17823008

14% Bond 2017 .......

05/15/17 ......

18194169 1

8274329

6457254

I
I

1419200

31200 1

0
0

I
I
I
I
I
I
I
I
I
I
I
I

116800

2752
3640800

809600
299200
1041440
9919840

165000
84000
0
237600
1741760
781760
1060800
1019200
514400
176240
1256480

~-7/8%

Bond 2017 ........

08/15/17 ......

14016858

9088858

'5~

1208000

~-1/8%

Bond 2018 ........

05/15/18 ......

8708639

1833439

6875200

304000

11/15/18 ......

9032870

2410270

6622600

307000

B-7/8% Bond 2019 ........

02115/19 ......

19250798

5463598

13787200

681600

B-1/8% Bond 2019 ........

08115/19 ......

20213832

16330312

3883520

562240

8-112% Bond 2020 ........

02115120 ......

10228868

5660068

4568800

856000

8-3/4% Bond 2020 ........

05/15120 ......

10158883

3389603

6769280

310720
808480

Bond 2018 ...........

8-3/4% Bond 2020 ........

08/15120 ......

21418606

5025646

16392960

7-7/8% Bond 2021 ........

02115121 ......

11113373

10252573

860800

280000

8-118% Bond 2021 ........

05/15121 ......

11958888

4400168

7558720

62080

8-1/8% Bond 2021 ........

08/15121 ......

12163482

4373082

7790400

86400

8% Bond 2021 ............

11/15121 ......

32798394

7316069

25482325

1038750

7-114% Bond 2022 ........

08/15/22 ......

10352790

7297590

3055200

476000

7-5/8% Bond 2022 ........

11115/22 ......

10699626

2861226

7838400

75200

7-1/8% Bond 2023 ........

02115123 ......

18374361

14366361

4008000

227200

6-1/4% Bond 2023 ........

08/15/23 ......

22909044

22374324

534720

83680

7-112% Bond 2024 ........

11/15124 ......

11469662

8956462

2513200

281760

7-5/8% Bond 2025 ........

02115125 ......

11725170

11134770

590400

152000

Total.. ...............

==============================

.......................
============ =

837373566

611708010

=============== = ================

I
=

225665556

15748065

================== = = ===============

#1 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 Table VI will be available after 3:00 p.m. eastern time on the Commerce Department's
Economic Bulletin Board (EBB). The telephone number for more information about EBB is (202) 482-1986. The balances
in this table are subject to audit and subsequent adjustments.

I I

D EPA R T 1\1 E N T

0 F

TIlE

'IREASURY

T REA SUR Y

NEWS

omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W•• WASHINGTON, D.C.• 20220. (202) 622·2960

FOR IMMEDIATE RELEASE
July 7, 1995

Contact:

Jon Murchinson
(202) 622-2960

MEDIA ADVISORY

The Treasury Department will hold a memorial service on Monday, July 10 to
commemorate the eight Treasury employees who died in the bombing of the Murrah Federal
Building in Oklahoma City. This schedule is for planning purposes only and is not for
publication. All events are on the Hamilton Place Plaza on the South side of the Treasury
Building. All times are tentative and subject to change.
10 a.m.

Cameras should be in place on press platform.

10:15 a.m.

Choir pre-program begins.

10:58 a.m.

U.S. Customs and U.S. Secret Service Color guards enter.

11 a.m.

Treasury Secretary Robert Rubin, program participants and families
proceed to stage.

11:03 a.m.

Advancement of colors.

11:08 a.m.

National Anthem.

11: 11 a. m.

Invocation by Father Paul Morel.

11: 15 a.m.

Welcoming remarks by Treasury Under Secretary Ronald Noble.

11:18 a.m.

Eulogies by Dale Edwards, U.S. Customs Senior Agent, Oklahoma
City, Lester Martz, ATF Special Agent in Charge, Dallas and Joe
Gallo, U.S. Secret Service Special Agent in Charge, Oklahoma City.

11 :28 a. m.

Tribute to Treasury colleagues by Secretary Rubin.

11:36 a.m.

Benedictio.n by Father Morel.

11 :38 a. m.

Customs bagpiper and memorial wreath processional.
-30For pren releases, speeche.f, public schedules and official biographies, call our 24.nOUT fax litU! at (202) 622·2040
RR-416

!A r

;

I
•

I
4

DEPARTMENT

THE

TREASURY

EWS

lREASURY

OFFICE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202)622-2960

JUL

I d JJ LJ

i b4~

ADV 11 A.M. EDT
Remarks as prepared for delivery
July 10, 1995
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
LAW ENFORCEMENT MEMORIAL PLAQUE CEREMONY
In a very few minutes, it will be my solemn duty to carry out a Treasury
Department tradition. Since 1991, when members of the Treasury law enforcement team
have lost their lives in the line of duty, we have placed their names on a plaque in the
fourth-floor hallway in our main building. It contains names dating back to 1907. The
eight individuals whose names I will unveil this morning -- six from the Secret Service
and two from the U.S. Customs Service -- gave their lives at Oklahoma City and sadly
bring to 173 the number of Treasury enforcement personnel so memorialized by their
colleagues and country.
These eight fell in the line of duty to a despicable act of terrorism, an act that
shocked the entire nation. Because of the magnitude of this tragedy, I wanted to invite
Treasury employees in the Washington area to join us this morning. I'm pleased to see
such an outpouring to remember our colleagues, to pay tribute to their lives, and to
recognize the special role law enforcement plays in our society.
In addition to the members of our Treasury law enforcement team we honor
today, other members of the extended Treasury family have suffered deeply from this act
of terrorism. We must also remember their loss and their grief.
The men and women of Treasury we honor today were dedicated public servants.
Their lives were committed not only to making our lives safer, but also to being good
neighbors, being part of their community, to raising families. As the memory of this
ceremony fades, we will honor them best by renewing our commitment to the principles
that these individuals rightly believed make this nation great.

RR-417

(more)

FlJr press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Today, from the Secret Service, we remember Assistant Special Agent in Charge
Alan G. Whicher Special Agents Cynthia L. Brown, Donald R. Leonard and Mickey B.
Maroney, Linda G. McKinney, office manager of the Oklahoma City Field Office, and
Investigative Assistant Kathy L. Seidl. And we remember Senior Special Agent Claude
Medearis and Senior Special Agent Paul Ice of the U.S. Customs Service.
When it comes to law and order, we must -- all of us -- stand with those who
stand against those who would deny our right to live in safety. In America, we value the
right to dissent, and we will fight those who use violence to destroy the rule of law.
We live in violent and dangerous times. The names on the plaque remind us of
that. The barricades on the streets around this complex remind us of that. The pictures
from Oklahoma City etched in our memories will never let us forget that. I will never
forget what I saw and heard when I went to Oklahoma City and visited with the families
of those who paid the ultimate price for freedom.
In these times, we must stand with our law enforcement personnel and every
dedicated public servant throughout this country. Every day Treasury law enforcement
personnel willingly take on some of the most dangerous assignments in the profession -protecting our President and other dignitaries, catching those who smuggle drugs into our
nation, arresting career criminals, enforcing our firearms laws. By their deeds and heroic
acts, they protect our safety.
In a peaceful park, just ten blocks from here, there is a place of great beauty and
quiet reflection where the names of federal, state and local law enforcement officers
from across the nation are etched in stone to memorialize the lives they laid down in
order to give us a safer country. These eight names will be placed on that memorial
next year. I fervently hope I do not see another Treasury name added to either
memorial in my tenure. In one corner of the national memorial are these words from
the book of Proverbs: "The wicked flee when no man pursueth: but the righteous are
bold as a lion."
We will be bold, and we will work diligently to bring those responsible for the
terrorist act in Oklahoma City to justice -- justice under the rule of law. And enforcing
the nation's laws is perhaps the best tribute we can pay in the coming years to those who
have sacrificed their lives for a society built on the rule of law.
We salute these men and women. We salute their families. And we salute
Treasury employees everywhere for the contribution you make every day.
Thank you.

-30-

UBLIC DEBT NEWS
Department of the Treasury - Bureau, qV~~ ~~bl~c 9~?\::
LI ...}hl'i ,

-_, Washington, DC 20239

I,n!.:.' ,},,()
'I

\J.,,

'· ,:- ~ , CO~Tl\CT:
JUL I J J) Uu i b 5 I

FOR IMMEDIATE RELEASE
July 10, 1995

Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
CU-'!". C THE T;1[:i:.:tny
Tenders for $13,646 million of 13-week bills to be issued
July 13, 1995 and to mature October 12, 1995 were
accepted today (CUSIP: 912794V35).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.37%
5.40%
5.40%

Investment
Rate
5.53%
5.57%
5.57%

Price
98.643
98.635
98.635

Tenders at the high discount rate were allotted 21%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

Received
$56,670,635

Accepted
$13,646,096

$51,174,790
1,371,957
$52,546,747

$8,150,251
1,371,957
$9,522,208

3,263,720

860,168
$56,670,635

860,168
$13,646,096

An additional $422,432 thousand of bills will be
issued to foreign official institutions for new cash.
5.38 - 98.640

RR-418

5.39 - 98.638

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

td'"

LJ 81: M~ '/

t/ i) 0
'. -> ,
I',
" 1,1
CONTACT: 'f~ice of Financing
202-219-3350
I

FOR IMMEDIATE RELEASE
July 10, 1995

JUl

UJJ

RESULTS OF TREASURY'S AUCTION

0 [1

I h ' ,',

O~ 2~~EK

BILLS

Tenders for $13 ,610 millioriJE</)f. c46n~~ P?r++s to be issued
July 13, 1995 and to mature January 11, 19'9'~'~weS:-e
accepted today (CUSIP: 912794W59).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.28%5.30%5.30%-

Investment
Rate
5.51%5.54%5.54%-

Price
97.331
97.321
97.321

Tenders at the high discount rate were allotted 57%-.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

Received
$54,222,393

Accepted
$13,609,651

$47,460,359
1,351,702
$48,812,061

$6,847,617
1,351,702
$8,199,319

3,600,000

1,810,332
$54,222,393

1,810,332
$13,609,651

An additional $888,568 thousand of bills will be
issued to foreign official institutions for new cash.

5.29 - 97.326

RR-419

"'I":
I : PI.' , ' ,
Departme nt 0 f the I r e a s u r y · . .., .\, ,I) (
Financial Crimes Enforcement Network

I J (',~'

I \ .•.. '

~).):;, {J

2070 Chain Bridge Road, Suite 200, Vienna, VA 221 nz-z~~ln
1500 Pennsylvania Avenue, NW, Suite 3210, Treasury Annex, Washington DC 20220
FOR IMMEDIATE RELEASE
July 6, 1995

Contact: Carolyn Savage
FinCEN
(703) 905-3770

. FlNCEN'S EXPERTISE ENHANCED BY NEW STAFF
In keeping with its goal to increase its cadre of financial and banking experts to
combat money laundering, Treasury's Financial Crimes Enforcement Network (FinCEN)
announced today the addition of four seasoned professionals to its senior staff.
"Building our experience base in many different directions to combat financial
crimes, particularly money laundering, requires the kinds of unique talents and valuable
expertise these employees bring to our organization," said Stanley E. Morris, Director of
FinCEN. "Their collective knowledge and experience brings new dimensions to how
we address financial crimes and our global anti-money laundericg strategies."
The new personnel:
Michael (Mike) L. Eid's long-standing career with the General Accounting
Office (GAO) provided him opportunities to acquire expertise in money laundering
processes and techniques. Prior to joining FinCEN, Eid was responsible for GAO's
review of the government's efforts to combat money laundering. Throughout his GAO
career, Eid testified before Congress, state and Presidential commissions on various
money laundering issues.
Jane Fisher has served in both public and private positions throughout her
career, acquiring extensive experience in international relations, foreign policy,
congressional affairs, management and marketing. Prior to joining FinCEN, Fisher
served for eight years as Deputy Staff Director for the Commission on Security and
Cooperation in Europe (CSCE) where she focused on economic cooperation, arms
control, conflict resolution, and human rights issues.
Richard (Rick) W. Harms returns to FinCEN three years after leaving U.S.
government service, during which he expanded his international and financial
intelligence expertise while serving as an expert consultant to the Australian
-more-

-420

Transaction Reports and Analysis Centre (AUSTRAC), Australia's financial intelligence
agency. Among his other achievements, Harms was also instrumental in developing
AUSTRAC's wire transfer monitoring system, which identifies potential money
laundering targets.
Gregory (Greg) A. Passic comes to FinCEN from the Drug Enforcement
Administration (DEA), where he was the primary architect of the money laundering
component of DEA's Kingpin strategy aimed at the top levels of narcotics trafficking
organizations. Passic served as DEA's Chief of Financial Investigations. Prior to
becoming a FinCEN criminal investigator, Passic acquired his strategic and
international money laundering expertise throughout a 27-year law enforcement career.
"FinCEN is a small agency with a very complex mission. It's strength lies in the
diverse expertise and broad backgrounds of its personnel," said Morris. "The addition
of these talented individuals to our staff is further evidence of FinCEN's commitment to
combat money laundering with not only the most advanced strategies and technologies,
but the best people."

###

The Treasury Law Enforcement Memopjt\all I?JaflUA
i~ fPW th floor of Main
Treasury was dedicated in 1991 in memory or''treasurY1.aw blt01cement personnel killed in
the line of duty.
[) t. iT Cf: Li E 1,:EA:: ~;:~y

With the addition of the eight names from the Oklahoma City bombing -- six from the.
Secret Service, two from the Customs Service -- the plaque now includes 173 names.
The names added today are Cynthia Brown, Donald Leonard, Kathy Seidl, Mickey
Maroney, Linda McKinney and Alan Whicher of the Secret Service; Paul Ice and Claude
Medearis of the Customs Service.
Among the men and women from the Treasury Department who are honored for
making the ultimate sacrifice are the following:
•

The first name on the plaque is Joseph A. Walker of the Secret Service, who was
killed on November 3, 1907, during a land fraud investigation in Durango, Colorado.

•

Customs Captain Edward B. Webb was shot and killed on October 8, 1926, after he
and another Customs officer, Maurray Tucker, pulled over a rum runner who opened
fire on the two Customs agents while they were inspecting the car near Burlington,
Vermont.

•

Curtis C. Burke of the Bureau of Alcohol, Tobacco and Firearms was shot and killed
by Charles Arthur "Pretty Boy" Floyd during execution of a federal search warrant in
Kansas City on July 22, 1931.

•

Leslie J. Coffelt of the Secret Service died after he was shot in an exchange of gunfire
with Oscar Callazo and Guiselio Torresola in front of the Blair. House when Puerto
Rican Nationalists attempted to assassinate President Harry S Truman on November 1,
1950.

•

The Secret Service's Julie Y. Cross was killed on June 4, 1980, by two unknown
assailants apparently intent on robbery in Los Angeles while on assignment
investigating a counterfeit case.

•

ATF agents Conway Lebleu, Todd W. McKeehan, Robert J. Williams and Steven D.
Willis were killed in Waco, Texas, on February 28, 1993.

omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C•• 20220. (202) 622-2960

FOR Irv1MEDIATE RELEASE
Text as Prepared for Delivery
July 11, 1995

STATEMENT OF LESLIE B. SAMUELS
ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY
BEFORE THE SENATE COMMITTEE ON FINANCE

RR-421

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

FOR RELEASE UPON DEUVERY
Expected at 2:30 p.m. EDT
July 11, 1995
STATEMENT OF
LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX rOLlcy)
DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE

Mr. Chairman and members of the Committee, I am pleased today to testify on
the taxation of U.S. citizens and certain long-term residents who expatriate by
renouncing their U.S. citizenship or abandoning their residency.
In March of this year, the Senate Finance Committee reported out a bill (H.R.
831) similar to the Administration's proposal described below that would have effectively
dealt with the problems of tax avoidance through expatriation. The entire Senate then
approved that bill. The Administration supports these efforts because we believe that
U.S. persons should pay their fair share of U.S. tax. Moreover, we believe that public
confidence in our tax system is eroded by the perception that some wealthy individuals
are able to escape paying taxes through devices that are not generally available to all
taxpayers. Our existing laws generally subject individuals to income tax when assets are
sold or subject estates to estate tax when the individual dies. Certain wealthy people
have found that they can completely avoid paying U.S. tax on their gains by renouncing
their U.S. citizenship. Because of the need to obtain another nationality and other
transaction costs, renouncing U.S. citizenship to avoid tax is generally only a viable
option for the wealthiest Americans.
Although expatriations by super-rich Americans have been publicized recently, the
problem of tax avoidance by renouncing citizenship was first addressed in 1966. Under
current rules, a special taxation regime applies to a U.S. citizen who renounces his or her
citizenship unless the loss of citizenship did not have as one of its principal purposes the
avoidance of tax. This special regime applies for 10 years after expatriation. It subjects
certain assets that produce U.S. source income to tax at graduated U.S. rates as if the
person were still a U.S. citizen. Thus, taxing U.S. persons who abandon their U.S.
citizenship is an accepted part of our law. Unfortunately, existing law has proven to be
ineffective.

In February of this year, the Administration offered its own proposal to deal with
this issue. Under the Administration proposal, if a U.S. citizen relinquishes U.S.
citizenship, property held by that person would be treated as if sold at fair market value
immediately before such expatriation. Similar rules would apply to expatriating longterm residents of the United States. However, no tax would be imposed on gains up to
$600,000, United States real estate, or interests in certain retirement plans.
RR 421

Senator Moynihan's version of the expatriation proposal, S. 700, is similar in many
respects to the Administration proposal and the Senate·passed version of H.R. 831. One
important difference is that it allows expatriates who post adequate security to delay
paying U.S. tax on gains from identified assets at expatriation if they elect to continue to
be taxed as a U.S. citizen with respect to income or gain generated from those assets.
The House Ways and Means Committee proposal, H.R. 1812, takes a different
approach to the taxation of expatriates - one much closer to the existing law. H.R. 1812
imposes income taxes on certain expatriates on their U.S. source income for a period of
ten years and estate taxes on assets in the estates of certain expatriates who die within
the ten-year period.
We support S. 700 because it does not interfere with an individual's right to
renounce U.S. citizenship and it appropriately ensures that the expatriate will pay tax on
all gains earned while subject to U.S. taxing jurisdiction. S. 700 removes many of the tax
incentives of current law that entice wealthy individuals to renounce U.S. citizenship. S.
700 is crafted to deal most effectively with the broad range of U.S. and foreign economic
interests owned by potential expatriates.
Proposals such as H.R. 1812 which are limited primarily to U.S. assets would be
less effective. We oppose H.R. 1812 because:

•

H.R. 1812 allows an expatriate who waits for ten years before recognizing
gains to avoid U.S. tax.

•

H.R. 1812 generally does not tax foreign source income. This exemption of
foreign gains rewards investment in foreign assets as well as creates a
potential loophole for those who may be able to recharacterize their
domestic income as foreign source income.

•

H.R. 1812 unnecessarily causes the United States to violate international
law by its intended override of most of our tax treaties.

•

H.R. 1812 contains many of the same compliance problems as current law
and is an ineffective response to the public perception and reality of tax
avoidance by wealthy expatriates who have substantial unrealized gains.

COMPARISON OF LEGISLATIVE PROPOSALS.

We believe that S. 700 is a more appropriate solution to the problems of tax
avoidance by expatriation than H.R. 1812. In our view, S. 700 has five advantages over
H.R. 1812: (1) S. 700 does not reward patient expatriates; (2) S. 700 does not exclude
income otherwise subject to U.S. tax; (3) S. 700 does not create a special class of U.S.
citizens who are subject to different standards upon expatriation; (4) S. 700 is more
2

administrable; and (5) S. 700 does not violate international law by its intended override
of most of our tax treaties.
A..

S. 700 DOES NOT REWARD PATIENT EXPATRIATES.

H.R. 1812 retains the loophole in current law that allows individuals to pay no tax
on gains accrued while subject to U.S. tax, if they have sufficient resources to wait for
ten years to recognize those gains. Consequently, the structural problem of current law
which permits a patient expatriate to avoid tax is not corrected by H.R. 1812. Under
H.R. 1812, taxpayers may have the beneficial use of their assets during the ten-year
period without paying U.S. tax by borrowing against their assets, since H.R. 1812 does
not trigger gains if U.S. assets are used as loan collateral.
Under H.R. 1812, unlike S. 700, expatriates who can wait ten years can also
achieve permanent exemption of income that has been actually realized prior to
expatriation, but the recognition of which is currently subject to deferral under an
exception in the Code. Congress created these exceptions, allowing deferral of realized
income, based upon the assumption that the income would be taxable by the United
States at a later time. Under H.R. 1812, persons who expatriate would after ten years be
in a better position than persons who remain citizens, because such expatriates can
defeat these Congressional assumptions by permanently avoiding tax -on- the income.

In contrast, S. 700 does not treat expatriates who can wait for ten years to elapse
_more favorably than expatriates who must recognize gains during the ten-year period
after expatriation or those U.S. citizens who do not expatriate. Under S. 700, all
expatriates with more than $600,000 of qualifying gains are required to pay U.S. tax. (S.
700 contains an election allowing expatriates to avoid paying the tax currently by posting
adequate security and agreeing to pay U.S. tax on the entire gain when realized. There
is no ten-year limitation on the tax imposed under this election.)

S. 700 DOES NOT EXCLUDE INCOME OTHERWISE SUBJECf TO
U.S. TAX.

Despite our current tax regime which taxes the worldwide gains of U.S. citizens,
H.R. 1812 only applies to domestic gains of expatriates. Thus, expatriates with foreign
assets are able to avoid tax under H.R. 1812. In addition, expatriates with domestic
assets may be able to avoid tax under H.R. 1812 by using tax planning techniques to
treat their domestic assets as foreign assets.

EXPATRIATES Wlm FOREIGN ASSETS.

Under current law, gains from foreign assets that accrued during U.S. citizenship
are not subject to U.S. tax after expatriation. H.R. 1812 retains this structural loophole
of current law, with relatively minor modifications. Thus, under H.R. 1812, even a
3

tax-motivated expatriate is not required to pay tax on all gains that accrued during U.S.
residence. Consequently, H.R. 1812 does not effectively address published reports of tax
abuse involving expatriates who avoided U.S. tax on foreign gains accrued prior to
expatriation.
The limited scope of H.R. 1812 is best illustrated by examining the various types
of gains it subjects to tax. First, H.R. 1812 would not tax gains from foreign real
property. Second, H.R. 1812 would not tax gains from tangible personal property that is
not located in the United States at the time that it is sold. Thus, if tangible personal
property is moved to a foreign country before it is sold, there will be no tax under H.R.
1812 (As discussed below, the regulatory authority provided in H.R. 1812 to the
Treasury regarding tangible personal property will be difficult to administer in many
cases.) Finally, stocks and bonds which generate foreign source income are generally
not subject to tax under H.R. 1812.
In contrast, as described above, S. 700 follows the framework of our existing tax
system which taxes all gains, whether foreign or domestic, of a U.S. citizen.

EXPATRIATES WITH DOMESTIC ASSETS.

Under H.R. 1812, taxpayers will continue to be able to use tax planning
techniques to avoid U.S. tax on domestic income by resourcing the income as foreign
source. We believe that as long as the Code exempts a class of assets from tax upon
expatriation, and provides for a waiting period for exemption from U.S. tax, tax advisors
will constantly discover new methods to avoid tax. The approach taken in H.R. 1812
lends itself to artful tax dodging. Some holes have already been plugged, but proposals
which are similar in concept to existing section 877 can be expected to be circumvented
by additional planning techniques. Furthermore, since the "taxpayer" will be overseas,
tax avoidance schemes do not have to be as iron-clad because of the difficulties of.
enforcing U.S. tax law against expatriates. Some of these techniques are described in
Appendix A.
We are most concerned about loopholes in H.R. 1812 that we have not identified.
Only a bill like S. 700 that does not exempt a broad class of assets or provide a waiting
period before exemption can be effective in preventing taxpayers from avoiding tax by
expatriation. Otherwise, tax planning techniques will certainly evolve to frustrate the
goal of taxing expatriates in an appropriate and fair way.
As a final note on this issue, the JCf Report seems to recognize that aggressive
tax planning will be used to circumvent expatriate tax rules. The report indicates "in the
longer term, four or five years after the [Administration] proposal is enacted, individuals
planning to expatriate at that time would have had enough of a warning to prepare
properly for expatriation, so growth in revenue attributable to the Administration

proposal drops off significantly.,,1 Although we are unsure of what techniques are
contemplated and thus do not agree with this conclusion, it is clear that in comparing
H.R. 1812 and S. 700, planning opportunities are very significantly greater under H.R.
1812. We do not understand why the proponents of H.R. 1812 believe that an expatriate
would be unable to plan around a provision which only taxes certain income for a
limited period of time (such as H.R. 1812), but would be able to plan around the
Administration proposal which comprehensively taxes all accrued gains at the time of
expatriation.

700 DOES NOT CREATE A SPECIAL CLASS OF U.S. CITIZENS.

We agree with H.R. 1812's premise that current law's tax motivation requirement
makes current law difficult to administer.2 For this reason, H.R. 1812 generally does
not require the IRS to demonstrate a tax avoidance motive for taxpayers with more than
$500,000 of net worth. However, H.R. 1812 provides special exceptions for certain U.S.
citizens by exempting them from tax unless tax avoidance can be proven.
H.R. 1812 provides special preferences to U.S. citizens who (1) were born with
dual citizenship, (2) have a family member that was born in another country, or (3) have
lived outside the United States for ten years. These individuals would be allowed to
enjoy the benefits of citizenship, but would not be required to pay tax if they renounce
U.S. citizenship unless tax avoidance is proven. We do not believe that it is appropriate
to create such classes of U.S. citizens with special tax benefits. U.S. citizens of foreign
birth and their children should certainly not be discriminated against nor, as H.R. 1812
would do, be provided with special benefits. This type of rule erodes public confidence
in the fairness of our tax system.
H.R. 1812 does not require these exempt expatriates to pay tax to any country. in
order to avoid the U.s.. expatriation tax. These expatriates can retire to a tax haven and
still enjoy the exemption provided by H.R. 1812. (H.R. 1812 requires those with family
members born in another country to obtain citizenship in that country; but this
requirement may not have any real tax effect since almost all countries tax on the basis
of residence, not citizenship.)
H.R. 1812 requires that these special taxpayers request a ruling from the IRS to
the effect that their expatriation is not tax motivated. Thus, these taxpayers will obtain
unique benefits if they merely request a private ruling from the IRS on this issue. Under

Staff of the Joint Committee on Taxation, "Issues Presented by Proposals to
Modify the Tax Treatment of Expatriation", June 1, 1995 at B·5. We shall refer to this
document hereafter as the "Jer Report".
I

Ways and Means Committee Report at p. 24.

H.R. 1812, if the IRS does not believe the expatriate's assertions regarding nontax
motivation, the expatriate will effectively avoid the tax because he requested a ruling,
unless the IRS successfully challenges the motivation in court. In making such a
.
challenge, the IRS would continue to face the same difficult problems of current law m
enforcing a rule based on the taxpayer's state of mind.
In contrast, S. 700 treats U.S. citizens equally. The only exception is that S. 700
does not apply to an individual who has lived in the United States for less than five years
and renounces U.S. citizenship by age 18 1/2. This exception seems appropriate because
an individual may automatically be a U.S. citizen if born within the United States, and
U.S. nationality laws do not allow such an individual to renounce U.S. citizenship
permanently until age 18 1/2.
D.

S. 700 IS MORE ADMINISTRABLE.

H.R. 1812 allows expatriates to leave U.S. tax jurisdiction without paying a current
tax or posting security. Thus, H.R. 1812 suffers from the same potential compliance
problems as current law. Like current law, H.R. 1812's requirement that the IRS
monitor an expatriate's activities for ten years after departure is very difficult to
administer because the taxpayer's income is not reported to the IRS and the taxpayer is
beyond IRS jurisdiction. H.R. 1812 does not ensure that additional information is
collected from expatriates for ten years after they depart. H.R. 1812 merely requires the
expatriate to file a form at the time of expatriation. No additional information is
required which would allow the IRS to monitor taxable events during the ten-year period
after expatriation. In addition, H.R. 1812's penalties for noncompliance are not
significant (the greater of 5 percent of the amount due under H.R. 1812 or S1,OOO).
In contrast, information should be available to enforce the provisions of S. 700
more effectively since the tax is imposed at the time of expatriation and a tax return is
due within 90 days of expatriation. Generally, continued monitoring would not be
required of post-expatriation activities. However, if an expatriate elects to defer U.S. tax
under S. 700, the requirement that the expatriate post security should be sufficient to
ensure a continuing flow of adequate information.
There are obviously tax administration issues when a person leaves the United
States with unfulfilled tax obligations. S. 700 determines the amount of those obligations
as the person departs U.S. jurisdiction and collects the tax shortly after departure (or
permits taxpayers to elect continued taxation of specified assets provided adequate
security is provided). In contrast, H.R. 1812 requires the IRS to investigate an
expatriate's activities for ten years, with all of the problems incumbent therein.

In addition, the procedure contained in H.R. 1812 which requires certain
~aye:s with connections to foreign countries to request an IRS ruling could result in

meffectIve use of IRS resources. In 1984, Congress recognized that the IRS could not
6

effectively administer a similar ruling process which required the IRS to determine tax
motivation when appreciated property was transferred to certain foreign corporations.
Also, if the IRS determines a tax avoidance purpose in the ruling process, the expatriate
can reject that determination. The IRS would then be required to litigate the matter. In
contrast, S. 700 has no need· for such a ruling process.
H.R. 1812 also authorizes regulations that would treat the removal of tangible
personal property from the United States as a taxable event. These regulations will be
difficult to draft and administer. For example, what would be the tax result if an
expatriate visited her U.S. grandchildren for a weekend while wearing appreciated
jewelry? Should these. regulations impose U.S. tax every time tangible personal property
is removed from the United States? What if the tangible property is moved before
expatriation?
Finally, H.R. 1812 also provides regulatory authority to apply the bill's antiabuse
rules to the five-year period prior to expatriation. It is unclear how these rules would
. operate. For example, assume an expatriate engages in a transaction that could be
subject to the antiabuse rules in year one, and then expatriates in year five. Would the
regulatory authority create a taxable event in year one - now a closed taxable year? In
addition, we understand that H.R. 1812 contemplates that Treasury will issue regulations
after enactment that will apply to the five-year period prior to enactment. Thus, H.R.
1812 could re.troactively create taxable transactions for events that occurred in 1991,
1992, 1993, 1994 and before February 6, 1995.
E.

S. 700 BE'ITER RESPECfS INTERNATIONAL LAW.

There are two ways in which expatriation proposals may affect international law.
My testimony first considers their impact on international human rights, and then turns
to their impact on U.S. tax treaties.
1.

INTERNATIONAL HUMAN RIGHTS.

Some expressed initial concerns about whether the Administration's expatriation
proposal would violate international law regarding human rights. It is now clear that
those concerns are unfounded. Letters from· a multitude of experts indicate that the
expatriation proposals that have been introduced do not violate international human
rights law. Letters were received from Harvard professor Detlev Vagts, New York
University professor Andreas Lowenfeld, and University of Virginia professor Paul
Stephan. In addition, Fletcher School of Diplomacy professor Hurst Hannum, who had
initially expressed reservations about the Administration proposal, wrote a second letter
indicating that the Administration proposal would not violate U.S. obligations under
international law. The Department of State has provided an extensive legal opinion that
concludes that the Administration proposal is consistent with international law. In
response to a Congressional inquiry, the Congressional Research Service has also

concluded that the Administration proposal would not violate international law. More
recently, Harvard Professor Ann-Marie Slaughter submitted a letter which concludes that
S. 700 does not violate international human rights. She states: "Individuals do not have
a right to evade the normal obligations of citizenship, including taxation. To allow
citizens to escape these obligations without penalty or compensation would be akin to
allowing an unrestricted right for rich portionS of a population to secede from their
poorer neighbors on the ground that they should not be required to shoulder the burden
of providing for the common welfare."
The JCI' Report supports these views in concluding: "In sum, viewing the
objective and design of the [Administration] proposals as an attempt to neutralize the tax
consequences that flow under United States tax laws from the decision to retain or
renounce citizenship, it is difficult to conclude that the proposals would be an arbitrary
infringement under internationallaw...n3
Today, I would like to add the opinions of several others. First, I would like to
submit for the record a letter from a prominent international human rights organization,
the Minnesota Advocates for Human Rights. The letter states:
While we take no position on the merits of [the Administration expatriation tax]
legislation, we are concerned that international human rights law has erroneously
been invoked by opponents of the proposal to suggest that it might violate the
right to leave and to return to one's country. As organizations devoted to the
protection and promotion of international human rights law, we must take issue
with the interpretation of international law being espoused by opponents of this
legislation... The proposed tax law change would not infringe upon human rights
protections... Accordingly, we hope that your Committee will consider the tax
proposal on its merits and avoid irrelevant international human rights arguments.
Second, I would like to submit for the record a detailed letter from Anthony
D'Amato, the Leighton Professor of Law at Northwestern University School of Law. Mr.
D'Amato is the Founder and Chairman of the Human Rights Interest Group of the
American Society of International Law. Mr. D'Amato's letter states:
After careful study and research, I believe that the Administration's expatriation
tax proposal does not violate, even minimally, the human rights that all persons
enjoy under international law. Indeed, a case can be made that the average
American taxpayer's rights are infringed under current law if wealthy Americans
can expatriate themselves and avoid paying their fair share of capital gains tax.

JeT Report at p. 99.

In summary, the Administration is satisfied that none of the proposals under
consideration violate international human rights.
2.

TAX TREATIES.

H.R. 1812 will necessarily cause the United States to violate its international
obligations because it is intended to override U.S. tax treaties. Although U.S. domestic
law allows legislative overrides of tax treaties, these overrides violate U.S. obligations
under intemationallaw.
Under H.R. 1812, most wealthy U.S. individuals are subject to tax on their U.S.
source income for ten years after they expatriate without regard to whether their
expatriation was tax motivated. The Committee Report to H.R. 1812 indicates that H.R.
1812 overrides contrary provisions of U.S. tax treaties:"
The Committee is also aware that certain existing U.S. income tax treaties may
not permit the United States to assert its taxing jurisdiction on former citizens or
long-term residents who are residents of such countries.... [T]he new provisions
[of H.R. 1812 will] take precedence over the treaties for a period of 10 years.
H.R. 1812 is intended to override at least three categories of U.S. tax treaties.
First, by substituting' a wealth test for a motivation test, H.R. 1812 overrides 22 tax
treaties that allow continued U.S. taxation of former citizens only if their expatriation
was tax motivated (income tax treaties: Australia, Barbados, Cyprus, Finland, France,
Germany, India, Indonesia, Israel, Italy, Jamaica, Mexico, Netherlands, New Zealand,
Norway, Spain, and Tunisia; estate tax treaties: Austria, Canada, Denmark, Germany,
and Sweden). As stated in the Committee Report, "the bill subjects certain individuals
to the expatriation tax provisions without inquiry as to their motive for losing their U.S.
citizenship or residency...'..s These treaties only permit U.S. taxation of noncitizens to
the extent their expatriation was tax motivated. Moreover, H.R. 1812 would clearly
override the 1992 income tax treaty with the Netherlands because that treaty specifically
provides that U.S. expatriation tax rules cannot be asserted against any national of the
Netherlands, even if the expatriation was tax-motivated.
Second, H.R. 1812 overrides eight estate tax treaties which restrict the ability of
the United States to tax transfers by former citizens who are residents of the treaty
partner at the time of their death (estate tax treaties: Australia, Finland, France,
Greece, Ireland, Italy, the Netherlands, and Norway).

Ways and Means Committee Report at p. 17.

Ways and Means Committee Report at p. 17.
9

Third, the provisions of H.R. 1812 relating to former long-term residents of the
United States override most of our income and estate tax treaties. None of these
income tax treaties permit the United States to impose tax on certain gains that would
be covered by H.R. 1812 on former residents of the United States who become residents
of the treaty partner. Similarly, none of the estate tax treaties permit the United States
to impose tax on certain transfers of assets that would be covered by H.R. 1812 by
former residents of the United States who become residents, of the treaty partner.
We also note that the override of tax treaties for a ten-year period ending in the
year 2005 (assuming enactment in 1995) is unprecedented. Presumably, any issue which
is pressing enough to override a tax treaty should also be pressing enough to override a
tax treaty after this ten-year period expires. Also, our treaty partners knowing that the
override will sunset after 2005 will attempt to drag out renegotiations so that those
treaties would not change their treatment of expatriates after 2005.
Treaty overrides are not an issue that our treaty partners take lightly. The JeT
Report indicates that the treatment of former U.S. citizens is an important issue in treaty
negotiations. "First, [our treaty partners] may prefer to preserve for their own residents
the benefits under the treaty (i.e., not subject to U.S. taxing jurisdiction). Second, they
may resist the continuing expansion of taxation by the United States based on citizenship
status. Third, they believe that they will lose revenue if they cede to the United States
primary jurisdiction over non-U.S. source income.'16 H.R. 1812 allows expatriates to
reduce their U.S. tax under H.R. 1812 by any foreign taxes paid on those gains, and
thereby cede primary taxing jurisdiction in certain cases to treaty partners. However, this
provision does not change the fundamental nature of the treaty override: our treaty
partners entered into a bargain with the United States that they did not expect to be
broken unilaterally.
H the United States were to renegotiate treaties to take account of an override for
expatriation, the JeT Report states that !fin order to extract such a concession from our
treaty partners during the negotiation process, it probably would be necessary for the
United States to forego certain other benefits to obtain a balance of benefits under the
treaties."' We agree that concessions would be necessary in any renegotiation of our
treaties. Therefore, when comparing H.R. 1812 to S. 700, Congress should weigh any·
tradeoffs in tax treaty negotiations that would be required as a result of H.R. 1812.
We believe that, from the perspective of intemationallaw, the approach of H.R.
1812 is fundamentally flawed since it is possible to achieve the tax policy objectives of
taxing expatriates without overriding tax treaties. In order to prevent tax avoidance by

JeT Report at p. 120.

, JeT Report at p. 120.

expatriates in a manner consistent with U.S. obligations under international law, the
taxable event should occur while the individual is still a U.S. citizen or resident, and not
after his expatriation. S. 700 does not conflict with tax treaties since S.. 700 assesses tax
while the individual is still a U.S. citizen or resident. The United States would be able
to impose this tax consistent with our treaty ~bligations.
The JCf Report questions whether the provision of S. 700, which establishes a
new date on which U.S. citizenship terminates, would violate tax treaties. (This same
issue is raised with H.R. 1812.) The JCf Report is concerned that the undefined term
"U.S. citizen" in tax treaties would have the meaning it had at the time that the treaty
went into effect. This concern is unfounded. The United States interprets this term by
reference to the definition that is in effect at the time of interpretation.8 This U.S.
approach is consistent with international norms. The 1995 version of the Organization
for Economic Cooperation and Development ("OECD") Model income tax treaty will be
revised to make this point more explicit, and the commentary will state that this
clarification is to conform the OECD Model text more closely to the general and
consistent understanding of Member states.
While a legislative override of tax treaties may occasionally be required by
compelling circumstances, expatriation tax avoidance is not one of those cases. We
strongly urge Congress not to override tax treaties when alternative means of achieving
our tax policy objectives can be accomplished without violating international law. In this
case, it is clear that S. 700 does not override tax treaties and this fact alone should be
the basis for its support over H.R. 1812. We believe that this objection by itself is so
serious that H.R. 1812 should be rejected.

OTHER ISSUES.
1.

INFLUENCE OF PROPOSALS ON THE INCENTIVES FOR
EXPATRIATION.

The JCf Report asserted that S. 700 would create incentives for individuals with
high basis assets to expatriate. We believe that this concern does not stand up to
scrutiny. First, existing law already provides powerful tax incentives for expatriation.
Under current law, a taxpayer with high-basis assets (ie., someone who has recently
inherited assets with a step-up in basis) can expatriate, then sell those assets at no or
little gain and reinvest in foreign source income producing assets. The sooner the
individual expatriates, the sooner he lowers his U.S. income tax liabilities under current
law, S. 700, or H.R. 1812. (In this regard, while this tax planning idea for taxpayers with

For the general proposition that the United States interprets undefined treaty
terms by reference to the definition in use at the time of interpretation, see Rev. Rul.
80-243, 1980-2 C.B. 413.
8

high basis assets is theoretically possible, we have not identified very wealthy U.S.
citizens who have recently expatriated as being in this category.) Thus, relative to
current law, S. 700 is unlikely to provide any additional incentive that would be strong
enough to cause acceleration of expatriations.
In addition, H.R. 1812 has similar incentives to those alleged in S. 700. Under
H.R. 1812, a recent heir could contribute his high-basis U.S. property to a foreign
corporation and incur little or no tax. As a result, the expatriate's U.S. assets ~ould be
treated as foreign assets under H.R. 1812 because they are held through a foreIgn
corporation. However, if the recent heir waited until his assets appreciated to expatriate,
to the extent he does not plan around the provisions of H.R. 1812, he would trigger a
larger amount of U.S. tax when he contributed his then-appreciated U.S. property to the
foreign corporation. Thus, to the extent H.R. 1812 is effective, a recent heir has similar
incentives to accelerate his expatriation to those he has under S. 700.

H.R. 1812 may provide incentives to accelerate expatriation among a different
group of taxpayers. H H.R. 1812 is effective in requiring individuals to pay U.S. tax for
ten years after their expatriation, individuals who intend to sell their business when they
retire, or give the business to their children, have an incentive to expatriate ten years
prior to such transaction. Under current law, they may be able to avoid U.S. tax and
delay their expatriation until immediately before the transaction. These same incentives
would apply to individuals who intend to expatriate to avoid U.S. estate taxes. S. 700
does not contain this same incentive to accelerated expatriation, because it does not
continue to impose U.S. income tax for ten years after expatriation.
On this point, I would like to submit for the record a letter from three law
professors at Harvard University: Bernard Wolfman, Reuven Avi-Yonah, and Diane
Ring. Their letter indicates that S. 700 is unlikely to increase expatriations, and notes
that if it were to cause increased expatriations, H.R. 1812 would be likely to have the
same effect. Their letter also makes the point that those with appreciated assets will
have substantially more incentives to accelerate their expatriation under H.R. 1812 than
under 5.700. They conclude: "We believe that a tax imposed on accrued gains at the
time of expatriation (such as the Administration proposal) is superior to an approach
which attempts to assess tax for ten years following expatriation. The latter proposal
seems to provide more incentives to expatriate than the former."
2.

TREATMENT OF LAWFUL PERMANENT RESIDENTS.

~.~..1812 imposes continuing income, gift and estate tax obligations for ten years
on any mdiVldual who has been a lawful permanent resident of the United States for
eight years. Some might view it as unusual to subject these people to continued U.S.
taxation for a longer period after they expatriate than the period that they were a U.S.
resident.

The JCT Report states: ''The Administration proposal would have an unfair
effect on U.S. long-term residents who have been in the United States for more than 10
years and who have had no notice that they would be taxed on unrealized gains upon
departure from the United States.t19 We do not agree with this analysis. Congress has
the right to change the taxation of long-term residents and has done so in the past (e.g.,
1984 changes to definition of "resident" of the United States under section 7701(b».
Thus, long-term residents have no right to assume that our. tax laws will not change,
especially when the change mirrors a provision applicable to U.S. citizens.
Finally, we note that H.R. 1812 is only effective for long-term residents who
expatriate after June 13, 1995. We believe that the effective date for any proposal
should be consistent with the date used for citizens: February 6, 1995. Also, this
effective date for long-term residents was set forth in the Administration's proposal.

THE JOINT COMMITrEE ON TAXATION EXPATRIATION REPORT.

II.

In response to the Committee's request to testify at this hearing, the discussion
below addresses a few of the points made by the JeT Report.
A.

IMPORTANCE OF TAX AVOIDANCE THROUGH EXPATRIATION.

We believe that the available evidence demonstrates that tax avoidance by
expatriates is an important problem which needs to be resolved. A group of wealthy
individuals are taking advantage of a loophole in existing law which results in a
significant revenue loss. Recent media interest as well as the attention devoted by the
Congress and its staffs demonstrate a keen interest in this problem and the need to
ensure that our tax code is perceived as fair. We have all dealt with reverse situations
affecting a few taxpayers and the nominal revenue when the assertion is made that the
tax laws were deemed to bite inappropriately. Thus, this issue needs to be resolved as a
matter of fairness and public perception, regardless of the exact number of individuals
affected or revenue raised.
The Jcr Report found that expatriation to avoid tax was not a significant or
growing problem. to We agree that there are relatively few persons involved, but the
revenue involved is not insignificant to either the taxpayer or the Treasury.
The JeI' Report states that the Department of State was only able to identify four
individuals who had expatriated out of approximately one thousand who were on the

JeI' Report at p. 4.

JCT Report at 1, 61, 65.
13

Forbes 400 list over the prior ten years.ll This does not seem to be compelling
evidence of an insignificant problem for several reasons. The Department of State was
unable to check a substantial portion of the Forbes 400 list because, due to the
limitations of their data, the JeT was not able to provide precise names of individuals
who are members of 203 families that were included in the Forbes 400. 12
There are many wealthy individuals in the United States who are not included in
the Forbes 400. Thus, assessing the magnitude of the problem by focusing on this list
does not give an accurate measure of the problem. Since the Administration proposal
was released in February, Treasury has continued to gather data on the incidence of tax
avoidance through expatriation. We are presently able to identify 68 citizens or longterm residents by name who have expatriated in the last five years and are wealthy
enough to be affected potentially by H.R. 1812. In attempting to identify these
expatriates, we have experienced some of the same frustrations that the JeT has
encountered in trying to identify wealthy expatriates by name. We too have found
transcription errors and difficulties matching expatriation records with our tax files.
Therefore, we believe that we have not identified all wealthy expatriates during this
period.
Also, there is a well-known cottage industry of tax advisors who advise on these
types of tax planning techniques. Books are published and seminars are regularly
presented on these issues. This industry would not exist without a reasonable level of
expatriation activity. In addition, based on extensive discussions with practitioners, we
believe that recent publicity of the expatriation tax loophole is causing many individuals
who had never seriously considered the possibility to begin the process in earnest.
Finally, the JCf revenue estimate, although much lower than the Administration's
estimate, confirms the seriousness of the problem. The JCf estimates that the
Administration proposal wouJd raise $1.9 billion over ten years. (The revenue estimates
are discussed in more detail below.) Even based on the JITs assessment of the number
of individuals involved, a tax loophole that allows these individuals, however many, to
save such a significant amount demands attention and action.
B.

ENFORCEMENT OF CURRENT LAW.

The JCf Report complains that the IRS has not exerted adequate resources in
trying to enforce current law.13 However, the JCf agrees that current law is so flawed

JCf Report at pp. 65-66.

In addition, the Department of State was unable to verify at least one person on
the Forbes 400, Kenneth Dart, because of a transcription error in the data it received.
12

JCf Report at p. 2.
14

that any such enforcement efforts would have only been effective with respect to those
taxpayers who engaged in poor tax·planning. The JCf Report concludes: "Because of
the limitations in the scope of present law, an individual may be able to achieve
significant tax savings through expatriation, even if the person is found to have had a tax
avoidance motive, and is thus subject to the special expatriation tax rules."t4
We believe that, given the inadequacies of current law, the IRS over the last 29
years has devoted appropriate resources to tax avoidance by expatriates.

•

Information provided to the JeT indicates that the IRS has identified
approximately twenty individuals who are wealthy expatriates. The IRS pursued
claims against many of these individuals, but existing law has not proven adequate
to impose an appropriate amount of U.S. tax.

•

For example, one individual expatriated several days before he earned several
hundred million dollars of foreign source income. In addition, if that individual
had remained a U.S. citizen, the taxpayer would have owed more than one billion
dollars in U.S. tax on subsequent transactions. Despite extensive IRS resources
devoted to this case, it appears that no U.S. tax will be collected on transactions
after the taxpayer's expatriation.

We conclude that the infirmities of current law are so serious that additional
enforcement effortS by the IRS would have been nearly futile.
C.

PURPOSE OF EXPATRIATION PROPOSALS.

In evaluating the proposals, we believe that the principal goal should be to move
the Internal Revenue Code closer to tax neutrality for preexpatriation gains of an
individual that is currently subject to tax as a citizen and facing the choice of whether or
not to expatriate. To the extent possible, expatriation should not allow a U.S. citizen or
resident to escape tax otherwise due on income or wealth accrued while a citizen or
resident. In this regard, proposals should attempt to develop a system where an
expatriate is not treated more favorably than a U.S. citizen who does not expatriate.IS
Many of the recommendations of the JCf Report are contrary to the goal of
moving closer to tax neutrality and achieving fairness. For example, the JCf Report
suggests that the United States should not tax gains of expatriates on foreign assets.16

JCf Report at p. 69.

H.R. Rep. No. 145, 104th Cong., 1st Sess. 24 (1995). We shall refer to this
document hereafter as the "Ways arid Means Committee Report".
15

JCf Report at p. 4.
15

However, to achieve tax neutrality, the expatriation proposal should apply to foreign
source income earned by expatriates because the United States generally taxes U.S.
citizens on their worldwide income, exempting the foreign source income of expatriates
retains the incentive to expatriate. In contrast, a proposal that taxes worldwide gains
unrealized at the time of expatriation would provide much less incentive to expatriate.
In addition, the JCf Report questions whether the expatriation proposal should
apply to U.S. citizens who were not born in the United States or who have not lived in
the United States for a period of time. 17 However, the United States has taxed its
citizens who do not reside in the United States since the enactment of the Internal
Revenue Code. The reason the United States taxes nonresidents is that they enjoy
substantial benefits of U.S. citizenship. If Congress were to determine that a nonresident
citizen does not enjoy enough benefits of U.S. citizenship to justify U.S. taxation of his
worldwide income, he should not be subject to any U.S. income taxes. As long as
current law provides for taxation of nonresident citizens, the expatriation proposal should
also apply to these individuals.
A comprehensive tax at the time of expatriation on accrued worldwide gains, such
as S. 700, comes closest to the ideal of tax neutrality. This approach would eliminate a
substantial portion of the tax savings that otherwise would result from a decision to
expatriate. In this regard, the motive for expatriation should be irrelevant. Further, the
expatriation tax provisions should not exempt any accrued gains that would be subject to
tax if realized as a citizen. Finally, the comprehensive accrued income approach would
not reach beyond the economic income the taxpayer earned while subject to the U.S. tax
System. Proposals like H.R. 1812 that tax U.S. source gains accrued after expatriation
will encourage citizens to engage in behaviors to avoid U.S. source income after
expatriation. This is the experience of current law.

REVENUE ESTIMATES.

III.

You have asked for our comments on the revenue estimates of the various
expatriation proposals. Treasury estimates that H.R. 1812 would generate approximately
$0.10 billion over five years without a treaty override or $0.45 billion over five years with
a treaty override, as compared to S. 700 which Treasury estimates would generate
approximately $1.68 billion over five years. A summary of Treasury's revenue estimates
for the various expatriation proposals follows.

JeT Report at p. 2.

TREASURY REVENUE ESTIMATES
(in billions of dollars)
Throu&h 2000

Throu&h 2005

Administration
proposal

2.15

6.30

s. 700

1.68

4.92

H.R.·1812
(no treaty override)
(treaty override)

0.10
0.45

0.30
1.19

In order to obtain its revenue estimates, Treasury began by examining recent
levels of expatriation. To do this, we attempted to locate the tax records from our files
.of those individuals who had recently expatriated. Our files consist of a sample of about
100,000 individual income tax returns, which includes a high proportion of the very
highest income taxpayers. Because of both the incomplete coverage of our files, and the
difficulty of matching records based on the name of the taxpayer (rather than the
taxpayer's identification number), it is likely that we were not able to locate all of the
relevant records. Nevertheless, expatriates whose tax records we were able to locate
were used to project a baseline showing the projected future tax consequences of
expatriation absent any change in the tax laws. The revenue gains attributable to each of
the proposals before you today were then estimated by comparing their resulting tax
consequences to this projected baseline.

Revenue estimates of the expatriation provisions are based on the specific
financial situations of a relatively small number of taxpayers, and for this reason are
subject to more uncertainty than many other revenue estimates. For example, although
we have identified data showing at least 68 wealthy expatriates in recent years who
apparently would have been subject to H.R. 1812, the revenue estimates of all proposals
to tax income of wealthy expatriates are dominated by the potential expatriation of only
a few multi-millionaires in any year. Adding or subtracting only one of these multimillionaires from the sample, especially in the early years of the estimate, will have a
relatively large effect on the revenue estimate. Therefore, it would be reasonable to
expect that two independent groups, each using their best efforts and judgment, could
come to different conclusions about the precise magnitude of the revenues attributable
to each bill.
Inferences that can be drawn from the JCf Report suggest that JCf and Treasury
may have different views on the best estimate of future levels of tax avoidance through
expatriation, on the effect of estate and gift taxes on individuals, and on U.S. taxes that
continue to be paid by expatriates. Treasury believes that tax avoidance through
17

expatriation is a growing problem. Therefore, we believe that the most recent
information on expatriations most accurately represents the scope of the problem. In
addition, we believe that if expatriation is deterred by a proposal, the United States will
collect estate taxes on individuals who would otherwise have expatriated. Finally, we
believe that expatriates continue to pay only very modest levels of U.S. tax as
nonresident taxpayers under current law. Disparities between Treasury and Jcr
estimates likely reflect the JCf's somewhat different views on these matters.
Because of the difficulty involved in determining the precise magnitude of the
revenue effects, it may be more instructive to focus on the relative magnitude of the
estimates for the various proposals. In our view, the Administration proposal should
raise the most revenue, S. 700 would rank second, and H.R. 1812 should be expected to
raise the smallest amount of revenue.
In order to explain this ranking of the revenue-generating potential of the three
proposals, let us compare the effect of each of these proposals on an extremely wealthy
U.S. citizen holding a diverse portfolio of appreciated assets who is planning to
expatriate solely to avoid income and estate tax under current law. Under the
Administration proposal, this individual is faced with a choice: he can expatriate and
pay capital gains tax on unrealized gains immediately, or he can remain a U.S. citizen,
continue to pay U.S. tax on his worldwide income, and defer tax on capital gains until
they are realized or his estate pays estate tax. We believe the Administration's proposal
will substantially remove that individual's tax incentives to expatriate. We, therefore,
assume that the individual will remain a U.S. citizen, and that the United States wiUlose
no tax revenue from that individual because he will elect to remain a U.S. citizen. (H we
had assumed that individuals such as this one would continue with their plans to
expatriate, the expatriate would pay a tax on his accrued gains at the time of departure,
and the revenue gain in the budget window would have been much larger.)

Generally, we assume that S. 700 will also deter this type of wealthy individual
from expatriating. Although S. 700 allows taxpayers to defer the payment of tax on their
gains, when the asset is eventually sold, tax is due on the entire gain. Thus, on a present
value basis, an expatriate would pay a tax on accrued capital gains under S. 700 that is at
least as great as the Administration proposal. However, we believe that certain
individuals may choose to expatriate under S. 700 and elect to defer tax until the asset is
disposed. Therefore, our revenue estimate for S. 700 is not as great as the estimate for
the Administration's proposal. S. 700 would reduce the revenue in a five or ten year
period for those individuals who choose to expatriate, because it would allow the
taxpayer to defer the tax on assets that have substantial accrued capital gains.
We be~eve that H.~ ..1~12 ~ unlikely to deter many individuals from expatriating.
Our h~othetIcal wealth~ mdl~dual s tax can be expected to be lower if the taxpayer
expatrIates. The expatrIate WIll nearly always have a tax incentive to expatriate under
H.R. 1812, because only certain types of income will continue to be taxed, whereas he
18

'would be taxed on all income if he remained a U.S. citizen and no tax is due after the
ten-year waiting period.
Some of the reasons why expatriation continues to provide tax-saving
opportunities under H.R. 1812 are inherent in the design of the bill, while others appear
to stem from potential loopholes. The tax incentives to expatriate that remain under
H.R. 1812 are four-fold. First, H.R. 1812 imposes tax on the U.S. assets of expatriates
for only ten years following expatriation. Thus, expatriates who are patient can forego
income from their U.S. assets and can put off realizing the embodied capital gains for
ten years. Second, some individuals own foreign assets, whose sale would be exempt
from tax after expatriation (as would any income generated by those assets). Third, as
described above, there are a number of techniques that seem to allow expatriates to
avoid tax on their domestic gains. Finally, H.R. 1812 allows exceptions for certain
individuals with ties (by birth, ancestry, or marriage) to foreign countries. Some of the
wealthy expatriates we have identified would have benefited from these exceptions..
The foregoing discussion describes the relative tax considerations for a wealthy
individual with a wide variety of appreciated assets who was planning to expatriate.
Much has been made of the potential effect of the three proposals on the less frequent
case of a taxpayer whose assets consist primarily of recently inherited wealth. Because of
the step-up in basis for inherited assets, this taxpayer will have a high basis in these
assets. The claim has been made that the Administration's proposal encourages these
recent heirs to expatriate immediately. We can debate whether this type of taxpayer,
who had planned to postpone expatriation to some future date, would in fact
immediately expatriate, and the revenue implications of such a decision. However, the
Administration's proposal, S. 700 and H.R. 1812 would all lead to similar results for
these wealthy heirs. In other words, under all three proposals the taxpayer will be able
to expatriate and immediately sell his assets and avoid future U.S. tax consequences, so
that this hypothetical should have little or no impact on the relative estimates for the
three proposals. In addition, if the Administration proposal speeds up expatriations,
those who expatriate are likely to pay some tax on departure, since even recent heirs are
likely to also own a number of appreciated assets.

CONCLUSION

In the last few months, extraordinary attention has been focused on tax avoidance
through expatriation. We stand firm in our belief that Americans who avoid their tax
responsibilities by expatriating should not be rewarded. Instead, they should be asked to
pay the same tax on iQcome they accrued while subject to U.S. tax laws that those who
remain will pay sooner or later. We believe that Congress should enact an expatriation
tax avoidance provision that is based on S 700.
Mr. Chairman, this concludes my remarks. I would be pleased to answer any
questions that the Committee may have.
19

APPENDIX A
POSSIBLE TAX PLANNING TECHNIQUES FOR EXPATRIATES TO AVOID TAX
UNDER H.R. 1812 ON U.S. SOURCE INCOME AND GAINS
1.

Under H.R. 1812, taxpayers can effectively dispose of their U.S. assets during the
ten-year period through installment sales. If an expatriate sells a U.S. asset to a
foreign purchaser for an installment note that will mature in eleven years, it
appears that no tax will be imposed on the sale under H.R. 1812. However,
during the ten-year period he would be able to receive interest on the installment
note without U.S. tax because the interest would be from foreign sources.

Property which produces U.S. source income can be transferred to a foreign
corporation without recognition of gain. As long as that corporation does not sell
the property or make any distribution of income to the expatriate within the
ten-year window, there will be no U.S. tax imposed by reason of H.R. 1812 on
income from those assets. After the ten-year period, the expatriate can withdraw
the income without U.S. tax. Also, an expatriate will always have an incentive to
contribute his U.S. assets to a foreign corporation, because any resulting gain is
only taxed to the extent of preexpatriation gains. In contrast, if he continued to
own the assets directly, he could be subject to tax on all gains.

An expatriate may reduce tax under H.R. 1812 by incurring interest expenses
which would reduce domestic income. For example, assume that an expatriate
will earn $20 million of domestic source dividends each year. The expatriate
could borrow $200 million (secured by his U.S. stock) and invest the loan
proceeds in foreign instruments. After this transaction, the expatriate will earn
$20 million of domestic dividends, pay $20 million of interest expense, and earn
$20 million of foreign income. Despite the fact that the expatriate may not have
significantly changed his overall economic position, the interest expense may be
allocated (in whole or in part) against U.S. income, thereby minimizing his U.S.
tax obligations under H.R. 1812.

HARVARD LAW SCHOOL
OAWDIlIDGE • MASSACHUSETTS' 02138

May 22, 1995
Hon. Leslie B. Samuels
Assistant Secretary (Tax Policy)
Department of the Treasury
Washington, D.C. 2~220
.Fax: (202) 622...Q605

Dear Seaetary Samuels:
Your office has asked for my views on the international human rights
aspects of the Administration proposal to prevent individuals who choose to
renounce their citizenship from avoiding their ordinary tax responsibilities. I
teach intemationallaw and intemationa1litigation and have written in the
area of demoaatic theory and international human rights.

I understand that Senator Moynihan is offering an amendment to the
Administration proposal that will allow individuals seeking to renounce
their citizenship to choose either to pay capital gains tax on gains in excess of
$600,000 or to continue to be treated as a US. ci~ for tax purposes. I
conclude that with the addition of this amendment the Administration's
proposal is consistent with intemationa11aw and with the U.s. commitment
to the protection and promotion of human rights.
As has been ably analyzed by the Office of the Legal Adviser and by
various other experts in intemationallaw consulted by your office, the
proposed tax violates neither the right to emigrate nor the right to expatriate.
U.s. citizens remain entirely free to leave the tenitory of the United States
and to live abroad. U.S. citizens also remain free to renounce their
citizenship, on the condition that they fulfill the ordinary obligations of
citizenship imposed equally and non-arbitrarily on all citizens.
Individuals do not have a right to evade the normal obligations of
citizenship, including taxation. To allow citizens to escape these obligations
without penalty or compensation would be akin to allowing an unrestricted
right for rich portions of a population to secede from their poorer neighbors
on the ground that they should not be required to shoulder the burden of

providing for the common welfare. To the extent that expatriation is a means
to the end of tax evasion, it is reasonable and.1egal for a government to
qualify or· condition the right of expatriation in such a way as to prevent it
from being used for such purpose. Indeed, the United States joins the
company of nations such as Canada, Germany, Denmark, Sweden, and the
Netherlands, nations with a strong record of combining protection of
fundamental human rights with recognition of the responsibilities of all
members of a polity to contribute their fair share to the commonweal.
To impose the expatriation tax without regard to the motiv~ for
expatration might unfairly burden those who seek emigration for reasons
unrelated to tax considerations. However, the amendment offered by SenatOr
Moynihan allowing individuals to elect to continue to be treated as U.S.
citizens for tax purposes for a length of time after expatriation alleviates this
concern. As amended, the proposed'tax is fully consistent with the protection
of international human rights.

· ADVOCATES

FOR HUMAN RIGKTS

July 7, 1995

The Honomble Robert Packwood
Chair, Committee on Finance
United States Senate
Washington, D.C. 20510

The Honorable Daniel Patrick Moynihan
Committee on Finance
United States Senate
Washington, D.C. 20510

Leslie B. Samuels
Assistant Secretary (Tax Policy)
Department of the Treasury

1500 Pennsylvania Avenue N.W.
Washington, D.C. 20220

Dear Sirs: .
We understand that the Committee on Fmance is considering qislation to subject wealthy U.S.
citizens to tax OIl the capital gains (m excess of $600,0(0) they have accumulated during the
paiod of their citi7.ensbip, even if they II)' to avoid eapital gains or estate taxation by giving up
their U.S. citizmsbip. While we tab no position OIl the merits of this Jqislation, we are
coneemed rbal inremaliooal human rights law bas erroneously been invoked by opponents of the
proposal to suggest that it might violate the right to leave and to return to one's country.
.
As an

orianization devoted to the protection and promotion of international human rights law,

we must lab: issue willi the int.cJprctatiOD of intanationallaw being espoused by opponents of
this l~sJatioft. TIle Univenal Declaration of Human Rights provides in Anicle 13 that
-Everyone bat the right 10 kave any country, including his own, and to retum to his countryand in Artide 15(2) that -No one shall be arbitrarily deprived of his nationality nor denied the
right to change hi! nationality. - Similarly, the International Covenant on Civil on Political
Rights, whiCh came into ~ £« the United States on ~r s. !m. ;~tw ~l Atri~j~
12(2) that -everyone sbaJl be free to l~ve ~f\~ ~try, including his own."
The proposed tax law cbange would not ~ge upon those h~~'l. n,,):~ ~rotec?ons. U.S.
citizens would not be prevented from leavmg the U.S.; thelf nght 10 '~1 ~t)uld be
undiminished. Neithct would U.S. citizens be deprived arbitrarily of their right to change tr~~!'
nationality. Instead, they would be subjected to taxes which they wou~d ordinaril~ have ~
to pay upon death or sale of their property and they would not be pemutted to avoId lantion
by the tactic of renouncing their citizenship.

'''IICOl'CD AVEm1E SOVTB

SUID Itst

MINJllLU'ous. MUlN&sOTA
asetS·I... U.S.A.

1.. 'n

'41 JJOl
,., .1~.1~71
S_i. _d_.'-6 i

.'!' ere' .O',

July 7, 1995
Page 2

We UDdersaancI that opponents of the Administration's tax proposaJ have even cited the
Jackson-Vanik Ameadment, Section 402 of the Trade Act of 1974. The Iacksc)n.Vanik
Amendment was adopted in IeSpODSC 10 the vtrj high Soviet tax imposed OIl Soviet citizens
(particularly Jews) who wanted to leave the U.S.S.R., but that tax was imposed on an the basis
of an individual's level of education and not their wealth or income. Also, the Soviet laX was
imposed on emigration - not on change of citizenship. Hence, the Jacbon-Vanik Amendment
is not inconsistent with the Clinton Administration's tax proposal.
It is also useful to note that similar tax provisions have been in force in the following
countries: Australia, Canada, Denmark, Finland, Germany, Netherlands, Norway, and SWeden.
Por example, Canada imposes a departure tax upon the termination of Canadian residence, which
is somewhat similar to the proposed u~s. tax on expatriation. Indeed, Canada and all the
countries mentioned above (unlike the U.S.) have ratified the Optional Protocol to the Civil and
Political Covenant or have acx.epted the individual petition pzocedure under the European
Convention for the Protection of Human Rights and Fundamental Freedoms. Nonetheless, a
review of the jurisprudence under the Civil and Political Covenant and the European Convention
fails to reveal any support for the idea that human rights law would foroid the proposed tax on
expatriaIion.
Accordingly, we hope that the CommiIIee will consider the tax proposal on its merits and
avoid irrelevant intematioaal human rights argumaIts.

SiDcady youn,

a. .~
BarbaIa A. Prey
Executive Director

j)A/"'t-

Itl- ~.1-

Professor David Weissbrodt
Legal Counsel

NORTHWESTERN UNIVERSITY
SCHOOL OF LAW

357 East Chicago Avenue
Chicago, illinois 60611-3069
Anthony D'Amato
LeightoD Professor of Law
July 6, 1995
HUll.

Office Phone: (312) 503-8474
HomePh01le: (312)587..8997
Fax: (312) 587-9969
E-mail: a-dam3lO@nwu.edu

Leslie B. Samuels

Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue N.W.

Washington, DC 20220
Dear Mr. Samuels:
In connection with the hearing lbal you have ~hWulc=d Cur July 11, 1995, I am
sending you the following comments on the international human rights implications of
the AdminiStIation expatriation tax proposal. I hope these comments may be of
~h;tance

to yuu.

Statement of Qualifications

I am the Leighton Professor of Law at Northwestern University, where I have
taught since 1968. 1 graduated from Cornell in 1958, received a J.D. from Harvard
Law Sehoul in 1961, i:Wd it Ph.D. Crolll CulUll1bia Uuivcl"~ily jn 1968. I a.w IlJC
founder in 1985 and still Chair of the Human Rights Interest Group of the American
Society of International Law. I have written about twenty books and a hundred
articles, specializing on the 1heoxy of imemationallaw and human rights.

Brief CODClusion
After careful study and research, I believe that the Admjnistration' s expatriation
tax proposal docs not violate, even minimally, the human rights that all persons enjoy
under internalionallaw. Imleed, a case can be IIlaW= lhal Lhe avenlge Ameri~
taxpayer's rights are infringed under current law if wealthy Americans can expatriate
themselves and avoid paying their fair share of capital gains 'tax.
Argument
I am personally opposed to capital gains taXation; 1 believe it disac1vantages
Americans in the world economy. However, as long as capital gains taxation is on the
books, there should be no unfair loopholes for anyone who has enjoyed capital
appreciation. Tbe Administration's expatriation tax proposal closes a loophole. This
can be seen clearly if we consider how Congress might bave taxed capital gains and
compare that scenario with the way capital gains are presently taxed. From the very
bcgiIulillg uf lbc capiLal gaiml laX, Cungr~~ might bavt: requirt:d t:at.:h ta..~payer at the
end of the taxable year to add up all capital appreciation, subtract the amount of capital
assets that bad devalued during that year, and pay a tax on the net gain if any. Instead,
Cougrc~s ucciucu tu lU capilal gains wht:n lht:y wc=r~ t.:unvt:ned ur sold. This may
have made the capital gains taX more politically acceptable. because a taxpayer who

- 1-

sold assets would presumably be holding cash, thus easing the tax bite. Yet if we
compue what Congress might hilve done with what Congress actually did, ~'C fmd that
there is no substantial difference as far as measuriil.g· the tax is concerned; rather, the
only difference is a technical one-that the tax as currently administered is triggered by
the sale or conversion of assets, :md not simply by bookkeeping at the eod of a taxablc

year. Below the surface, what is really being taXed, in both cases, is the capital
appreciation itself. Capital gains taxation is simply a tax on net capital apprec~tion.
When the tax is triggered bY:l sale or by the taxable year'coming to a close-IS only of
incidental imponance.
It seems to me thnt QD)' AmericllIl citizen, who has enjoyed the economic and

social protections of this country that have enabled him or her to amass capital
appreciation, owes a capital gains tax. Congress has provided either that the tax must
be pilid upon sale or conversion of the C:lpiw ilSset or that the appreciated asset be
funneled into the taxpayer's estate where it incurs estate taxation at higher rates than
the capital gains rate. Since everyone who owns a capital asset either sells (or
converts) it, or dies holding it, there is in theory no escape from capital gains taxes.

When Congress initially enacted the capital gains tax, it was thought that there was no
possible escape, and hence the tax was fair because everyone enjoying net capital
appreciation would have to pay it sooner or later.
However, it has recently been found that there may have been an unintended
expatriate's loophole. An American taxpayer who has amassed capitDl appreciation
during the teIDl of his or her American citizenship, may decide to avoid the "triggering
mechanism" by (a) UDdergoing expatriation, and (b) selling the appreciated assets after
a new eitizenship hns been acquired in another country. Even UDder presem law, if the
IRS can prove that the expatriation was done for a tax-avoidance pmpose, the capital
gains tax will apply and "follow" the taxpayer to the new country. AI, I see it, the only
reason for the Administration's current expatriation tax bill is the difficulty of proving

a tax-avoidance mtcnt. The expatriating taxpayer can well afford to hire expensive
counsc~ to fight the IRS on the issue of intent, an issue which is inherently difficulty to
prove.

There should be no reason for the IRS to have to prove intent, because
expatriating taxpayers should not be allowed to escape capital gaw taxation for the
incidental reason having to do with the "triggering mechanism." For the underlying
fact is. that ~~ital 3:ppreciation was earned. d~ the course of the taxpayer's
Amcncan eltlZCnship, and thcrcfon: a tax IS fauly due on that appr=iation at some
point in time. If the taXpayer manages to avoid paying the tax because of expatriation·
,
then all the other taxpayers who remain American citizens are proportionally
disadvantaged to the cxtent of the expatriate's tax avoidance.

International law t a system that dates back over three thousand years, was never

mtc:ndcd to conf~~ an advantage C!n a person who changes national allegiance at the
expense of the Clnzens who remam home. In recent years, intemationallaw has
aff~tive1y pro~ded for exp~triation, .but not at the expense of avoiding one's
lcptml.ate oblig.aaons. Thua, m thc Uruversal Declaration of IIuman Rights Articles
13 and 15 proVIde:
'
Anicle 13

1. Everyone has the right to freedom of movement and
residence within the borders of cach state.

-2-

2. Everyone has the ~ to leave any country, including his
own, and to retum to hIS country.
Article 15
1. Everyone has the right to a nationality.
2. No one shall be arbitrarily deprived of bis nationality Dar

denied the right to change his nationality.
Those who qUote these provisions out of context cODveniently fofFt that the Universal

Declaration of Human Rights also contains Article 29:
Anic1e 29
1. I!VcryODC has duties to the community in which alone the
free and full development of his personality is possible.
2. In the exercise of his rights and frced0Jm 9 everyone shall be
subject only to such limitations as are determined by law solely

for the purpose of s~ due recognition and respect for the
rights and freedoms of others aDd of mcctiug the just

requirements of morality, public order and the general welfare
in a democratic society.

3. These rights and freedoms may in no case be exercised
contraI)' to the pmposes and principles of the United Nations.
Anicle 29 paragraph 2 makes it clear that any of the preceding Articles that comer
specific rights on persons (such as the right to a nationality and the right of
expatriation) arc Dot to come at the expense of the "rights and freedoms of others. "

Normally, the act of expatriation does not affect the rights of other persons. But-if
expatriation in fact functions so as to negatively affect the rights of others, then the
expatriation can be limited by law 50 as oot to have chat JICgaLivc cctccl. ThWi, lhe
expatriation tax plugs this particular loophole. It ensures that the expatriate does not

get away without paying his or her fair share ofuxes.

A qualification similar to that of Anicle 29 is contained in the International
Covenant on Civil and Political Rights, ratified by the United States Senate on April 2,
1992, but this time right within dle same ALticle that allow~ Coe cApell.natiun, Article

12:

Article 12
1. Everyone lawfully within thc lcrrilUry of a Slale shall,
within that territory, have the right to liberty of movement and

freedom to choose his residence.

2. Everyone shall be free to leave any country, including his
own.

-3-

3. The above-mentioned rights shall not be subject to any
restrictions except those which arc provided by law, arc
necessary to protect national security ~ public order (ordre
public), public health or morals or the rights and freedoms of
others, and :tte consistent with the othcr rights rccogDizcd in the

present Covenant.
4. No one sb3ll be arbitr3rily deprived of the right to enter his

own country.
Thus, international law again makes it clear that one person's human rights arc not to
be at the expense of another person's h!JlIWl rights. ~t is a fundamental tenet o~
taxation that persons who arc equally Situated are subject to ~ taxes. Amencan
citizens who enjoy ~piW appreciation and then either sell their assets or include their
assets in their estates must pay the capital gains tax (or estate taxes at higher rates).
The same holds true for an American citizen who enjoys capital appreciation and then
leaves the United States before sclliDg the asscts (or, of COUISC, before dying). The
capital gains that accrue when during the time that a taxpayer is an American citizen
are fairly subject to taxation. Paragraph 3 of Article 12 of the International Covenant
OD Civil and Political Rights which speaks of the "rights and freedoms of others n

ensures application, under intemationallaw, of this principle to the expatriating
taxpayer.

To be sure, the scale between an individual's human rights and the "rights and
freedoms of others" can tip too far in either direction. If an expatriate leaves Without
paying his fair share of taXeS, then, as I have argued, tho "rights and freedoms of
others" are negatively impacted. But it is also possible to inflate the "rights and
freedoms of others" to the point that a person is deterred from expatriating. 'Ibis is
iDclccd what happened in the Soviet Union in the 19705, which was rightly subject to
the Jackson-Vanick Amendment to the Trade Act of 1974. This Amendment, also
known as the "Freedom of Emigration" Amendment, denied most-favored-nation
treatment to the Soviet Union so long as it "imposc[d] more than a nominal tax on

emigration." (Trade Act of 1974, 19 USC § 2432.) .Congress was reacting to the
imposition by Moscow of a -diploma tax" on emigrants who had received higher
education at thc State's expense.

The Soviet Union's "diploma tax," for at least four basic reasons, presented an
almost insuperable barrier to any individual who desired to leave that coUDtty. Y ct if
we look at the "diploma tax· more closely, we can fmd that it is significantly different
from the "exit taX." First, the Soviet Union made the payment of the "diploma taX" a
precondition for its citizens to leave the country. ~ was a physical obstacle to

emigration, one that in fact blocked most people from leaving. In contrast, the
Administration t s expatriation tax imposes no resaaint upon anyone's right or freedom

to leave the United States and/or give up American citizenship. Second, the "diploma
tax" was extremely steep. Although the actual amounts imposed on citizens wishing to
leave the Soviet Union varied according to the bureaucrats who administered the tax,
my own calculation of the average amount of the "diploma tax" is that it was the
equivalent of the amount of money an average Soviet citizen might have been able to
save a~er fifteen to twenty years of labo~. As a ~sult, the "diploma tax" was
excessIvely burdensome, and 5UCCeeded In reducmg the rate of emigration to a trickle.
In contraSt, the "exit tax" only applies if there are capital gains. And if there are
capital gains, the taxpayer is only liable for a tax of 28 % (or less) of the cash realized
uPOJ?- sale ~f ~ assets. Since the taxpay~r will have this cash in hand, paying of a
pomon of It m taxes, though unpleasant, 15 hMdly a barrier to leaving the country. (In

-4-

those cases where it may appear to be a barrier, the bill gives the expatriate reasonable
options for deferring payment.) Third, there was-DO-rational basis within the Soviet
economy for placing a monetary value on higher education? with the result that the

amoum of the diploma rax" was essentially arbitrary.' The reason there was no
It

gradua~ received the s2ID.e
monthly salary as a person who did not go to college. The value of higher education
was only that you bad a wider choice of jobs (e.g., you could be a scientist in military

rational basis was that? under the Soviet sy£tem, a college

defense if you we.re a college gradtlate). Si.uc.e higher education was free, aDd siDee it

did not lead to a higher-paying job, a college graduate could not recapture the value of
her education in the job market. Hence, raising the money needed for the "diploma
tax" within the Soviet economy was ume1ated to the fact of having a higher education.

Hence the amount of the "diploma taX" was arbitrary. This lack of economic
relationship between the diploma and the diploma tax constitutes a major difference
from the "exit tax" proposed in the United States. wheze there is a direct relation

between asset appreciation and paying a capital gains tax on that asset appreciation.
Fourth, the Soviet Union imposed the "diploma tax" in order to discriminate against its
Jewish citizens who had been emigrating to Israel in large numbers. Although the
"diploma tax" applied to everyone who wanted to leave, in fact nearly everyone who
wanted to leave in the 19705 was of the Jewish faith. Thus the "diploma tax," quite
apart from human-rights provisions regarding D2tionaiity and expatriation, may ha~e

violated other deep-seeted human rights prohibitions against discrimination based upon
group membership.
FhWly, allow me to address the contention that even if the Administration's

expatriation tax does not violate intemationallaw. other countries might perceive it as
contrary to the position the United States took regarding the Soviet "diploma tax," and
therefore might regard the United States as compromising its moral authority with
respect to intemational human rights. I believe that if some people in other countries
take this position, they may be doing it to score political points. For honest reflection
should convince them that there is not even the remotest chance that the expatriation taX
violates international human rights-indeed, as 1 have argued, not imposing the tax
woul~ violate the rights of all the American taxpayers who do not leave this counuy.
(If they don't want to engage in honest reflection about this pOint, then there's notb.iDg

we can do about it. We shouldn't change our own policies because other people can
dishonestly misconstme them.)
Conclusion
Even though I see no problem whatsoever with the international human rights

implications of the Administration's expatriation tax proposal, I am gratified that this
issue is being given prominent attention. A few decades ago DO one would have cared
about human rishts. It is a distinct mark of our progress as a civilization that an issue
of tax policy is argued in terms of its impact upon international human rights.

Respectfully submitted,

~,t~

Leighton Professor of Law

Northwestern University

-5-

HARVARD LAW SCHOOL
CAMBRIDGE • MASSACHUSETTS· 02JS8

July la, 1995

Leslie B. Samuels
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania A venue, N. W .
Washington, D.C. 20220
Dear Secretary Samuels:
We would like to share with you some of our views regarding one aspect of the
expatriation proposals that will be considered by the Senate Committee on Finance on July
11. We understand that it has been suggested that the Administration proposal might create
a particular incentive to expatriate for individuals who own unappreciated assets. This
suggestion is puzzling. Initially, we wonder how many wealthy individuals have little or no
gain in their asselS. Even recent heirs often have assets that have appreciated. But
assuming the existence of such individuals, current law nearly always provides an incentive
to expatriate as soon as possible to avoid U.S. income taxes. The Administration proposal,
which would tax accrued gains of expatriating individuals, would seem to add little to the
incentives of existing law, especially given the latter's ineffectiveness. Moreover, the House
Ways and Means Committee proposal (H.R. 1812) would have the same purported incentive
as the Administration propOsal. Under H.R. 1812, an expatriate could "cleanse" U.S. assets
by contributing them to a foreign corporation and then recognizing any accrued gains. Thus,
under H.R. 1812, a recent heir might have an incentive to expatriate as soon as possible to
reduce the amount of appreciation that would be triggered when assets are transferred to
the foreign corporation. We conclude, therefore, that individuals with unappreciated assets
should be no more likely to expauiate under the Administration proposal than under H.R.
1812.
Furthermore, if H.R. 1812 effectively requires expatriates to pay tax on their U.S.
income fOT ten years foJlowing expatriation (a result we doubt), it seems likely that H.R.
) 812 would create incentives for wealthy individuals with appreciated assets to expatriate.
If an individual planned to sell his or her business and retire at age 65, under current
ineffective law that individual could avoid U.S. tax by expatriating immediately before
retirement at age 64. If H.R. 1812 were enacted, however, the individual would need to
expatriate at age 54 (10 years prior to retirement) in order . to avoid U.S. tax. This concern
may be more serious because the population of wealthy individuals presumably contains
many more people with appreciated assets than those with unappreciated assets. Similarly,
an expatriate trying to avoid U.S. estate tax can accomplish that result under current law by

expatnatmg just before death. If H.R. 1812 were in effect. the individual would be
encouraged to expatriate at least ten years before he or she expected to die.
We believe that a tax imposed. on accrued gains at the time of expatriation (such as
the Administration proposal) is superior, for the above and other reasons, to an approach
which attempts to assess tax for ten years following expatriation. The latter proposal seems
to provide more incentives to expatriate than the former.

Sincerely,

~U~
Bernard Wolfman
Fessenden Professor of Law

~~~IY~J)(
Reuven Avi-Yonah
Assistant Professor of Law

!~~9
Assistant profess/of Law

The views expre.~sed above are those of the individuals and not necessarily those of the
University.

TREASURY
""' '.J!

FOR IMMEDIATE RELEASE
July 12, 1995

[f'-

TC"

Confuld:,S'J~Y Jon Murchinson
(202) 622-2960

RUBIN ANNOUNCES FINANCIAL MARKETS ASSISTANT SECRETARY NOMINEE

Treasury Secretary Robert E. Rubin announced Wednesday, July 12 that President
Clinton has nominated Darcy E. Bradbury to be Treasury Assistant Secretary for Financial
Markets.
Ms. Bradbury has been serving as Deputy Assistant Secretary for Federal Finance
since August of 1993. From January of 1990 until she joined the Department, Ms. Bradbury
was New York City Deputy Comptroller for Finance. Ms. Bradbury was an investment
banker specializing in infrastructure finance from 1982 to 1989 with First Boston and Kidder,
Peabody & Co.
Ms. Bradbury graduated magna cum laude from Harvard/Radcliffe Colleges in 1978
with a B.A. in social studies and graduated with honors from the Harvard University School
of Business Administration in 1982. She is married to Eric Seiler of New York City and they
have two sons. Ms. Bradbury was born in 1957 in New York State and was raised in Fair
Oaks, CA.
-30-

RR-422

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

THE

TREASURY

IREASURY
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIAAVIfi.Jtm;.NJ.~.T'i'!'~!B:~~9~, D.C.· 20220· (202) 622·2960

FOR RELEASE AT 2:30 P.M.
July 11, 1995

CONTACT:

Office of Financing
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,400 million, to be issued July 20,
1995.
This offering will provide about $1,175 million of new
cash for the Treasury, as the macuring bills are outstanding in
the amount of $25,235 million.
Federal Reserve Banks hold $6,662 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $2,875 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given In the
attached offering highlights.
000

Attachment

RR-423

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JULY 20, 1995

July II, 1995
Offering Amount .

$13,200 million

91-day bill
912794 T4 6
July 17, 1995
July 20, 1995
October 19, 1995
October 20, 1994
$2S,927 million
$10,000
$ 1,000

lS2-day bill
912794 W6 7
July 17, 1995
July 20, 1995
January IS, 1996
July 20, 1995

Description of Offering:

Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .

$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .

DEPARTMENT

THE

TREASURY

OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, ~JWr" 'rASlQ,l"lG'rO!"!,, D.C .• 20220. (202) 622-2960
I:.

- . "\ ... 1 ... ~ . ,

FOR IMMEDIATE RELEASE
Remarks as prepared for delivery
July 12, 1995
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
BRADY LAW GRANTS ANNOUNCEMENT
I want to talk about how important the action being announced today is to
enforcement of what I believe is a landmark law in our efforts to reduce handgun
violence and save lives. This has been a cooperative effort on the Hill and in the
administratio~ and important progress is being made.
We're nearly a year and one-half into the Brady Law, and we know for a fact it is
keeping handguns out of the hands of people who have no business owning such
weapons. Mter our Bureau of Alcohol, Tobacco and Firearms did such a good job
implementing the law, they were asked to take a look at its results. The ATF estimated
in February, the one-year point for Brady, that it had stopped about 41,000 illegal
handgun sales. There is clear proof that handguns are being kept away from convicted
felons, fugitives, drug users, stalkers, spouse abusers and, yes, even children who have
tried to buy handguns. Very importantly, law-abiding Americans who want to own a
handgun are still able to purchase one with minimal inconvenience.
The requirements of the Brady Law are keeping these weapons out of reach of
the small percentage of people who use them in crimes. That's important when you look
at how many handguns there are in society and when you look at the crime figures.
There are an estimated 76 million handguns potentially available for sale in this
country. At least 2.5 million handguns were manufactured for domestic sales in 1993,
and our Bureau of Alcohol, Tobacco and Firearms estimates about 3.5 million handguns
were sold in the United States in 1993.
The importance of the Brady Law is reinforced by the crime numbers. The last
statistics available tell us that handguns figure in 86 percent of the violent crimes
recorded in this country, and that handguns are responsible for more than 13,500
murders every year.
RR-424

(more)

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

We want law enforcement personnel and firearms dealers to have a rapid way to
tell if a potential handgun buyer has a criminal record, is under indictment, or faces a
restraining order for potentially dangerous behavior. With some 3.5 million handguns
being sold each year, the faster police and dealers know if the wrong people are trying to
buy guns, the better.
This program is an important step in making it easier to ensure that people who
have no business with a handgun can't get one, and that law abiding citizens who want to
buy a handgun can get a quick "yes."
Thank you.
-30-

D EPA R T MEN T

0 F

THE

T R E IA SUR Y
,

IREASURY
OFFlCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHIl'lGTON, D.C. - 20220 - (202) 622-2960

Remarks as prepared for delivery
July 12, 1995

Remarks
by

Ronald K. Noble
Under Secretary for Enforcement
Department of the Treasury
before the
National Association of Blacks in Criminal Justice
Denver, Colorado
MEMBERS OF THE NATIONAL ASSOCIATION OF BLACKS IN CRIMINAL
JUSTICE, I AM HONORED AND HAPPY TO BE HERE TONIGHT. I AM HONORED
BECAUSE YOUR ORGANIZATION IS ON THE CUTTING EDGE OF LAW
ENFORCEMENT. I AM HAPPY TO BE HERE BECAUSE I DO NOT OFTEN ENOUGH
HAVE THE OPPORTUNITY TO SPEAK DIRECTLY WITH RANK AND FILE
MEMBERS OF LAW ENFORCEMENT.
BEFORE TURNING TO SOME PRESSING LAW ENFORCEMENT ISSUES, I
WANT TO CONGRATULATE YOU ON YOUR CONFERENCE AND YOUR
ACHIEVEMENTS. IN THIS ADMINISTRATION WE BELIEVE IN EXPANDING
OPPORTUNITY, AND WE BELIEVE THAT A PROPER ROLE FOR GOVERNMENT IS
EMPOWERING ALL PEOPLE TO MAKE THE VERY BEST OF THEIR LIVES.
AFRICAN AMERICANS IN LAW ENFORCEMENT ARE ESSENTIAL TO
HEAL THY CIVIC LIFE. IN OUR COMMUNITY, WE IMPROVE COMMUNICATION
AND UNDERSTANDING. WE MAKE POSSIBLE A SENSE OF JUSTICE. AND WE
MAKE IT MORE LIKELY THAT JUSTICE WILL BE ACHIEVED.
I AM PROUD TO SERVE IN AN ADMINISTRATION THAT INCLUDES
AFRICAN AMERICANS AT THE HIGHEST LEVELS OF LAW ENFORCEMENT,
INCLUDING DR. LEE BROWN AS THE HEAD OF THE OFFICE OF NATIONAL DRUG
CONTROL POLICY. IN MY POSITION AT TREASURY, I HAVE STRENGTHENED
OUR DEMAND REDUCTION PROGRAMS AND OUR BORDER DRUG INTERDICTION.
OUR LAW ENFORCEMENT BUREAUS PROVIDE MENTORS AND TUTORS IN OUR
SCHOOLS, TEACH YOUNG PEOPLE RESISTANCE TO GANGS, AND BECOME ROLE
MODELS TO OUR YOUTH.

I HAVE WORKED TO ACHIEVE DIVERSITY IN TREASURY'S ENFORCEMENT
BUREAUS. WE NOW HAVE A FEMALE HEAD OF U.S. INTERPOL; A FEMALE
DIRECTOR OF TREASURY'S ASSET FORFEITURE FUND; I APPOINTED THE FIRST
AFRICAN AMERICAN ACTING DIRECTOR OF A TREASURY BUREAU; THE FIRST
AFRIC AN AMERICAN ASSISTANT COMMISSIONER AT CUSTOMS, AND THE FIRST
AFRICAN AMERICAN ASSISTANT DIRECTOR AT ATF.
DIVERSITY ALONE IS NOT THE ANSWER. THERE HAS RECENTLY BEEN A
DISTURBING REPORT THAT FEDERAL LAW ENFORCEMENT AGENTS HAVE BEEN
PARTICIPATING IN AN ANNUAL "GOOD OLD BOYS" EVENT THAT INVOLVES
OPENL Y RACIST ACTS. IF THESE ACTIONS OCCURRED AS REPORTED THEY ARE
OUTRAGEOUS AND INCONSISTENT WITH BEHAVIOR BECOMING A LAW
ENFORCEMENT OFFICER. LET ME ASSURE YOU THAT WHEN I LEARN THE FULL
FACTS -- AN INQUIRY IS UNDERWAY -- I WILL ENSURE THAT APPROPRIATE
ACTION IS TAKEN. THE ONE POSITIVE THING I CAN SAY ABOUT THE REPORTS
I'VE HEARD SO FAR IS THAT A WHITE AND A BLACK AGENT VENTURED TO
THIS EVENT TOGETHER THIS YEAR. WHEN THEY UNDERSTOOD THE TONE OF
THE GROUP, THE TWO OF THEM LEFT TOGETHER AS WELL, AND REPORTED
WHAT HAD OCCURRED.
BUT ALL OF THE EFFORT AND ACHIEVEMENT WE ARE MAKING IN THE
AREA OF DIVERSITY AND EQUALITY AND DIGNITY IS BEING CHALLENGED BY
AN OMINOUS DEVELOPMENT: THE MANY ATTACKS ON FEDERAL LAW
ENFORCEMENT ACROSS THIS COUNTRY.
NEXT WEEK THE HOUSE OF REPRESENTATIVES WILL BEGIN HOLDING A
SERIES OF HEARINGS ON THE EVENTS THAT OCCURRED TWO YEARS AGO AT
WACO, TEXAS. THE FIRST FOUR DAYS OF THESE HEARINGS WILL FOCUS ON
THE ROLE OF THE BUREAU OF ALCOHOL TOBACCO AND FIREARMS AT WACO
AND THE REVIEW OF ATF'S INVESTIGATION OF DAVID KORESH THAT
SECRETARY BENTSEN MADE PUBLIC IN SEPTEMBER 1993 . THESE HEARINGS,
WHICH COVER GROUND ALREADY REVIEWED BY CONGRESS LAST YEAR, ARE
VERY MUCH ON MY MIND.
ALSO ON MY MIND DURING THESE PAST MONTHS SINCE THE BOMBING
OF THE FEDERAL BUILDING IN OKLAHOMA CITY ARE THE ATTACKS ON
FEDERAL LAW ENFORCEMENT, AND IN PARTICULAR ON THE BUREAU OF
ALCOHOL. TOBACCO, AND FIREARMS. ATF IS A VERY IMPORTANT MEMBER OF
THE TREASURY ENFORCEMENT FAMILY. TONIGHT I WOULD LIKE TO SHARE
WITH YOU SOME OF MY THOUGHTS ABOUT ATF, AND ABOUT THE VARIOUS
INVESTIGATIONS OF WACO.

AS POLICE IN SOME OF THE MOST DANGEROUS NEIGHBORHOODS OF
OUR NATION'S CITIES, YOU FACE VIOLENCE AND VILIFICATION BY ARMED
CRIMINALS EVERY DAY WHEN YOU DO THE WORK OF ENFORCING OUR
NATION'S LAWS. BUT I AM CERTAIN THAT SINCE YOU HAVE BEEN WORKING
AT YOUR JOBS, YOU HAVE NOT AWAKENED TO FULL PAGE ADVERTISEMENTS
IN YOUR MORNING NEWSPAPERS CALLING YOU AND YOUR ORGANIZATIONS
FASCISTS AND THUGS. BUT THIS IS PRECISELY WHAT HAS HAPPENED TO THE
ATF AND ATF AGENTS THIS PAST YEAR. THIS NAME CALLING HAS HAPPENED
IN NEWSPAPERS AND IT HAS EVEN HAPPENED IN CONGRESS.
AS THE SON OF A MILITARY FAMILY, I VIVIDLY REMEMBER THE 1960'S
WHEN SOLDIERS RETURNING FROM VIET NAM WERE CALLED BABY KILLERS,
AND WHEN POLICE WERE CALLED PIGS AND OTHER EPITHETS THAT I WILL
NOT REPEAT HERE, BY CITIZENS WHO OPPOSED THE WAR IN VIET NAM. THAT
LANGUAGE WAS WRONG AND TERRIBLY DIVISIVE. IT IS THE KIND OF VICIOUS,
UNF AIR, AND DESTRUCTIVE RHETORIC THAT ATF AND ITS AGENTS FACE
TODAY. IT IS NOT ONLY WRONG. IT IS NOT ONLY MOTIVATED BY THE LOWEST
FORM OF POLITICS. BUT IT DEEPLY IMPAIRS THE MORALE OF THE AGENTS ON
THE LINE.
I AM AWARE THAT SOME PEOPLE BELIEVE THAT THERE ARE LAW
ENFORCEMENT AGENTS WHO ARE OUT OF CONTROL AND WHO MISUSE THEIR
AUTHORITY. FROM TIME TO TIME POLICE OFFICERS SOMETIMES OVERSTEP
THEIR AUTHORITY. BUT, AS I OFTEN TELL MY STAFF , "I AM AN EVIDENCE
MAN, SHOW ME THE EVIDENCE." I HAVE NOT SEEN EVIDENCE THAT ATF OR
OJHER TREASURY AGENCIES ARE OUT OF CONTROL AND USING EXCESSIVE
FORCE AGAINST CITIZENS. IF, HOWEVER, YOU OR ANYONE IN YOUR
COMMUNITIES ARE A WARE OF ANY MISUSE OF AUTHORITY BY TREASURY
LAW ENFORCEMENT AGENTS, PLEASE BRING THEM TO MY ATTENTION, AND I
ASSURE YOU THEY WILL BE THOROUGHLY INVESTIGATED.
WHY IS ATF BEING ATTACKED NOW? WE ALL RECOGNIZE THAT THERE
IS ARE GROUPS IN OUR COUNTRY WHO DO NOT SUPPORT THE FIREARMS LAWS
THAT WERE PASSED WITH THE OVERWHELMING SUPPORT OF THE AMERICAN
PUBLIC. ATF IS THE PRINCIPAL AGENCY CHARGED WITH ENFORCING THOSE
LAWS. THE MOST EXTREME OPPONENTS OF THESE LAWS ARE VILIFYING THE
DEDICATED MEN AND WOMEN OF ATF. THEIR OBJECTIVE IS TO UNDERMINE
ATF'S ABILITY TO ENFORCE THE LAWS, TO UNDERMINE THE PUBLIC SUPPORT
FOR THE LAWS, AND ULTIMATEL Y TO WEAKEN THE LAWS THEMSELVES.
LET'S NOT CONFUSE THIS DESTRUCTIVE AGENDA WITH PROTECTED
SPEECH. WE LIVE IN A DEMOCRACY THAT CHERISHES AND PROTECTS PUBLIC
DEBATE ON IMPORTANT ISSUES. FOR THOSE WHO OPPOSE THE FIREARMS
LA WS, IT IS LEGITIMATE TO CRITICIZE THE LAW IF YOU DON'T LIKE IT.
3

Bl1'1' IT IS WRONG TO HARASS, INTIMIDATE, AND THREATEN THOSE WHO
ENFORCE THE LAW. AS AN EXPRESSION OF OPPOSITION TO LAWS LIKE BRADY
AND TilE AS SAUL T WEAPONS BAN. LAW ENFORCEMENT AGENTS WHO ARE
DOING THE DANGEROUS WORK OF PROTECTING THE REST OF SOCIETY
SHOULD NOT BE USED AS PAWNS IN A POLITICAL FIGHT. DESPITE THE
SHAMEFUL RHETORIC DIRECTED AT THEM, THE AGENTS OF ATF WILL NOT BE
DETERRED FROM DOING THEIR SWORN DUTY.
I CANNOT PROTECT ATF AGENTS FROM THE HARM AND THE HURT AND
THE INDIGNITY OF POLITICALLY MOTIVATED SLURS. BUT I CAN ASK YOU,
MANY OF WHOM I AM SURE HAVE WORKED SIDE BY SIDE WITH ATF AGENTS,
TO REFLECT UPON SOME OF THE HEROIC LAW ENFORCEMENT WORK
PERFORMED BY ATF IN OUR NATION'S CITIES. THE BEST WAY TO COUNTER
THESE INSULTS IS WITH THE JUST PRAISE THAT THESE MEN AND WOMEN
HAVE EARNED.
THIS IS THE TRUE ATF RECORD:
•

ATF IS IN THE FOREFRONT OF LAW ENFORCEMENT'S STRUGGLE
AGAINST GUN VIOLENCE IN OUR CITIES AND AMONG OUR YOUTH. ATF
HAS FORMED 21 ACHILLES TASK FORCES WITH STATE AND LOCAL LAW
ENFORCEMENT OFFICERS IN MAJOR CITIES WITH HIGH VIOLENT CRIME
RATES. BETWEEN 1988 AND 1994, THE ACHILLES PROGRAM TOOK 6,251
VIOLENT CRIMINAL OFFENDERS OFF THE STREETS.

•

ATF CONFRONTS SOCIETY'S MOST DANGEROUS CRIMINALS. OF THE
10,000 SUSPECTS ATF REFERRED FOR PROSECUTION IN 1994, 47 PERCENT
OF THESE WERE CONVICTED FELONS. 49 PERCENT WERE INVOLVED
IN NARCOTICS TRAFFICKING. 25 PERCENT HAD VIOLENT CRIMINAL
HISTORIES.

•

ATF ALSO PROVIDES SCIENTIFIC EXPERTISE AND GUN TECHNOLOGY
SUPPORT FOR OTHER LAW ENFORCEMENT AGENCIES. IN NOVEMBER
1994, TWO FBI AGENTS AND A D.C. POLICE DETECTIVE WERE KILLED BY
A SUSPECT IN AN UNPROVOKED SHOOTING INCIDENT INSIDE THE D.C.
POLICE HEADQUARTERS. ATF TRACED THE MURDER WEAPON TO A GUN
TRAFFICKING RING RESPONSIBLE FOR TRAFFICKING FIREARMS FROM
ALABAMA TO WASHINGTON, D.C. THREE MEN ASSOCIATED WITH THE
RING HAVE BEEN CONVICTED ON CHARGES OF VIOLATING FEDERAL
FIREARMS LAWS.

•

AFTER THE WORLD TRADE CENTER BOMBING, IT WAS AN ATF
EXPLOSIVES TECHNICIAN AND A MEMBER OF THE NEW YORK CITY
BOMB SQUAD THAT FOUND THE KEY PIECE OF EVIDENCE -- THE
4

VEHICLE IDENTIFICATION NUMBER FROM A RENTED VAN -- THAT
ALLOWED ATF, THE FBI AND THE NEW YORK CITY POLICE TO IDENTIFY
AND BRING TO JUSTICE THE ISLAMIC FUNDAMENTALISTS ACCUSED IN
THE BOMBING.
ATF AGENTS ARE WORKING HAND-IN-HAND WITH OTHER FEDERAL,
STATE, AND LOCAL LAW ENFORCEMENT AGENCIES TO SOLVE THE
HORRIBLE BOMBING IN OKLAHOMA CITY. AFTER MCVEIGH WAS
STOPPED FOR A TRAFFIC VIOLATION, AN ATF AGENT WAS
INSTRUMENTAL IN IDENTIFYING TIMOTHY MCVEIGH, WHICH LED TO HIS
ARREST IN THE OKLAHOMA CITY BOMBING CASE.
FOR THESE, AND OTHER ACTIONS, ATF AGENTS, AND ALL LAW
ENFORCEMENT OFFICERS, DESERVE THE FULL SUPPORT AND RESPECT OF THE
CONGRESS AND THE AMERICAN PEOPLE, NOT THEIR DISDAIN. NEVERTHELESS,
THERE IS AN UNPRECEDENTED SWELL OF VIOLENCE, HATRED, AND
DISRESPECT FOR FEDERAL LAW ENFORCEMENT OFFICERS. IN A SOCIETY
THAT ONE ROSE UP AGAINST EXTREMIST RHETORIC AND STOOD WITH OUR
LOCAL POLICE, WE HAVE IN SOME QUARTERS BECOME THE "BAD GUYS" AND
PEOPLE WHO OPENLY PREACH DEFIANCE OF THE LA W HAVE BECOME THE
"GOOD GUYS."
GROUPS OR INDIVIDUALS PREACHING "STATE'S RIGHTS," "COUNTY
SUPREMACY," OR ANARCHY AS DOES THE UNABOMER, OR OTHER SIMILAR
THEMES ADVOCATE THAT CITIZENS SHOULD OPPOSE, BY FORCE IF
NECESSARY, THE FEDERAL GOVERNMENT. BECAUSE CONGRESS HAS GIVEN
ATF PRINCIPAL RESPONSIBILITY FOR ENFORCING OUR NATION'S GUN LAWS,
THESE GROUPS SEE ATF AS THEIR "ENEMY." THE HATEMAIL RECEIVED BY
ATF AGENTS FROM CITIZENS WITH AN EXTREME FOCUS ON GUNS IS BOTH
FRIGHTENING AND SOBERING.

THIS IS THE ENVIRONMENT IN WHICH THE WACO HEARINGS IN
CONGRESS WILL TAKE PLACE. BUT LET ME SAY THIS: LAW ENFORCEMENT
SHOULD NOT BE ABOVE CRITICISM. WHEN WE ARE WRONG -- WHEN WE
OVERSTEP OUR LEGITIMATE AUTHORITY OR SIMPLY MAKE MISTAKES -- WE
MUST CONCEDE OUR MISTAKES, LEARN FROM THEM, AND MOVE FORWARD.
THIS IS WHAT WE DID AFTER WACO: WE TOOK A HARD LOOK AT MISTAKES ,
PRESENTED THEM TO THE PUBLIC FOR SCRUTINY, AND MOVED FORWARD
BASED ON THE LESSONS LEARNED.
ON FEBRUARY 28,1993, FOUR BRAVE ATF AGENTS WERE KILLED WHILE
ATTEMPTING TO EXECUTE A LAWFUL SEARCH AND ARREST WARRANT ON
DAVID KORESH AT THE BRANCH DAVIDIAN COMPOUND IN WACO. ON APRIL
5

19. 1993. DURING THE FBI RAID AIMED AT BRINGING AN END TO THE ST ANDOFF. DAVID KORESH AND HIS FOLLOWERS SET FIRE TO THE COMPOUND AND
KILLED MANY INNOCENT CHILDREN.
PRESIDENT CLINTON AND SECRETARY BENTSEN, THE CONGRESS AND
THE PUBLIC, ALL WANTED ANSWERS. PRESIDENT CLINTON DIRECTED BOTH
TREASURY AND THE JUSTICE DEPARTMENT TO CONDUCT VIGOROUS AND
THOROUGH INVESTIGATIONS OF WHAT HAD LED TO THE LOSS OF LAW
ENFORCEMENT AND CIVILIAN LIVES.
SECRET ARY BENTSEN ASKED ME TO LEAD THE TREASURY
DEPARTMENT'S REVIEW OF ATF'S INVOLVEMENT, FROM THE BEGINNING OF
THE INVESTIGATION THROUGH THE UNSUCCESSFUL EFFORT TO EXECUTE
SEARCH AND ARREST WARRANTS. HE DEMANDED THAT THE INVESTIGATION
BE HONEST, UNCOMPROMISING, AND COMPREHENSIVE.
TO ENSURE THAT THE REPORT WAS IMPARTIAL AND COMPREHENSIVE,
SECRETARY BENTSEN ENLISTED THREE INDIVIDUALS OF NATIONAL
PROMINENCE AND THE HIGHEST INTEGRITY -- PULITZER PRIZE WINNING
JOURNALIST EDWIN GUTHMAN, WATERGATE PROSECUTOR HENRY RUTH, AND
LOS ANGELES POLICE CHIEF WILLIE WILLIAMS. THEIR ROLE WAS TO PROVIDE
GUIDANCE TO THE INVESTIGATION, CONSIDER ITS FINDINGS, AND ASSESS THE
FINAL REPORT. THEY RECEIVED NO PAYMENT FOR THEIR SERVICES.
TREASURY'S OFFICE OF THE INSPECTOR GENERAL WORKED CLOSELY WITH
THE REVIEW TEAM TO ENSURE THAT THE REVIEW WAS THOROUGH AND
UNBIASED.
WE ASSEMBLED AN INVESTIGATIVE TEAM OF SEVENTEEN SENIOR
INVESTIGATORS FROM THE SECRET SERVICE, THE CUSTOMS SERVICE , THE IRS ,
AND THE FINANCIAL CRIMES ENFORCEMENT NETWORK. NO ATF PERSONNEL
TOOK PART IN THE REVIEW.
THE REVIEW TEAM ALSO CONSULTED WITH 10 NON-TREASURY EXPERTS
IN T ACTICAL OPERATIONS, FIREARMS, AND EXPLOSIVES. LIKE THE
INDEPENDENT REVIEWERS, THE INDEPENDENT EXPERTS SERVED WITHOUT
PAY.
WE ALL KNOW HOW DIFFICULT IT IS FOR ANY ORGANIZATION TO JUDGE
ITS OWN. IT CAN BE ESPECIALLY PAINFUL IN THE LAW ENFORCEMENT
COMMUNITY WHERE SUCCESS, AND SOMETIMES SURVIVAL, DEPENDS ON
COMRADERIE AND LOYALTY. ONE OF THE SENIOR EXECUTIVES IN MY OFFICE
LIKENED THE WACO REVIEW TO CONDUCTING OPEN HEART SURGERY ON
YOURSELF. WITHOUT ANAESTHESIA.

IN CHOOSING THE MEMBERS OF THE REVIEW TEAM , MY FIRST PRIORITY
WAS TO ASSEMBLE THE BEST INVESTIGATIVE TEAM COMPOSED OF
INDIVIDUALS WITH THE INTEGRITY AND THE COMMITMENT TO FIND OUT
WHAT EXACTLY HAPPENED. I CAN ASSURE YOU, THE REVIEW TEAM
EXCEEDED MY HIGHEST HOPES IN THIS REGARD.
AT THE SAME TIME, WE ALSO ENSURED THAT THE INVESTIGATION
TEAM INCLUDED PEOPLE OF COLOR AND WOMEN. INDEED, THE WACO
REVIEW TEAM INCLUDED 8 AFRICAN-AMERICANS, 7 WOMEN, 1 HISPANICAMERICAN, AND 1 ASIAN-AMERICAN.
OVER A 5-MONTH PERIOD, BETWEEN MAY AND OCTOBER 1993, MEMBERS
OF THE TEAM TRAVELLED THE COUNTRY AND CONDUCTED OVER 500
INTERVIEWS TO DETERMINE WHAT HAPPENED NEAR WACO AND WHY. WE
RECEIVED UNQUALIFIED COOPERATION FROM THE HUNDREDS OF ATF AGENTS
WHO WERE INTERVIEWED. WITHOUT THEIR SUPPORT, OUR DIFFICULT TASK
WOULD HAVE BEEN RENDERED ALL BUT IMPOSSIBLE.
SECRETARY BENTSEN ISSUED TREASURY'S 220 PAGE REPORT ON
SEPTEMBER 30,1993. IT WAS CRITICAL OF ATF AND MAIN TREASURY. MAJOR
NEWSPAPERS PRAISED THE REPORT FOR ITS CANDOR AND THOROUGHNESS.
THE TREASURY REPORT MAKES CLEAR THAT THE EVENTS AT WACO
WERE UNUSUAL AND THERE WERE PLENTY OF LESSONS TO LEARN. IN
RESPONSE, BOTH ATF AND MAIN TREASURY HAVE MADE ORGANIZATIONAL
REFORMS.
AFTER THE REPORT WAS ISSUED, NUMEROUS PERSONNEL CHANGES
WERE MADE, BOTH IN WASHINGTON AND IN THE FIELD. THE LEADERSHIP AT
ATF HEADQUARTERS WAS REPLACED. THE DIRECTOR OF THE ATF RETIRED. I
APPOINTED THEN SECRET SERVICE DIRECTOR JOHN MAGAW, A THIRTY FOUR
YEAR VETERAN OF LAW ENFORCEMENT AND A KNOWN REFORMER AS THE
NEW DIRECTOR. THE 2 RAID COMMANDERS WERE RELIEVED OF THEIR LAW
ENFORCEMENT DUTIES. THEY NO LONGER WEAR BADGES, CARRY GUNS, OR
SUPERVISE LINE AGENTS. THEY WERE DISCIPLINED FOR ERRORS IN
JUDGMENT AND FOR FALSE AND MISLEADING STATEMENTS THEY MADE
FOLLOWING THE RAID.
SINCE THE WACO INCIDENT, FOUR SEPARATE CONGRESSIONAL COMMITTEES
HAVE HELD SEVEN DAYS OF HEARINGS ON ATF'S ROLE AT WACO. NOW TWO
MORE HOUSE SUBCOMMITTEES ARE HOLDING HEARINGS NEXT WEEK. I HAVE
SEEN THE PROPOSED SCHEDULE FOR THE HEARINGS. THE MEMBERS ARE
PLANNING TO ASK THE SAME BASIC QUESTIONS THAT WERE ADDRESSED TWO
YEARS AGO IN THE TREASURY REVIEW.
7

LET ME TELL YOU WHAT THESE BASIC QUESTIONS ARE AND HOW THE
TREASURY REVIEW ANSWERED THEM.

FIRST, WAS THE INVESTIGATION OF DAVID KORESH AND HIS
FOLLOWERS TO DETERMINE WHETHER THERE WAS PROBABLE CAUSE TO
BELIEVE THAT FEDERAL FIREARMS LAWS HAD BEEN VIOLATED PROPERLY
CONDUCTED?
MY IMPRESSION IS THAT CRITICS WORRY THAT ATF SINGLED OUT
KORESH AND HIS FOLLOWERS FOR INVESTIGATION BECAUSE THEY WERE AN
UNCONVENTIONAL RELIGIOUS GROUP. THAT IS NOT WHAT HAPPENED. DAVID
KORESH WAS INVESTIGATED FOR FIREARMS VIOLATIONS, NOT HIS RELIGIOUS
BELIEF OR RELIGIOUS PRACTICES.
ATF'S INVESTIGATION BEGAN IN LATE MAY 1992 WHEN THE SHERIFF OF
MCLENNAN COUNTY, TEXAS, ASKED ATF TO INVESTIGATE SUSPICIOUS UPS
DELIVERIES TO CERTAIN PERSONS RESIDING AT THE BRANCH DAVIDIAN
COMPOUND. THESE DELIVERIES INCLUDED MORE THAN $10,000 WORTH OF
FIREARMS, INERT GRENADE CASINGS, AND A SUBSTANTIAL QUANTITY OF
BLACK POWDER.
ATF BEGAN A FORMAL INVESTIGATION ON JUNE 9, 1992 TO PURSUE
EVIDENCE OF TWO VIOLATIONS: (1) THE ILLEGAL MANUFACTURE OF MACHINE
GUNS FROM COMPONENT PARTS, AND (2) THE ILLEGAL MANUFACTURE AND
POSSESSION OF DESTRUCTIVE DEVICES, INCLUDING EXPLOSIVE BOMBS AND
GRENADES AND THE MATERIALS NECESSARY TO PRODUCE THEM.
BY NOVEMBER 1992, THE ASSISTANT U.S. ATTORNEY WAS SATISFIED
THAT PROBABLE CAUSE EXISTED TO SUPPORT SEARCH AND ARREST
WARRANTS. THE FEDERAL MAGISTRATE-JUDGE WHO ISSUED THE WARRANTS
AGREED.
WHEN THE COMPOUND WAS SEARCHED AFTER THE FIRE, THE
FOLLOWING ILLEGAL WEAPONS WERE RECOVERED:
48 MACHINE GUNS
70 SILENCERS
4 FUNCTIONAL PRACTICE HAND GRENADES
DOZENS OF GRENADE COMPONENTS
THE TREASURY REVIEW TEAM CONSULTED TWO WEAPONS EXPERTS
AND TWO EXPLOSIVES EXPERTS. EVERYONE CONSULTED CONCLUDED THAT
THE EVIDENCE GATHERED BY ATF AMOUNTED TO PROBABLE CAUSE OF
VIOLATIONS.

MOREOVER, AT THE TRJAL OF THE 11 BRANCH DA VIDIANS ON WEAPONS
AND MANSLAUGHTER CHARGES LAST YEAR, NONE OF THE DEFENSE
ATTORNEYS CHALLENGED THE WARRANTS.
THE SECOND QUESTION BEING ASKED BY CONGRESS IS, ONCE THE
THRESHOLD FOR PROBABLE CAUSE FOR A SEARCH WARRANT TO SEARCH
THE BRANCH DAVIDIAN COMPOUND WAS MET, DID THE ATF DEVELOP AN
APPROPRIATE PLAN FOR EXECUTING THE WARRANT?

THE TREASURY REVIEW FOUND THAT THERE WERE SERIOUS FLAWS IN
THE PROCESS OF PLANNING TO EXECUTE THE WARRANTS. THERE WAS POOR
INTELLIGENCE GATHERING AND ANALYSIS. ATF TOO QUICKLY DISMISSED
AL TERNATIVES TO EXECUTING WARRANTS, SUCH AS THE POSSIBILITY OF
LURING KORESH OFF THE PREMISES AND ARRESTING HIM A WA Y FROM THE
COMPOUND.
THE THIRD AREA OF CONGRESSIONAL QUESTIONING CONCERNS THE
RAID ITSELF, DID THE ATF CARRY OUT THE PLAN IN AN APPROPRIATE
MANNER?
FIRST, THE REVIEW POINTS OUT, THE RAID COMMANDERS DEPARTED
SIGNIFICANTLY FROM THE RAID PLAN. THE PLAN WAS DEPENDENT ON
SURPRISE BUT THE COMMANDERS WENT FORWARD WHEN SURPRJSE WAS
LOST. THE PLAN WAS DEPENDENT UPON THE DAVIDIAN MEN BEING
SEPARATED FROM THE WEAPONS IN THE COMPOUND. THE COMMANDERS
IGNORED THIS FUNDAMENTAL PRECONDITION, PROCEEDING BEFORE THE MEN
WERE SCHEDULED TO BE OUTSIDE AND CONTINUING FORWARD WHEN THERE
WAS NO EVIDENCE OF ACTIVITY OUTSIDE THE COMPOUND.
AS THE REVIEW MAKES CLEAR, THE DECISION TO GO FORWARD WITH
THE RAID WAS A MISTAKE, NOT MERELY IN HINDSIGHT, BUT BASED ON
WHAT THE DECISIONMAKERS KNEW AT THE TIME.
THESE ARE JUST SOME OF THE HIGHLIGHTS OF THE TREASURY REPORT.
TWO YEARS AFTER THE REPORT WAS ISSUED, THERE MAY WELL BE DETAILS
THAT CAN BE ADDED. IT MAY BE POSSIBLE TO EXPAND ON SOME OF THE
SUBJECTS THAT COULD NOT BE INCLUDED IN THE 500 PAGES OF REPORT AND
EXPERT REPORTS TREASURY PROVIDED. BECAUSE I AM A PERFECTIONIST BY
NATURE I WILL BE DISAPPOINTED IF CORRECTIONS THAT SHOULD HAVE BEEN
MADE ARE POINTED OUT TO ME. BUT I WILL NOT BE SURPRISED. SINCE WE
ISSUED OUR REPORT, THERE WAS A LENGTHY TRIAL PROVIDING
INFORMATION THAT DID NOT EXIST WHEN WE DID OUR INVESTIGATION.

WHA TEVER FACTUAL ADDITIONS AND MODIFICATIONS COULD IDEALLY
BE MADE. HOWEVER, I DO NOT BELIEVE THAT ANY EXAMINATION WILL
AL TER OUR FUNDAMENTAL CONCLUSIONS ABOUT THIS TRAGIC EPISODE IN
LAW ENFORCEMENT HISTORY: ATF HAD A LEGITIMATE, COMPELLING, AND
LA WFUL BASIS FOR INVESTIGATING DAVID KORESH FOR VIOLATION OF
FEDERAL FIREARMS LAWS; THE PLANNING EFFORT FOR EXECUTION OF THE
WARRANTS WAS SERIOUSLY FLAWED; AND THE RAID SHOULD NOT HAVE
BEEN CARRIED OUT UNDER THE CIRCUMSTANCES THAT EXISTED.
WHATEVER MISTAKES WERE MADE BY ATF, HOWEVER, THE REAL
VILLAIN AT WACO WAS DAVID KORESH. HE WAS TIPPED OFF 45 MINUTES
BEFORE THE RAID BEGAN. WITH THE KNOWLEDGE THAT AGENTS WERE
COMING WITH A LAWFUL WARRANT, KORESH ARMED HIS FOLLOWERS WITH
ILLEGAL MACHINE GUNS, GRENADES, AND OTHER ASSAULT WEAPONS, AND
PLACED A SNIPER ON THE WATER TOWER. THEY THEN LAY IN WAIT. WHEN
THE ATF AGENTS ARRIVED, LAW ENFORCEMENT AGENTS WERE AMBUSHED.
FOUR ATF AGENTS WERE BRUTALLY KILLED.
OTHER AGENTS WERE MAIMED AS THEY SOUGHT COVER BEHIND CARS AND
OTHER BARRIERS. IN THE FACE OF WITHERING FIRE, ATF AGENTS ACTED
WITH HONOR AND HEROISM. THROUGHOUT THE FlREFIGHT. THEY
DEMONSTRA TED EXTRAORDINARY DISCIPLINE, COURAGE, AND HEROISM. LET
ME CITE JUST TWO EXAMPLES:
SPECIAL AGENT TIM GABOURIE, A MEDIC, REPEATEDLY EXPOSED
HIMSELF TO GUNFIRE TO TREAT SEVERAL WOUNDED AGENTS.
ANOTHER SPECIAL AGENT LEFT A PROTECTED POSITION TO THROW HIS
BODY OVER A WOUNDED COLLEAGUE.
THIS ADMINISTRATION HAS SHOWN A FIERCE DEDICATION TO LAW
ENFORCEMENT AND TO REDUCING VIOLENT CRIME IN OUR COUNTRY.
SECRETARY RUBIN SPEAKS OUT EVERY DAY IN DEFENSE OF ATF'S AGENTS
AND ITS PROFOUNDLY IMPORTANT MISSION. TWO DAYS AGO, SECRETARY
RUBIN AND I PARTICIPATED IN THE UNVEILING OF THE INSCRIPTIONS ON A
PLAQUE AT TREASURY OF THE NAMES OF EIGHT MEMBERS OF TREASURY
ENFORCEMENT BUREAUS WHO DIED AT OKLAHOMA CITY IN A BOMBING.
EVERY DAY, YOU ARE ON THE FRONT LINES OF THE STRUGGLE IN OUR
SOCIETY BETWEEN RIGHT AND WRONG, DIALOGUE AND VIOLENCE, ORDER
AND CHAOS. WHEN I TESTIFY AT THE HOUSE HEARINGS ON WACO, I WILL BE
STRENGTHENED BY THE KNOWLEDGE OF YOUR STRUGGLE, YOUR
DEDICATION, AND THE SACRIFICES YOU AS LAW ENFORCEMENT AGENTS ARE
TOO OFTEN CALLED UPON TO MAKE TO PRESERVE THE LIFE AND LIBERTY OF
THE CITIZENS OF THIS COUNTRY.
-3010

DEPARTMENT

TREASURY

_ _ _ _ _ _ _ _""":1

THE

TREASURY

NEWS

: : . . ._ _ _ _ _ _ _ _
Q

OFFlCE OF PUBUC AFFAIRS • 1500 PE.r\NSnXANL;\ AVENl'E, ;-";.W .• WA5iHINGTO', D.c:.. 20220.12021622-2960

July 13, 1995
'.'

--: ._ ..-:-, . '.~1!-... -:-.;'.~·\'lq·~

TIlE DISCIPLINE' 'OF FAILURE
Richard S. Carnell
Assistant Secretary oC the Treasury
Cor Fmanciallnstitutions
Conference on Foreign Banks in the United States:
Economic, Supervisory, and Regulatory Issues
OfrlCe oC the Comptroller oC the Currency

It is a pleasure to participate in the ace's conference on foreign banks in the United
States. To those of you who represent foreign banks with operations in this country, I
extend a hearty welcome. Those of us at the Treasury who deal with issues involving crossborder banking well understand the benefits the U. S. economy derives from the large
contingent of foreign banking institutions represented, in greatly varying ways and to greatly
varying degrees, in the U.S. financial system.
I think: you are all well aware of the mutual benefits of integrating the world's
financial markets. What I would like to discuss today is a vital lesson other countries can
draw from recent U.S. experience in managing (or mismanaging) risk in the banking system.
Given the natural reluctance of any country to run controlled experiments on its own
economy and financial system, one of the few ways to learn without suffering is to look at

the outcome of failed poliCies in other countries.
The failed U.S. policies for managing risk in the banking system that I am referring
to date back to die Bankin& Act of 1933 -- this nation's response to the banking collapse of
the early 19301. The approach was simple: get banks out of any business that appeared
unfamiliar or unduly risky; put up barriers to competition in the form of chartering
restrictions, product restrictions, and interest rate ceilings to maintain banks' earnings and
financial strength; and introduce federal deposit insurance to eliminate the potential for any
future failures to cause depositor anxiety and interbank contagion.

RR-426
-MOREFar press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2
What this approach failed to deal with was incentives: banks' incentives to take
undue risks and seek ways to circumvent the new restrictions on their ability to compete;
customers' incentives to seek out less regulated alternatives; and regulators' incentives to
paper over problems as they arose, rather than deal with them promptly and forthrightly.
This omission did not result from a universal failure to recognize the problem: President
Roosevelt, Senator Glass, and many bankers and academics voiced misgivings about the
potential for deposit insurance to create moral-hazard problems.
For many years (indeed, as late as the early 1970s) one could believe that the system
was working extremely well. A set of favorable factors -- such as the Depression-forged
conservatism of a generation of bankers -- postponed any real stress-test of the system.
It was only after market interest rates first approached and then exceeded regulatory
ceilings, bank loan-to-asset ratios approached historical highs, a new generation of managers
with no memories of the Depression succeeded to leadership, and banks began to feel
constrained by the existing array of geographic and product restrictions that any question
arose about the emperor's clothes. The credit crunches and disintermediation of 1966 and
1969, the failures of Public Bank of Detroit in 1970 and U.S. National Bank of San Diego in
1973, the recommendations of the Hunt Commission in 1971, and the birth of money market
mutual funds in 1973 all provided warnings that the emperor, if not down to his skivvies,
was less than adequately attired for the gathering storms. But not until the sharp reversal in
Federal Reserve monetary policy in late 1979 was the emperor fully revealed in all his
nakedness; the sharp rise in interest rates in the spring of 1980 stripped away the fmal veil
and disclosed a depository system needing fundamental reform.
Thrifts took the hardest hit. We know the story of a rigidly designed thrift industry,

whose liabilities repriced faster than its assets, shocked by the high and variable interest rates
induced by the change in monetary policy. Unfortunately, what is less well known is how
the thrift regulator's failure to close insolvent institutions exacerbated the debacle. Legislators
and regulators continued to believe (or at least to hope) that the health of the thrift industry
could be restored simply by deregulating prices and products and giving troubled institutions
a little time to grow out of their problems. Thus began a decade of capital forbearance; of
regulatory accounting designed to conceal rather than to reveal; and of tolerating continued
(and, in llWly cases, greatly increased) risk-taking by institutions that had long been book
value-insolvent. Tbe coats of falling to deal with incentives earlier -- a $150 billion tab for
taxpayers, the loss of COGfidence in government and the regulatory process -- have been high
indeed.
The American banking industry also suffered problems during the 19805. Bank
regulators acted more quickly than thrift regulators to close insolvent institutions, but the
sheer number of failures depleted the FDIC's Bank Insurance Fund in 1991. And we know
now that bank regulators could have done an even better job had they been armed with more
effective tools.

3
In enacting the FDIC Improvement Act of 1991, the Congress finally took on issues it
had shied away from for decades. The Act required risk-based premiums, prompt corrective
action, and least-cost resolution. Prompt corrective action requires regulators to impose
increasingly stdngent restrictions and requirements on an institution as its capital declines
below required levels -- with the goal of resolving the institution's problems at no loss or
minimal loss to the deposit insurance fund. Least-cost resolution curtails too-big-to-fail
policies by generally requiring the FDIC to resolve failed or failing institutions using the
method least costly to the deposit insurance fund. Exceptions can be made only if necessary
to avoid "serious adverse effects on economic conditions or financial stability," and then only
if proposed by two-thirds majorities of both the Federal Reserve Board and the FDIC's
Board of Directors and approved by the Secretary of the Treasury. Congress intended this
exception only "for those rare instances in which the failure of an institution could threaten
the entire financial system."
These reforms hail the arrival of a new day in the supervision of depository
institutions in this country. The reforms have already been effective. Healthy institutions
have strengthened their balance sheets and management. Undercapitalized institutions are
rare. Uninsured depositors and other creditors do pay attention to the health of the
institutions with which they deal. The costs to the FDIC of resolving failed institutions have
fallen dramatically, both in absolute dollars and as a percentage of failed institutions' assets.
The reforms signify the belated recognition (and major steps toward the solution) of
an essentially universal problem. For many years, some foreign banking regulators berated
the United States for allowing banks to fail. Now, many aspects of our system deserved
such scorn -- the aspects that were actually conducive to large numbers of bank failures, such
as branching and other geographic restrictions that tended to keep institutions small and
hinder diversification of their loan portfolios.

But the possibility of failure itself -- with repercussions for managers, shareholders,
and some classes of creditors, if not for insured depositors -- is a vital source of discipline.
More and more, countries that once would have viewed a bank failure as a stain on their
national honor are comina to realize that there are worse disgraces. And even though
cultural and national differenc:es may modify the effect of given regulatory regimes from one
country to aootber, the responses of consumers, managers, and regulators to financial
incentives ale .ffidently similar to suggest that - just as what fails abjectly in the United
States is likely to fail abjectly abroad - what succeeds here also stands a good chance of
succeedin& elsewhere. Bank customers everywhere want convenience, good service, and
competitive prices. Shareholders and creditors want good returns and moderate risk. And
IIWla&en want to keep their jobs.
It may help, in stressin& the universal necessity for appropriate regulatory incentives
relardless of a nation's size, culture, and institutions, to recall an incident that occurred
some years ago at a conference on financial regulation. A prominent American academic
was discussing the Danish bank regulatory system -- which relies (apparently with

4
considerable success) on prompt closure of failing institutions to maintain stability. He
suggested that such an approach might prove useful in the United States. The chief executive
of a major bank responded that what worked in a small country like Denmark was hardly
relevant to a banking system as large and complex as that of the United States. That's
parochialism.
The fact remains that a very diverse set of countries around the world have recently
experienced banking problems that have highlighted the importance of imposing costs on
managers and shareholders through failure and resolution -- as a means of controlling risk in
the longer run. Countries that have adamantly rejected such a solution have had to recognize
the high costs of maintaining such a policy. While American-style democracy may not be
easy to export, an appropriate system of bank regulatory incentives -- like petroleum, caviar,
and rock-and-roll -- is a commodity that should be in demand worldwide. And especially at
the price r m offering it for today.

-30-

ws
OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE. N.W. - WASHINGTON. D.C .• 20220. (202) 622-2960
.._, - -..: ,
\

\",

STATEMENT OF THE HONORABLE ROBERT E. RUBIN
SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
July 14, 1995

Mr. Chairman and members of the Committee, thank you for

th~- invitation

to speak

with you this morning about the U.S. program to support Mexico's stabilization.

Since I testified on Mexico before this Committee on March 10, f\lexico's
stabilization program has gained very significant ground. While Mexico continues to face
substantial challenges, I am greatly encouraged by progress achieved to (Lue. The goal of
promoting U.S. exports, jobs, and the security of our borders over the long run is being
accomplished. Potential spillover into other emerging markets that are so iIl1portant to U. S.
security and economic interests has been contained.

The U.S.-led international support program has been essential to f\kxico's success so
far. Our funds, along with financial support from the international cOllllllllnity via the IMF,
RR-427
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

the Inter-American Development Bank, and the World Bank, have supported Mexico in
implementing the policies needed to put its economy back on the track towards growth and
prosperity.

As you know, on July 5, the Treasury provided $2.5 billion in support to Mexico.
That brought total outstanding funding by the United States under the February 21
agreements to $12.5 billioll, including $1 billion from the Federal Reserve. I have been
asked why, if Mexico is making substantial progress, we provided this latest disbursement.
This is an important question which both Under Secretary Summers and 1 will address today.
Before we do so, however, I want to review the reasons the President authorized the
program and why it is so important to persevere.

U.S. Interests

On January 31, with the bi-partisan support of the congressional leadership and of the
Federal Reserve Board, the President acted to safeguard important U.S. interests by
authorizing up to $20 billion in support to Mexico through Treasury's Exchange Stabilization
Fund, or ESF. Potential escalation of the crisis in Mexico was a direct, long term threat to
U.S. exports and jobs that depend on bilateral trade. At the same time, the crisis put at risk
the security of our 2,OOO-mile border with Mexico.

Mexico's diffIculties threatened to spread beyond its borders to other promising

emerging markets. That could have had a chilling effect on the important market reforms
that these countries have been advancing, and which we have been advocating for decades.
Our leadership was central to protecting our interests and to marshalling international support
-- specifically, $18.9 billion in emergency support from the IMF.

On February 21, I signed four Agreements to implement the plan. These agreements
were based on one overriding principle: the need to protect U.S. interests. They contain
rigorous economic, financial and reporting requirements

ensure that all U.S. resources

committed in this program are secure. Funding to Mexico has been proviued in stages, and
before each new disbursement, we have verified that Mexico continues to meet these strict
conditions.

The agreements provide assured backing for our support from Mexico's oil export
proceeds. Given the importance of the oil backing, we formed an interagency working group
to analyze Mexico's oil export prospects over the long term. The group's conclusions

confirm that Mexico's oil export revenues will fully back all outstanding disbursements and
potential disbursements under the program.

Returning Confidence

When I first appeared before this Committee four months ago to describe our support
effort, it was far too soon to make anything but the most preliminary judgement about the

probability of success, though it was certainly our view that this plan should work.
the signs of success are substantial. Mexico's government has

demonstrat~d

Today,

a steadfast

determination to meet its commitments, and take the steps necessary to restore financial
stability. Market confidence has begun to return, and capital inflows to Mexico have
resumed. Mexico's money supply, on an inflation adjusted basis, has declined by 38 percent
this year. Mexico has moved to a fiscal surplus, and to a trade surplus. The outstanding
stock of tesobonos, which were at the heart of the Mexican crisis, have been reduced from
$29.2 billion at the beginning of the year to $8.9 billion today. More than $2 billion in
dollar borrowings from the bank insurance fund have

hp".,

repaid.

The crisis of confidence which Mexico's situation created in other emerging markets
has subsided. Mexico is regaining access to international capital markets faster than
expected.

Just this week, the government returned to the international markets with a highly

successful bond issue. The success and expansion of such efforts are essential for continued
stability and a return to growth.

Political Reforms

While our assistance program is not conditioned on political and judicial reforms, its
support of economic stabilization has increased the prospects for their sllccess. Since taking
office, President Zedillo has moved to weed out corruption and has taken steps to continue
reform of Mexico's judicial and electoral systems. The fact that opposition candidates have

won recent electoral victories is an encouraging sign that the democratization process is
deepening.

Cooperation to Halt Narcotic Trafficking

Mexico is making progress on other fronts. U.S.-Mexican cooperation in combatting
illicit drug trafficking has improved markedly. Attorney General Reno has held repeated
talks with Mexican Attorney General Lozano since the day of President Zedillo's
inauguration. The two have established anew, intensive coordination mechanism at the
senior policy level. The Justice Department informs me that Mexico's resolve has begun to
bear fruit, such as the arrest three weeks ago of Hector Salazar, a powerful Mexican drug
leader, the capture of Jose Sosa-Mayorga, an important crimimil kingpin in late May, and the
April seizure of a record $6.35 million in cash at Mexico City's airport.

Attorney General Lozano intends to push a'tough penal code reform package through
the Mexican legislature this autumn. That will greatly enhance Mexican investigative
procedures. We expect our joint efforts to progress further in the months ahead. Obviously,
much more needs to be done, and we will continue to push forward with the Mexicans to
combat the narcotics problem.

Lessons for the Inttrnational Financial Community

The international financial community has also learned much from Mexico's
experience. In this age of faster and more integrated capital markets, we must improve our
tools for preventing crises before they happen, and enhance international capacity to deal
quickly with crises that do unfold, before they spread to other parts of the global financial
system. That is why the G-7 countries support a range of measures designed to increase
transparency and surveillance, and expand emergency financing capabilities through the
IMF's General Agreement to Borrow. These steps will adapt the financial system to present
needs, without cost to the V.S. budget.

Latest Disbursement -- Promoting Stability

Clearly, Mexico has come a long way in a short time. With a strong trade
performance, sound financial policies, and continued structural reform, growth should return
by 1996. Our decision to disburse $2.5 billion last week supports continued Mexican
progress and V. S. interest in solidifying the prospects for Mexico's success.

u.S. Support in the Second Half

In the press release for the Mexican support program, issued when we signed our
agreements with Mexico, I stated that "ten biHion dollars will be made available in stages

between now and the end of June 1995 ... [and] using the same terms and conditions, another
$10 billion will become available -- as needed and in stages -- beginning in July." Staging
our funding has provided us with the capacity to assess Mexico' s financing needs on an
ongoing basis.

As noted in the letter which you and Senator Dole recently wrote to me, Mr.
Chairman, Mexico indicated on February 21 that the second $10 billion would be available
for "unforeseen contingencies." It was our hope -- clearly shared by the Congress -- that it
would not be necessary to utilize the second $10 billion of the $20 billion support package.
We regret any incorrect impression we might have left that the second $10 billion would be
available only for an emergency. Both Under Secretary Summers and I, in response to
Members' questions, made it clear that solid evidence that the stabilization program was
working would be a necessary condition for any disbursement beyond the first half-year's
$10 billion.

Our decision to disburse $2.5 billion last week reflects our belief that the program is
working, and is not a sign that Mexico is faltering. Data on capital flows continuously
becomes available that informs our assessment of Mexico's financing needs. In view of the
heavy amortization schedule this summer, our desire to promote the rising tide of market
sentiment, and our current forecasts for net inflows of funds from all sourceS in the third
quarter, we decided that it would be prudent to disburse these funds.

Conclusion

Mr. Chairman, I think that the best way to understand why the United States-led
effort is so important is to put Mexico's present difficulties in historic perspective. The
current crisis has been compared to Mexico's debt crisis of thirteen years ago. That crisis
spawned economic calamity, first in Mexico, then a few months later in Brazil, and finally,
throughout Latin America. It led to what has been called a "lost decade" of protectionist
policies, negative growth, financial instability, and political and social unrest in much of this
hemisphere.

Here, at home, Mexico's and Latin America's difficulties in 1982 posed a serious
challenge to the health of our financial system. They sent the number of illegal immigrants
crossing into the United States sharply higher. Ultimately, Mexico and Latin America's
collapse deprived our economy of a full decade's worth of opportunities for trade and
investment in some of the largest markets available to us.

Mexico's economy is not what it was in 1982. After 7 years of reform, the pieces
are in place for Mexico to avoid a repetition of the lost decade, and instead, to achieve a
healthy rate of economic growth. It was to avert another lost decade and all the harm it
caused us that the United States chose to lead the present support effort for Mexico. We are
now on the path toward success.

The 1982 crisis prompted a severe wage-price spiral. Prices soared by 42 percent
over the first six months of the crisis, and inflation continued to rise unchecked, hitting 110
percent between January 1982 and January 1983. Today the situation looks very different.
Though prices have risen over the first six months, inflation is now falling, thanks to strong
action by the Mexican government.

In 1982, Mexico's currency continued to depreciate sharply, by a full 73 percent
between January 1982 and January 1983. This time, the decline in the peso appears to have
halted after an initial 55 percent fall. In fact, the peso has strengthened by 23 percent since
March, even while Mexican reserves are rising.

Mexico's current account deficit is adjusting more quickly than if did thirteen years
ago. The deficit narrowed sharply from 7.7 percent of GDP in the last quarter of last year
to 2.1 percent over this year's first quarter --compared to 7.3 percent in the first quarter of
1982, and 5.3 percent in the second quarter. Rising trade surpluses in April and May of this
year suggest that adjustment will continue. This time it has taken Mexico's government only
7 months to regain access to international capital markets. In 1982, Mexico was shut out of
world markets for a full 7 years.

Most importantly, in 1982, Mexico and other Latin American countries initially
responded to difficulties by retreating from the kind of free-market measures we have sought
to promote for decades. The Mexican goverpment slapped on exchange controls, raised

import restrictions, nationalized the banking system, suspended debt repayments, and
generally retreated behind protectionist walls.

The outlook is very different in 1995. This time Mexico's difficulties have prompted
the government to accelerate privatization, and to free-up wage bargaining and other sectors
of the economy more quickly. The Mexicans are moving swiftly to shore lip their financial
regulatory and legal environments, while lifting restrictions on foreign investment. Most
important from a U.S. perspective, the Mexicans have chosen to keep their markets open.
This embrace of the market offers Mexico and the United States our best chance for escaping
another lost decade.

Under Secretary Summers will now describe in greater detail the changes we have
seen in Mexico's economy over the past six months. Thank you.

DEPARTMENT

THE

TREASURY

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W .• WASHINGTON. D.C .• 20220. (202) 622-2960

k..

efT: .~ , . '"

STATEMENT OF LA \VRENCE SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON
BANKING. HOUSING AND URBAN AFFAIRS
July 14. 1995

RR--l28

For press releases. speeches, public schedules and official biographies, call our 24-haur fax line at (202) 622·2040

STATEl\1ENT OF LAWRENCE SUMMERS
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITIEE ON
BANKING, HOUSING AND URBAN AFFAIRS
July 14, 1995

Mr. Chairman and members of the Committee, thank you for the opportunity to meet with you this
morning to discuss the U.S. support program for Mexico. I would like to describe Mexico's
economic stabilization efforts and provide more detailed information regarding our decision to
disburse $2.5 billion to Mexico last week.

Implementation of the Economic Stabilization Program

When Secretary Rubin and I testified to this committee in March, it was c1e.ar that a fundamental
change in the course of Mexico's policies was required. Mexico has needed to correct the errors of
1994 that threatened its financial stability and long-term prospects for growth. It is now going
through a painful and difficult adjustment process, but I can report to you that Mexico's
commitment to policy reform has resulted in significant progress, and our objectives in supporting
Mexico's adjustment are being served.

Mexico's money supply is down 17 percent since the beginning of the year. The budget surplus
has exceeded expectations, rising to 2.7 percent of GDP in the first quarter. Mexico is preparing
transportation and petrochemical operations for sale and is opening the telecommunications and
gas sectors to private investment.

The central bank has increased the frequency and breadth of

its public reporting, now publishing information on money market operations daily and key
balance sheet data weekly. The bank will soon make this information available via the Internet.

Progress to date

The results of the economic stabilization program have been promising.

Inflation is down to 3

percent in June from its 8 percent peak in April and is expected to decline further in the second
half of the year. Strong export growth and restrained imports have reversed Mexico's trade
imbalance much faster than expected. Mexico is also managing its dollar debt crisis successfully.
Over two-thirds of the $30 billion in tesobonos have been repaid since the beginning of the year.
With international support, Mexico has raised external reserves to over $14 billion, up from $6
billion at the beginning of the year, despite large repayments of debt.

Returning Confidence

The financial markets have responded to the strong policies and the economic adjustments they
are witnessing in Mexico. The peso has strengthened over 20 percent since March and stabilized.
Peso forward rates for the end of the year have risen almost 40 percent from their mid-March
lows. Mexican stocks and prices on Mexican Brady bonds have recovered to pre-crisis levels.
Mexican government agencies and some banks are regaining access to private sources of capital.
And, earlier this week. the government made a strong return to international capital markets. A
$500 million offering by the government was raised to $1 billion when demand exceeded the original

supply by three times.

At the same time, capital flows have resumed with -strength to many other developing countries. The
rally in Brady bond markets in genera) suggests the risk of contagion from the Mexican crisis has
diminished significantly.

Outstanding Problems

Inevitably, given the magnitude of the adjustment necessary, Mexico's economy has entered a deep
recession. Unemployment has risen sharply. However, most observers now expect a resumption of
growth late this year or early next year. Indeed, recent reports on the performance by Mexican
businesses during the second quarter were more favorable than most analysts expected. As Secretary
Rubin pointed out in his testimony, the adjustment will be less painful and protracted than that which
followed the 1982 crisis.

As the recession has deepened, working Mexicans have faced growing sacrifices. Mexico's

government has worked to mitigate the impact of the crisis, particularly on the poor. These efforts
are backed by $1 billion in World Bank and IDB lending. Social cohesion has been maintained
despite the difficult economic circumstances.

On June I, the Mexican government presented a long-term development plan that stresses the
importance of long-term savings and investment in human resources, including basic education,
health services, and nutrition.

In our testimony and reports to Congress, we have consistently highlighted the Mexican banking
system asa crucial issue. Mexico's recession and high interest rates have left many borrowers unable
to repay their loans. The Mexican government has responded to banking problems with measures to
improve regulation and supervision of banks, to encourage new investment in the financial sector,
and to close insolvent institutions, without the creation of excess liquidity. We are monitoring the
situation closely.

There have recently been some encouraging developments with respect to this sector. Interest rates
have fallen from over 80 percent to near 40 percent. The banks have been able to repay $2.3 billion
of the $3.8 billion borrowed from the government's insurance fund. The government will receive
$1.75 billion in World Bank and Inter-American Development Bank loans, which are conditioned on
stronger regulatory controls and improved accounting standards. Removal of cenain limitations
under the NAFT A on foreign acquisitions of Mexican banks, as well as recent government effons to
encourage and support bank restructuring, have facilitated bank recapitalization. Already one
foreign investor has recapitalized and assumed control of a Mexican institution. Several other deals
are under discussion.

Treasury is monitoring banking problems and the broader economy closely. We have
implemented systems for the regular collection of some 60 categories of information embracing
nearly 250 pieces of data from the Mexican government. Treasury staff are in daily contact with
Mexican officials and will complete five compliance missions to Mexico in July alone.

U.S. Support in the Second Half

With our assistance, Mexico has come a long way Our decision to disburse $2.5 billion earlier this
month recognized this progress. It also recognized the U.S. interest in solidifying the prospects for
Mexico's success and its rapid return to growth. Our disbursement reduced the uncertainty
surrounding the need for Mexico to repay almost $7 billion of tesobonos over the next several
weeks. The continued strengthening of confidence and stability will encourage the private sector
inflows that are necessary for the program to succeed. It is also the way fOT Mexico to reduce its
reliance on official external support.

Our disbursement coincided with that of the Th1F, which, under its S18.9 billion stand-by
arrangement, announced on June 30 the immediate release of$2 billion, adding to the $7.8 billion
disbursed in February. The IMF also announced that it would make available $8.7 billion in 5
tranches over the next year, including $1.73 billion in August, subject to Mexico's continued
satisfactory perfonnance. I would also note that World Bank and IDB funding approved in June will
add S2.8 billion to Mexico's external resources.

Let me just say on the question of the last disbursement, I sincerely regret any incorrect impression
we left in our discussions regarding the availability of the second SID billion of U.S. support. It was
our intention to provide all of our support on a staged and conditional basis if and when it was
needed. For the reasons I just referred to, it was our decision to provide $2.5 billion in early July.

Conclusion

Mexico has advanced substantially on the path to recovery. The U.S.-led international support
program fortified Mexico's commitment to right the policy errors of 1994 and to adhere to a
disciplined program based upon the fundamentals of sound economic management.

I bel ieve that history will demonstrate that the President s decision to support Mexico was the
I

right one -- for security along our borders and in our hemisphere, for our economic security
worldwide, and for American jobs. Thank you.

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Washington, DC 20226

24 Hour Telephone: (202) 927-8500
J~ly

11, 1995

STATEMENT FROM DIRECTOR MAGAW
"GOOD 0' BOY ROUNDUP"

Washinqton--Since cominq to ATF as Director in October
1993, I have continually stated that we have zero
tolerance to any kind of discrimination or harassment.
If any of this misconduct exists in ATF, I want it
searched out and destroyed.
I am appalled that an event such as the one reported in
today's Washington Times would happen in any facet of
our society -- particularly involving law.enforcement
officers.

I was alerted to this event about a month ago when I
received a copy of an article that appeared on the
Internet (Gadsden Minutemen Newsletter). At that time,
I ordered our Office of Inspection to conduct an
official inquirY. To date, that inquiry has not shown
any misuse of government property or resources. I have
directed our Office of Inspection to continue its
investiqation into this matter to determine whether any
current ATF employee has breached our code of conduct
or professional ethics.
Nothing is ever as 900d or as bad as may be first
indicated. To say that ATF agents are majority
participants in this event is false. In this year's
event of approximately 300 law enforcement officers
from Federal, state and local agencies, only 6 to 10
attendees were from ATF. Four of those were retired
agents, and two were agents who left when they heard
the racial undercurrents of other participants.
Everyone at ATF knows of my intolerance for
discrimination and harassment. If an inquiry finds
that anyone is involved in these practices, I will do
everything in my power to mete out the strongest
possible discipline.
RR-429

#1#

I~yestiqat~ve

report DY Jeff Randall, Gadsden Minutemen, and other parties

The wGoOQ '01 Boysw outing is he1d ~nu&lly at Ocoee, Tn. sased on my
interviews with 1aside source., this event is organized l)y. Gene P.i;htmeyer
(IATF-Tn.) and Reuben Younq (All-Al.). This event has a history of being an
all-white get-together. It a1.o n.s a history, to which there is

documentation/witnessea, of bein9 very racist.
The "Good '01 Boy.- attract$ aqents f~~ various government agencies 3uch as
A~F, DEA, Secret service, and other la~ entO%C~Dt agencies. The event usually
goes !O~ several days and includes various activities. Flye~s (inv1tat1ons) are
sent out to selected people, for a fee you :eceive an ar.m band which allow~ you
eAtranc:e to the ~9%'oUDd, f% •• beer from a bear truck within the camp, a
t.e-abirt, a cap and a beer mug.
I learned of this even~ several montha ago and decided to investigate tor
my.sel%. I arrived at the ou~ar edges o~ the camp at approzimataly 11:00 a.m.
CST, Friday Hay 19, 1995. I placed a ·police· cap on, qrabbed my camera and
~alked in via a rear unquarded entrance. I was not questioned as to whether or
not I was suppose to De there, however, towards the end of my visit, I felt that
I va. about to be . . ked to leave.
Inside, I blended in and . .t people trom all aqencies, some of which vore
tee-shirt. st.t1nq their agencies name and where they vere from. Several of the
~ople we:e too drunk to carryon conYersationa with, howe~r I did speak with
~vo aients, whom I did Dot know, but were wearing arm bands. These agents were
:u'9hly upset ~out quote ·~9ge,,· A7'F agenu that "ere brought in by a white ATt
lqent: the p.evious night (Thursday). These agents said that they would not
attend the event i.n the tutu:oe becauseot the "niqqers" being' a.l~owed in. A.l..l
~oUftd tbe ~ift campground (cen~er of camp) I heard racial. slurs and saw racial
:e.-shizts and other itema, one being a small yellow card that ~.ads ftnigger
\Wltiftf license-. I aleo ovazhe.-rd guests (wearin9 arm banda) talldnq about
'those nii90:s· that v.~. in the camp on the previous nic;ht. The con"ersation
,as, that aft a.ltercati.on a.J.most oec:ur~ed between various &/ienb due to the
)lacks beinq in the camp. I alao witnessed a poker game in process between
several oth.~ -guest.·, with, what appeared to be a l.r~e sum of money on the
:ab1e and eschanqing hands •. Se. .r~l people vere wearing tee-shirts depicting
).J. Simpson OD a b.nging gallows. Throughout my approximate 2 hoc: stay, I did
lot see any black peop~. in the c:owd ot approximately 300 peopJ.•• Durin9 this'
;~ I heard nume~ous racial slU%s and dis.ati.f~etion that thei: annual
Jathering had, for the first t~, al~ov.d ·ni9ge~s· to attend.
I took several pic:tuzes, several of variou. anonymous l.av enforcement
,ersonnel, one of a man vearing a Birminqham Narcotics tee-shi~t, one of a ~n
~rked Metro Po1ice, several. shots of Gene &ightmeyer, whom I recognized fz:om
,re'rious picturu and video, with is Deer mug and "hat appeared to be & bottle of
rhiskey in • p~per bag, ••veral pictures of the Campsite, including the Lite
.eer truck, one picture of a North Carolina fraternal o%der of police vehicle,
.leens•. plate I FOP-NCr ene ot an anonymo~ GMC van, Tn. license plate
680
ISJ, .evera~ of unnamed people wearing tee-shirts with the words wYoung Guns lIft
~d ·Pi~nN, and'one o~ the welcome sign to the entrance of "GOOQ '01 BOyS".
I ~id meet some people (agenta) in the crowd who appeared ~o be very decent
,ndiv~dua~s, however, the major~ty oL who~ I spoke with, seamed to be very
:ac1st, judqinq trom my conversations with them. 7he only ille9a~ act~ons I
ritnessed V~. the open vamblinq and the guests 1 witnessed dr1vinq from the
~qround art •• drinkin9 (drunk').

Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
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Citation Information
Document Type: Transcript

Number of Pages Removed: 3

Author(s):
Title:

Date:

ABC "Good Morning America" Interview with John Magaw, Director, Bureau of Alcohol,
Tobacco
and Firearms

1995-07-13

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

FOR IMMEDIATE RELEASE
July 14, 1995

MEDIA ADVISORY

Treasury Secretary Robert E. Rubin will meet with U.S. Customs Service officials on
Monday, July 17 in New York City. He will be available to the media to discuss law
enforcement issues at the U.S. Customshouse, 6 World Trade Center, 5th floor, Room 555 at
9:45 a.m. Cameras should be in place by 9:30 a.m.

Contacts:

Jon Murchinson, Treasury, (202) 622-2960
Janet Rapaport, Customs, (212) 466-4547

-30-

RR-430

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE. N.W .• WASIDNGTON. D.C .• 20220. (202) 622·2960

FOR RELEASE AT 2:30 P.M.
July 14, 1995

COtITACT:

Office of Financing
202/219-3350

TREASURY'S 52-WEEK BILL OFFERING
The Treasury will auction approximately $18,250 million of
5~-week T~easury bills to b~ issued July 27, 1995. This offering
w~11 prov1de about $1,275 m111ion of new cash for the Treasury,
as the maturing 52-week bill is currently outstanding in the
amount of $16,963 million. In addition to the maturing 52:week
bills, there are $25,287 million of maturing 13-week and 26-week
bills.

Federal Reserve Banks hold $11,163 million of bills for
their own accounts in the three maturing issues. These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,683 million of the three

maturing issues as agents for foreign and international monetary
authorities. These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders. Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
For purposes of determining such additional
amounts. foreign and international monetary authorities are
considered to hold $326 million of the maturing 52-week issue.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and

bonds.
Details about the new security are given in· the attached
offering highlights.
000

Attachment

RR 431

HXGHLIGHTS OF TREASURY OFPBRXNG OF 52-WEEK
TO BE XSSUED JULY 27, 1995

BIL~S

July 14, 1995

. . _ .

Qfferin~Amount

$18,250 million

Description of Offering:
Term and type of security
CUSIP number . _ .
Auction date
Issue date
Maturity date .
Original issue date . Maturing amount. _ .
Minimum bid amount

364-day bill
912794 Z6 4
July 20, 1995
July 27, 1995
July 25, 1996
July 27, 1995
$16,963 million
$10.000
$1,000

Multiples . . . . Submission of aida:
Noncompetitive bids

Accepted in full up to $1,000,000
at the average discount rate of
accepted competitive bids
(1) Must be expressed as a discount rate
with two deCimals, e.g., 7.10%
(2 ) Net long position for each bidder
must be reported when the sum of the
total bid amount. at all discount
rates. and the net long position are
$2 billion or greater.
( 3 ) Net long position must be determined
as of one half-hour prior to the
closing time for receipt of
competitive tenders.

competitive bids

Maximum Recosmized Bid
at a Single Yield

35% of public offering

Maximum Award .

35\ of public offering

of Tendera:
Noncompetitive tenders
Reeei~t

Prior to 12:00 noon Eastern Daylight
Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight
Saving time on auction day

competitive tenders

Payment Terms .

. . .

Full payment with tender or by charge
to a funds account at a Federal

Reserve bank on issue date

DEPARTMENT

IREASURY(
~

THE

TREASURY

NEWS

~~178~9~_ . . . . . . . . . . . . . . . . . . . . . . . . .. .

..................................

OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

Contact: Chris Peacock
(202) 622-2960

FOR IMMEDIATE RELEASE
July 17, 1995

MEDIA ADVISORY
Treasury Secretary Robert Rubin will brief reporters at 1 p.m. today, Monday,
July 17 on a Treasury inquiry into the "Good 0' Boys Roundup."
Secretary Rubin will be joined by Treasury Under Secretary for Enforcement
Ronald K. Noble and Treasury Inspector General Valerie Lau.
The briefing will be in Room 3327 of the Treasury Department, 1500
Pennsylvania Ave. N.W.
Cameras should be in place by 12:30 p.m.
Press without Treasury, White House, State, Defense or Congressional press
credentials must provide name, date of birth and Social Security number by noon to the
Treasury Office of Public Affairs. Call (202) 622-2960 or fax the information to (202)
622~1999.

-30-

RR-432

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
July 17, 1995

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,232 million of 13-week bills to be issued
July 20, 1995 and to mature October 19, 1995 were
accepted today (CUSIP: 912794T46).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.41%
5.47%
5.46%

Investment
Rate
5.58%
5.64%
5.63%

Price 98.632
98.617
98.620

$100,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 9%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$47,806,255

Accepted
$13,231,755

$42,544,266
1,440,736
$43,985,002

$7,969,766
1,440,736
$9,410,502

3,261,960

559,293
$47,806,255

559,293
$13,231,755

Type

Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $312,007 thousand of bills will be
issued to foreign official institutions for new cash.

5.40 - 98.635

RR-433

5.44 - 98.625

5.45 - 98.622

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
July 17, 1995

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,213 million of 26-week bills to be issued
July 20, 1995 and to mature January 18, 1996 were
accepted today (CUSIP: 912794W67).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.39%
5.40%
5.40%

Investment
Rate
5.63%
5.64%
5.64%

Price
97.275
97.270
97.270

Tenders at the high discount rate were allotted 28%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

Received
$51,373,305

Acce:gted
$13,212,633

$44,310,064
1,563,034
$45,873,098

$6,149,392
1,563,034
$7,712,426

3,400,000

2,100,207
$51,373,305

2,100,207
$13,212,633

An additional $1,170,693 thousand of bills will be
issued to foreign official institutions for new cash.

RR-434

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
July 17, 1995

STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN

Today, I am announcing a comprehensive and independent investigation of the socalled "Good 0' Boys Roundup." This inquiry will be conducted jointly by the Inspector
General of the Treasury Department and by our Under Secretary for Enforcement. It will be
overseen by an outside group of eminent Americans who will be asked to assess the inquiry's
thoroughness, accuracy and independence. Our purpose is to get to the truth, period; and then
to take all necessary steps so that we can tell the American people: This will not happen
agam.
Before discussing the inquiry, I would like to comment for a moment or two on why
this matter is of such critical importance.
In our society, we cherish the rule of law. The rule of law can only have meaning
when law enforcement and law enforcement officers act as instruments of justice and fairness.

An enduring legacy of American racism is the belief -- justified in many
instances -- among African-Americans and other minorities that justice at times is enforced
against them in a discriminatory fashion.
F or these reasons, law enforcement officials -- in perception and reality -- must
demonstrate on and off the job that they are as free from bias as their jobs require them to be.
And it is the responsibility of their supervisors, right up to the Office of the Secretary, to be
vigilant -- so justice is administered with integrity, fairness and freedom from bias.
We condemn as totally abhorrent the participation of law enforcement officials in the
"Good 0' Boys Roundup," because it included abjectly racist and anti-semitic behavior totally
inappropriate for law enforcement officers, and because no one who
(More)
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-2-

participated in it had the good sense or decency to do anything about it. That is unacceptable
and we \vill make sure it does not happen again.
When the Director of the Bureau of Alcohol, Tobacco and Firearms, John Magaw,
pre\'iously the head of the Secret Service. first learned of the so-called "Roundup," he ordered
an in\'estigation by ATF' s Office of Inspections.
That was nearly one month ago.
Before this investigation was fully completed. reports of the "Roundup" appeared in
the press. Director Magaw, quickly and without reservation, spoke out against the racism
apparent from descriptions of the "Roundup." Ronald K. Noble. Under Secretary for
Enforcement, did the same thing before a national assembly of African-American criminal
justice officials in Denver. I fully identified with their condemnation in response to a
question from Senator Moseley-Braun at a hearing on Mexico held this past Friday.
But words are not

enough~

deeds are what matter.

That is why we are taking the additional actions we announce today. At Treasury,
Valerie Lau. the independent Inspector General. and Ron Noble. Under Secretary of the
Treasury for Enforcement. will jointly conduct an inquiry into the alleged participation of
active Treasury Department enforcement employees in the "Good 0' Boys Roundup." The
heads of all enforcement bureaus -- Director Magaw, Secret Service Director Eljay Bowron,
Customs Commissioner George Weise. and IRS Commissioner Margaret Richardson -- fully
support this independent inquiry.
The purpose is to ascertain the facts; determine whether participation by Treasury
employees constituted violations of law. regulations or procedure; and judge whether existing
policies are adequate and sufficient to prevent participation by Treasury personnel in similar
e\'ents in the future.
The inquiry is expected to be completed within 120 days, and a report with
recommendations shall be made public. The members of the independent board will be
announced shortly.
Once the inquiry is complete. we will take whatever appropriate actions are called for
by the facts we unearth. This process will be comprehensive and candid. I personally have
the utmost confidence that the Inspector General, the Under Secretary for Enforcement, and
the board of inquiry will get to the bottom of this issue.
.

-3-

I am proud, I will say it even more strongly, deeply proud, of the men and women of
the Treasury Department's enforcement bureaus.
They do dangerous and difficult work; they place their lives on the line every day so
that the rest of us can live in greater safety and greater security. I was in New York this
morning with agents of the Customs bureau, and we talked about the undercover work they
were doing with extraordinarily dangerous criminals and the arrests that have been made in
response in the areas of narcotics, in the sale of nuclear material, fraud, smuggling of various
kinds and other dangerous activity inimicable to public safety.
Similarly at the ATF, roughly 30 percent of their arrests are of armed drug traffickers.
This is dangerous and difficult work, and it absolutely requires our support for them to be
effective. And that support in turn depends on law enforcement officials conducting
themselves with scrupulous fairness, without any hint of racism or bias. And that support also
requires that if problems develop, and inevitably there will be problems from time to time as
there are in any organization, that those problems be dealt with fully, candidly, openly and as
expeditiously as possible. It is for all these reasons that this investigation is so important.
-30-

DEPARTMENT

THE

TREASURY

1REASURy'~.'G NEW S
_

178<}

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

TRANSCRIPT OF PRESS BRIEFING
TREASURY SECRETARY ROBERT E. RUBIN
UNDER SECRETARY RONALD K. NOBLE
INSPECTOR GENERAL VALERIE LAU
JULY 17, 1995

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1995-07-17

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SECRETARY OF THE TREASURY

July 17,

1995

The Honorable Newt Gingrich
Speaker of the House of
Representatives
Washington, D.C.
20515
Dear Mr. Speaker:
I write on the issues of deficit reduction and the need for
Congress to increase the statutory limit on the public debt.
The deficit reduction program enacted in 1993 has substantially
reduced the deficit as a percentage of our gross domestic
product. The Administration believes that it is imperative that
we continue on a path of deficit reduction. This belief is
reflected in the 1996 budget proposals of both the President and
Congress (despite the very substantial other differences between
these budgets). However, even if the budget deficit continues to
decline, as I am sure you are aware, there will soon be need for
action by Congress to increase the limit on the public debt.
The precise day when the Treasury will run up against the present
permanent debt limit of $4.9 trillion is not knowable this far in
advance.
However, in the absence of an increase in the debt
limit, we are likely to run out of cash and room under the debt
ceiling in October.
We will advise you of our more precise
estimates of Treasury cash balances and debt later this summer
as we approach the date when the Treasury will run up against the
permanent limit.
We look to Congress to act in a timely manner to avert a debt
limit crisis that could interrupt Government operations, delay
payments to recipients of benefits and millions of others,
disrup~ the Treasury's borrowing operations, generate uncertainty
in the domestic and international securities markets, and
increase the Government's cost of borrowing.
I note that the conference report on the Concurrent Resolution on
the Budget for FY 1996 -- recently passed by Congress -- called
for a permanent increase in the debt ceiling to not more than
$5.5 trillion (which would not be reached until sometime in
1997).
This amount would allow ample time to revisit the debt
limit issue in a well-considered and orderly fashion.

We recognize that some want to link the need for a debt limit
increase to the debate over the budget this fall, but that is not
appropriate or in the best interests of the American people and
our economy.
We look forward to working with you to ensure that
the bill to increase the debt limit is not encumbered with any
extraneous matters that might needlessly delay its enactment.
Sincerely,

COhS

~,\

'.-J

Robert E. Rubin

DEPARTMENT

THE

TREASURY

NEW
S
...................................\.'t~~~rl~~~.J...................................
TREASURY (~'ll

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

TRANSCRIPT OF PRESS BRIEFING
TREASURY SECRETARY ROBERT E. RUBIN
UNDER SECRETARY RONALD K. NOBLE
ATF DIRECTOR JOHN MAG A,\'
JULY 11, 1995

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1995-07-11

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DEPARTMENT

THE

TREASURY

,NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON; D.C .• 20220. (202) 622-2960

For Release Upon Delivery
Expected at 9:00 A.M.
July 18, 1995
STATEMENT OF
CYNTHIA G. BEERBOWER
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Committee:
I am pleased to present the views of the Treasury Department
on fuel taxes deposited in the General Fund of the Treasury for
deficit reduction purposes and on diesel dyeing requirements. We
have been asked to comment on (i) the extension of the delayed
effective date of the 4.3-cents-per-gallon deficit reduction fuel
tax on commercial aviation fuel; (ii) the appropriateness of the
2.5-cents-per-gallon deficit reduction fuel tax currently imposed
on the rail industry; and (iii) the diesel fuel dyeing
requirements enacted as part of the Omnibus Budget Reconciliation
Act of 1993, including proposals to suspend collection of the
excise tax on recreational boat diesel fuel and to exempt Alaska
from diesel dyeing requirements.
In 1993, this Committee decided that deficit reduction was
critical to the nation's well-being, and that excise taxes on a
broad base of transportation fuels was an appropriate part of the
deficit reduction plan. In this hearing, we are addressing
whether Congress' intention should be effectuated with respect to
the commercial airline industry and the railroad industry. In
1993, congress carefully considered and agreed to an allocation
of the responsibilities of the various transportation industries
for deficit reduction. We believe that piecemeal unravelling of
that agreement would be a mistake.
1.

Transportation Fuels Excise Tax Exemption for Fuels Used in
commercial Aviation

Current Law
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93)
imposed an excise tax of 4.3 cents per gallon on:
(i) all
transportation fuels currently subject to the Leaking Underground
storage Tank (LUST) Trust Fund excise tax, with a delayed
effective date for fuels used in commercial aviation; (ii)
liquefied petroleum gases currently taxable as special fuels;
(iii) diesel fuel used in noncommercial motorboats; and (iv)
compressed natural gas used in highway motor vehiCles or
RR-436
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-2-

motorboats (at 48.54 cents per mcf). Taxable fuels include motor
fuels (gasoline, diesel fuel, and special motor fuels) used for
highway transportation or in motorboats, fuel used in aviation,
gasoline used in off-highway non-business uses (e.g., small
engines and recreational trail uses), diesel fuel used in trains,
and fuels used in inland waterway transportation. Most fuel uses
that are exempt from the LUST tax are also exempt from this tax.
The excise tax increase was generally effective on October
1, 1993 (with appropriate floor stocks taxes being imposed on
that date), but gasoline and jet fuel used in commercial aviation
were not subject to the tax until October 1, 1995 (with
appropriate floor stocks taxes being imposed on that date).
Revenues from this transportation fuels tax are retained in
the General Fund of the Treasury. This tax is separate from, and
in addition to, excise taxes imposed on the same fuels to fund
the Highway Trust Fund, the Airport and Airway Trust Fund, the
LUST Trust Fund, the Inland waterways Trust Fund, or the Aquatic
Resources Trust Fund.
Discussion
The Administration opposes further delay of the effective
date of the 4.3-cents-per-gallon tax on commercial aviation fuel
enacted as part of OBRA 93.
This Committee decided in 1993 that deficit reduction is
critical to the nation's economic well-being, and that "the
revenues raised by a broad-based transportation fuels excise tax"
would be appropriate for reducing that deficit.l Consistent with
that rationale, fuels used by all modes of transportation were
equally subject to the tax.
The effective date of the tax with respect to commercial
aviation fuel was delayed because of concerns that the commercial
airline industry generally was experiencing significant losses.
It was thought by some that the imposition of the fuel tax would
exacerbate the industry's temporarily depressed economic
condition, but there was no intention that commercial aviation
should be exempted from the generally applicable excise tax on
transportation fuels to generate General Fund revenues for
deficit reduction.
In 1993 and 1994, the revenues and profits of the industry
in fact recovered from recession lows. The Department of
Transportation reports that as the economy recovered from the

lSenate Print No. 37, 103d Cong., 1st Sess. 212 (1993).

-3-

recession, airline traffic grew. 2 The airlines also restructured
their operations, increased efficiency, cut excess capacity, and
reduced unit operating cost. As a result, the major airlines'
operating profits grew to over $2.4 billion in 1994. These
trends are continuing into 1995; first quarter operating profits
were $495 million and second quarter results are now being
compiled and are expected to be strong. The Federal Aviation
Administration now forecasts that the present strong growth in
airline traffic will continue for the next two years, and do so
at the rate of approximately 4 percent through FY 2006 (this
forecast assumes the imposition of the 4.3-cents-per-gallon tax).
As the Department of Transportation concluded in its testimony on
May 9, 1995, before the Subcommittee on Oversight of the House
committee on Ways and Means, the airlines' net income is expected
to continue to grow. In addition, the Department of
Transportation has provided a schedule of direct Federal taxes
and customs fees for selected transportation modes.
(See
attached schedule.)
In view of the airlines' improved financial performance, the
impact of an excise tax of 4.3 cents a gallon on commercial
aviation fuel will be less burdensome than it would have been in
1993. To put this tax in perspective, the tax rate is well
within the range over which jet fuel prices have fluctuated in
recent years. During 1993 and 1994, average monthly jet fuel
prices ranged from 50.7 to 61.3 cents p~r gallon. In addition,
eXC1se taxes that apply generally and at the same rate to all
fuel used in a particular mode of transportation tend to be
passed on to consumers.
A tax on jet fuel will not affect the international
competitiveness of the u.S. carriers because the tax will apply
to both u.S. and foreign carriers operating in the u.S. and will
not apply to u.S. carriers (or foreign carriers) in their
international operations.
The enactment of OBRA 93 reduced the deficit and contributed
to the present economic expansion. We must be careful not to
unravel the deficit reduction plan pi~cemeal. Moreover, we
believe that an extension of the exemption for aviation fuel is
unwarranted and would be unfair to other sectors of the
transportation industry.
2.

Deficit Reduction Tax on Railroad Diesel Fuel

Background
Prior to OBRA 93, highway motor fuels were subject to tax at
2see statement by Patrick Murphy before the Subcommittee on
Oversight of the House committee on Ways and Means, May 9, 1995.

-4a rate that included a 2.5-cents-per-gallon deficit reduction
rate. Receipts attributable to this deficit reduction rate were
not deposited in the Highway Trust Fund, but instead were
retained in the General Fund. A tax at the 2.5-cents-per-gallon
deficit reduction rate was also imposed on diesel fuel used in
trains, and receipts attributable to this tax were also retained
in the General Fund. As originally enacted, the 2.5-cents-pergallon tax would have expired on September 30, 1995.
In 1993,
the Administration recommended that the 2.5-cents-per-gallon
deficit reduction tax be made permanent.
CUrrent Law
Under the Conference Agreement to OBRA 93, the 2.5-centsper-gallon tax on highway motor fuels was extended through
September 30, 1999, but receipts attributable to the tax were
shifted from the General Fund to the Highway Trust Fund,
beginning october 1, 1995. The tax on diesel fuel used in trains
was also extended through September 30, 1999, but the rate of tax
was reduced to 1.25 cents per gallon for periods after September
30, 1995. Receipts attributable to this tax will be retained in
the General Fund.
As discussed above, OBRA 93 also imposed a permanent excise
tax of 4.3 cents per gallon on transportation fuels generally,
including diesel fuel used by trains. Thus, beginning October 1
of this year, diesel fuel used in trains will be subject to a
5.55-cents-per-gallon tax dedicated to the General Fund for
deficit reduction purposes while fuel used in other forms of
transportation -- highway, inland waterway, commercial aviation
and non-commercial aviation -- are subject to a 4.3-cents-pergallon tax dedicated to the General Fund (in addition to the tax
dedicated to trust funds).
Discussion
The Administration does not support repealing or reducing
the 1.25-cents-per-gallon excise tax on rail diesel fuel that is
deposited in the General Fund for purposes of deficit reduction.
As ~h7 attache~ Department of Transportation analysis shows,
def~c~t reduct~on taxes are a smaller percentage of net revenue
for the railroads than for commercial trucking and airlines
(assuming the tax on aviation fuel is taken into account). Under
the compromise reached in OBRA 93, receipts from the 2.5-centsper-gallon tax on highway motor fuels were shifted from the
General Fund to the Highway Trust Fund, while the tax on diesel
fuel used in trains was cut in half. Deficit reduction is
es~ential ~n our efforts to ba~ance the budget, and we support
th~s goal ~n the context of th~s tax.
The deficit reduction plan
w~s enacted in 1993 ~o get the nation's economy on track.
P~ecemeal tax reduct~on would send the wrong signal concerning
our commitment to further deficit reduction. As stated earlier,

-5-

the Administration does not believe that the 1993 agreement
should be reopened at this time, although we believe that it
would be appropriate for Congress to re-examine this issue when
the tax expires in 1999.
3.

Diesel Fuel Dyeing Requirements

Background
Diesel fuel and gasoline that are used for highway
transportation and certain other purposes are generally subject
to tax. Diesel fuel, however, unlike gasoline, is also used
extensively for nontaxable purposes such as home heating.
Because diesel fuel used for taxable and nontaxable purposes is
otherwise physically indistinguishable, many countries 3
(including the united states) that tax highway fuels, but not
fue~ destined for other uses, have imposed dyeing requirements to
differentiate taxable from nontaxable fuel. In addition, many
states dye diesel fuel for enforcement of fuel taxes. Before
1994, the Internal Revenue Code did not impose a dyeing
requirement with respect to diesel fuel. Instead, diesel fuel
was generally subject to tax when sold by a wholesale
distributor, who determined, in accordance with Treasury
regulations, whether the fuel was taxable or nontaxable. A
dyeing requirement was imposed, however, beginning in October
1993, under the Clean Air Act. The Act prohibits highway use of
diesel fuel with a sulfur content exceeding prescribed levels and
requires dyeing of high-sulfur fuel to facilitate enforcement of
this prohibition.
During the period leading up to the enactment of OBRA 93, a
number of reports indicated that there was substantial evasion of
the diesel fuel tax. The Department of Transportation estimated
that the diesel fuel tax was evaded on 15 to 25 percent of total
gallons consumed. Both this committee and the House Committee on
Ways and Means concluded that this problem could be alleviated by
moving the collection point further up the distribution stream
(from the wholesale level to the terminal) for diesel fuel taxes.
This change would reduce the number of times the fuel changes
ownership prior to tax and reduce the number of taxpayers, so
that diesel fuel taxes would be easier to collect, and payments
of tax would be easier to monitor. The committees were also
concerned that this change be accomplished in a manner that
minimized the additional burden imposed on exempt users by
preserving their ability to buy diesel fuel (including heating
3To our knowledge, the following countries require dyeing of
motor fuel: Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Holland, Ireland, Italy, Luxembourg, Peru, the
Philippines, Portugal, South Africa, Spain, switzerland, the united
Kingdom, and the United states.

-6-

oil) free of tax. H.R. Rep. No. 111, 103d Cong., 1st Sess. 311
(1993). Senate Print No. 37, 103d Cong., 1st Sess. 214 (1993).
Current Law
An excise tax totaling 24.4 cents per gallon is imposed on
diesel fuel. In the case of fuel used for highway
transportation, 17.5 cents per gallon (20 cents after September
30, 1995) is dedicated to the Highway Trust Fund an~ ?1 cent per
gallon is dedicated to the LUST Trust Fund. In add1t1on, 6.8
cents per gallon (4.3 cents after September 30, 1995) is imposed
on transportation fuels generally and is retained in the General
Fund.
OBRA 93 changed the imposition of the diesel fuel tax from
the wholesale level to the removal of the fuel from a terminal
facility (i.e., the terminal rack). This legislation also
provided that tax is imposed on all diesel fuel removed from
terminal facilities unless the fuel is destined for a nontaxable
use and is indelibly dyed pursuant to Treasury Department
regulations.
In general, the diesel fuel tax does not apply to nontransportation uses of the fuel. This exemption includes offhighway business uses, such as powering off-highway construction
equipment and farming. Use as heating oil is also exempt.
(Most
fuel commonly referred to as heating oil is diesel fuel.) The
tax also does not apply to fuel used by State and local
governments, to exported fuels, and to fuel used in commercial
fishing and shipping. Fuel consumed by intercity buses and
trains is partially exempt from the diesel fuel tax.
Nontaxable (and partially taxable intercity bus and rail)
users of diesel fuel may either use dyed diesel fuel on which tax
is never paid (and pay the appropriate tax in the case of train
and intercity bus operators) or purchase tax-paid, undyed diesel
fuel and file a claim for refund of tax paid. In the case of
diesel fuel sold to States and local governments and for farming
use, the refunds are claimed by registered ultimate vendors who
sell the fuel to the consumers without tax.
(These claims accrue
interest unless they are paid within 20 days.) Other nontaxable
users of diesel fuel may either claim refunds on the taxpayer's
income tax return (estimated income tax payments may be reduced
to adjust for these amounts) or on a separate refund claim, if
the total amount of refund due a taxpayer exceeds $750 at the end
of any of the first three quarters in a calendar year.
To enable law enforcement officials to ensure that untaxed
fuel is not used in a taxable use through dilution of dye
concentr~t~ons, present law impo~es a penalty of $10 per gallon
($1000 m1n1mum) on persons who d1lute dye concentrations below
prescribed minimum levels. If an untaxed substance (e.g.,

-7-

kerosene) is blended with dyed diesel fuel and is destined for a
nontaxable use, dye must be added to the fuel mixture to ensure
that required concentrations are maintained.
Also, in certain circumstances, an untaxed substance (e.g.,
kerosene) is blended with taxed (clear) diesel fuel. When this
blending occurs, tax is due on the untaxed substance.
Present law also imposes a penalty of $10 per gallon ($1,000
minimum) on persons who sell or use untaxed diesel fuel in a
taxable use after the fuel is removed from a terminal facility.
For example, truck owners having dyed diesel fuel in their
vehicle tanks are subject to this penalty. Similarly, owners of
truck stops having dyed diesel fuel in pumps dispensing fuel to
highway users are subject to the penalty. The Internal Revenue
Service (IRS) has begun a program of spot checks for dyed diesel
fueY at truck stops and State highway weigh stations.
Although the dyeing requirements under the Clean Air Act and
the excise tax statute are not identical, the Administration has
endeavored to coordinate the two regimes to simplify compliance.
The Treasury Department worked in conjunction with the EPA during
the drafting of the temporary regulations governing the diesel
dyeing program to assure compatibility with the Clean Air Act
regulations. In addition, last year, the Administration
responded to concerns raised by the State of Alaska and others
regarding the similarity in color of the dye previously used for
high-sulfur diesel fuel (blue) and that used for aviation gas
(blue). Both the EPA and the Treasury Department issued guidance
providing that the color for all diesel would be red for purposes
of both dyeing regimes.
Discussion
General

Achieving effective compliance with excise taxes on fuels
has been a problem not only for the Federal government but also
for the States. After trying other procedures, the United states
has learned that taxing fuels at the terminal rack and dyeing
nontaxable diesel fuel are the best methods for preventing fraud,
assuring that honest retailers and wholesalers do not have to
compete with those supplied with untaxed fuel, and securing
adequate revenue to support the nation's transportation
infrastructure and for deficit reduction. The United States has
been a late-comer to implementing these simple steps toward
better compliance. As previously discussed, many foreign
countries have used dyeing for years to distinguish between taxed
and tax-exempt fuel.
The OBRA 93 changes in the administration of fuel taxes have
been a success. Recent revenue collections demonstrate that the

-8-

changes were warranted and necessary. As ~he commissi~ner of the
IRS testified in February before the Overs1ght Subcomm1ttee of
the House committee on Ways and Means, preliminary tabulations of
excise tax liabilities reported on tax returns showed receipts to
be $1.09 billion higher for the first three quarters of calendar
year 1994 than for the same period in 1993, after adjusting for
the rate increase. Complete data for 1994 have now been
reviewed. The total amount of 1994 receipts available for the
trust funds increased by $1.23 billion over the prior year, again
adjusting for the rate increase. Taking into account increased
refunds and credits, and attributing some of the increase to
economic growth, the Treasury Department estimates that diesel
fuel tax receipts, net of refunds, were $600 - $700 million
higher in 1994 than in 1993 due to improved compliance alone.
Compliance Efforts

The diesel dyeing program represents what can be
accomplished through partnerships with state taxing authorities,
other Federal and State agencies (such as the Federal Highway
Administration and EPA), and industry. The first phase of
implementation of this program included:
(i) education/outreach
to affected stakeholders; (ii) recruitment and training of IRS
enforcement personnel; (iii) formation of working partnerships
with the States; and (iv) terminal and roadside inspections.
Through May of 1995, the IRS has visited and inspected over
20,000 terminals and other outlets for both enforcement and
education. These efforts at outreach, taxpayer education, and
burden reduction are an ongoing and integral part of the dyed
diesel compliance program. Moreover, a major portion of·these
compliance efforts depends on cooperative joint efforts with the
States. During the week of January 23 through 27, 1995, thirty
IRS Districts participated in joint compliance checks with their
respective States inspecting over 16,000 trucks. The results of
these inspections indicated that less than one percent of the
trucks were using dyed fuel on the highway. We believe this
indicates successful implementation of the diesel dyeing program.
Moreover, several States4 are piggybacking on the success of this
program and passing similar legislation calling for taxation at
the terminal rack and dyeing of diesel fuel.
Because the number of taxpayers liable for these taxes
decreased, the ability to monitor compliance with these taxes has
greatly increased. Detection of diesel fuel tax evasion schemes
however, is a dynamic enterprise. The IRS is continuing to
'
"To o~r knowledge~ the, following states have adopted this
federal p1ggyback leg1slat10n:
Michigan, Indiana, Wisconsin,
Florida, California, Iowa, South Dakota, North Carolina, South
Carolina. Tennessee and New York state systems are also terminalbased for gasoline.

-9identify and stop noncompliance with the diesel tax law,
including incorrect filings, nonfiling, and tax evasion schemes.
For example, the IRS devoted additional resources to reregistering diesel vendors as ultimate vendors under the new law.
This "upfront" effort has enhanced the IRS's ability to verify
the authenticity of vendors filing diesel refund claims.
The improvements in administration and compliance, with the
resulting increase in collections, are attributed to Congress,
the Federal Highway Administration, the States, the petroleum
industry, and user group representatives, and their continued
interest in and support of the IRS'S efforts to improve
compliance with the motor fuel excise tax statutes. It is
imperative that the statutory changes that have been made by OBRA
93 be left intact in order to continue this favorable trend. We
will continue to monitor the effectiveness of the diesel dyeing
program and will alert Congress to issues as they arise.
Particular Issues
While the diesel dyeing program has been an overall success,
certain issues involving specific cases have been identified.
The remainder of my testimony will discuss three concerns that
have been raised.
a.

state Exemptions

Background -- One issue raised has been the application of
diesel dyeing in Alaska, where more than 90 percent of diesel
fuel is used for home heating, commercial fishing and other nontaxable uses, and where diesel fuel must often be blended with
kerosene during winter conditions. Unlike the excise tax
statute, the Clean Air Act permits the EPA temporarily to exempt,
upon request, Hawaii and Alaska from the dyeing requirements.
Only Alaska has requested and been granted such an exemption by
EPA. This exemption expires at the end of 1996.
Administration's Recommendation -- The Administration would
support an exemption from the excise tax diesel dyeing
requirement for diesel fuel sold in Alaska during the remainder
of the period when it is exempt from the Clean Air Act dyeing
requirements, subject to procedures established by the Treasury
Department. The Administration believes that the Clean Air Act
and the excise tax dyeing regimes should be as harmonious as
feasible, respecting the differences between the two statutes.
b.

Noncommercial Boats

Background -- In addition to other changes discussed above,
OBRA 93 also extended the diesel fuel tax to fuel used in
pleasure boats to finance the repeal of the excise tax on luxury
boats. Because diesel fuel used in pleasure boats is taxed, and

-10-

dyed diesel fuel cannot be used for a taxable purpose, pleasure
boats must use clear fuel. A sUbstantial penalty is imposed on
the use or sale of dyed fuel for a taxable use, including the use
in pleasure boats.
It appears that, while many marinas carry both dyed and.
clear fuel, some marinas are carrying only dyed fuel for the1r
commercial customers due to limited tankage. As a result, there
have been complaints that pleasure boats are unable to buy clear
fuel at all marinas. Many marinas, however, have already
incurred the expense of adding a separate tank for clear, taxed
diesel fuel in order to comply with current law. Although some
State fire codes may preclude the installation of additional
above-ground tanks at some locations, we are unaware of any State
prohibitions on the installation of underground tanks. Based on
discussions with other Federal agencies, we also conclude that
there is no Federal regulatory prohibition of additional tanks at
marinas.
Further, we are monitoring marinas in various areas. We
have found that clear diesel fuel is readily available in areas
where recreational boating is popular, and availability has
improved significantly since the summer of 1994. Moreover, we
found that clear fuel availability has improved even in areas,
such as the Gulf Coast of Louisiana, where commercial boating
predominates and retailers are least likely to accommodate
recreational users. We believe that the availability of clear
diesel fuel should continue to improve as the market adjusts to
the new rules. We are concerned, however, that uncertainty over
the permanence of the new rules is retarding the adjustment
process and may have discouraged some marina operators from
installing the facilities needed to serve their pleasure boat
customers.
Administration's Recommendation -- The Administration
opposes the proposal to suspend collection of the excise tax on
recreational boat fuel for two years while the Treasury
Department conducts a study on various procedures for collecting
excise taxes on diesel fuel sold for use, or used, in
recreational boats. This proposal merely defers the problem with
no real prospect that a better alternative to the current system
will be found during the suspension period. Based on our
experience with the enforcement of motor fuels excise taxes since
the taxes were first enacted, we believe (and collections data
supports) that the current method of collection is the most
effective and efficient. We have no doubt that any further
Treasury Department study will reach the same conclusion.
However, we are cognizant of safety concerns and want to receive
more information about any area where the tax may have caused
safety problems. Moreover, we recognize that there may be room
to improve the availability of diesel fuel to recreational
boaters, but in our view, the current situation does not justify

-11scrapping the entire system. We believe Congress concluded in
1993 that recreational boaters should contribute to deficit
reduction. Therefore, suspending the collection of the excise
tax would undermine that goal.
As noted above, the availability of clear
significantly in the year and a half since the
boat diesel fuel went into effect. We believe
continue as the market responds to the OBRA 93

fuel has improved
tax on pleasure
this trend will
changes.

c. Kerosene
Background -- Since OBRA 1993, it has been brought to our
attention that there are continuing opportunities to evade the
motor fuels excise tax on kerosene used in highway vehicles.
Kerosene is a petroleum distillate used in space heaters,
aircraft engines, and as a stand-alone fuel in some vehicles.
Also, kerosene frequently is blended with diesel fuel during cold
weather to prevent formation of wax crystals in fuel lines.
In
some parts of the country, diesel fuel/kerosene blends containing
30 percent kerosene are common. Clear, low-sulfur kerosene (I-K)
is often available at service station pumps.
Before 1994, diesel fuel/kerosene blends used in highway
vehicles were generally produced before the sale of the blend by
the wholesale distributor, and the blend was treated as diesel
fuel.
Thus, tax was paid on the kerosene portion of the blend in
the same manner as tax was paid on the diesel fuel.
Treasury temporary regulations provided that before July 1,
1994, kerosene would not be treated as diesel fuel.
Subsequently, the IRS published Notice 94-72, 1994-2 C.B. 553,
announcing that the exclusion of kerosene from the definition of
diesel fuel would continue until the issuance of further
guidance. Therefore, under the current rules, kerosene is not
taxed or dyed upon removal from the bulk transfer/terminal
system, but if it is blended outside the system with previously
taxed diesel fuel, the untaxed portion of the mixture is taxable
on the removal or sale of the resulting blend.
Commentators have alleged that many kerosene/diesel fuel
blenders have been able to sell their product at a much lower
price than their competitors because they evaded tax on the
increased volume of the fuel they produced and sold. Therefore,
these commentators have proposed that kerosene be included in the
definition of diesel fuel and be taxed or dyed when removed from
the bulk transfer/terminal system. others, however, have
expressed concern that a tax-or-dye requirement would conflict
Hith numerous State laws and product safety certifications that

-12-

require kerosene to be sold clear and undyed. s In addition, a
tax-or-dye requirement would impose increased burdens on lowerincome families who would recover the tax paid on kerosene for
heating purposes only through an income tax credit.
Administration's Recommendation -- We believe that the
continuation of the present treatment of kerosene would
perpetuate the problems that Congress sought to correct in the
1993 Act, and that a change is essential if the new diesel fuel
tax system is to function as Congress intended. We also believe,
however, after consulting with the Consumer Product Safety
Commission, that it is imperative to consider the consumer safety
issues of adding dye to kerosene used in space heaters.
Therefore, we would like to work with Congress, mindful of the
differing needs of the consumer and the distributor, to devise an
ultimate vendor refund rule in this specific case. We urge the
Congress to address this issue as soon as possible.

SA number of states require that clear kerosene be used in
space
states are concerned that dye ~;n k erosene may
. These
.
.
.heaters.
.
d.~sgu~se
~mpur~t~es, such as sulfur, that may be toxic when burned
~n unvent~lated areas.
The Consumer Product Safety C
. .
h
also expressed similar concerns.
omm~ss~on as

ATTACHMENT

DIRECT FEDERAL TAXES AND CUSTOMS FEES FOR SELECTED TRANSPORTATION MODES
Fiscal Year 1994
Total

Commercial Aviation

Actual FY 1994
Trust ~una Geneiil

With the Aviation Fuel Tax
Total
'I'rust ~una L;eneiil

Fu~1

Deficit reduction
LUST
Passenger ticket
Freight waybill
International departure
Total taxes

$
$
12.5
S 4,747.0
$
330.0
S 224.7
$ 5,314.2

Customs fees 11
Total taxes and customs fees

S 213,8
S 5,528.0

Total Revenue
Net revenue 21

$ 6,5,748.0
$'65,735.5

Taxes anctfees as a % of net revenue

S
S

S 4,392.6
$ 1,752.4
$
25.1
$
357.5
S 1,635.7
S 650.3
S 8,813.6

Customs fees 51
Total taxes and customs fees

16,5
S
$ 8,830.1

Total revenue
Net revenue 61

S88,600.0
S79,769.9

S
S
$
$
S

S
S

2.~

6.3
199.3

Total revenue
Net revenue 61

S 33,007.0
S 32,807.7

Taxes and fees as a % of net revenue

0.6%

213,8
$ 213.8

$
213,8
S 5,907.0

S
S

0.3%

4,392.6
25.1
357.5
1,635.7
650.3
7,061.2
7,061.2

$
S1,752.4
$
$
S

S
$

5,314.2

9.0%

S1,752.4

$ 4,392.6
S 1,752.4
25.1
S
357.5
S
$ 1,635.7
S 650.3
S 8,813.6

16,5
SI,768.9

16,5
S 8,830.1

2.2%

8.9%

190.2
193.0

Customs fees
Total taxes and customs fees

$
379.0 $
12.5 $
S
12.5
S 4,747.0 S 4,747.0
$
330.0 $
330.0
$
224.7 S
224.7
$ 5,693.2 S 5,314.2

$
$
$

379.0

$ 379.0

213,8
$ 592.8

8.1%

S
$
S
$
S

S
$

S
S

4,392.6
-25.1
357.5
1,635.7
650.3
7,061.2
7,061.2

0.9%

S
S 1,752.4
$
S
S

$1,752.4

16,5
S 1,768.9

S88,600.0
S 79,769.9

S
S

5,314.2

$
S
$
$

8.1%

11.1%

Taxes and fees as a % of net revenue

12.5
4,747.0
330.0
224,7
5,314.2

$65,748.0
$65,356.5

8.4%

Commercial Trucking
Fuel
Highway Trust Fund
Deficit reduction
LUST
Tire tax
Retail sales tax 31
Highway use tax 41
Total taxes

Railroads
Fuel
LUST
Deficit reduction
Total taxes

$
$
$
$

$
S
$

2.8

S
2.8

$
190.2
190.2

S
2.8

11.1%

6.3
196.5
S

S
$

S
S

8.9%

2.8
190.2
193.0

6.3
199.3

2.8

2.2%

2.8

190.2
S 190.2

2.8

6.3
196.5

S 33,007.0
$ 32,807.7
0.0%

0.6%

0.0%

11 Incluaes fees on passengers arriving by ship.
21 Total revenue less LUST and deficit reduction fuel taxes. (The ticket tax, waybill tax, international
departure tax, and customs fees are collected by the airlines from their customers, and are not included in
gross revenues.)
31 A 12-percent federal tax imposed on purchase of large commercial trucks.
41 Annual licensing tax of$l00 to $550 (depending on size) imposed on commercial trucks.
51 Includes fees paid by commercial buses.
61 Total revenue less total taxes and customs fees.

0.6%

ST ATEMENT OF PATRICK V, MURPHY
ACTING ASSISTANT SECRETARY OF TRANSPORTATION
FOR AVIATION AND INTERNATIONAL AFFAIRS
BEF,9RPTHE
SUBCOMMITTEE ON OVERSIGHT OF THE HOUSE
COMMITTEE ON WAYS AND MEANS
CONCERNING THE TRANSPORTATION FUELS TAX EXEMPTION
FOR AVIATION JET FUEL
May 9, 1995

Madame Chairman and Members of the <;:ommittee, the Department of Transportation
is pleased to have this opportunity to testify on the scheduled imposition of the aviation
fuel tax on the airlines this October 1.

I would like to submit for the record my written testimony on the airline fuel

tax

and

the financial condition of the airline industry, which I delivered to the House Aviation
Subcommittee several weeks ago.

Background

Two years ago, Congress imposed a 4.3-cent per gallon excise tax on transportation
fuels, effective October 1, 1993, but temporarily exempted the airlines from paying the
tax

as it would have applied to aviation fuel. That statutory exemption expires

September 30, 1995. Given the improving health of the airline'industry and the need
to reduce the Federal budget deficit, the Administration believes that the exemption
should not be extended. This action is also appropriate given that the other
transportation industries have paid their full share of this tax for two years.

RR-LLihA

Industry Health
The airlines are today in a far better position than they were two years ago to absorb
the impact of the fuel tax. At the time Congress granted the exemption, the airline
industry was undergoing the worst financial crisis in its history. In· 1992, the U.S.
aviation industry suffered its worst year ever, with total operating losses of $2.2 billion
and net losses of $4.6 billion. The airlines had accumUlated- over $10 billion in net
losses ~in 1990 through 1992. All major passenger carriers except Southwest
Airlines had suffered heavy losses; Several airlines, including Eastern and Pan
American, had ceased operations and were liquidated during .this period, and three
more major airlines had filed for bankruptcy protection.

Today's picture is significantly different. Most airlines have experienced major
improvements in their financial condition. As the economy has recovered from
recession, so has airline traffic. The airlines have also engaged in a major restructuring
of their operations, increased efficiency, cut excess capacity, reduced unit operating·
costs, and enhanced their competitive strength. In addition, the three major airlines
that had been under bankruptcy protection two years ago have since emerged from
Chapter 11 proceedings. As a result, the major airlines' operating profits grew to over
$2.4 billion in 1994, a complete reversal from 1992, and their net loss declined to
$121.5 million. Five of the nine major passenger airlines posted operatin'g profits and
net profits, as did both major all-cargo airlines.

These trends are continuing into 1995. The majors' first-quarter operating profit
increased from $85 million in 1994 to $485 million in 1995. Since first-quarter results
are norinally relatively low, owing to the extreme seasonality of airline traffic, we
expect the airlines to show strong operating and net profits for calendar year 1995.

The FAA now forecasts that the currently robust airline traffic growth rates will hold
for the next two yean, and then cootinue at a healthy 4.2 percent through FY 2006.
That strong growth in airline traffic, combined with the airlines' ongoing capacity

reductions, should result in higher load factors far the industry. This, in tum, should
boost the airlines' operating profits. In view of these factors, we are now optimistic
that the airlines' net income should also continue to grow.

Wall Street analysts appear to share this po$itive Outlook for the ~es. The emerging

consensus among airline analysts is that airline fundamentals have improved and should
continue to improve. The positive fundamentals include incieased traffic, restrained
capacitY growth, higher load factorS,· improving revenue performance, cost
containment, and financial restructuring. These are not temporary changes. As
Michael Derchin of NatWest S~ties has stated, "These are not the type of changes
that affect profitability for a quartet or two, but the type that can enhance the
profitability picture for this industry for the rest of the decade."

The airlines' recovery has been driven, in part, by the steady decline in fuel costs in
recent years. Airline fuel costs have declined_ from 78 cents per gallon in 1990 to
about 53 cents per gallon today. In 1990, fuel costs accounted for nearly 17 percent of
the airlines' total operating expense. In 1994, they represented only about 10.6 percent
of total eXpense, and only 10.2- percent in the first quarter of 1995.

In this perspective, the impact of a 4.3 cent-per-gallon fuel tax is now far less onerous
than it was two years ago. Based on the latest-reported data, if the tax were imposed .

on the 12.6 billion gallons of jet fuel purchased in 1994 by the .~or passenger
airlines, expense would be .higher by $543 million annually-an increase in total.
operating expense of only 0.7 percent. Moreover, we anticipate that the airlines will
pass through some portion of the tax to passengers and shippers in the form of higher
fares and rates and will adjust capacity and make service adjustments to increase fuel

efficiency, reducing the tax's cost burden. A further reduction in the impact would
result from the Ql3DJ1er in which the fuel tax expenses are handled by the airlines in
calcqlating their income tax liability.·

Fairness· to Other Transport Modes
The 4.3-cent per gallon fuel tax was applicable to highway gasolil'le and diesel fuel,
maritime fuels, general aviation fuels, and commercial aviation fuel. Only the tax on
commercial aviation jet fuel was deferred for two years, the reason being to give the
. airline industry time to recover from its financial losses.

As a result of the 1993 fuel tax increase, modes oftransportation other than commercial

aviation, including motor carriers and railroads, had their then-existing deficit reduction

fuel tax of2.5 cents per gallon, as established by the Omnibus Budget Reconciliation Act
of 1990, increased by 4.3 cents p.er gallon, to a total of6.8 cents per gallol) fot deficit
reduction.

We have calculated the relative impact·ofthe deficit reduction.portion of the Federal
excise fuel taxes on the railroads and motor carriers. We estimate that for 1994 the
impact of the deficit reduction portion of the fuel taxes on the .CIass 1 railroads and their
usen was approximately $221 million, and was appro~ $1.78 billion for motor
-carriers and their users. (We have not estiinated the effect on maritime carriers.)

In this context, the case for extending an exemption is very difficult as a matter of

fairness. Other transport modes have paid the 4.3-cent per gallon transportation fuel
tax for almost two years. By the time the commercial aviation exemption expires,

motor carriers and their users alone will have paid as much $3.5 billion over two yean.
In view of the airline indU$Uy's recovery, there is no longer any justification for

granting the airlines preferential treatment compared to .surface modes.

Deficit Reduction
The 4.3-cent per gallon transportation fuel tax was enacted to help reduce the deficit. In
this era of fiscal austerity, we believe it .is imperative for all sectors of the economy to

pull their fair share of the weight in reducing the Federal deficit. The aviation fuel

tax

represents the airlines' contribution to deficit-reduction. Accordingly, we believe the
airlines'· exemption from the transportation fuel tax should be permitted to expile as
scheduled.

STATEMENT OF PATRICK V. MURPHY
ACTING ASSISTANT SECRETARY OF TRANSPORTATION
FOR AVIATION AND INTERNATIONAL AFFAIRS
BEFORE THE·
SUBCOMMfITEE ON AVIATION OF THE HOUSE
COMMITIEE ON TRANS PORTATION AND INFRASTRUCTURE
CONCERNING THE FINANCIAL CONDITION OF THE AIRLINE INDUSTRY
.MARCH 22, 1995

Mr. Chairman and Members of the Subcommittee, the Department of Transportation is
pleased to have this opportunity to comment on the financial condition of the U.S.
airline industry.

When I last appeared before this Subcommittee two years ago, the airline industry was
in the very earliest stages of recovery from the most severe financial crisis in its
history. In 1992, the U.S. aviation i~dustry sufferoo its worst year ever, with total
operating losses of $2.2 billion and net losses of $4.6 biliion, and had accumulated
over $10 billion in net losses from 1990 through 1992. All major passenger carriers
except Southwest Airlines had suffered heavy losses. Several airlines, including
Eastern and Pan American-two of America's oldest and largest airlines-had ceased
operations and were liquidated· during this period, and three more major airlinesAmerica West, Continental, and TWA--had flled for bankruptcy protection under
Chapter 11; several more airlines were considered by industry analysts to be on the
brink of bankruptcy.

I am pleased to report that today's picture is different. Most airlines have experienced
improvements in their financial condition. As the economy has recovered from

2
recession, so has airline traffic. The airlines have also engaged in a major restructuring

of their operations. As a result, they have increased efficiency, cut excess capacity,
reduced unit operating costs, and enhanced their competitive strength. In addition, the
three major airlines that had been under bankruptcy protection two years ago have since
emerged from Chapter 11 proceedings.

Historic Fmancial Results
Since 1985 the airlines have ridden a financial roller coaster. From i985 through
1989, the major airlines as a group had strong net income in every year but 1986.
Over the five-year period, they had cumulative net income of over $3 billion, including
$1.6 billion in 1988. By the end of 1989, the major airlines had aggregate net
stockholders' equity of nearly $14 billion, and long-term debt of nearly $16 billion.
The airlines' debt/equity ratio stood at a fairly healthy 53/47 level.

Beginning in 1990, the airlines suffered three consecutive years of massive losses. In
1990, the major airlines lost over $3.6 billion, due primarily to Iraq's invasion of
Kuwait, the subsequent Gulf War, and the consequent increase in fuel prices and
decline in international airline traffic. The airlines suffered another $1.8 billion loss in
1991 as the economy slid into recession, and $4.6 billion in 1992 (including over $2
billion in one-time charges to reflect changes in the airlines' accounting of pension
liabilities). By the end of 1992, the majors' long-term debt had skyrocketed to over
$21 billion, and stockholders' equity had plummeted to about $9.2 billion. The
industry's debt/equity ratio had climbed to 70/30.

The industry began its recovery in 1993, when the major airlines earned operating
profits of $1.4 billion and net income of $450 million. Six of the nine major passenger
airlines were profitable in 1993. (These figures somewhat overstate the industry's
improvement, as they include "fresh start" accounting for Continental and

:rwA with

their emergence from bankruptcy in 1993.) Preliminary figures for 1994 show that,
although they posted a small net loss of $63.6 million, the major airlines' operating
profits increased to $2.4 billion. Five of the nine major passenger airlines posted
operating profits and net profits, as did both major all-cargo airlines.

Although long-term debt continued to increase in 1993, to $27 billion, net
stockholders' equity began to recover, climbing nearly one-third to $12.3 billion.
According to preliminary figures, the industry's long-term debt declined in 1994 to
$26.6 billion, and stockholders' equity grew another 30 percent to a record high of
nearly $16 billion. The majors' debt/equity ratio has improved to 62/38.

The overall industry recovery during the last two years has been driven primarily by
the general economic recovery from the 1991-1992 recession. In addition, carriers
have been significantly aided by the rapid decline in aviation fuel costs since 1990.
Because of instability in the oil markets caused by the Iraqi invasion of Kuwait, the
industry's average cost of fuel jumped to nearly 78 cents per gallon in 1990. Fuel
prices have declined sharply every year since then, falling to 60 cents in 1993 and to 56
cents during the first nine months of 1994. This steep, rapid decline in jet fuel costs

has been a primary factor in the airlines' recovery over the last two years. Finally,
most major carriers have restructured their operations to improve efficiency and cut
costs, in order to become more competitive not only with each other but with low-cost
carriers like Southwest and successful new entrants.

Since January 1992, no fewer than 30 new jet airlines have started up domestic U.S.
operations, and we have authorized .operations for 12 carriers who have not yet
commenced service. At this moment, we have 10 more new entrant applications
pending before the Department. These and other low-cost, mid-size airlines have' fllied
a void left by the majors in point-ta-point, short-haul and medium-haul city-pair
markets with dramatically positive results. The larger carriers have been forced by this
development to redouble their cost-cutting efforts. They have reduced service on
unprofitable routes, expanded service on underserved routes, retired older, inefficient
aircraft, and, in some cases, achieved new collective bargaining agreements that allow
a more efficient use of labor. In order to improve the efficiency of their operations,
airlines have entered into major domestic and international code-sharing and jointmarketing alliances with other carriers. Many have also restructured their debt and
equipment leases to improve earnings and cash flow; others have reappraised their
entire route structures and operating philosophies. In addition, management leaders at
many airlines have increasingly formed partnerships with labor by encouraging
employee ownership, primarily through Employee Stock Option Plans. Employees
now hold an outright majority share of United, the nation's largest airline, and own

large equity shares of many other airlines. including America West, Continental,
Nonhwest, Southwest, and TWA.

These changes in the airlines' operations constitute the most comprehensive
restructuring of the industry at least since the development of hub-and-spoke networks
in the early and mid-1980s, and perhaps since passage of the Airline Deregulation Act
in 1978.

As a result of this restructuring, most airlines have achieved dramatic improvements in
their financial position. Northwest, in particular, has made enormous strides in the
past two years. After suffering record losses of $386 million in 1992, it earned $81
million in 1993, and a record $430 million last year. American, America West, and
United, which also suffered from heavy losses in 1992, were all solidly in the black by
1994. Southwest, which was the only profitable passenger carrier in 1992, has seen its
net earnings increase by 73 percent to $290 million last year. And ValuJet, less than 2
years old, enjoyed an astounding 25 percent operating margin last year, with net
income of over $20 million. Restructuring has also enabled the three major airlines
formerly under Chapter 11 protection to reorganize and escape from bankruptcy.
Continental emerged from bankruptcy in April 1993, TWA in November 1993, and
America West in August 1994.

At the same time, the airlines' recovery has not been uniform. Despite their large
aggregate operating profits, the major carriers posted net losses for 1994 of $64 million

6
(based on preliminary data), and a few carriers remain in a weak financial position.

Even the weaker carriers, however, have made significant progress in cutting unit
costs, rationalizing their route systems, and increasing efficiency. As airline traffic
increases with continued economic growth, the industry's fortunes should improve
considerably.

Forecast Operating and Fmancial Results
The airline industry's financial prospects are critically dependent on continued airline
traffic growth, which itself is a function of overall growth in economic output. Gross
domestic product (GDP) grew by 3.8 percent in fiscal year 1994. At the same time,
airline traffic increased by 5.5 percent, from 483 billion revenue passenger miles
(RPMs) in FY 1993 to 510 billion in FY 1994.

OMB forecasts continued GDP growth of 3.1 percent in FY 1995, 2.4 percent in FY
1996, and 2.5 percent from FY 1997 to 2001, and 2.4 percent from FY 2002 to 2006.
(The FAA's long-term traffic forecast.is based on a consensus of long-term growth
forecasts issued by OMB and several economic analysts in the private sector.) With
these economic forecasts as a basis, the FAA forecasts that the currently robust airline
traffic growth rates will continue for the next two years, and then continue at a healthy
4.2 percent through FY 2006. The FAA forecasts airline traffic of 537 billion RPMs
in FY 1995, 567 billion in FY 1996, and 869 billion by FY 2006.

Most major

airlin~s

have announced plans to control or trim their capacity this year,

and to continue pursuing reductions in unit costs. Continued strong growth in airline
traffic, therefore, should result in higher load factors for the industry. This, in tum,
should boost the airlines' operating profits, even as their real passenger yields (revenue
per passenger-mile) continue to fall.

We are now optimistic that the airlines' net income should also continue to grow.
Long-term debt should continue the slow decline begun in 1994, and net stockholders'
equity should increase sharply.

As over the last two years, however, these benefits may not be spread evenly among
the carriers. Airlines with high costs or poor route structures may continue to struggle
unless they effect significant corrective steps. Highly leveraged carriers are especially
vulnerable to upward pressures on interest rates. Neverthele$s, we anticipate that even
the weaker carriers should progress toward profitability over the next several years,
albeit possibly at a slower rate than the healthier airlines.

Airline industry cost structure
The airline industry is labor-intensive. During fiscal 1994 (the most recent period for
which we have detailed data), salaries and wages accounted for 24.8 percent of the
major airlines' total operating expense, and fringe benefits comprised another 9.6
percent. Total labor costs amounted to 34.3 percent of their operating expense, by far
the largest expense item.

Fuel and capital costs were the next largest expense groups. The majors' fuel and oil
expense was 11.2 percent of operating expense. Total equipment costs (rentals plus
depreciation) were 13.4 percent of operating expense. Passenger traffic commissions
are also a major airline expense, amounting to 9.4 percent of operating expense.
Altogether, labor, fuel, equipment, and commission costs made up 68.3 percent of total
expense in FY 1994.

The distribution of airline expenses has not been static over time. Fuel and oil made up
nearly 23 percent of airline expense in 1985, declining to a low of 13.7 percent in 1988
before climbing again to 16.7 percent in 1990 with the Iraqi invasion of Kuwait and the
attendant instability in the oil markets. Since that time, the industry's fuel cost has
declined as a share of operating expense to a

100y~

low of 11.2 percent in fiscal

1994.

Traffic commissions grew rapidly and nearly continuously during the last ten years,
from 7.8 percent of expense in 1985 to 10.3 percent in Calendar Year 1993, an
increase of one-third, before declining to 9.4 percent in fiscal 1994. Aircraft rentals
have also grown from 3.5 percent in 1985 to 8.5 percent in FY 1994.

Labor expenses as a share of total expense have fluctuated a great deal over the last 10
years, falling from a high of 38.6 percent in 1986 to a low of 31.9 percent in 1990.
They have since increased to 34.3 percent in FY 1994. Depreciation has shown a

similar trend. declining from 5.5 percent in 1985 to 4.3 percent in 1990. and since then
climbing to 4.9 percent in FY 1994.

Unit costs have also shifted over time. Total operating expense per available seat-mile
(ASM) grew from a low of 7.2 cents in 1986 to a peak of nearly 9.3 cents in 1991.
Since that time, total unit cost has declined somewhat to about 9.2 cents per ASM.
Labor costs, which were 2.7 cents per ASM in 1986, have climbed steadily, reaching
nearly 3.4 cents in FY 1994. Passenger commissions have also grown continuously
and rapidly, from 0.6 cents per ASM in 1986 to nearly 1.1 cents in 1993, an increase
of over 72 percent in seven years, before dec~ning in FY 1994 to 1.0 cents per ASM.
Equipment costs (depreciation, amortization, and rentals) have also increased, from 0.8
cents per ASM in 1986 to nearly 1.4 cents in FY 1994. Fuel costs, on the other hand,
peaked at 1.6 cents per ASM in 1990, and have since declined nearly one-third to less

than 1.1 cents per ASM.

By functional grouping, the airlines'

l~gest

costs were aircraft operating expense,

which accounted for 40.1 percent of total operating expense in fisca11994. (Aircraft
operating expense consists of flying operations expense, flight equipment maintenance,
and depreciation and amortization on flight equipment.) Other major functional
groupings are reservations and sales expense (including commissions), which accounted
for 16.6 percent of total expense, traffic servicing at 10.3 percent, passenger servicing
at 9.4 percent, and aircraft servicing at 6.2 percent of operating expense. Together

these five groups accounted for 82.6 percent of the airlines' operating expenses in FY
1994.

Effect of the 4.3 cent jet fuel tax

Two years ago, Congress temporarily exempted the airlines from paying the 4.3 centsper-gallon excise tax on jet aviation fuel. That statutory exemption expires September
30, 1995. At the time Congress granted the exemption, airlines were undergoing their
worst financial crisis in history.

The industry is now in a position to accommodate this tax increase. Therefore, we do
not support a further extension of the exemption. As I noted earlier, fuel costs have
continued to fall, and now represent only about 11 percent of the industry's total
operating expense. In absolute terms, fuel is now about 56 cents per gallon, down
from 78 cents in 1990 and 64 cents in 1992. In that perspective, the impact of a 4.3
cent-per-gallon fuel tax is far less onerous. Based on the latest reported data, if the tax
were imposed on the 12.1 billion gallons of jet fuel purchased by the major airlines, the
airlines' fuel expense would be higher by $543 million annually--an increase over
actual fuel expense of 7.9 percent, but an increase in total operating expense of only
0.7 percent.

The Department of the Treasury estimates that, for every dollar .it gains from the
aviation fuel tax, it loses about 25 cents in corporate income tax from the airlines.
Thus, a very rough estimate of the net effect of the fuel tax on the airlines would

11
appear to be about $407 million, or only about one-half of one percent of operating
expense. Moreover, we anticipate that the airlines will pass through some portion of
the tax onto passengers and shippers in the form of higher fares and rates. We also
expect that the airlines will adjust capacity and make equipment and service adjustments
to increase fuel efficiency, thus further reducing the tax's cost burden. Thtis, the net
impact on the industry would be substantially less than $407 million.

In this context, the case for extending an exemption is very difficult as a matter of
fairness to other transport modes, which have paid increased excise taxes on fuel during
the past two years. The Administration's position, therefore, is that there is no longer
a justification for exempting the airlines from paying their fair share of energy taxes
beyond the current fiscal year.

Recommendatiom to enhance airline profitability
Because the airline industry is hyper-sensitive to overall economic conditions, the surest
road to the industry's recovery is continued economic growth. As Laura 0' Andrea
Tyson, then Chair of the President's Council of Economic Advisors and now Chair of
the National Economic Council, wrote last year in introducing the Administration's
Initiative to Promote a Strong Competitive Aviation Industry, "A strong economy will
be the best medicine for what ails the aerospace complex."

Nevertheless, as Dr. Tyson added, "a strong economy cannot alone cure these
industries' ills." There is still a role for government policies to promote the financial

12
health of the aviation industry. Two years ago, at the Administration's behest,

Congress established the National Commission to Ensure a Competitive Aviation
Industry to investigate the causes of the aviation

i~dustry's

financial woes, and to

recommend measures to speed their recovery. The Commission adopted a list of 61
recommended steps to improve the aviation and aerospace industries' viability.

In Janll¥Y 1994, in response to the Commission's recommendations, the
Administration unveiled-its Initiative to Promote a Strong Competitive Aviation
Industry. The Administration adopted 49 of the Commission's recommendations. As
of January 1995, the Department has taken a large number of specific administrative
actions to implement these recommendations.

Among the Department's most prominent actions are the introduction of new
technology and navigation rules to streamline the FAA's air traffic control, which has
already significantly reduced fuel consumption and airport delays for many carriers;
accelerated implementation of the Global Positioning System; and a comprehensive
examination of the High Density Rule affecting the four slot-controlled airports
(Kennedy, LaGuardia; O'Hare, and Washington National), in order to determine the
rule's impact on airline competition, fares, and service patterns. In addition, the
Department has continued to monitor closely the airlines' operating and financial
results, has encouraged the entry of new airlines by removing hindrances to market
entry and assuring that new carriers are not harmed by unfair competitive practices.

13
We are also continuing to reassess the economic impact of existing regulations in order

to minimize regulatory burden on the industry.

Another important way to improving airline profitability is liberalization of routes,
fares, and rates. Although the domestic industry has been deregulated for over 16
years, international routes are still subject to severe restrictions in many bilateral
aviation markets. Liberalization of our bilateral aviation agreements with our trading
partners, therefore, is another important goal of the Administration.

To achieve this, the Administration has adopted "Open Skies" initiatives with a number
of our trading partners. The most dramatic fruit of tliis effort was the recent signing in
Ottawa of the new U.S.-Canada aviation agreement. That agreement provides for
complete "Open Skies" to be phased in over three years between the U.S. and the
Canadian cities of Montreal, Toronto, and Vancouver, and for immediate "Open
Skies" in all other U.S.-Canada markets. The Department has just issued temporary
exemption authority to six U.S. carriers to provide new service to Montreal, two
airlines to Toronto, and six to Vancouver. We expect the new U.S.-Canada agreement
to result in several billion dollars in new trade between the two countries.

The Administration has also aggressively pursued "Open Skies" agreements with
countries overseas. In the last few weeks, the United States has initialed "Open Skies"
agreements with Austria, Belgium, Iceland, Luxembourg, and Switzerland. "Open
Skies" negotiations with Finland are scheduled for this week, and should begin soon

with Denmark, Sweden, and Norway. In addition, the Administration is seeking to
improve bilateral agreements with a number of our other trading partners, including
China, Japan, Peru, Poland, and the United Kingdom.

Successful implementation of "Open Skies" or liberalized bilateral agreements will
provide U.S. airlines with more opportunities to compete on an even footing for
increasingly valuable international traffic. Since U.S. carriers are the most costefficient in the world, we are confident such opportunities will result in increased
profitability recovery.

In addition to the foregoing administrative actions, and as Secretary Peria discussed
with this Subcommittee on February 14, the Administration has proposed draft
legislation to restructure FAA's Air Traffic Control functions in a new governmentowned corporation funded by user fees. This would allow for more flexible personnel
and procurement policies, ensure that the ATC system is able to respond quickly and
efficiently to the growth of the industry and to technological advances, and provide for
the highest degree of safety. We expect to transmit the draft legislation to Congress
shortly.

Last year, in response to recommendations of the Airline Commission, the
Administration supported provisions in proposed legislation to reform the bankruptcy
laws, including changes with respect to airlines. Last October Congress enacted the
Bankruptcy Reform Act of 1994 we included several of the provisions we supported.

15
In addition, on February 15, 1995, Representative Clinger introduced legislation in
H.R. 951 to liberalize the restrictions on foreign ownership of U.S. carriers.
Liberalization of foreign ownership rules was included in the Commission's
recommendations, and has been adopted by the Administration in its Aviation Initiative
and by the Department of Transportation in its recent international aviation policy
statement. The Department is reviewing H.R. 951 in light of these fact9rs.

Conclusion

With competitive pressures exerted by low-cost carriers, every major airline has
launched a program to cut costs to the bone. These programs have included withdrawal
from unprofitable routes and stations, retiring inefficient aircraft, reducing food
service, changing distribution channels, shifting to ticketless reservations and booking,
cutting commissions, and trading labor concessions for equity stakes in the airlines.
These developments reflect the major changes going on in the airline industry as it
restructures itself into a more efficient, highly competitive, and low-cost service
industry. When these efficiencies are combined with today's health economy, and with
our ongoing efforts to .promote the health of this important economic sector, we see a
profitable era for airlines.

Mr. Chairman, let me once again extend my thanks for the opportunity to present the
Department of Transportation's views on the current and future health of the aviation
industry. I am confident that, as our economy continues to grow, as U.S. air carriers

16
become more efficient, and as the policies the Department has proposed or has
underway are implemented, the aviation industry will grow, flourish, and prosper.

DEPARTMENT

THE

1REASURY~..

TREASURY

NEWS

omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. -

, D.C. - 20220 - (202) 622-2960

WRITTEN STATEMENT OF ERIC J. TODER
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
DEPARTMENT OF THE TREASURY
SUBMITTED TO THE WAYS AND MEANS OVERSIGHT SUBCOMMITTEE
IN CONNECTION WITH HEARING ON IRS'S TAXPAYER COMPLIANCE
MEASUREMENT PROGRAM
JULY 18, 1995

Dear Madame Chairman and Members of the Subcommittee:
I am happy to submit this statement at your request regarding the ways in which
Treasury's Office of Tax Policy (OTP) relies on the data compiled in the Internal Revenue
Service's (IRS's) Taxpayer Compliance Measurement Program (TCMP) audits. The
principal purpose of the TCMP audits is to develop information that will enable the IRS to
administer the tax laws more effectively. IRS is solely responsible for the timing, scope,
and design of the TCMP audits. But the information the audits produce is also helpful to
OTP for both policy analysis and revenue estimation.
From a policy perspective, from TCMP audits provide OTP with valuable information
on those aspects of the Federal tax system that create the greatest problems of compliance for
taxpayers and administrative problems for the IRS. TCMP audits indicate which items of
income, expense, deduction, or credit generate the greatest numbers of errors per response.
Such errors can occur either because the specific tax provisions associated with those items
are unduly complex and confusing for taxpayers, because they are difficult for the IRS to
verify, or both. The TCMP data can thus be very helpful to OTP in suggesting policy
changes that reduce taxpayer burden and improve compliance. From an estimating
perspective, TCMP audits provide useful information on how proposed changes in
information reporting or in the level of resources devoted to tax administration would affect
future tax receipts.
Treasury's Office of Tax Analysis (OTA) evaluates numerous proposals to improve
taxpayer compliance and the ability of IRS to enforce the tax laws. In estimating the revenue
impact of these proposals, it is first necessary to establish a "baseline" of the level of noncompliance. The TCMP is the only source of data that provides sufficiently detailed
information on the level of compliance associated with specific tax provisions. For example,
the Energy Act of 1992 required buyers who deduct seller-financed mortgage interest to
report the name and social security number of the seller. The revenue estimate for this
RR 437

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-2-

proposal required two key pieces of information: (1) the degree of non-compliance in
reporting home mortgage interest deductions associated with seller-financed mortgages and
(2) the extent to which the IRS could expect to close this gap by requiring the additional
information. TCMP data on the level of non-compliance for seller-financed mortgages and
on the level of compliance for mortgages financed through financial institutions that currently
required information reporting were used to estimate the revenue gain from the proposed
increase in reporting requirements.
Another example of the use of the TCMP data in estimating the revenue effect of tax
compliance initiatives is the provision of the Omnibus Budget Reconciliation Act of 1993
which required donors to obtain substantiation from donee organizations for charitable
contributions of $250 or more. The provision required a charitable organization to state the
size of the contribution made by the donor and provide a good faith estimate of any goods
and services rendered in exchange for the contribution. Before this change in the tax law,
the taxpayer needed only to have a cancelled check as validation for a charitable contribution
deduction. The TCMP data showed that charitable contribution deductions are frequently
and substantially overstated, and showed how the overstatement of charitable contribution
deductions was distributed by size of contributions. These data proved crucial in estimating
the effects of alternative proposals to detect overstatement of charitable contribution
deductions, including the specific one that became law.
The TCMP data also were very helpful in estimating the revenue effects of requiring
mortgage brokers to file information reports to the IRS on the proportion of property taxes
paid by the buyer and the seller in the course of a home sale. Previously, it was possible for
both the buyer and the seller of the house to claim a deduction for the entire amount of
property taxes paid on the house in the year of the sale. While the TCMP data did not
directly measure compliance for this specific type of deduction, compliance under this
proposal could be inferred from examination of compliance in the reporting of the home
mortgage interest deduction, an item whose compliance is measured by the TCMP. Thus,
even if the revenue effects of a compliance proposal cannot be estimated directly from the
TCMP data, it may be indirectly estimated by using a closely related TCMP compliancemeasured income or deduction item.
These are just a few examples of how OTP uses TCMP audit data to determine where
additional information reporting would be particularly helpful and in estimating the revenue
consequences of such changes. To the extent the qUality of the TCMP data is maintained at
a level consistent with the primary objectives of the program -- the determination of
taxpayer compliance levels, the appropriate allocation of IRS audit resources, and the
selection by the IRS of specific tax returns for audit -- the TCMP data will continue to meet
OTP's. requirem~nts. Conversely, i~ the TCMP program were reduced or compromised to
the pomt where It no longer accomplJ~~es these objectives of the IRS, OTP's ability to rely
?n the data would also be adversely attec.ted. Were that to happen, Jur ability to propose
Improvements to the tax system and prOVIde accurate revenue estimates would be reduced.

DEPARTMENT

THE

TREASURY

TREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR RELEASE AT 2:30 P.M.
July 18, 1995

CONTACT:

Office of Financing
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,400 million, to be issued July 27,
1995. This offering will provide about $1,125 million of new
cash for the Treasury, as the maturing 13-week and 26-week bills
are outstanding in the amount of $25,287 million.
In addition to
the maturing 13-week and 26-week bills, there are $16,963 million
of maturing 52-week bills. The disposition of this latter amount
was announced last week.
Federal Reserve Banks hold $11,163 million of bills for
their own accounts in the three maturing issues. These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,683 million of the three
maturing issues as agents for foreign and international monetary
authorities.
These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders. Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $4,357 million of the original 13-week and
26-week issues.
Tenders for the bills will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. This offering of Treasury securities is
governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000

Attachrm=nt
RR-438

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JULY 27, 1995

July 18, 1995
Offering Amount .

$13,200 million

Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .

91-day bill
912794 V4 3
July 24, 1995
July 27, 1995
October 26, 1995
April 27, 1995
$11,768 million
$10,000
$ 1,000

182-day bill
912794 W7 5
July 24, 1995
July 27, 1995
January 25, 1996
July 27, 1995
$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .

U EPA R T MEN TO.'

TilE

T l{ E A S LJ

'IREASURY·
omCE OF PUBUC AFFAIRS • 1500 PENNsn.VANIAAVENUE, N.W. W'A:SIDNG,TON D.C•• 20220. (202) 622·2960

FOR IMMEDIATE RELEASE
July 19, 1995
STATEMENT BY TREASURY GENERAL COUNSEL EDWARD S. KNIGHT

Dick Reavis has questioned the legal basis for the military
support to the Bureau of Alcohol, Tobacco and Firearms in the
Davidian matter. The Treasury Department's Waco Administrative
Review and my Office have reviewed the law and facts. We have
concluded that military support in this matter was lawfully
provided.
.
A reading of the specific statutes shows, first, that the
"Posse Comitatus Act" -- which bars military forces from direct
civilian law enforcement -- does not prohibit all military
assistance to civilian law enforcement. Second, all types of
assistance -- including national guard as~istance -- provided the
ATF in this matter falls outside the "Posse Comitatus Act."
Third, the type of military support that WdS provided the ATF
during the investigation qf the Davidians and execution of
warrants could have been obtained regardless of whether or not
there was a showing of a drug nexus.
'rhc facts are that Alll!" uncovered and disclosed, in good
faith, information of a possible narcotics violation at the
Davidian compound. This information was accepted by the state
and federal military entities. All of the special forces
training was provided consistent with orders issued by the
military. Finally, as the Texas National Guard required, the
hellc.;opters used tv assist ATF were not armed.
-30-

RR-439

Fur press reletues, speeches, public schedules and officiol biographies, call our 24~our fa line at (202) 622-2040

I :' ~~ :: ' () '(

(

. I, J J (; i , '
Statement of 11, Geoffrey Moulton, Jr.
Associate Professor, Widener University School of Law
Project DireCtor, Department of the Treasury Waco Administrative Review
Before the Subcommittee on National Security, International Affairs, and Criminal
Justice, Committee on Government Reform, and the Subcommittee on Crime,
Committee on the Judiciary
July 19,1995
L0~

','

Thank you to both Chairmen and Committees for giving me the opportunity to
appear before you today. My name is Geoff Moulton, and two years ago I served as
the project director for the Treasury Department investigation into ATF's failed raid
on the Branch Davidian Compound near Waco, Texas. Before undertaking that
assignment, I graduated from Columbia Law School in 1984, clerked for Chief Judge
Wilfred Feinberg in the United States Court of Appeals for the Second Circuit, and
then for Justice Rehnquist on the United States Supreme Court, After finishing my
clerkship with Justice Rehnquist, I served roughly four years as an Assistant United
States Attorney in the Eastern District of Pennsylvania, In the middle of those four
years, I spent six months on a temporary detail to the Justice Department, serving as
Special Counsel to the Assistant Attorney General for the Criminal Division, After I
left the government, I worked in private practice for two-and-one-half years, I am
now an associate professor at Widener Law School in Delaware, where I teach
criminal procedure, white collar crime, and legal ethics.
As we all know, on February 28, 1993, four agents from the Treasury
Department's Bureau of Alcohol, Tobacco and Firearms were killed, and more than
twenty were wounded, as they unsuccessfully attempted to execute lawful search and

RR-440

arrest warrants at the Branch Davidian Compound near Waco, Texas. Several
residents of the Compound were killed in the raid as well.
Even before the fire 51 days later, the Executive Branch, Congress, the media
and the general public raised serious and important questions about A TF actions at the
Compound. and about ATF's inconsistent post-raid statements about what had actually
happened. Clearly, there needed to be a comprehensive reyiew of the events of
February 28, and of the process that lead up to the raid. The Treasury Department
began planning for such a review during the 51-day stand-utl that followed the failed
raid. That standoff was handled on the law enforcement side by the FBI, which was
invited to and did take over at the scene the day after the r:llU. The standoff ended on
April 19, when the Compound erupted in fire set by

residel1[~

after the FBI used tear

gas to attempt to force the occupants to leave. The fire destroyed the Compound, and
more than 70 residents died.
On April 19, President Clinton directed the Treasury and Justice Departments,
which are responsible for ATF and the FBI, respectively, to conduct "vigorous and
thorough" investigations of the events leading to the loss of law enforcement and
civilian lives. Secretary Bentsen created a unique review structure that, I believe,
was very effective. He asked Ronald K. Noble, who by then had been designated to
be Assistant Secretary of the Treasury for Enforcement, to lead Treasury's review of
ATF's involvement in the case, from the beginning of its investigation of Koresh
through the unsuccessful effort to execute search and arrest warrants. To ensure that
the report was impartial and comprehensive, the Secretary enlisted three individuals of

national prominence and integrity -- Watergate prosecutor Henry Ruth, Pulitzer Prize
winning journalist Edwin Guthman, and Los Angeles Police Chief Willie Williams -to provide guidance to the investigation, consider its findings, and assess the final,
report.
Mr. Noble asked me to serve as the project director for the Review. As
project director, I was responsible for assembling the seventeen senior investigators
from the Secret Service, the Customs Service, the IRS, and the Financial Crimes
Enforcement Network, as well as six other attorneys, to assist in the investigation and
the preparation of the report. Along with two assistant project directors -- Lewis C.
Merletti, then Deputy Assistant Director of the U.S. Secret Service, and David L.
Douglass, an attorney on leave from the law firm of Wiley. Rein and Fielding -- I
was responsible for directing and overseeing the investigation. supervising the
Review's day-to-day operations, and coordinating and participating in the drafting and
editing of the report.
In addition to the independent reviewers selected by Secretary Bentsen,
Treasury's Office of Inspector General monitored the review team to provide
assurance to the Department that the project plan was complete and properly
implemented, and that all relevant facts were fully considered. We also consulted
with ten non-Treasury experts in tactical operations, firearms and explosives. The
independent analysis that each one of them submitted to the review team is appended
to the report. These outside experts, like the three independent reviewers, served
without pay.

Our mission from the beginning was to conduct a thorough, comprehensive
and impartial review. First and foremost, our goal was to learn what happened near
Waco, and then to relate the facts. We reviewed primary source material and
interviewed over 500 individuals in the four-and-one-half months between May 17 and
the submission of the report on September 30, 1993. The vast majority of those
interviews were conducted in person, and many lasted a full day or more.

As the

review progressed and new facts emerged, we conducted countless follow-up
interviews. Based on this investigation, including credibility determinations and
circumstantial evidence, we made factual detemlinations'and analyzed those facts.
We took a hard, critical look at all the evidence, and produccd a thorough, detailed
and candid report.
What did we learn') I want to emphasize one thing wc learned that I fear may
be lost in these next several days --the rank and file agents at :\ TF who were sent to
enforce federal firearms and explosives law at the Branch Davidian Compound did
their best to perform their assigned tasks and showed dedication and often spectacular
courage in the face of extraordinary gunfire. Unfortunately, the Review also found
disturbing evidence of flawed decisionmaking, inadequate intelligence gathering,
miscommunication, supervisory failures, and deliberately misleading post-raid
statements about the raid and the raid plan by certain ATF supervisors. Upon
publication of our report, five ATF employees were placed on administrative leave.
Soon thereafter, the position of A TF Director was filled by John McGaw, former
director of the Secret Service, and other senior ATF managers were replaced.

I understmd from the agenda for the next several days that you are interested
in a few issues in particular: Was ATF's investigation of David Koresh and his
followers improperly motivated?

Did ATF have probable cause to believe that

people inside the Compound were manufacturing illegal machine guns and explosive
devices? Why did the ATF decide to enforce its warrants through a dynamic entry
rarher than some other option? Was the raid plan well-conceived and properly
executed? Did ATF mislead the military in its effort to obtain military assistance?
These are all issues that the Treasury Review thoroughly investigated two
years ago and which we addressed in our report. I' would like briefly to highlight for
the Committees the Review's findings with respect to those issues.
Did ATF properly initiate an investigation of Koresh and his followers?
The answer we gave in the report and the answer that remains correct is yes.
Based on evidence that is set out in the report. we concluded that ATF properly
focused on Koresh after receiving complaints from local law enforcement officials -the McLennan County Sheriff's Department -- in May, 1992. We reviewed
allegations that ATF targeted Koresh because of his religious beliefs and sexual
conduct with minors. We found no support whatsoever for those allegations. Before
opening a formal investigative file, the ATF case agent made a preliminary
determination, by debriefing local officials, interviewing gun dealers, and searching
national firearms registries, that federal crimes might be being committed. He then
opened a file, and conducted a thorough, professional investigation to develop
probable cause that illegal machine guns and explosive devices were being produced

and possessed at the Compound. In light of the infonnation presented by local
authorities, it would have been irresponsible for ATF not to have initiated an
investigation.

Did ATF have probable cause to believe that people inside the Compound
were manu; Jcturing illegal machine guns and explosive devices?
The answer we gave in the report was the same as [he nne given by the judge
who reviewed and approved the warrant. Magistrate-Judge Green -- yes. The
evidence that A TF presented in support of the warrant aprl ication plainly showed that
there was probable cause to believe that Koresh and his foll()\\"(:rs were committing
numerous violations of federal firearms laws. ATF agents P:llllstakingly traced the
paper trail of transactions in\olving fireamls. fireanns pan". aI1li chemicals, and
interviewed local law enforcement officials. neighbors. and jprmer residents of the
Compound.
By late February 1993. the case agent. Davy Aguilera. had amassed an
impressive amount of evidence that Koresh was unlawfully possessing and
manufacturing machineguns and explosive devices. At the beginning, Aguilera knew
that Koresh was receiving shipments of M-16 parts and materials used to make
explosives. along with other fireamls materials. Because neither Koresh nor any of
his known followers were registered owners of any M-16 machine guns, or of any
machineguns at all, the agent could reasonably infer that Koresh was purchasing M-16
parts to convert AR -15 semiautomatic rifles into illegal machine guns , over a fairly
substantial period of time. That inference was strengthened when the agent learned
that another fireamls dealer, Henry McMahon, had sold about 90 AR-15 lower
6

receivers to Koresh, and that McMahon tried unsuccessfully to conceal the bulk of
those sales and then mislead Aguilera about the identity of the purchaser. Aguilera
also learned that Koresh had purchased AR-15s and AR-15 upper receivers from
several other sources. Once he had the AR-15 receivers and the M-16 parts, Koresh
needed only a metal lathe and milling machine to make a substantial quantity of
machine guns. Reports from several sources made it clear that Koresh possessed both
machines at the Compound, and that he had experienced operators, including a
mechanical engineer, who were designing and manufacturing fully automatic weapons
for Koresh.
In addition, A TF had reason to fear that Koresh posed a danger not only to his
followers but also to the surrounding community. Aguilera learned Koresh had a
propensity toward violence and intimidation. Koresh's control of the Compound
originated with a gunfight, which was ended by armed deputies. He used threatening
rhetoric and preached an apocalyptic theology, backed up by an arsenal of weapons
and an extraordinary control over his followers. A TF reasonably believed that
Koresh was far more threatening than a lone individual who had a liking for illegal
weapons. It would have been irresponsible for ATF not to have pursued Koresh once
Aguilera's investigation showed there was probable cause to do so.
That this evidence established probable cause that Koresh was violating the
fireanns laws was corroborated by A TF fireanns and explosives experts, and by
interviews of neighbors and fonner Compound residents. I think it is important to
remember that "probable cause" is not the same as "beyond a reasonable doubt." The

leading Supreme Court case on the subject, Illinois v. Gales, 462 U.S. 213 (1983),
describes probable cause as a "fair probability" or "substantial chance."

So the

question here is whether the evidence obtained by ATF created a "fair probability" or
"substantial chance" that there would be evidence of firearms violations at the
Compound. That standard was not only met but exceeded.
The Treasury Review further confirmed the existence of probable cause by
consulting two non-Treasury weapons experts and two non-Treasury explosives
experts.

The weapons experts, William Davis, Jr.. and Charles Fagg, confirmed that

Aguilera and Judge Green had ample evidence to support searching the Compound for
evidence of the manufacture of illegal machine guns. The explosives experts we
consulted, Paul Cooper and Joseph Kennedy, concluded that the evidence gathered by
A TF established probable cause to believe that illegal explosives were being
manufactured. All four of their reports were included in the Appendix to the
Treasury Report published in September 1993. I should add that Aguilera's
conclusion was further confirmed when, in March 1993, a former Compound resident
told the Texas Rangers that he had milled AR-15s at the Compound so that they could
be fired automatically, and when, after the April 19 fire, 48 illegal machines and
evidence of illegal explosive devises were recovered from the Compound.
I would like to make one final point about the probable cause issue before
moving on. None of the lawyers for the eleven Branch Davidians who were charged
with weapons offenses and conspiracy to murder federal agents ever challenged the
validity of the search warrant. And several of their clients were convicted of the very

offenses that Aguilera referenced in his warrant. In this country, the proper way to
challenge the validity of a warrant is in court, not by shooting at the people who are
attempting to serve it. The warrant here was carefully reviewed by the U.S.
Attorney's Office, duly authorized by a neutral and detached magistrate, and properly
issued. I am confident that had it been challenged in court. the trial court, the Court
of Appeals and the U.S. Supreme Court all would have upheld its v3.lidity.

Why did the ATF decide to enforce its warrants through a dynamic entry
rather than some other option? And was the raid plan well-conceived and
properly executed?
As the probable cause investigation was nearing its conclusion, A TF tactical
planners were deciding how best to execute the warrant the) expected to soon obtain.
At first. the planners considered the siege option. Under [hi" scenario, agents would
first ask those inside the Compound to honor the warrant. If access were denied,
ATF would immediately establish a perimeter around the C()mpound and seal off its
inhabitants until they relented and permitted the search to proceed. This option might
have minimized the risk of a violent confrontation between ATF and the Branch
Davidians and, even if violence ensued, would have minimized the agents' exposure
to gunfire from the Compound. This option was ultimately rejected, however, for
several reasons. Several former Compound residents noted the danger that Koresh
might respond to a siege by leading his followers in a mass suicide. In addition, the
residents had their own source of well water and at least a three-month supply of
military rations, and so might well have withstood a long and arduous standoff. The
planner~ also were worried about the destruction of evidence within the Compound

during a siege.
In evaluating the raid planning process, the raid plan itself, and the execution
of that plan, the Treasury Review was assisted by six, independent tactical operations
experts. Each of those experts had access to all Review materials, and each filed
their own analysis for inclusion in the Treasury Report.
With the help of those experts. our report reached several important
conclusions concerning the raid planning process. First. whether or not the planners
were right to reject the siege option. they should not have done so without the benefit
of assistance from psychologists and other experts, who were better equipped to
evaluate the accounts of former Branch Davidians. Second. (he planners did not give
sufficient attention to trying to arrest Koresh away from the Climpound. A seriously
flawed intelligence-gathering and processing system lead the planners to believe,
wrongly, that Koresh never left the Compound, It was true that he did not leave the
Compound regularly, but the Review was able to document that Koresh in fact did
leave the Compound on several occasions in late 1992 and January 1993. As a result
of the deficient intelligence system, ATFs effort to arrest Koresh away from the
Compound, and thus reduce the risk of resistance from his followers, was abandoned
too quickly.
Third, the Review catalogued other intelligence-system flaws that seriously
compromised the raid-planning process. The raid planners mistakenly believed that
Koresh kept all the weapons under lock and key in a room adjacent to his own, and
planned accordingly. They mistakenly believed that all or almost all of the men

living at the Compol!nd would be out working in a construction area way from the
"arms room" at 10:00 a.m. the day of the raid. As a result the raid was planned for
10:00 a.m. rather than the more traditional pre-dawn time period.
Fourth, the planners failed to engage in meaningful contingency planning. The
absence of any contingency plan, other than to abort the raid before arrival at the
front door of the Compound, left the raid commanders with the stark choice between
going forward with the raid after surprise was lost or canceling an operation in which
they had made a tremendous investment.
Finally, as to the technical merits of the raid plan itself. most of the Review's
tactical experts agreed that the plan had a reasonable chance of success if all of the
planners' major factual assumptions had been correct. The experts disagreed.
however. over whether the plan was a good one. I understand that later this week
you will be hearing from two of the experts whose analysis we included in our report,
so I will defer discussion of the technical aspects of the plan until then.

Did ATF mislead the military in its effort to obtain military assistance?
The Treasury Report describes the support received by ATF from the active
military as well as the Texas National Guard. This support included the provision of
training facilities and equipment, aerial reconnaissance missions, the use of
helicopters during the raid. and advice concerning ATF's medical and
communications plans. The principal military support issue that we addressed was
whether ATF misled the military about the existence of a "drug nexus" in order to
obtain "nonreimbursable" support, that is, support provided by the military free of

charge.
In order to answer that question we interviewed the critical personnel at ATF,
the Texas National Guard, and the Department of Defense. We also reviewed the
written communications between ATF and those other two entities. What we found,
and what the report states, is the following. In November 1992, ATF approached the
US. military and the Texas National Guard for support.

In carly December, a

Department of Defense representative briefed A TF officials about military support
available for the Branch Davidian investigation and possible execution of search
warrants. During this briefing. the Department of Defense representative told ATF
that it could obtain military assistance without having to reimburse the Defense
Department if the investigation was related to narcotics enforcement, that is, had a
"drug nexus." Soon thereafter. an ATF agent then met \vIth officials of the Texas
National Guard to detennine what assistance that entity could provide. During that
meeting. the Guard and representatives of the State of Texas repeated that ATF could
get "nonreimbursable" (free) support if the case had a drug nexus.
Following these meetings. A TF agents investigated whether there was any
drug activity at the Compound. The case agent, Aguilera, had infonnation from a
fonner member that parts of an illegal methamphetamine lab had been at the
Compound when Koresh took control in 1988, and that the local sheriff's department
had planned to collect this equipment. Aguilera then learned from the sheriff's
department that it had no records indicating that these parts had been collected by or
turned over to the sheriff. In addition, an ATF agent acting in an undercover

capacity reported that Koresh had told him that the Compound would be a great place
for a methamphetamine lab because of its location. Furthermore, a criminal records
check and information from informants suggested that one Compound resident had a
prior conviction for possession of amphetamines and a controlled substance, and that
several other individuals associated with the Compound had oeen identified as perhaps
having some involvement in illegal narcotics activity.
After this information was gathered, A TF accurately provided it to the Texas
National Guard and representatives of the U.S. military. In particular, on February
4. 1993. ATF officials met with representatives of both groups and accurately
informed them of the results of ATF's investigation into the existence of a drug
nexus. The information was not fabricated. nor was it exaggerated. All of the
military entities concerned indicated that they were satisfied that a sufficient drug
nexus existed to justify nonreimbursable military assistance. Moreover, most of the
military support that was provided to ATF in this matter could have been obtained, on
a reimbursable basis, even had there been no drug nexus.
In short, after thoroughly investigating the facts, the Treasury Review
concluded that ATF did not mislead U.S. military or Texas National Guard officials
in obtaining their assistance on a nonreimbursable basis. That is not to say that ATF
had developed probable cause to believe there were narcotics offenses taking place at
the Compound. They had not. But here probable cause was not the relevant
standard. As our report pointed out, neither the laws, nor the regulations and
manuals of the military entities, provided a definition of the quantum of evidence

necessary to establis!1 a drug nexus. Indeed, the Review expressly suggested that the
relevant policymakers develop more precisely defined criteria for detennining when a
drug nexus is sufficient to justify nonreimbursable military assistance.

Other Findings.
Before concluding, I want to outline briefly the Treasury Review's other
significant findings, which mayor may not be addressed in these hearings.

Media ImpacT on ATF's InvesTigation.
Our report analyzed the interaction between A TF and the media before and
during ATFs raid on the Branch Davidian Compound. The interest of the media in
covering suspected criminal conduct and official responses to that conduct will often
be in tension with law enforcement's need to have the advantage of surprise in its
activities. Here those interests collided first before the raid. when ATF was unable to
persuade a local newspaper to delay its publication of a series about Koresh and his
followers. We concluded that while those negotiations might never have been
successful, had they been entrusted to someone in A TF with more expertise in media
relations, an arrangement more suitable to ATF and the paper might have been made.
On the day of the raid, media activity in the area of the Compound tipped off
Koresh, allowing him to lay his ambush for ATF agents. Employees of the local
paper and a local television station roamed the roads in the area of the Compound for
more than an hour before the raid. A cameraman for the television station told a
local letter carrier, who unbeknownst to the cameraman was resident of the
Compound, that a raid was imminent. The letter carrier in tum told Koresh, who

then prepared his ambush.

The Flawed Decision

Go Fonvard with the Raid.

The report addressed why ATF's raid commanders proceeded with the raid
even though they should have realized that the raid had been compromised. We
concluded that the decision to proceed was tragically wrong, not just in retrospect, but
based on what the decisionmakers knew at the time. Based on interviews of all
surviving law enforcement participants in the raid, it was and is clear that the raid
commanders had more than enough information from the undercover agent to
conclude that the raid had been compromised. The report further concluded,
however, that the flawed decision to go forward was not simply a matter of bad
judgment by the raid-day decisionmakers. It was also the product of serious
deficiencies in the intelligence gathering and processing structure, poor planning and
personnel decisions, and a overall failure of ATF management to check the
momentum of a massive operation.

Treasury Oversight.
Our report examined the role of the Treasury Department, and in particular the
Office of the Assistant Secretary for Enforcement, in the February 28 raid. The
Office of Enforcement, which has oversight responsibility for ATF, was not advised
of the planned raid until fewer that 48 hours before it was to begin. Although the
Office of Enforcement's approval was not sought, concerns about the action caused
that office to direct that the raid not go forward. As the report stated, those concerns
were expressed by several individuals in the Office, including Ron Noble, who at the

time was acting as a part-time consultant pending his nomination and confinnation as
Assistant Secretary for Enforcement. ATF then provided assurances that the raid was
necessary, carefully planned, and designed to minimize the risks to all involved.
Based on these assurances, which addressed the concerns raised by Noble and others,
the raid was permitted to proceed.
We further concluded that the responsibility for ATFs failure to notify the
Office of Enforcement until fewer than 48 hours before the raid rested with both ATF
and the Office of Enforcement. which at the time had no regulation or guideline that
required notification from ATF. As noted in the report. the Office subsequently
instituted new guidelines and regular meetings v.:ith enforcement bureau heads to
ensure early notification of significant operations that will permit meaningful oversight
and review.

ATF Post-Raid Dissefrlltlarioll of Misleading lnjonilillioll about [he Raid and [he
Raid Plan.
The report described how. in the wake of the February 28 tragedy, the raid
commanders and their superiors

the ATF hierarchy attempted to answer the call for

explanations. Critical aspects of the information that they provided to the public was
misleading or wrong. Two of the principal commanders, in particular, appeared to
engage in a concerted effort

conceal their errors in judgment. Their conduct had

the effect of wrongfully pointing the finger at a line agent as being responsible to the
failed raid. In addition. ATF' s top management, perhaps out of a misplaced desire to
protect the agency from criticism, offered accounts based on those raid commanders
statements. disregarding evidence that those statements were false. The report also
16

described the alteration of the written raid plan by raid commanders, after the raid
itself, and the submission of that altered plan to the Texas Rangers and to the Review,
without any indication that it was not the original raid plan.
Conclusion.

The Treasury Review was thorough, accurate, and candid. It did not shy
away from criticizing, where appropriate, the conduct of ATF and ATF personnel.
The independent reviewers and Treasury's Inspector General gave it their full
support. Upon the report's publication in September 1993, it was praised by
members on both sides of the aisle, as well as by rnuch of

[h~

media. I am aware of

nothing that has been learned in the nearly two years since that calls into question the
central findings of our report.

I
,

t' ('

I' ,

,11\

"""

MILITARY SUPPORT T~:jlH,~ •. A~F . OPERATION IN WACO

ATF properly received milit;;~') ~t~pl6itJ from Federal and
National Guard units in connection with the investigation of
Vernon Wayne Howell. The type of support that was provided to
ATF by the military, including training, could have been obtained
with or without a drug nexus.
The following points summarize the
relevant law, and how it authorized the military support provided
in this case.
LAW AND PROCEDURE

Posse Comitatus Act
•

The Posse Comitatus Act, 18 U.S.C. § 1385, bars military
forces from direct enforcement of civil law.
It does not
prohibit all assistance to civilian law enforcement by the
military.
The support ATF received in this case did not
constitute direct enforcement.

•

The Posse Comitatus Act did not apply to the operations of
the National Guard units which provided support to ATF in
Waco.
The extent to which a state National Guard may assist
civilian law enforcement is a function of the state's law.
Federal law, ~ 32 U.S.C. § 112, affects funding and
whether such state-provided support needs to be reimbursed
by the law enforcement entity.

Military Assistance - Title 10 forces
•

Chapter 18 of Title 10, U.S. Code, sets out the extent of
the assistance which federal military forces can provide.

•

10 U.S.C. § 372 allows DOD to provide military equipment,
including spare parts and supplies, and base facilities, to
civilian law enforcement entities, for all (not just drugrelated) law enforcement purposes.

•

10 U.S.C. §§ 373 and 374 allow DOD to provide training to
civilian law enforcement in·the operation and maintenance of
§ 372 equipment, and expert advice py DOD personnel, for all
(not just drug-related) law enforcement purpo~es.
DOD
personnel can also actually operate § 372 equ1pment, to the
extent such operation does not constitute direct
partfbipation in civilian law enforcement.

•

10 U.S.C. § 375 incorporates the restrictions of the Posse
Comitatus Act, by prohibiting "direct participation in a
search seizure, arrest, or other similar activity." All of
the military support provided to ATF complied with § 375.

•

10 U.S.C. § 377(b) waives t~e re9ui~em~nt for.reim~ursement
for such equipment and serV1ces ~f 1t 1S pr~v~ded 1n ~he.
normal course of military operat10ns or tra1n1ng, or 1f 1t.

RR-441

result~ in a benefit to the military unit equivalent to what
the un1t would otherwise obtain from training or operations.

Military Assistance - National Guard
•

Texas law provides a broad grant of authority to the
Governor to use the Guard to support civilian law
enforcement.
See Texas Government Code, § 431.111(b): the
Governor can employ national guard assets "to assist civil
authorities in executing law as the public interest or
safety requires
"

•

32 U.S.C. § 112 provides federal funding for state National
Guard operations done to further drug interdiction and other
counter-drug enforcement activities, and results in
provision of such support without a reimbursement
requirement.

•

Provision of National Guard support to-civilian law
enforcement is possible without a drug nexus, where the
state is willing and able to provide the service, and the
Department of Defense has vetted the request's legality, and
provisions for reimbursement.

FACTS
•

ATF initially approached the Texas National Guard, seeking
aerial reconnaissance of the Davidian compound. The ATF
representative was told that such support required a drug
nexus; i.e., an indication that there was a counter-drug
element to the investigation or operation.

•

By this time, ATF had obtained information indicating that
there had been a methamphetamine lab at the Davidian
compound several years earlier, and that there had been a
recent shipment of unspecified chemicals, instruments, and
glassware to the compound, suggestive of a current
operation.

•

ATF later acquired additional information suggesting the
possible presence of a methamphetamine lab at the compound,
including a statement by Koresh to an undercover agent.

•

This information was provided to the Texas National Guard,
and ~ater to officials of the entities which regulated and
provided Federal military support, Operation Alliance and
Joint Task Force Six. The information was not fabricated
and was accurately reported.
All of the military entities
concerned indicated that they were satisfied with the drug
nexus identified by ATF.

•

The military support provided to ATF consisted of the
2

National Guard overflights which detected "hot spots"
consistent with methamphetamine production; tents, office
equipment and other administrative support; medical,
communications, and range training by a Special Forces unit
attached to JTF-6, as well as some critiquing of ATF's
rehearsal of the raid; and 3 helicopters which were to
operate as a diversion at the start of the raid.
•

All of the Special Forces training was provided consistent
with the requirements of Chapter 18, and did not constitute
direct enforcement of civil law.

CONCLUS:rONS

•

Neither the laws, nor the regulations and manuals of the
military entities, provide a definition of the quantum of
evidence necessary to establish a drug nexus.

•

ATF uncovered and disclosed, in good faith, information
indicative of potential narcotics Violations at the Davidian
compound. This information was accepted by the state and
federal military entities.

•

The type of support that was provided to ATF by the
military, including training, could have been obtained with
or without a drug nexus.

•

The Treasury Report correctly concluded that ATF did not
mislead U. S. military or Texas National Guard officials in
obtaining their assistance.

'. ,

i:L;~

••

l.
•

.
'J

i (j

,J (j ~ J
DISTORTIONS IN THE ASHES OF WACO BY DICK J. REAVIS
I

I..

, . .J

-J.)

Distortion:

Reavis states that federal law enforcement agents
threw "grenades" inside the compound (p. 11).

Fact:

ATF agents were not armed with grenades.
Only the
Branch Davidians had and used hand grenades, ~hich
explode, expelling fragments to kill and maim.
Grenades thrown by Branch Davidians badly injured
ATF personnel.
Some ATF agents were authorized to use flashbangs,
diversionary devices which enlploy a bright flash
and a loud noise to distract--not injure.
There
is no evidence that any Branch Davidian was
injured by a flashbang.

Distortion:

Reavis states that fully automatic
weapons--machineguns--may be lawfully purchased or
made in the United States (p. 34).

Fact:

Since 1986, it has been illegal to manufacture
machineguns, except by licensed manufacturers for
sale to the military, to law enforcement, and for
export. Pre-1986 machineguns may only be sold,
transferred, or purchased with prior approval by
ATF.

Distortion:

Reavis states that kits to convert the
semi-automatics to automatic fire are legal items
of commerce (p. 34).

Fact:

Conversion kits designed and intended for use in
converting weapons into machineguns are not legal
items of commerce.

Distortion:

Reavis states that converting an AR-15 to
automatic fire is not a simple job and requires
special equipment (p. 34).

Fact:

Special equipment is not necessarily needed to
convert an AR-15 rifle into an illegal machinegun.
Merely substituting some M-16 parts may turn an
AR-15 rifle into a machinegun--a matter on which
ATF has issued a public warning since 1988.
Furthermore, milling out the AR-15 for insertion
of an automatic sear is a comparatively easy
process.
Trade publications commonly carry
advertisements from companies selling tools that

RR-442

are specifically designed to make the conversion
process simple.
Distortion:

Reavis claims that the affidavit did not show
intent, a requirement of the law (p. 35).

Fact:

The search warrant affidavit, examined by a
detdched and neutral magistrate, did contain facts
showing Howell/Koresh's intent to commit a crime.
The affidavit clearly states that Koresh expressed
a desire to obtain and/or manufacture machinegun~
and hand grenades, and all of the evidence in the
affidavit clearly indicates that he was gathering
all of the parts and machines necessary to fulfill
that intent.
Further, the affidavit refers to
several witnesses who stated that they either saw
or heard machinegun fire anqexplosions.
Finally,
the purpose of a search warrant is not only to
seize evidence of a crime, but also to seize
contraband, and an illegal machinegun--one that is
not registered--is contraband and may be seized.
Proof of a crime meeting prosecution standards is
not needed to obtain a search warrant. Under the
standard established by the Supreme Court,
probable cause to obtain a search warrant is
established by examining the affidavit for the
"totality of the circumstances" presented.
In
fact, the leading Supreme Court case, Illinois v.
Gates, 462 U.S. 213 (1983), upheld a finding of
probable cause based only on an affidavit that
partially corroborated an anonymous tip.

Distortion:

Citing selective legal scholarship, Reavis
suggests that the firearms statutes enforced by
ATF are unconstitutional (p. 122).

Fact:

Reavis fails to mention that the Federal Courts,
including the Supreme Court, have consistently
upheld the constitutionality of such statutes.
united states v. Miller, 307 U.S. 174 (1939) ~
United States v. Hale, 978 F. 2d 1016 (8th Cir.
1992) (rejecting constitutional challenge to
federal restrictions on machinegun ownership).

Distortion:

Reavis argues that Koresh was involved in a legal
business to buy and sell firearms, citing his
transactions with Henry McMahon (p. 35).

Fact:

Koresh did not have the license necessary to
legally engage in business as a firearms dealer.
In fact, Henry McMahon, doing business as Hewitt

Hand Guns out of his home, attempted to mislead
ATF officers about his relationship with Koresh.
On one of ATF's visits to his home, McMahon told
the ATF officers that Koresh, a "preacher," was
storing 65 AR-15 rifles missing from his stock.
About a month later, McMahon presented ATF with
receipts and ATF forms reflecting the sale of the
missing 65 lower receivers to "Vernon Howell,"
implying that David Koresh and Vernon Howell were
two different people.
In fact, 15 of the AR-15s
which McMahon sold to Koresh were converted to
illegal machineguns.
Distortion:

Reavis suggests that the Davidians were merely
defending themselves against excessive, deadly
force.

Fact:

The Davidians were not defending themselves.
They
set a deadly ambush for law enforcement officers
who were serving a valid search warrant.
On
Turning Point, Graham Craddock, a Branch Davidian,
admitted that members of the compound were lying
in wait for Koresh's signal to shoot these
officers.
The book paints a picture of the Davidian women
dressing their children and attempting to hide
them from an impending assault. The book omits
any description of the Davidian men getting their
assault rifles, including machineguns and .50
caliber rifle, passing out ammunition, and
concealing themselves to await the order to fire.

Distortion:

The helicopters strafed the compound (pp.
130-134) .

Fact:

The helicopters did not strafe the compound. All
the helicopter pilots and crew say the helicopters
were not armed and did not fire on the compound.
Mullony, a reporter, says the helicopters were
turning away when ATF cattle trailers started up
the road.
Firing erupted 10-20 seconds after
this.
Only a fixed wing craft was over the
compound later, when 911 tapes claimed strafing.

Distortion:

The number of raiders who disembarked at Mt.
Carmel has never been authoritatively established
(p. 138).

Fact:

The Treasury Review (Report, 81) has established
that 76 agents disembarked from the cattle
trailers.
Six forward observers were also direct
raid participants.

Distortion:

Reavis implies that the Davidians thought that ATF
shots at the dogs were directed at them, and that
is what started the fire fight.

Fact:

No shot was fired at any dog until well after a
barrage of gunfire erupted from the compound (pp.
138-141) .

Distortion:

There are two kinds of federal search warrants (p.
139) .

Fact:

This is simply wrong. There is only one kind of
warrant.
There are two ways of executing a
warrant, depending on whether the agent thinks it
is safe to knock and announce.

Distortion:

The Texas Rangers didn't take custody of the
compound until 3 hours after the fire, and ATF
could have taken the "missing" right side of the
door (p. 142).

Fact:

After the fire on April 19, an ATF explosives
expert was the only ATF employee to have access to
the compound and he was accompanied by a Texas
Ranger.
Furthermore, the Rangers have said that
they simply did not recover the right side of the
door because there was nothing particularly
recognizable left.

TREASURY

EWS

~89~. . . . . . . . . . . . . ..

. . . . . . . . . . . . . . . .

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 19, 1995
Media Advisory
Reporters who need Treasury Department information during
hearings on Waco should contact David Icikson in the Office of
Public Affairs at (202) 622-2960.
-30-

RR-443

For press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040

DEPARTMENT

THE

TREASURY

'.;~T(E,
ll.~.j ,I

TREASURY

omCE OF PUBUC AFFAIRS - 1500 PENNSYLVANIA AVENUE, N.W.- WASHINGTON, D.C. - 20220. (202) 622-2960

FOR RELEASE AT 2:30 P.M.
July 19, 1995

CONTACT:

Office of Financing
202/219-3350

TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $29,250 MILLION
The Treasury will auction $17,750 million of 2-year notes and $11,500
million of 5-year notes to refund $16,621 million of publicly-held securities
maturing July 31, 1995, and to raise about $12,625 million new cash.
In addition to the public holdings, Federal Reserve Banks hold $562
million of the maturing securities for their own accounts, which may be
refunded by issuing additional amounts of the new securities.
The maturing securities held by the public include $982 million held by
Federal Reserve Banks as agents for foreign and international monetary
authorities. Amounts bid for these accounts by Federal Reserve Banks will be
added to the offering.
Both the 2-year and 5-year note auctions will be conducted in the
single-price auction format. All competitive and noncompetitive awards will
be at the highest yield of accepted competitive tenders.
Tenders will be received at Federal Reserve Banks and Branches and at
the Bureau of the Public Debt, Washington, D. C. This offering of Treasury
securities is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the Treasury to
the public of marketable Treasury bills, notes, and bonds.
Details about each of the new securities are given in the attached
offering highlights.
If the auction of 2-year Treasury notes to be held Tuesday, July 25,
1995, results in a high yield in a range of 5.500 percent through and
including 5.624 percent, the 2-year notes will be considered an additional
issue of the outstanding 5-1/2 percent 5-year notes of Series P-1997 (CUSIP
No. 912827G30) originally issued July 31, 1992. The additional issue of the
notes would have the same CUSIP number as the outstanding notes, which are
currently outstanding in the amount of $12,104 million.
If the auction results in the issuance of an additional amount of the
Series P-1997 notes rather than a new 2-year note, it will be noted at the
bottom of the Treasury's auction results press release.

000

Attachment

RR-444
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

nEPARTMENT

TilE

TREASURY

~~/7~~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

..............................

OrnCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C .• 20220. (202) 622-%960

FOR IMMEDIATE RELEASE
July 19, 1995

Attached is additional background information based on
testimony in today's Waco hearings.
-30-

RR-445
4:30 EST

For pre.(.'i releases, speeches, public schedules and official biographies,

can our 24-hour fax line at (202) 622·2040

Itat. . .t:

David ~~04.au .aYI Ear.an adv11e4 his follover.
that Rno onl IhOuld do aftythin, atupid P whan AT'

l;proa=ll1.

"act:

Branch Davidian C~...a Craddock cont....d on
'rurninq po1n~ th.~ .eeen of thl aompoWlci var.
11ift, in vait tor Kor••h'. 11qnal ~o &hoot ATJ

ag.ntl. Xorllh advi ••d hi. fOllower. to get out

the ;un. and the ammunition in preparation tor
ATr'. arrival.
statement:

Six Davidian. wire killod.

Vact:

AT~·.ient. killed thr88 Dav1d1ans on FIDruary 28.
Thr.. other. wlrl killl' by perlona inside the

compound.

.tat.IDt:

Dafen.e lawyer. t ••~1ti.d tbat Kore.h and hil

rollowlr. were involved 1ft • bu.ine.. venture to

tNy and .ell quna.

Faat:

The Tr •••ury review found no independent evidence
to cgrrO~oratl the ala1m that Kor••h bought the
9Uns Il. an inve.tment. It thi. wa. true, ha did
not have the proper lie.nse. to conduct IUch •
bUlin.,. ••

DATI.

~ •• ~t.t.OIlI

IB thl oou~.e of • ..Iii., be'.... XoKal.. aDd
ATF, .axahoD DalIla IO~•• h vao offe~e4 to .kov A~'
IIi. . . . , MaxahoD offerl« &;'1I111Z'a thl phalli vita
.o~ •••• till oa the,liae, ~'afUile~ • •avi.
XClJl&)aIlIl a.ay
JI) •

,p.'

J'aet:

p... _..•..'e to

•

MCMahon did
tnnm !\Orl.n 'to the

thi. ert.ct
However, the ATF
-,.nt. were undlrltan4&bly reluctant to nave
diract contact with Rowo11/Ror •• h •• early in
their 1nv•• t1qat1on.

•

There 1. ftO o~j.otiye rea.on to b.lievi that
HOWlll/XOre.h would hay. willingly Ihown the
a,ent. hi. ill1i&1 machin_guns.

aqen~s.

"XJ r ••dill'l ot the wanut 4oa. us GQl&villoe •• tat
tAU. va. iBtaat to put 1.,al part. ,olltl.r lBto illai.l

1.. . . .U.aa

" ••pou."
Fact:
M.re po••esI1on of • Maehin.gun i. unlavtul without any
&bowinq of intent (11 U.S.c. 922(0»)
The

.tt1~av1t

cl.arly -tat•• that Xoraah wanted to obtain

and/o~ .anuta~tur•••chln@

guna aft4 hand ~.nade., an~ the
evidence .e~ forth 1ft the att1C&v1t Cl'.~lr indicate. that
he v.. qltAarlnq allot the pa~a ~n~ maCh ne. n.ce.e.~ to
fulfill that intant.
•

The affidavit alao reter. to I.veral wltn•••@8 who .tate4
that they eith.r a.v or heard .a~1n. gun tire and
axplo.iona at the campounQ.
The warrant was reviewad ~y the Aa.i.tant ~.S. Attorney and
a fedaral ma~i.tr.ta-ju4;'. They tound there ~a. pro~abl.
~au.. to i.aua ••arch and arr_at warrant. for the unlavful
manufacture ot m.china~. and the unlawtul manufacture and
po•••s.ion ot explosiv•••

•

Tbe va11dity ot the warrant. vaa not que.tioned at trial.

McL..or. aDd 1U110DY la, th" ••• the ~.li •• pt.~•
• ak. tv. •••••• 41r'Gtly ~.~lD4 tat aompouD4 at
levaltitu4. (p. 12.).
r.att

•

McLemore teat1fi.d the helicopters came
within "a couple At hunlS:-ecS yarde" of tbe
compounCl.

~aotl

•

v•• not in a po_ition to .tat.
prlci.ely how ole.. the b.lioopt.~. came to
the oompound, •• MUllany ~A.t1r1.4 that tho
tva ot tham vera twA pil._ AWay tram the
compound Whan th.y oblarve4 the helioopt.rs
..kin; the t1rlt two pa••••.
Kctemo~.

Hullony t •• titied that the only aircraft over
the compound durinq the firing wa. a tixod
wing aircratt, which va. not tly1nq
particularly low.

%n th.

aou~lI. ot • .eeUa; lIetweQ MaX.helJS UIS
_exahon 0&1184 ~erl'h _he ottl~o4 to Ihow A~7
hi. quaa; KeNahoA oftered Aguilar. the pboae viCk
Ko~ •• b atill OK t •• 11Ae, )aut ~il.ra .av.1S

A~P,

KoXahOD ••ay (p. 38).

•

HcMahon 414 pa.s a me.8agl to this errect
from Xore.h to tho aqant.. How8v~r, the ATF
a,enta vere und8ritan~acly reluotant to have
direct oontact with How.ll/~ore.n .0 early in
their investiqation.

•

Th.~. i. no o»je~tiv. rea.on ~o ~.11ev. that
HoWall/Xoreah would have vl11inily .hewn the
.,ents hi. illeqal machin.gun••

~VI8

The atfi4avit 414 not

or tal law Cpo '5) .

'act:

.~o. 1.tl~t,

a raquiram.nt

• ere po ••••• ion at A maCh1ne gun i. unl~wful
any .howing of intent. (18 U.S.C.

v1thou~

922(0»

Tho attidavit ol.arly .tat•• that Kora.n
want.d to Qb~aln and/or manufactur. ~achine
gun. and han4 grenade., and ~h • •vidence .at
forth in the atti4av1t cl.arly indicat•• ~aat
h. va. qatharinq allot the parte and
machin •• n.c •••• ry to tulfill that intent.

The affidavit also r.far. to ••v.ral

witn.'e8e whg .tatad that th.y either saw or
haard maohine VUn fir~ and explosions at tha
compound.

Tha purpol. of a •• arch warrant 1. not only
to .alza evidanea of a orima, but allo to
•• i l . ~ontr.b.nd. An illegal machin. gun-on. that i. not reiilt.red--ia ccntracand and

may be &Qized.

DEPARTMENT

THE

TR~:ASURY

~,78~9~. . . . . . . . . . . . . . . . . ..

....................

OmCE OF PUBUC AFFAIRS • 1500 PE~NSYLVANIAAVENUE, N.W•• WASHINGTON, D.C. • 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
July 19, 1995
Attached is additional backqround information based on
testimony in today's Waco hearings.
-30-

RR-446
6:00pm EST

For press releases, speechu, public schedules and official biographies, roll OUT 24-hour fax line at (202) 622·2040

TibbalS••mr

atatementa 8peclal 19aDt
,~. VD•• z •• y.~ .,e.' baC
O~ •

cU·•••• aaJal ••

u-n.

atatla i8 hi. affidavit that
tb. up,.~ aDA lover r.c.lve~.
Tb. AK-n ha ••••• " ••• 2 ••• 1"'.1", •• t

A;Uil.~.
o~l.zy.d

...arate vpp.~ &ad lo••~ ~.o.1ver., a
known to Ipoetal AqaBt I9ul1ora.

taa~ Yh1a~

.baUIG aave

~e.ft

Fact:

The .tat.mant 1. that a company 1n South Carol in. ha • • old
tho n.e••••ry part. to convert ~-l~ ritl •• and AX-41 ritlaa
to machin. gun. if th.ir ou.toaer. h.d the upp.r and lower
receiver. for tho •• firearm.. Howell v•• a eu.tomer of thi.
Co~pany.
That etatement 1. corr.ct a. it relate. to an ARl!..
The otatement do •• not n.c ••••rily indioat. that an
AX-47 con.1st. ot two part. a. Mr. T1~bidaaux RAAml to
indioata.

BUPONSJ: TO INCOIUt~Cr STATKMF.NT8 IN SmART WRICHTS TlrSTIMONY
A'HI'IiOIl:

f Idlral Law Enforcement hu not accepted responsibility for

wha~

happened at

w&~.

1iuIh,

Treaewy ise\lfd • detailod QZld oriricc1 roport that blamod ATP for poor
intelli.ence ,athetin,. which lead to the prnlature abandonment of other option.
tOr ItrVine the warrantl. Th, report also criticiz.G th, AlP raid commandtfl who
chNie tn pracYd.

IVln

thouih the elem.ent of rurpri.. hid bIen loat. Then raid

commanders wire dlll'lotld; they nn Innaer have lAw enforcement a.uthority,
ccmmand Ilentl, or carry weapons
.ofve~

me warrants whlIl KOfim 1,1\ the compound.

A•• rdOD:

ATP !;ould hi'"

Truth:

It must be rem.mb.red thlt three warrants wore issued·· 011. lO arrest KurOlh, un;
to louch tho main hOYIe at ttl. compound, and eme to Icarcb the "Mag B&2" at
the compoWld. AltkougA ATF milht ha"e been able to arrest Koresh off the
compound, it would still bAye beeD nec;UAIY to seac the sqarch WArrant! on •
h,avily armed <trucN[f' It i. entirely pOlllible thAt arrc.nnl Korcsh would have
lead hi. follow.tJ to take offtDliv. violent acrion to i'rH nim. It is olso likely that
hi. followen would ha.v. r"ilt.d the •• uca warrant just u violently I even if
K.Clreah 1'1~ been arre9tecl away from the compound Th. Treasury Review fully
addresses the iuue nf ATt". intelligence failures lind eritieiZt!. ATF plmnert for
failina to dewmiftl If !;.oresh ever left theC('Jml"C'und.

Allerrion:

ATf' used annor piercina bullets qainst the DavicUans.

liu1l1:

ATF did not us. IUmoe

pi~I\;inK bull~.

,aUbor armor pien:in, ammunition

It was

tb~

n.vidians who filed

,so

til" ATP li"'llS.

Allcrdoa:

Rick ROil acted u an outside advisor tel ATIT.

Tnadu

Ron only ,Ive AIF the addross for David Block. Ho did Dot provido any other
informatioD to ATF.

A.lsertlOn:

Helicopters arrived £'U'lt and fired on tb. compound.

Tl1I1h~

The helicopter p,lots testitied at trial undeT o2th that no chats were fired from the
heUcopt.rs. Th. doors of the helicnpterll were clnud at "II tim .. , In (ac:t, two
helicopters were forced m land because they wete hit by fire from the Da.vimanA.
Non. of lb. helicopters ever Aew over lb,. compound.. The Treumy R.eview

Q)ncludecl1har the helicopters urived Sllbsequent 10 the bone trailen.

1 ••• ~ioBI If t~e .1. . . .t of .uzp~l •• wa. iapg~taAt a. ATF
~1.1De4, the agent. you15 have Ooft!uote' the op.ratioa at 'a...
I'aot:

Fe»~ary

11 an4

re~~Qry

12 ATP raid

Q~4nders

briet.d

ATr hea4quar~.r. on t~e plan. tor the operation. A•• eoiate
Director for LAw Enforcement Daniel Hartnett questioned why
the ra14 wa. soheduled for 10:00 a.m., rather than pre-dawn,
When raids are ;anarally ~egun. Chojna~ki and gar.byn, the
raid command.re, axplaine4 that the plan depended on
eatohinq the men in tho pit away from the room where th~
quns were believe to ~e located.
ATF vaa al.o ~on~arnad about the ri.k to children and oth8r
1nnocent if the warrants were exeouted nnd@r th. cover of
d.arkne.s.
Thea. rind in;. ware .et forth in the Tre.aury review.

~.avil

AllertloDI X7 fUe •• II caae KDr.sh did Dot .tart aakiftq maohiae
,U.I v.tll ~e 1.~De4 ot A~~'s iuv •• ti;at1oDo
7act:
A nei9nbor ot the compound with military experience has
8~a~ed ~ha~ trom about 3anuary and 'ebruary ot lSS2 he heard
machine gun tire on the compo~~ p~p.rty Qur1n9 the n1~nt
hour.. Xore.h v •• not alert.4 to ATF'a intere.t until
a;entl met W1th Henry HCMahen 1ft ~e summer of 1992.

Former re.ident. .tatei that they had •• en ••ohina
the ccmpoun~ ~etore ATF 8ta~.d ita 1nv••tlqat1on.

~n.

DEPARTMENT

THE

TREASURY

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960

FOR IMMEDIATE RELEASE
July 19, 1995
STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
The Administration strongly opposes Congressman Sanders' amendment to H.R. 2020.
The Exchange Stabilization Fund has been a vital tool of international economic and
monetary policy for every President since FDR. It has enjoyed broad bipartisan support for
60 years because it has been frequently used to defend the dollar, to avoid excess
fluctuations in currency markets and to protect vital U.S. economic and security interests.
House action on this legislation is but one step in a long and continuing legislative process.
We will continue to press our very strong concerns on this issue in the weeks and months
ahead.
-30-

RR-447
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

NEWS
OFFICE OF PUBUC AFFAIRS • ISOQ PENNSYLVANlAAVENlJI;, N.W.• WASHINCTON, D.C .• 20220. (202) 6!l!-29fiO

FOR IMMEDIATE RELEASE
July 20, 1995
Attached is a oOPY of testimony to be delivered by Lewis

Merletti before the House subcommittees investigating events at
Waco.
-30RR-448

Far JwaI reieases1 fjJeeches. public scluJuks and officUd biographies, coJl our 24-laaur faz.line at (202) 622·2040

•

BTA~2KBRT

OP LBWI8 C.

KllLBTTI

OKXTED STATBS .BeRET SERV%CE

Assistant'project Diraotor, DepartmeDt or tbe Tr •• 8u~ waco
~4aiai.trativ.

aeview

July 30, 1115

Thank you to both Chair.aen Hccollum and Zeliff for giving .e
~he

opportunity to appear before you to4ay.

My name is Lew

.erletti, and two years aqo I •• rved as the Assistant projeot
Director tor the Treasury

Depar~eDt

Administrative Review of the

Alcohol, Tobaoco, and Firearms' inve.tiqatioD of Vernon Wayne
Bowell, also known .a David Koresh.

In tbe way of

~CkgrOUDd,

I am a veteran, baving served from

19'7 to 1970 in the United stat •• Army'. 7th Speeial Forces
Group, rort Braqg, Korth Carolina and in the 5th Special .orces
Group in the RepUblic of Viet Naa.

I qra4uate4 trom Duquesne

University in 1"3 and was appointe4 as a Special Aqent in the

unit.4 States secret Service in 1'74.

1 have b.en assigned to

the Philadelphia and H.w York 71.1d Offioes, Where

in numerous complex criminal

RR-448

inve.~i;ation3,

participated

inolu4inq interviews

of ao•• of tbe survivor. of the JOhestoWD ••••• cre.

I have been

a team l.ader on a a.eret serv1o. Tactical Counter Assault Team
.nd bave been
Of rica an4

~he

Speoial Aqant in Charqe of the Baltimore Field

Seoret Servicels

xarylan~.

-.ltsville,
Directo~ ~or

Review,

~h.

~raininq

center located in

While assigned as the Assistant Projeot

the Department of Treasury Waeo A4ministratiV$

vas the Deputy A8.istant Director for the aecret

Service'a Office ot Inspection.
Offiee of

protecti~.

I am currently assignee! to the

operations.

On February 28, 19'3, agents of the Treasury Department'$
Bureau of Alcohol,

~obaceo,

and Fire.rms .ttempted to execute .

lawful search and arr •• t warrants
near Waco, Texas.

the nranch Davidian Compound

They W6re met with a murderous hail of gunfire

and as a result, four aqents were killed, and mora than 20 ware

wounded.

sevaral residents of the Compound were killed in the

exchange of qunfire between ATP aqants and those inside

th~

Compound buildinq.

The

~reasury

Departaent, understandinq the need for a

cQmprehensive review of the events la&diDq to the failed attempt
to serve the warrants, beqan planning for An administrative
review, Which would fully examine ATPls actions at Waco.

April 19, 1993, presi4ant Clinton directed the Treasury an4
Justioe Dapartaents, whicb are responsible tor the ATF and the

PDI,

respectively, to conduct "viqorous and tborouqh"
2

investigation. Of the evante lea4inq to the 10.. of la.
enfo~cement

and civilian livea.

immedia~ely.

The Treasury Departaent acted

Secretary Bentaea direoted Rona14 K• •o~l.,

Assi.tant Secretary of tbe Treasury
lead a

T~.asury re~iev

(Bnforcem.n~'

~h.

Gont~a4ictory

d •• ignate, to

of ATP's oriminal investigation of Kor ••b

and the UDsuccessful .ffort to execute .earch and
warrants.

~hAD

ar~est

a.view was al.o to consider any aisle.ding or
.t.t. .en~s . .d. to the public by ATP officials.

In aD effort to ensure that the Review's investiqatioD was

impartial and comprehensive, three individual. of national

prominence and inteqrity agr •• 4 to serve as rndependent Reviewers
-- Watergate pro.ecutor Henry Ruth, PU11t.er Prize journalist

Edwin Qutbman and LOS &Agele.

~olice

Chief Willi. Williams.

were to oversee and provide guidance to

~he

They

investigation,

consider its findings, and asseSB the final report.

Treasury's

Office of InSpector General was to monitor the review team

investiqatioD to provide assuranGe to the Department
p~oject

~hat

the

plan vas complete aDd properly implemente4 and that all

relevant faots ware fully consi4ered.

Additionally, outside

experts in tactioal operations, firearms and explosives rrom
varied lav

.ntorceaen~

and

.ili~ary ~ackqroUA4.

were enlisted to

consider the techDioal aspeats in their are. or experti.e.

Baoh

of these ten expert. provided ia4ependent reports on their
analysis of the investigation.
the Treasury oepartment report.

~heir

conclusions are appended to

K. Geoffary XoultOD, Jr. vas nam.d Project
aeviaw, and

~.vid

~ireotQrs.

L. Dougla•• and I .erved

team of

sev.n~eeD

Dirao~or ~or

th.

projec~

A•• i.tant

••aior oriminal investigator$

vare .elected fro. the U.8. CUstom. servioe, the IRS, and the
O.S. Seoret servioe to •• sist in the investiqation and
preparatioD of the report.

r intervieved each of tbe •• iDvestiqators.

I advised them

that the Review v •• not • criainal invastiqation, but an
admini.trative review and that the purpose

~••

of Vbat happened at Waco and to report thoa.

to find the truth

fin4i~9s.

The

Review waa Dot to be either a "witch hunt" nor a "wbitew;lsh", but
rather, a touqh, thorough, an4

~.tailed

1nve.tiqation

~ith

lia1tat1oDs' on where that ln~estiqation might lea4.
As the investigative plan v •• developing, the review teAm
received a briefing from the secret servia.'s Traumatic Incident
Program on what tbe team could encounter as they conduoted the
. interviews of those agents involved in the Shooting at the Braneh
Davidian Compound.

In tact, .any Of the traumatic reactions

addressed by the program vere exactly vbat the

i~vestiqative

team

encountered and I b.11eve that beeause of the Program ve were
better prepared to assist the aqent. beinq interviewe4 to cope
with very .motional recollections.
oe~re4

.a veIl.

Those

~riering.

A number ot other briefinqa
provi4ed background

information a44ressinq ATV'. mi8~ion; the tecbnical aspects of

converting

quD8

to aachina quA.; and • general disauaaioa of the

laga1 raairications pro~l ...tig with
the

~aQ.

cr~in.l

a«ainiatrative review in

ongoing

inv.stigation, a. vell &8 the

pos.ibility

resultant persoADal actions.

The murder investigation or the four ATF agents was being
eODduo~.d

by the Texas Ranier., Who supported a complete,

impartial review by the Traasury DepartaeDt.
»roaacutinq Assistant

u.s.

A~torD.Y,

X •• t with the lead

aay Jahu, and Z intor.med hi.

of how the aaview v •• to be conducted and our conoern with regard

to tbe on-qoinq murder investigation.

~TP

Direotor stephen

Biqqins, in a memoran4um to the Assistant secretary for

Enforcement, requested the

of~ioe

of Enforoement assume

l.adarship for a comprehensive raview of the incident.

with this spirit of oooparatioD end commitm.nt rrom the
Treasury Department, the AT7, the Texas aangers and the U.S.

Attorney's Office at waco, the investi9ative team

~eqan

oollecting and raviawing all ezistinq material relating to the
ATF

inva.tigation of Eoresh.

Xoregh and the development or
eZ8oution

It included ATT's investigation of
pro~able

cause, tha

plannin~

and

the searcb and arrest warrants, the decision mak1nq

process to prooeed with the ezecutioD of the varrauts, and ••dia

statements . .4e by AT.

of~icials

aftar the raid.

The interviaw. were orqan1 ••d to encompass all areas of

aonsi4.r.~ion

an4 included:

AT~

agenta; Treasury nepartment

officials; other Pederal law enforcement officers; st.te and
loeal law enforoameQt officers; neighbor. of the compound; local
·merchants; former

~vidiana;

Wation.l Guard and ailitary

persoDDel; personnel who provided non-law enforoement support;

members of the media; an4 anyone .18e who miqht have pertinent
information;

In all, aore than 5DO of theae persons ware

personally intervi ••ad by this Review.

In most cases, prior to the iuterview or ATF "lina" aqents,
the Review

~roject

Director and I would meet with them

explain the Reviaw prooess and mi8sion.

~ud

We would attempt to

aDBWer any que.tioD posed and respond to any Who rai.ed concern
with the process.

After each interview, we met individually with

each agent to determine if the interviews caused them any
concerns.

Both Geoff Houlton an4 I were impressed vith the

overwhelming positive responses by thoee aqants who wera
interviewed, not only with re;ard to the Review process, but with
re~ard

to the manner in which the intervie.s vere conducted.

Almost without exoeption, the "line" aqents welcomed the Review
and demanded that the truth

h •• rd.

Each one of. our interviews v •• refleeted on a Memorandum of

xntervlaw, all of which have be.n

p~04uced

to these

~ommittees.

an4 allot which were turned over to the proseoution team in

Wago.

I caDDot adequately d •• aribe to you the proc... the aevi ••
used to con4uat the iDveati9ation an4 the aaDDer in .hich the
report vaa 4rarted without DomaentiDq on the Gomaitment &D4
d8dicatioD to

~h.

proc••• or the .embers of

review

t ....

A1aost without ezaeptioD, aftar e.oh battery of interviews v.re
completed, the . .tire team - over twenty agent. and lawyers would meet and to analy ••

ea~h

In this maDDer, all

interview.

team members beo. .e aware of ' all •• pects olthe investigation.

This was not an easy or short prOGess.
event from

I.~h

detail of a ractual

interview . .8 brouqht forward. It was analy'sed and

compared with details about the same tactual event from other
intervievs.

When

investi9a~ioD

disparity or contradiction wao noted, rurtber

va. conducted until • consensus among the t*am

members vas reached on the disputed detail.
of inquirY vare often developed

durin~

In addition, lines

thes. meetings and all

team .embers contributed to the deoision to go forward with or
limit the soope of inquiry.

This prooess aztended to the 'draft1n9 of the report as vell.
AS each section vas drafted, it vas presented to the entire team.
BACh member iD4ependently ravieved that .eotion
oonvened to disousa word by vord, line

&D~ •

meeting was

line, paragraph

paragraph, the taotual QODtent of the section and any oonclusions
the faota aiqht engen4er.

This prooess vas repeated over and

over aqain until there vaa agreement b7 all

.eabe~.,.that

the

saction or the report contained all the raotual information
7

~.oeS8ary

to reach the atated DODOlu8ioDS an4 that the

informatioD was aoourate and presented rairly.

..adless to say,

this proce •• vas long and az4uous and t real that only tully
commit~e4

individuals with a atronq beli.f in fairness and the

pursuit of the truth could have completed the process.

The aeport of the Department of the Tre.sury on the Bureau
of Alcohol,

To~aooo,

an4

~ir.arm.

InvestiqatioD ot Vernon Wayne

Howell, also known as David Koresh, is partly the product of a

group of committed individuals who worked countless hours, spent
many days away from their home and family, and who endeavored to
qat at the truth that would auswer the questions raised in the

aftermath ot the failed attempt to serve the warrants.

It is

partly the product of a qovernm8nt that insisted, that a group

such .a this be rormad and then mandated it to find the truth.
~ut

it is mostly the product of the men and women of the

A~F,

who

came forward willingly to tell their story and who told their
story without regard to any 8elt inter•• t or fear of
reperoussion8 in order that the death of their comrades in arms
will Dot have been in vain, and that their aqency le&rn trom the
mistakes made and beco•• a atronqer orqanilat1on.

Therefor., I .tand by the 50114, tLma

~ested

integrity of

the report, as do my seventeen fellow investigators, and I look
forward to the committees attirmation of this Review.

UBLIC DEBT NEWS
Department of (he Treasury •

Bureau of the Publit ;Deb( '.: Wa~hi'ngtJri.,(bc 20239

nt;~O!iJ.rAcQr=-.) {jQf~J of Financing

FOR IMMEDIATE RELEASE
July 20, 1995

202-219-3350

RESULTS OF TREASURY'S AUCTION OF

5~-WEEK

BILLS

Tenders for $18,294 million of 52-week bills to be issued
July 27, 1995 and to mature July 25, 1996 were
accepted today (CUSIP: 912794Z64).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.36%
5.38%
5.38%

Investment
Rate
5.68%
5.70%
5.70%

Price
94.580
94.560
94.560

Tenders at the high discount rate were allotted 100%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

Received
$43,711,143

AcceQted
$18,294,143

$37,909,800
824,943
$38,734,743

$12,492,800
824,943
$13,317,743

4,650,000

326 1 400
$43,711,143

326 1 400
$18,294,143

An additional $49,900 thousand of bills will be
issued to foreign official institutions for new cash.

5.37 - 94.570

RR-449

DEPARTMENT

THE

TREASURY

TREASURyy()6~~><]) ·N';;'(
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OmCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 20, 1995
Attached is additional background information based on
testimony in today's Waco hearings.
-30-

RR-450

3:15pm EST

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

.ar~a.tt

A•••rtioBI

o!)jecti•••

Urr'.

~~ •••

W.oo r.view w•• 1••• thaa

tbozo~qh

aDd

Fact:

•

The Treasury report has been widely praised in the media by
.~er. of Congress and outside reviewers for beinq candid
and oomprehenaive.

•

Independent Reyi.yers. To ensure the report was impartial
and complete, then Secretary Bentsen enlisted three
individual. of national prominence and integrity -- pulitzer
Prize winning journalist Edwin Guthman, Waterqate Prosecutor
Henry Ruth, and Los Anqalas police'Chief Willie Williams
to provide guidance to the investigation, consider its
tindinqs, and aS88S8 the final report. They received no
payment for their services. These reviewers found the
report to ~. thorouqh, objective, and fair.

•

Seasoned InyestigatOtl. seventeen senior investiqators from
the Secret Service, the CUstoms Service, the IRS, and. the
Financial crimes Enforcement Network assisted with the
interviews and the preparation ot the report. No ATF
personnel took part in the review. These investigators
interviewed over 500 ind.ividual., and prepared objective and
thorough reports of the interviews. Allot these have been

provided to conqress.

Expert.. The Treasury review team consulted with 10
non-Treasury experts in tactical operation., firearm., and
explosives. The analyses each submitted to the review team
are appended to the repOrt. They, like the independent
reviewers, served without pay.

•

Q~side

•

Inspector General. Treasury'. Office of the Inspector
General (010) monitored the administrative review tea. to
enaure that the project plan was complete an~ properly
impluaented. The OIG was asked to comment on whether
relevant information obtained durinq the investigation was
prop.rly considered and inclUded in ~. final report.

•

The finding- of the Treasury report war. the result of a
painatak1nq process of debate, analysi., reconsideration,
and critical review.

ft.

lJl4e,udeat ...i ....r., the %a~.otoZ' QeJUtral, . ." tile
.ajor a •••paper. 00.81l484 the 1"eport

etito~ial _ar". of
fo~ ita hoa ••
aDd

oaa40z.

P.03/09
JUL-21-1995

04:02

•

Jlaber. of c:oavzo••• Oil _til .i4•• of til. ai.l. IODd til.
~.poft ••• "iap.1"tial, ad .elf-eff.oia," e4 "thorough ill
ita !iDlila.,•• "

•

The a.sertion about the integrity of the Treasury report was
made by an individual criticized by the review and who
'resigned troID his position illlJladiately attar its
publication.

P.04/09

••at abeet

""laabl:»Ul,."
•

As the na•• implies, a flaahbanq produce. a bright liqht and
a loud noia.' ita purpose is not to kill or injure, but to
distract.

•

Theae device. may not be used unless approved in advance in
writing by Headquarters, Chief Special operations Division,
and then only atter the aqent. attend an eiqht hour traininq
caursa.

•

At Waco, .a in any case where such devices could be used,

the agents wera instructed to US8 distraction devices only
aftar visually checkinq the area td determine it was sate to
do 80. Moreover, in Waco there was a particular concern to
ensure no children were in the area.

8Jla4eq4J

A•• artioD: &T.r oould .ave qon. dlzeatlr to the door to •• rve the
nrr&llts. Dur:l1l9 the oompliuoe iJl8paotioJl of B.D~ KalCahOIl,
Kor.sh iDVited &T7 to vi.it the oompoUB4.
Fact:

•

AT!' had search warrants for the unlawful manufacture and
pos •••• ion of machine guns and explo.ives. Thera i8 no
reason to believe that Koresh would have allowed federal
a;enta to a.areb the compound without resistance.

•

Visita by Joyce Sparks, the case worker from the Texas
Department of Protective and Requlatory Services, wera
carefully controlled and orchestrated.

•

The decision not to rely on Roresh's qoodwill was entirely
appropriate and rested on valid considerations. Koresh'.
had & propenaity towards violence, used armed guard., and
controlled a ma.sive arsenal or automatic and semiautomatic
weapons. The ATF planners reasonably concluded that a
polite request to search the compound without readiness to
use torce would have been foolhardy and irresponsible.

•

The violent response by Koresh to the ATF, resulting in the
deaths of 4 ATF aqents, on the day they attempted to aerv.
the a.arch warrant (February 28, 1993) demonstrates that
Roreah would not have "peacefully" allowed such a search.

•

There 18 no evidence to sU9Qest that the of tar made by
ltorash on July 30, 1992, was a tlstan4inq offer" that was
open until February, 1993.

JUL-2i

P.06/09

04!03

leliff
Assertion: Treasury provided the 8ubcommittee. with 13,000 paqes
of·disorqanized pieoes at paper.
Fact:
•

In response to conqressional requests, the Treasury
Department provided congressional committees with more than
25,000 pages of documents and numerous charts, maps,
diagrams, audiotapes, photographs, and videotapes. Each
paqe bears a bates stamp.

JUL-21-133S

04:03

I.litt

Assertion: Tbe surveillance Dotes from the undercover house vere
incomplete.
Fact:
•

That is correct, as the Treasury review reported two years
ago: "(t]he aqents in the undercover house did not conduct
effective surveillance or keep comprehensive records of what
they did see and they could not see." (p.148)

Z_11ft

Assertion: Treasury provided the sUbcomaitt••• with 13,000 paq••

or disorganized piac•• of paper.

Fact:
•

In response to conqressional requests, the Treasury
Department provided congressional committees with more than
25,000 paqes of documents and numerous charts, maps,
diaqrams, audiotapes, photoqraphs, and videotapes. Each
paqe bears a bates stamp.

JUL-21~1995

P.09/09

04:03

Belirf

AssertioD: Tbe surveillance Dote. fro. the UDdercover bouse were
illcompl.ete.
Fact:
That is correct, as the Treasury review reported two years

aqo: U(t]he aqents in the undercover house did not conduct

effective surveillance or keep comprehensive records of what
they diet see and they could not see. 1I (p.148)

DEPARTMENT

THE

TREASURY

TREASURyc'~/N
E
W
S
. ~!
178q~"."""""""""""""""""'"
OFFlCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 20, 1995

Contact: Chris Peacock
(202) 622-2960

STATEMENT OF TREASURY SECRE'J"ARY ROBERT E. RUBIN
I am naming today six members to an independent Citizens Review Panel for the
Treasury Department's investigation of the "Good 01' Boys Roundup." The members of the
Citizens Review Panel will provide their individual evaluation of the Office of Inspector
General's fact-finding investigation and report. They will also provide their individual
evaluation of the Under Secretary for Enforcement's recommendations concerning the
applicability of existing laws, policies, rules, or regulations, and any proposed changes to
them.
The Citizens Review Panel is composed of six extremely qualified and well-respected
Americans:

Julius L. Chambers, Chancellor of North Carolina Central University, and former
Executive Director of the N.A.A.C.P. Legal Defense and Educational Fund;

Norman Dorsen, Stokes Professor of Law at New York University School of Law, former
President, Society of American Law Teachers, and former President, American Civil Liberties
Union;

Helene L. Kaplan, a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom, and
former chair, Board of Trustees of the Carnegie Foundation and Barnard College;

Rex E. Lee, president of Brigham Young University, who served as Solicitor General of the
United States during the Reagan administration;

Patrick V. Murphy, Director of the Police Policy Board for the United States Conference of
Mayors, and former Commissioner of the New York City Police Department;

Fred Thomas, Director of Public Safety for Prince Georges County, Md., and recently retired
Chief of the Metropolitan Police Department of Washington, D.C.
I am honored that these distinguished individuals have agreed to lend their expertise and
judgment to this important undertaking.
RR-451

-30-

For press releases, speeches, public schedules and official biographies, call our 24..1zour fax line at (202) 622-2040

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: 25

Author(s):
Title:

Date:

ABC News, "This Week With David Brinkley", Topic: A Preview of the Waco Hearings, Guests:
Robert Rubin, Representative Bill Zeliff (R-New Hampshire), John Trochmann

1995-07-09

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

TREASURY··

NEWS

OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 _ (202) 622-2960

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 AM
JULY 21, 1995

STATEMENT OF
JOSEPH H. GUTTENTAG
INTERNATIONAL TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and members of the Committee, I am pleased
today to testify on the tax policy considerations relating to the
deferral of United States income tax on earnings of U.S.-owned
foreign companies, as well as on the tax treatment of foreign
sales corporations (FSCs).
This Administration has been keenly aware of the importance
of keeping U.S. companies competitive in the global marketplace.
We approach the taxation of international income earned by U.S.owned foreign companies with such awareness.
Simply and basically put, the United States allows most
business income realized by U.S.-owned foreign corporations to be
eligible for a deferral of U.S. tax until the income is remitted
to the united states. The reason for taxing passive income
currently and eliminating deferral with respect to excess passive
assets is that there is no policy justification for allowing tax
deferral for investment portfolios abroad that could just as well
be located in the united States and that bear little or no
relationship to the operation of an active business. Typically,
these investment portfolios are held abroad in low or no tax
countries.
In the international tax area one should consider at least
three aspects of the rules governing taxation of outbound
investment:
the rules governing deferral of the taxation of
income earned abroad, the rules governing relief from

RR-4S2
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

-2-

international double taxation, and the rules for sourcing income
and expense. Accordingly, after a brief discussion of the
problems inherent in international taxation, I will provide an
overview of current law that focuses on the reasons for our
existing policy before turning to two specific items under
current law that play important roles in implementing this
pOlicy:
1) provisions relating to section 956A of the Internal
Revenue Code; and 2) the tax treatment of passive foreign
investment companies. Finally, I will discuss the tax treatment
of FSCs.
Issues Inherent in International Taxation
As this Committee is well aware, there are many difficult
issues that must be addressed in any tax system.
with respect to
the taxation of international income, additional issues arise
because different countries have different tax rates and tax
bases. These differences in tax rates and tax bases can distort
decisions about where to conduct income-producing activities just
as different tax treatment of different domestic investments may
distort where income is invested domestically.
such distortions
reduce worldwide economic welfare.
It is impossible to eliminate
these distortions completely. Our tax rules should be aimed at
raising required revenue in an equitable, administrable fashion
while at the same time minimizing the distortions.
The issues in designing international tax rules can be
illustrated by examining two ways in which tax burdens can
differ. First, an individual may face different tax burdens
depending on whether he invests at home or abroad thus distorting
the investors choice between investing at home or abroad.
In the
face of differing international tax burdens, the residence
country can equalize its investors' choices, from a tax
perspective, by taxing all investment currently and offering a
full tax credit for any taxes paid abroad.
(Eliminating this
type of tax distortion is often referred to as capital export
neutrality.) Under such a system investors will choose to fund
the most productive activities regardless of where they are
located (that is, in the United states or in a foreign country)
and capital will not be diverted to less productive alternatives
in low tax jurisdictions. There would be minimal incentive for
foreign countries to grant tax holidays and more incentive to
harmonize tax burdens.
A second way in which tax burdens can differ is if capital
invested in a country is taxed differently depending on whether
it comes from foreign or domestic sources. A country can
ameliorate this distinction by exempting the foreign income of
its resident investors from tax, so that their foreign
investments are taxed only by the source country.
(Putting
foreign and domestic investors on an equal footing is often
referred to as capital import neutrality.)
Under such a system

-3-

foreign and local investors in each country will face the same
tax burden and no investor will have a tax advantage over another
investor.
It is impossible to eliminate both types of tax differences
in the face of differing tax rates and bases in different
countries. A country with a moderate tax rate cannot equalize
taxes paid by its residents on income from foreign and domestic
investments, and at the same time allow those residents to pay a
lower rate of tax, for example, on income from tax havens.
U.s. tax policy must cope with the reality that independent
countries, in the exercise of national sovereignty, will
inevitably have different tax rates and bases. The following
section discusses the way that the United states approaches this
challenge.
overview of Current Law
Like most industrial countries, the united states claims
income tax jurisdiction on the basis of both the residence of the
taxpayer and the source of the income. Thus, the United states
taxes its citizens and residents (including U.s. corporations) on
both domestic and foreign source income, and it eliminates or
reduces international double taxation by allowing a credit for
foreign taxes paid or accrued on foreign source income. U.s.
persons may earn foreign source income directly, for example
through a foreign branch of a U.s. corporation.
They also may
earn foreign income indirectly through a foreign corporation that
repatriates foreign profits by paying dividends to U.s. _
shareholders. A U.s. citizen or resident earning foreign source
income directly generally is taxed in the year the income is
earned.
In contrast, the U.s. tax on foreign source income
earned through a U.S.-controlled foreign corporation generally is
deferred until the income is repatriated. Although such income
is not permanently exempt from U.s. tax, this deferral can
provide a substantial tax benefit in the form of the time value
of the money.
with unlimited deferral, the most relevant tax
liability is the foreign (source country) tax, and U.s.
shareholders bear an effective tax burden comparable to that
borne by other investors in the source country.
Deferral provides no tax benefit where the effective foreign
tax rate on the earnings of a foreign corporation is equal to or
higher than the effective U.s. rate.
In this situation, the
foreign tax credit will completely offset U.s. t~x, whenever that
tax is imposed.
In tax havens or low tax countrles, however, the
availability of unlimited deferral can operate as a strong tax
incentive for foreign over domestic investment (and for
investment through an affiliate of a foreign corporation rather
than a foreign branch).
In this case, the deferral could cause a
U.S. multinational corporation to prefer foreign investments with

-4-

pre-tax returns substantially below those of comparable domestic
investments.
While the general rule over the history of u.s. tax law has
provided for deferral of tax on income earned by foreign
entities, numerous situations have been identified which require
deferral to be limited or eliminated. Thus, the Code provides a
number of "anti-deferral" regimes to tax currently the income
derived from investments that are easily moved internationally,
including passive investments (portfolio investments in debt or
equity and rents or royalties in which there is no active
management of the underlying property) and investments in certain
active businesses that are easily moved, such as international
shipping, insurance, and income from sales among related parties
that are routed through third countries. The most important of
the anti-deferral regimes is contained in subpart F of the Code
which requires that 10 percent or greater U.S. shareholders of a
controlled foreign corporation ("CFC") include in current income
their pro rata shares of the CFC's income from passive
investments and movable active businesses.
For foreign corporations (including CFCs) with predominantly
passive income or assets, the passive foreign investment company
(PFIC) rules of Code sections 1291 through 1297 impose an
interest charge with respect to the deferred tax on all income of
the foreign corporation that is not currently included under
subpart F; alternatively, each shareholder, regardless of the
size of its ownership interest, may make an election under which
it currently includes in its income its pro rata share of all
income of the PFIC. Other anti-deferral rules potential~y
applicable to foreign corporations with some degree of u.s.
ownership are the foreign personal holding company rules of Code
sections 551 et seq. and the foreign investment company rules of
Code section 1246. The accumulated earnings tax of Code section
531 et seq. and the personal holding company tax of Code section
541 also apply to foreign (as well as domestic) corporations. We
have been working with the tax-writing committees of Congress to
simplify these rules by eliminating some of these overlapping .
regimes and better coordinating the regimes that would remain.
We look forward to continuing to work with the Committee to
implement such a simplification proposal. We view this effort as
a very high priority.
The previously described rules restricted deferral with
respect to taxes on income from certain passive assets. Pre-1993
law provided an inappropriate tax incentive to keep excess
passive assets themselves overseas, outside u.s. tax
jurisdiction. In 1993 Congress added section 956A to the Code to
remove these benefits for exce~sive accumulations of passive
assets abroad. Such accumulatlons are excessive when their
purpose bears no reasonable relationship with the operation or
expansion of any active business abroad, but merely avoid u.s.

-5-

tax.

It is very difficult to justify deferral for such
on gro~n~s that they are needed to preserve
1nternat10nal compet1t1veness, and Congress believed that neither
subpart F nor the PFIC rules sufficiently restricted the benefits
of deferral in such cases.
~ccumula~ions

Current U.S. tax policy generally strikes a reasonable
balance between deferral and current taxation in order to ensure
that our tax laws do not interfere with the ability of our
companies to be competitive with their foreign based
counterparts. As noted at the outset, countries have different
tax rates and tax bases.
Therefore, it should come as no
surprise that various countries have different approaches to the
individual components of international taxation.
Nevertheless in
looking at the totality of the United states tax system, our
rules are similar to our major trading partners whose tax laws
provide for general deferral of tax combined with a foreign tax
credit and anti-abuse provisions. Accordingly, many foreign
competitors of U.s. mUltinationals are subject to tax regimes
similar to the U.s. system.
The following sections describe in greater detail two
regimes that were designed to eliminate investment distortions
that can be caused by differential tax rates.
956A and Related Subpart F Rules
Subpart F represents the most significant exception in
existing law from the general rule of deferral.
Subpart F was
originally enacted in 1962 and was substantially revised_in 1986.
The excess passive assets rules of section 956A were added to
subpart F in the Omnibus Budget Reconciliation Act of 1993.
In general, under subpart F, a "U.S. shareholder" in a
foreign corporation that was a "controlled foreign corporation"
for an uninterrupted period of thirty days or more during the
taxable year is taxed currently on its pro rata share of the
corporation's "subpart F income,lI its earnings invested in U.S.
property, and, after enactment of section 956A, its earnings
invested in "excess passive assets." A "U.S. shareholder" is a
U.S. person that owns 10 percent or more of the foreign
corporation's voting stock (Code section ~51(b)). A "controlled
foreign corporation ll ("CFC") is a foreign corporation in which
such U.S. shareholders hold directly, indirectly, or by
attribution more than 50 percent of the voting power or value on
any day during the corporation's taxable year (section 957(a)).
"subpart F income" c,?nsists primarily of insurance income
and foreign base company lncome, which is income derived from
passive investments and certain business activities considered to
be easily movable and thus ~esponsive ~o tax considerations. A,
"high tax" exception is avallable for lDcome that would otherwlse

-6-

be foreign base company or insurance income if that income is
subject to an effective tax rate greater than 90 percent of the
maximum u.s. statutory rate (section 954(b) (4».
In addition to taxation of subpart F income, the subpart
F regime also requires u.s. shareholders of CFCs to include in
income the undistributed, untaxed earnings that the CFC invests
in u.s. property (section 956) or in excess passive assets
(section 956A). Ordering rules ensure that earnings are not
subject to tax under more than one regime and are not again taxed
when distributed.
"u.s. property" for section 956 purposes is defined to
include tangible property located in the United states, including
real property, any stock in, or obligation of, a u.s. person, and
any right to use intangible property in the united states
(section 956{c».· Section 956 was generally designed to tax u.s.
shareholders on transactions by the CFC that are analogous to the
distribution of dividends and to prevent foreign earnings from
returning to the United States without bearing full u.s. tax.
Under the excess passive assets rules of section 956A, u.s.
shareholders must include in income their pro rata share of a
CFC's earnings from tax years beginning after September 30, 1993
to the extent the CFC holds passive assets in excess of 25
percent of its gross assets. The 25 percent test is applied on a
group basis to related CFCSi a group for these purposes consists
of foreign corporations each of which is owned more than 50
percent (by vote or value) by another member of the group (other
than the top-tier CFC).
section 956A falls squarely within the parameters that over
time have defined the circumstances in which restrictions on
deferral have been determined to be appropriate. That is, within
the context of an overall deferral regime, section 956A imposes a
tax on foreign earnings where deferral would unduly influence and
distort investment decisions.
It ends deferral only where the
accumulation of passive assets is so significant as to create a
compelling presumption that earnings are no longer needed in the
foreign business and are retained by the CFC primarily for tax
reasons. Because the u.s. tax on a section 956A inclusion will
be reduced by foreign tax credits, section 956A will have its
greatest effect in cases where the underlying earnings were not
subject to a significant foreign tax.
Prior to enactment of section 956A in 1993, it was possible
to defer u.s. tax on large amounts of a CFC's non-subpart F
earnings indefinitely, as long as the CFC paid no dividends and
made no investment in u.s. property that would trigger a tax
under section 956. For example, a CFC's return on its
intangibles escaped u.s. tax not only in the year earned but in
subsequent years, as long as those returns remained abroad. This

-7-

extended deferral of u.s. tax on active foreign income could
effectively amount to a tax exemption for that income.
The
opportunity for extended deferral of tax enhanced the incentive
to locate business operations abroad.
It also created a distinct
incentive to retain an amount of earnings in excess of the
reasonable working capital and expansion needs of the foreign
business.
In many cases, the retained earnings were sitting virtually
idle in passive accounts. Treasury research done at the time
section 956A was enacted indicated that the average percentage of
passive assets for all CFCs was 13 percent. Breaking this figure
down for tax havens and non-tax havens, we found that while the
average percentage of passive assets for companies in non-tax
haven countries was only 7 percent of total assets, the average
for companies in tax haven countries was 30 percent. Thus, the
CFCs with the most significant section 956A problems tend to be
those in tax haven or low tax jurisdictions.
The excessive accumulations of passive assets under pre-1993
law were difficult to justify on competitiveness or other policy
grounds.
In fact, taxpayers generally have not argued that their
competitiveness with other foreign-based multinationals is
premised on their ability to hold passive investments in excess
of the 25-percent threshold of section 956A. We are satisfied
that the 25-percent threshold generously accommodates working
capital needs of most CFCs.
Some have suggested that section 956A is an incentive for
foreign over domestic investment because, to avoid taxation under
section 956A, taxpayers can simply move excessive passive
investments into active foreign operations. According to
proponents of this argument, jobs will thus be taken from the
United states.
We believe this result is unlikely.
Before enactment of
section 956A, careful consideration was given to its impact on
decisions involving the location of new active business
operations.
By reducing the opportunity for extended deferral of
tax on foreign earnings, section 956A was intended to reduce the
tax incentives for the transfer of capital--and the attendant
jobs--from the united states for investment abroad. There was a
greater incentive for investment in tax havens under pre-~993 law
because it allowed taxpayers to escape u.s. tax not only ~n the
year foreign earnings were generated but in subsequent years as
well as long as those earnings were retained in the low-taxed
foreign country.
secti~n 956A limits the ext 7nded deferra~ of
tax on these earnings w~thout completely deny~ng the benef~ts of
deferral. Taxpayers continue to enjoy the same pre-1993 benefits
of deferral as long as they do not excessively accumulate
earnings in passive assets.

-8-

Moreover, section 956A did not create a new incentive to
choose active foreign over active u.s. investment of a CFC's
earnings. Before enactment of section 956A, taxpayers who
responded to the deferral incentive were not repatriating their
earnings to invest directly in u.s. jobs or take advantage of
u.s. business opportunities. To enjoy deferral, they left their
foreign earnings in the CFC. section 956A did create a new
incentive to choose active investments over passive foreign
investments of a CFC's earnings. The choice of an active foreign
investment, however, depends not only on the tax results but also
on the availability and suitability of investment opportunities
and business objectives. Those taxpayers that chose passive over
active foreign investments before enactment of section 956A may
not have had active investment opportunities; given the
relatively low rates of return on passive versus active assets,
one could assume that CFCs would have exploited any genuine
opportunities for active investments rather than passively
investing an amount of earnings that far exceeds the reasonable
needs of the business and that now exceeds the section 956A
threshold.
In sum, section 956A clearly reduces the tax incentive to
transfer abroad capital (and associated jobs) currently located
in the United states. Congress struck a reasonable balance in
1993 by maintaining deferral while minimizing tax-motivated
business location decisions and insuring that our tax laws do not
jeopardize the competitiveness of u.s. industry. Consequently,
we would strongly oppose any changes at this time to section
956A.
Passive Foreign Investment Companies
While the subpart F rules are the most significant exception
from deferral for foreign subsidiaries of U.S. corporations, the
PFIC regime is of most importance to u.s. persons holding
portfolio investments in foreign corporations that earn primarily
passive income.
Congress enacted the PFIC rule~ in 1986 to remove an
incentive for u.s. persons to invest in passive assets through
foreign corporations rather than domestic investment funds.
Both
the domestic and foreign investment funds can be structured to
avoid a corporate-level tax on the passive income (in the case of
domestic co:porations, ,through the regulate~ investment company
rules and, ~n the fore~gn context, by locat~ng in a tax haven).
However, investo:s in domestic funds ge~erally are subject to tax
currently on the~r share of the fund's ~ncome while before 1986
U.S. invest~rs in foreign i~vestment funds generall~ were able '
both to avo~d current taxat~on and to convert ordinary income to
capital gain income.

-9-

To address these concerns, the PFIC rules provide that a
u.s. person who owns stock of a PFIC must include in income
currently the shareholder's pro rata share of the income of the
PFIC, or be subject to additional tax upon disposition of the
stock of the PFIC or receipt of "excess distributions" from the
PFIC. The latter "interest charge" regime is intended to
approximate the economic effect of current taxation of the
investment income. A foreign corporation is a PFIC for any
taxable year if 75 percent or more of its gross income for the
taxable year is passive income or at least 50 percent of its
assets produce passive income or are held for the production of
passive income.
Because the purpose of the PFIC rules generally is to
distinguish between "active" and "passive" companies, while the
purpose of the subpart F rules is to prevent the deferral of
taxation on income that is easily movable and therefore
responsive to tax considerations, there are significant
differences between "passive income" for PFIC purposes and
"subpart F" income.
For example, the "easily movable" subpart F
income that arises from active businesses, such as shipping,
generally is not covered by the PFIC rules.
Similarly, income
earned in the active conduct of a banking or insurance business
by most foreign banks and insurance companies also is not passive
under the PFIC rules. A similar exception applies to securities
brokers and dealers that are also CFCs. Moreover, although both
the subpart F and PFIC rules provide "look-through" rules that
treat certain, otherwise passive, income or assets of a foreign
corporation as active to the extent attributable to active income
or assets of related persons, the PFIC rules do not incl~de the
subpart F requirement that the related person be organized in the
same country.
On the other hand, the PFIC rules provide no
"high-tax" exception to the definition of passive income.
Although the PFIC rules use a narrower definition of
"tainted" income than the subpart F rules, they apply to more
shareholders.
The PFIC rules apply to u.s. persons who own even
a single share of the stock of a PFIC (or options to acquire such
stock, including convertible debt), regardless of whether the
PFIC as a whole is U.s.-controlled. This rule reflects the
difference between subpart F's orientation toward foreign
subsidiaries of u.s. companies and PFIC's orientation toward
passive investments of individual U.s. investors. The rule also
was intended to prevent taxpayers from avoiding the PFIC regime
in the same ways that they avoid the other anti-deferral regimes.
For example, the subpart F current inclusion rules apply
only to "u.S. shareholders" (that is, those who own 10 percent or
more of the voting stock of the foreign corporation) and then
only if more than 50 percent of the equity of the corporation (by
vote or value) is concentrated in the hands of such U.S.
shareholders. Accordingly, a less than 10-percent shareholder

-10-

can avoid current recognition of income under subpart F.
Similarly, the personal holding company rules and foreign
personal holding company rules, which subject foreign
corporations or their u.s. shareholders to either a penalty tax
or current taxation on passive income, apply only if five or
fewer individuals own (directly or indirectly) more than 50
percent in value of the stock of a foreign corporation. Thus,
these provisions can be avoided by dispersing majority ownership
among more than five individuals.
Congress enacted the broad PFIC provisions to limit tax
incentives to invest in passive assets abroad. Prior antideferral regimes, which generally applied only to closely-held
corporations, were inadequate to deal with the increasing problem
of deferral by individuals. The PFIC rules are even more
important now than they were in 1986, since more u.s. investors
have become comfortable with the idea of investing outside the
united States. without the PFIC rules, every well-advised u.s.
taxpayer would have substantial tax incentives to hold all of his
investments in stocks or securities (other than stock in u.s.
companies that currently pay dividends) through offshore
corporations. Accordingly, the PFIC rules were not intended to
affect overall u.s. savings levels, but rather to ensure that we
do not inappropriately encourage u.s. persons to invest those
savings overseas.
We recognize that the PFIC rules are complex. As noted
above, we look forward to continuing to work with the committee
to simplify the PFIC rules and the other anti-deferral regimes.
Overview of Foreign Sales Corporations Provisions
The final topic that Treasury has been asked to testify on
is the tax treatment of Foreign Sales corporations.
Foreign Sales Corporations (FSCs) are foreign corporations
that earn income from participating in u.s. export transactions.
See Code sections 921-927. The FSC provisions provide a limited
exemption from u.s. tax for income arising from certain export
transaction~.
The FSC rules were added to the Code in 1984 to
replace the domestic international sales corporation (DISC)
rules, which were phased out in response to criticism by u.s.
trading partners that DISCs violated the General Agreement on
Tariffs and Trade (GATT). The FSC rules were designed to provide
a tax treatment of income arising from export transactions that
is compatible with the GATT.
Generally a FSC either purchases u.s. goods and sells them
abroad (a buy-sell FSC) , or it is paid a commission for
participating in a sale or lease (a commission FSC). Although a
FSC may purchase from (or provide services to) unrelated
suppliers, generally a u.s. exporter forms its own FSC.
That FSC

-11will either buy and sell exclusively the exporter's property or
function as an exclusive commlssion agent for the exporter. A
FSC also must satisfy certain requirements (designed to make the
FSC rules compatible with the GATT) including requirements that
the FSC be managed outside the United states and that it carryon
certain economic processes outside the United states.
FSC benefits are generally limited to income from the sale
or lease outside of the united states of goods manufactured in
the united states.
Income from licenses of intangible property,
including copyrights, is generally not entitled to FSC benefits
but a statutory carve-out extends FSC benefits to licenses of
films, tapes, and records. Treasury is aware of legislative
proposals to extend FSC benefits to licenses of computer software
for reproduction abroad. Treasury would not oppose such a
proposal, assuming that appropriate offsetting revenue measures
can-be identified.
The "exempt foreign trade income" earned by a FSC is not
taxed by the United states because it is characterized as foreign
source income that is not effectively connected with the conduct
of a u.s. trade or business. This income approximates the
portion of the FSC's income that is deemed allocable to the
foreign activities of the FSC. The income also is excluded from
taxation under subpart F.
See sections 951(e) and 954(d) and
(e). Also, no U.s. tax is imposed on the exempt income when it
is paid to u.s. corporate shareholders because they are allowed a
100-percent dividends-received deduction for dividends
attributable to exempt foreign trade income. The only corporatelevel tax that such exempt foreign trade income bears is. foreign
income tax, which ordinarily is minimal because a FSC is usually
formed in a low-tax country or in a country or U.s. possession
that exempts FSC income from tax. Other income earned by a FSC
generally is taxed under regular U.S. rules. Accordingly, other
FSC income is taxed either in the year in which it is earned or
in a later year when it is repatriated as a dividend.
Virtually every FSC (whether a commission FSC or a buy-sell
FSC) that deals with a related party determines its foreign trade
income under one of two administrative pricing rules; i.e., rules
that determine the price that the FSC is deemed to pay its
related supplier or the commission it is deemed to earn. One
administrative pricing rule (the 23-percent rule) determines a
transfer price (or commission) such that the taxable income of
the FSC attributable to the sale (or lease) does not exceed 23
percent of the combined taxable income of the FSC and the related
person that is attributable to foreig~ trading gross receipts,
the receipts from the export transactlon (or group of
transactions). The other rule (the 1.83-percent rule) determines
a transfer price (or commission) such that the taxable income of
the FSC attributable to the sale (or lease) does not exceed 1.83
percent of the FSC's foreign trading gross receipts from the

-12transaction (or group of transactions).
In each case, the FSC is
allowed to treat 15/23 (65.22 percent) of its foreign trade
income (gross income attributable to foreign trading gross
receipts) as exempt.
Treasury is required to submit quadrennial reports to
Congress on the operation and effect of the FSC program. The
first such report was submitted in January, 1993 and covered FSC
operations for the period from January 1, 1985 through June 30,
1988. This report discussed the history and operation of the FSC
provisions, the effect of FSCs on U.S. trade and U.S. tax
revenues. The report used a standard econometric. trade model to
calculate the effect of FSCs on U.S. trade and estimated the
reduction in exports that would occur if FSCs were repealed. The
report estimated that, overall, the FSC program increased U.s.
exports by about $1.5 billion (or 7 tenths of one percent) in
1985 and 1986, and by 1.2 billion (or one-half of one percent) in
1988. The next report will be submitted by 1997 and will cover
the operation of the FSC program up to June 30, 1992.
The FSC provisions should be considered in conjunction with
the rules for determining the source of income for export sales,
which also provide for the tax treatment of income arising from
export transactions. Depending on a taxpayer's circumstances, the
sales source rules may cause the greater tax savings to be
realized by exporting directly rather than utilizing a FSC.
In
the case of inventory property that is purchased in the United
States for export abroad, the source of income is determined
under the title passage rule of section 862(a) (6), which
generally sources such income entirely from the country .in which
the seller's right, title, and interest in the goods pass to the
purchaser.
As described above, to avoid double taxation of foreign
source income, U.s. taxpayers are permitted to claim a credit for
foreign taxes, to the extent that the foreign tax does not exceed
the U.S. tax that would be imposed on the taxpayer's foreign
source income. No credit is allowed to the extent that a
taxpayer has paid foreign taxes in excess of the amount of U.S.
taxes that w.ould be imposed on its foreign source income; such a
taxpayer is said to have "excess foreign tax credits." Taxpayers
with excess foreign tax credits will seek to increase their
foreign source income at the expense of their domestic source
income in order to reduce their U.S. tax liability.
The sales
source rules, which allow taxpayers the opportunity to plan the
source of their export sales income, are a significant means by
which taxpayers with excess foreign tax credits reduce their U.s.
taxes.
Consequently, a taxpayer with excess foreign tax credits
will generally prefer to export directly, without utilizing a
FSC, in order to maximize its foreign source income and thereby

-13-

minimize its u.s. tax liability. A taxpayer that does not have
excess foreign tax credits will probably realize the greatest tax
savings by exporting through a FSC.
Conclusion
The current u.s. international tax rules are the result of a
series of compromises and of long experience with the incentives
created by residence-based taxation coupled with a general system
of deferral. The various anti-deferral rules, which were
responses to specific abusive situations, involve complex and
occasionally overlapping rules that may warrant simplification
and rationalization but that generally reflect an effort to
strike a middle ground between current taxation of all foreign
source income and complete deferral of tax on that income.

DEPARTMENT

THE

TREASURY

oNEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANlAAVENUE, N.W. - W,ASIflNGTON, D.C. - 20220 - (202)622·2960

FOR IMMEDIATE RELEASE
July 20,. 1995

Attached is a statement by Treasury General Counsel
Knight.

~dward

-30-

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•

8lfATZXBlft BY TRU..Ul\Y fa.ORAL COQJI••L IJDWAlU) I. DIGHT

In the course ot the Congressional hearings on waco, memb.rs
have referred several ti~es to an electronic mail me•• age dated
April 14, 1993, from Ro~ert McNamara, A.aociate Chief Counsel
(Enforcement) entitled Pt,limin~ry Investigative Plan. They also
referred to a message trom Mr. McNamara dated April 9, 1993
titled Woco Press Ral'OI •.
• be April l4 Meslaq,

The April 14 message is be1ng taXen out of cont.~t. In
particular, Mr. MCNamara's messa;e states that the Justice
Department did not want the Treasury Review to conduct any
investiqative interviews with potential witnesses in the criminal
case. He not.s that there would be potential problems for the
Treasury Review it witness interviews were delayed: "At some
point ve are 90ing to have to interview. the crucial witnesses an~
perhaps may have to take statements~ while we may De a~le to vait
for some of them to have testified in the criminal trial, the
pa.ssage of time will dim memories. 1f
In questioning this morning, a member of Congress addea the
\lord "hopefully" before reading "th. pas.aqe of tim. will dim
memories." The aadition of the wor~ "hop.fully" -- which is not
in the Treasury document -- is simply incorrect.
A full, fair and aocurate reading of Hr. McNamara's massaqe
shows that he was pointing out that delayinq interviews was not
dasi~e&ble.
Mr. MCNamara's messaqe underscorea his concern that
the Tre~sury Review be searching and comprehensive. He is
pointing out that certain actions preliminarily requestea by the
Justice Department could potentially limit Treasury's ability to
get to the truth.

The Treasury Review made many pointed criticisms of the ATF
investigation of David Xoresh. Hr. McNamara's message was part 0:
the early thought process that ultimately lead to the Trea&ury
Review. Throughout the planning and conduct of the ReView, two
ideas were paramount: (1) to produce a thorouqh, unbiased review
ot ATF's conduct and (~) to ensure that the actions of the
Trea.ury Review did not j.opar~ize the Justice Depa.tment'e
criminal case aqainst those who murdered tour ATF aqent •• To
thOA. ends, the Treasury Review employed independent outside
reviewers, had the Traasury Inspector G.neral oversee the
investigative plan, and undertook appropriate coordination with
the Justice Department. Mr. McNamara's m88saqe raised several
issue. that were relevant to the planning and execution or the
plan, and notified the Treasury ott ice of Enforcement of issues
that needed to be coordinated with the Justice Department.

~tB'd

The April 9 M, •• ag.
Th. mea.aqe indicates that the Treasury Department was
plannin9 to issue a press statement.
onoe again, a ~ull, fair,
and accurate readinq ot Mr. McNamara's message makes clear that
the Tr.asury Department coordinated this press statem.nt with the
Justice Department to ensure that the ongoing murder
inv.stigation and the negotiations with the Branch Dav1d1ans were
not compromised. The JuaticQ Department expressed concern that
criticisms ot ATF mi;ht hinder the investigation and the
neqotiations. The coordination between the Treasury and Justice
Departments on this issue was entirely appropriate. Here aqain,
to suqq.st that this mesaaq. 1, Qvidenee of a cover-up is simply
incorrect.
-30-

6~:~

S66t-t~-lnr

DEPARTMENT

____

TREASURY

THE

TREASURY

NEWS

~~17~_-

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220· (202) 622-2960

For Immediate Release
As Prepared for Delivery
July 21, 1995
STATEMENT OF LAWRENCE H. SUMMERS
NOMINEE FOR DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMIITEE

Mr. Chairman, I am grateful for this opportunity to appear before you tOday in
connection with my nomination to be Deputy Secretary of the Treasury. I am deeply
honored by the trust that Secretary Rubin has shown in recommending me for this position,
and that the President has demonstrated in nominating me.
For the past two and a half years, I have served as Under Secretary for International
Affairs at the Treasury Department. It has been my privilege to work first with Secretary
Bentsen, then with Secretary Rubin on a wide range of economic and financial issues facing
our nation. I believe that the President and the Congress, working in a spirit of bipartisan
cooperation, have achieved real progress over these past two and a half years toward
increasing America's export potential, opening foreign markets to our goods and services,
and reintegrating the transition economies of the former Soviet Union and Eastern Europe
into the world economy.
My experience before coming to Treasury was as an econom~st working on policy
questions, first as a professor at Harvard, and then as Chief Economist and Vice President at
the World Bank. At Harvard I taught and conducted research on a range of economic issues,
including tax policy, unemployment, and the role of financial markets. At the Bank I had
responsibilities for managing the organization's research, statistical, and training programs,
and participating in its lending decisions.
If confirmed as Deputy Secretary, I look forward to working very closely with
Secretary Rubin and assisting him in the fulfillment of the Treasury Department's broad
array of responsibilities. I believe that there is nothing more important for the future of our
country than successful economic policies that allow market forces to harness the tremendous
economic energy of the American people. Appropriate public policies in support of a sound
financial system are crucial to attaining this objective.
In particular, I would highlight four areas which should be priorities for the Treasury
RR-454
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press re I
eases,

Department in advancing the continued economic success of the American people over the
months and years ahead.
One is the need to increase our national savings and investment rates -- both of which
lay the foundation for our nation's future. Cutting government spending and balancing the
budget, considering tax and other measures that can increase private savings, and furthering
critical public investments can all play an essential role in achieving rising standards of living
for the American people.
A second priority must be continued support for international economic cooperation.
We must work with other countries to ensure that the process of opening markets, furthering
market-oriented reforms in developing countries, and safeguarding the functioning of
international financial markets goes forward.
Third, the United States must maintain a modern and effective financial system as the
basis for our prosperity. Such a system is essential to provide funds and capital for our
industries, channel investments to their most efficient use, offer high returns for the
American people, and allow our financial services firms to compete effectively overseas.
Fourth, Treasury -- like other agencies with law enforcement responsibilities -- must
work to improve its capacity to meet those responsibilities. Narcotics trafficking, money
laundering, tax evasion, and other crimes all represent a threat to the rule of law in our
society, and the economic progress that we work for.
Many of these issues are complex. While we have made progress over the last
several years, much more must be done. Clearly, there will be some disagreement as to how
best to achieve our aims. I strongly believe that it is very important to discuss key issues
fully and openly.
In conclusion, let me say that the Treasury Department has a long and proud tradition
of professionalism, integrity, and public service. If confirmed, I will do my utmost to
maintain that tradition, by remaining fully responsive to the Congress, and serving Secretary
Rubin and President Clinton to the best of my abilities. Let me offer you my personal
assurance that I will continue to do everything in my power to work closely and
cooperatively with the members of this Committee and all the members of Congress in the
weeks and months ahead.
Thank you once again Mr. Chairman for bringing me before this Committee. Now I
would be pleased to respond to any questions which you or the Committee may have.

DEPARTMENT

THE

TREASURY

OFFICE OFPUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE. N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
July 21, 1995
STATEMENT OF RONALD K. NOBLE
UNDER SECRETARY OF THE TREASURY
(ENFORCEMENT)
BEFORE THE SENATE JUDICIARY COMMITTEE

Mr. Chainnan, Senator Biden, and members of the Judiciary Committee:
I appear before the Committee today to discuss the most disturbing of issues: racism.
The specific matter giving rise to the issue is the report of racist activity at an event attended
by Treasury law enforcement officers and known as the "Good 01' Boys Roundup." My
purpose is two-fold: first, to re-state our policy that racism, anti-semitism and sexism will
not be tolerated at the Department; and second, to describe the measures that Treasury will
take to investigate this particular matter and to better ensure that it does not take place again.
As you know, there is a pending investigation by the Treasury Department's Office of
Inspector General into this matter. Inspector General Valerie Lau, who is conducting the
factual inquiry into the Roundup, directed that the Office of Enforcement and all Treasury
enforcement bureaus refrain from discussing any matters that might jeopardize her
investigation. ATF Director John Magaw will discuss the results of his preliminary fact
finding. And I am able to discuss today the steps taken by Treasury to get to the bottom of
this matter, as well as the process for reviewing relevant issues raised by the event and other
racially questionable matters.
We at Treasury share the Committee's outrage. As Secretary Rubin has stated time
and again, and well before this incident came to light, there is no place at Treasury for
discrimination or racism of any kind. This principle has been, and will continue to be, our
guide at Treasury Enforcement as we address issues of race, including those raised by this
ugly gathering.
To take any other attitude would call into question the moral and legal authority upon
which law enforcement rests. Just as, in the words of Martin Luther King, Jr., "injustice
RR-455
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anywhere is a threat to justice everywhere," racist sentiment anywhere within law
enforcement is a threat to right minded, legitimate law enforcement everywhere. If left
unchecked, the racism, anti-semitism or sexism of even a few officers would cast doubt on
the essential functions performed and missions carried out by the entire law enforcement
community.
Imagine, if you will, the following hypothetical scenarios: a Secret Service protective
detail for an African or Israeli head of state being mistrusted because of racist or anti-semitic
sentiments ascribed to a few agents; every Customs check at the border becoming suspect
because a few inspectors had previously singled people out based upon the color of their
skin; or the Drug Enforcement Administration or local law enforcement authorities being
doubted every time they made a drug bust because other officials from the same groups had
previously made "bad busts" that originated from racial bias, rather than objectively
determined probable cause.
Such skepticism would provide confrrmation to cynics in our society who believe,
erroneously, that law enforcement is not there to work for all Americans, thereby making
them even less willing to put their trust in the public servants sworn to protect them. An
even more extreme, but entirely possible, result would be continuation of the current
dangerous trend among certain individuals who go beyond skepticism and, again erroneously,
view law enforcement as the enemy. We must not step foot on that slippery slope.
For these reasons, the manner in which Treasury reviews the Good 01' Boy Roundup
is of vital importance. It must begin, of course, with a review of what has happened thus
far. As noted, the Inspector General has directed us not to discuss any matters relating to,
or affecting the pending investigation beyond that to which we agreed with the Chair. As
Under Secretary for Enforcement, I was prepared to recruit investigators and legal staff for
the specific purpose of investigating the facts and analyzing policy. But, in light of concerns
over independence, the Inspector General has decided to generate the factual report on her
own. Her task is quite difficult; I believe that a joint investigation would have been
appropriate, but I respect her independence and her decision.
Secretary Rubin and the Office of the Under Secretary for Enforcement responded
immediately upon learning of this event. On July 11, 1995, ATF Director John Magaw
advised us that upon learning of it four weeks before, he initiated an internal investigation.
In response to questioning from Senator Moseley-Braun at a hearing of the Senate Banking
Committee, Secretary Rubin stated that the Department would "take all actions within our
purview to deal with" those from Treasury who attended the Good 01' Boys Roundup. This
sentiment was repeated and made more explicit in a public written statement from the
Secretary issued shortly thereafter.
In a speech last week to the National Association of Blacks in Criminal Justice, I
pledged that there would be a full investigation of the matter and that appropriate actions
would be taken within Treasury Enforcement. I repeated this pledge most recently at a

briefmg that I gave on the issue to members of this Committee and to members of the
Congressional Black Caucus.
Finally, Director Magaw, who had moved expeditiously to investigate the incident
when he first learned of it, released a statement immediately upon publication of newspaper
reports, stating that he abhorred what the Roundup represented and would do everything in
his power to discipline those found to be in violation of the law or Departmental rules.
Of course, however strongly we signalled our disgust, two facts remained clear.
First, given the reportedly few ATF agents present in a gathering of several hundred law
enforcement officers, there was a possibility that agents from other bureaus, within and
outside of Treasury, also participated in the Roundup. Second, actions speak louder than
words: Treasury had to take defmite steps to investigate the issue thoroughly, take necessary
and proper actions against those who violated any laws or internal policies, and take any
necessary and appropriate actions to prevent such behavior from occurring again.
Each of these facts was confronted directly. First, Secretary Rubin and I directed all
of the law enforcement bureaus at the Department of the Treasury to conduct internal
investigations and determine whether any of their personnel had attended the event. These
inquiries were coordinated by Treasury's Office of the Inspector General, and in less than a
week revealed that employees from the Secret Service, United States Customs Service,
Internal Revenue Service, and Federal Law Enforcement Training Center had attended at
least one of the Good 01' Boys Roundups.
The disclosure that personnel from other bureaus attended the Good 01' Boys
Roundup led to the decision by Secretary Rubin that a broader review would be needed. As
a result, Secretary Rubin announced on Monday the formation of an independent review of
the Good 01' Boys Roundup.
As I stated earlier, the Inspector General will be solely responsible for the factual
investigation and report of the Good 01' Boys Roundup. As Under Secretary, I will be
responsible for determining what laws, policies, and regulations may have been implicated by
the disclosed facts. I also will be responsible for drafting recommendations as to any
changes that should be made to such laws, policies, and regulations
To further ensure that this review is independent and impartial, Secretary Rubin also
announced that the oversight function assigned to the Inspector General and me would be
extended to an independent Citizens Review Panel composed of prominent citizens with
unquestioned expertise and integrity on matters relating to race, the law, and law
enforcement. The members of the Citizens Review Panel will separately examine the
completed Inspector General investigation and report and will provide oversight for the
Office of Enforcement's work in reviewing and formulating appropriate laws, policies and
regulations.

The members of the Citizens Review Panel are: Julius L. Chambers, Chancellor of
North Carolina Central University and former pxecutive.Director of the N.A.A.C.P. Legal
Defense and Educational Fund; Norman Dorsen, Stokes Professor of Law at New York
University School of Law, former President of the American Civil Liberties Union, and
former President of the Society of American Law Teachers; Helene L. Kaplan, Partner at the
law frrm of Skadden, Arps, Slate, Meagher & Flom, and former Chair of the Board of
Trustees of the Carnegie Foundation and Barnard College; Rex E. Lee, President of Brigham
Young University and Solicitor General of the United States under President Reagan; Patrick
V. Murphy, Director of the Police Policy Board of the United States Conference of Mayors,
former Commissioner of the New York City Police Department, and former President of the
Police Foundation; and Fred Thomas, Director of Public Safety for Prince Georges County,
Maryland, and recently retired Chief of the Metropolitan Police Department of Washington,
D.C.
The role played by the members of the Citizens Review Panel is of vital importance.
We believe that the surest way to promote confidence in an investigation of members of our
bureaus is by having the process and recommendations reviewed by those who have no
institutional stake in the matter, and who can dispassionately offer advice on the methods
employed, the conclusions reached, and the· recommendations issued. Such is the approach
that we at Treasury adopted in previous reviews of its policies and actions.
Secretary Rubin has requested that this investigation is expected to be complete within
120 days. Moreover, Treasury will continue to move quickly once the investigators have the
facts. Information developed through the investigation concerning the actions of specific
individuals will be forwarded to the relevant agencies for appropriate action. Disciplinary
action will be meted out to those for whom it is warranted. In this regard, we will explore
all aspects of the law. Moreover, as noted earlier, we would seek appropriate changes to
present rules, regulations, and laws to meet this serious problem in the future. We must not,
however, run afoul of civil liberties such as freedom of association and speech protected by
the United States Constitution. These are complex issues that must be addressed and
resolved with great care.
Mr. Chairman, I would like to make one last point before closing. Contrary to some
earlier reports, the facts as presently reported do not implicate a large number of agents of
any of the Treasury enforcement bureaus. In this regard, some of the accounts of ATF's
involvement may have been particularly exaggerated. Still, one person in attendance at an
expressly discriminatory and racist event is one too many, and the Inspector General's
investigation will determine the actual number of Treasury law enforcement agents in
attendance. And I assure you that the Under Secretary of Enforcement will make clear that
there is no place within the Department of the Treasury for law enforcement officers who
engage in racist, anti-semitic, or sexist behavior.
A racist law enforcement officer can not effectively enforce the laws of our society
while ensuring the essential civil rights of its citizens. Such a person therefore should have

no place in law enforcement. The Treasury Dt;partment's independent review constitutes the
Department's pledge to do everything in its power to examine this ugly gathering and to
ensure that appropriate action is taken and enforceable rules, regulations, and policies are
formulated.
Thank you, Mr. Chairman.

() EPA I{ T 1\1 E N T

0 F

THE

T REA S II l{ \'

NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C•• 20220. (202) 622·2960

FOR IMMEDIATE RELEASE
July 21, 1995
Attached is a copy of a letter to Speaker of the House Newt
Gingrich from the independent reviewers of the Treasury
Department's investigation of the Bureau of Alcohol, Tobacco and
Firearms' actions at Waco in 1993 .
-30-

RR-456

Hay a5,

1~;!5

spe&ke~ New~

Q1nqrich

Qrti.tecl lta~. liou•• ot "pr •••nt.tiv••

O.S. Cap1tol
W•• hinqton, CC 20515

Th. \UDe~.1gned, who .e:veel. a. l.ncl.epencl.nt raviewertl of
Tr ••• ury Oep.r~.nt'. 1nve.ti9ation ot the Sureau ot
Alc::ohol, tobacco ancl. Fir.arms acticl\. at Waco in 1 g93, vr1 t.e
reapootrul.l~ concerning the clec:j 8ion of
the leaclera o~ the
Bou.e ot "pt•••ntative to authori~. h ••r1nqa into the traqedy.
~.

~. you n.va cl.ec1d.ed. to go lQrward. with the hearing-s,
our
hop. 10 that you will ensure that. they Decome .. to~ for trutb
and fairness .. oppo.ed. to • means for air1nq the myths and. lie.
that. the Nat10nal aitle b.od-eeion ancl. a tev other 'JZ'OUp. U .
pe:petratin9' That i . QU~ c~nc.rn.

One ot many tal.ehooQa De1n9 eireulatecl. 1. that AfF1e
aotions at Waco never were investi'Jateci. fully. Quite, the
oontra::y: th. 't'r... ury'. eZ'itiqu. 1tICS tho:r:oui'h, unapartng and.
none.t. More than 30 attorney., inve.tiqa1:ors and. support statr
jo1ned. 10
operation.,

experts in fire.m.,
in .. f1ve-month probe

explosiv..
and.
tactical
to learn the t~th. ThQxper~s ~ere not paid, nc~ were va. we ove~.av the 1nv•• t1gat10n
anc! 'P.rticipated. 1n wl'l.ting the :epQrt which The Wall street
Journal char ac:terized a. nextenaively detailed" and. the Loa
~qele. Tim.1 said. w.s a ~c:oura9.ou., candid evaluation."
The ta~t., ciftta11.d in the SOl-pa.qe ~eport, .peU clearly
and. \Ii thout ~.pute. David. Kore.h, the Branch Oaviciian lead.er,
w•• not inva.t1gated. b.c:au•• of his %.1~i'1o~. beli.fs. Ra vas
the target o( a lawful inv •• tigation ~hich the ATI' irUl:iatecl
atter the Sheriff'. Ottice in McLennan County,
fexa. v ••
concerned th.t Kor.sh v •• viol.tin'J facl.er&l fir •• rm. law8. The
A'1T inv•• ~iCjJ. tion oont1:mecl tnat Kore.n anc! the Cav1d.i.an. had
a.ocumulated A !ormidible arsenal
more Chan 100 ••••ult
r1tle., kits ~o ma~. 111eqal machine gun •• ehousanda of round.s
of ammunition rifle grenade. and explosive •.

pon. and • ..,lodv•• v:!.elatJ.ona 11. at the oore ot
autne~1\y. I~ v~'ls have be.n 1r%••pon.~~e tor
the A~ n.~ ~e nave inv•• tigated and '~1.~1~ irr ••pon.~.l. tor
",orr not to have .ouq!'u: ';. .nro~c:. ~he laVe '1'hw Lr'&V•• ~.iq.ticn
convinca4 ~. U.•. At.t.o~ney' a ottioe in ~u.t1n that thu. wa.
prgQADla e&~. ~o a~~e.t Kor •• h and s.arch the Oavid1an pr~ •••
~ • V.I. ma,1.~%ata 1 •• u14 vl%~ant~ to that ettaat.
Th.

the

~Tr'.

1II • •

L.9.~

'ttl. ~v1a'" rapol'tad t.h.t the 1-'IT Ift&cs.••• r10u. ru.eu•• ana
ai..j'oldpent. in .aakinQ te .K'I. the vuranu vi th & ::Ihov gf
!h. r.viaw IhoWM Chat. 1" v1av of .venta izllMd.iatelv
••~na ~. raid, ~t .ho~. ftO~ k~ve gc~a forward.

f.....

!'he "Tr
l_._cahLp,

al\.

T~ea.ury
~ao~ioa

,\I_""on,all andor

tawed

I::h-

arrerll

ion

and acted upon the r.v1.aw·.
raee...,...,u!a~ion.,
wMatI
prgvLdad
1ntor;n&t:.ic:m
And.
9U~aalLn.. ~at. would Po w.oful ~n p~a~.nti~ ~fte.. a~ror. from
~~n. ~~.~a•.
The A7r haa" moved torv.rd. Thar.rore, wa hope
~ ~._~1";. will not impugn ~h. rapueat~on. or
ATF a90n~B who
~:.velY Ic.uqh't 'to uphglc:1 th. 1.&W - • • pe.Lally
;:ha fou~ vho
~.4 -- C.nvay LeBleU, Toad Mo~a.han, Rob.rt Williams and It.van

Wil11..

4e .e net enly would ba unfair,

~ut Qa.~ly ~c~l1nq

tho •• of u. who honor and r ••p.c~ the rol- ot law an:o~wem.nt
1n prot.gtin~ our riiht., Q~~ paope¥~y &ft4 O~~ fra.dem.
~o

We are .'II~le.ir'l9 a copy of ~h. 't're.'U:y itev1ev ~or your
ana we urqll yg~ t.o •• k oth.~ l'YIUer_ to .i:ud~ ito.
My~;me wnQ doe., WO Doli.ve, will aono1UM that eh. aC!r.ions of
~ha
'l':n. . u 2Y and. t:h. ~T" in the aftermath ot 'the CU'.adru~
out-com. a~ Waco. 'vare !orthcOll\1n;, prote •• ~onal &!\d r ••pon.~bl •.

paz-.uau

DEPARTMENT OF THE, TR!ASURY

-~"f!l'"','
:( "..: '\~

WASHINCTON

.~\.~.I."
J.•
".

...

,."

statement by

Treal1.l~

Geuttral Counsel Edwart'l S. Knight
gUG J ,.J U U 00 .( I
Counsel to Mr. G~rabyn milrepres~nted the content ~f gettlQMent
negotiations. ATIi' did not lIe.k the dcutr1.l.ction ot auy recordS
relAted to the pe:r:lIIunnel action. COpifillil of. all Qt the,Qvi4ence
ha~ been preQerv~d and provided to the Subccmmitteas.
Cop1.~

the

of the emcire official disCiplinary tiJe were provided to
8 on July 7th.

Sub~~mmitt ••

n~gotiatioll", ccunsel to the "mr(loyea& sought
the remov~] or ~ef.r.nC.8 to thQ disciplinary act~ons from
certain o~her parsOnnel tUes. The a9r.e~ntB have be~n
implemented in _ fa.hien that i~ entirely consist.nt with the
requirement. nf Office of Personnel Management dire~tives.
Copies of all e)punqed doeumente exiRt in the official
disciplinary fi]ee: provided to the SuLt.:ornrnittees.

During eettletneftt

The

Illcso pl.:ovid815, at the sugge.uon of the Merit
Soard Administrlltive JUQQ~, tor the return of
to th~ Ag~ncy. Hie 8uggeDtion W~~ offered
of the e naitivi~y or the unaerlying evldQnce and hi~
that tha MSPB would be making diIlClo~Hu'e decisions,
or the Department, nn FOIA requelitil for these documents.
to tha e~loyeel concurred in tnis.

~g%'eem.nt

Syst~m9 prot.ctio~n
the appe~l reco: 8

becauoc
conCA,.".

instli.lcul

Counsel

RR-457

EWS

TREASUR¥·

OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANJAAVENUE, N.W•• WASHINGTON. D.C. • 20220. (202) 622·2960

FOR IMMEDIATE RELEASE
July 21, 1995
Attached are two updates based on testimony in today's Waco
hearings.
-30-

RR-458

For press ~lea.se.(,

spt:l!mes, public scheduks and official biugraphia, call our 24-lt.our fax line at (202) 622·2040

•

from the Treasury Department show a

Memos

Department of JUBtiee "eover-up" of
reviews of AIF conduct at Waco.
FACT:

int~rnil

Thera was nl) cover-up .- the alleg~tiona ..liatort longstanding Juctice Oep~rtm.nt poliey-

BJ.CICGJlotmtl.

Under lonq-Jl:anding );)olicy. the Ju.t1'-=1t Llepartmlltnt askcd
that any:in~ern~l lnveStlQ4t1nn be delayed whilo crimin~l
1nvest1g~t1~ns want forwara on ~h. kl111n~ of tha ATT
agents.

be.n in foree l.ll1.uer t;he prevtous two
and wag in force during t.ht! first year of
the .:urra nt acim.ini:stlO.t.ion.

'I'h.i.~ poljcy has
admi~ist:l &l:ions

The reason iw simple. =a.rall.l invc3tigatiolUS can
contf.'minal:e orimincl iuvliIsClgatlon.. And intcrviewa;.
conuuctea for criminal invQ8tigation~ can alway~ be uocd in
intQrn~l

invest.i.gat10ni

The d.eciston co
~hat

po~tpon.

afr.~rward.

an inl:.ern&1

inV'e8i;1~at1(")n

alJ;o

inte:.t:v1ews of AT1=' a.genta would be cunduccad hy
che indep~ndent TaXA!! RangeL-s _. rather than by th~ Treatlury
insurcad

Oep~rtm.n~
a~ t~intcd

who •• intarvi.wa of ATr agcnt& woul~ b~ &Qcailed
in the heated atm~8phere following the raid.

Last y •• r, Attorney General Reno loosened Lh~ poli~y to
permit aone inte~nal a!ta1rl lnv~9ti9ationg to go furward
s1mul~anee~~ly -- tho~gh an oxcep~10n remains for critic~l
aieu~tiona ~uch ~8 the one in Waco.

KcCollwa
Assertio~:
AT7 aa4 DO written raid plan. There ahou14 have been
~etter IAtelligeDce.
eomaanaera never 4evelope4 photo. taken at
the u~4ercover house. one of the.e pictures .hovs a woman

holding • rifle. Thi. evidence planner• •bou14 bave considered to
appreciate the po •• ibility of armed re.istance from women v1tbiA
the coapoUB4. ~be videotape. produced by the undercover boa ••
were Dever vieved.
Fact;
•

The Trea.ury review reported two year. aqo that ATF lacked a
rinalized written raid plan on the ~ay ot the raid. (p.207208)

•

The Treasury review reported two years ago that photoqraphs
taken at the undercover house were never developed. (p.52)
The Treasury review reported two years ago that ATF planners
wrongfully ignored the possibility of armed resistance from
women resident in the compound. (147-8)
The Treasury review reporte4 two years ago that the
videotapes produced by the undercover house were never
viewed.
(p.52)

D EPA R T 1\11 E N T

0 F

THE

T REA S lJ I{' Y

ornc!: OF PUBliC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220 • (202) 622-2960
FOR IMMEDIATE RELF.ASE

Contact: David Icikson

July 21, 1995

(202)

622-2960

MEDIA ADVISORY

The Treasury Department has released a joint Waco Review
Team and Bureau of Alcohol, Tobacco and Firearms analysis of the
video, Waco, the Big Lie.

Thos~

interested in receiving a copy

of the Department's responses to various false accusations in the
video should contact the Office of Public Affairs at

(202)

622-

2960.
-30-

RR-459

For press rekases,

speeches, public scludules and official bingraphies. call our Z4-1wurf"" line at (202) 622-2040

•

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• -w.ASHJ!NC~TOIN D.C •• :10220. (:102) 622-2960

FOR IMMEDIATE RELEASE
July 21, 1995
Waco Update

Attached is an update
hearinqs.

ba~ed

on testimony in today's Waco

-30-

RR-460
4:30pm EST

For prm releases, speechn, public schedules and ojJicial biographies, coll OUT 24-1wurfax line at (202) 622·2040

•

TOTA.. P.12I2

A••• ~io.1 A~ DOD~.D.ed that the aa.pGUD4 bou.e4
•• \lIupu,aai•• lu.

aD il1e~.1

Fact:
•

AD pre.ented the lI'ational CUarcS and the Dep.rt.ent ot

Deren.. with evidence ot possible druq activity on tho
compound.
..U.!!

AD ......ti.ll' U.•411
aotiyltr •• the oaapo.a4.

. . . .rtiOD:

~ut

the

."i••IIG8

of dn,

Fact:
•

The military aid VII l.qa1.

•

H.licopter. would have be.n " ••d with or without .v14ence ot
dru9 activity on the COilpound.
The madical traininC) provided by the military came in handy

due to the .abu.h.
•

RepZ'e.entativ•• frOli the U.s. military and the Taxa •
National Guard 4.tar.mine« that ATr'. information concernlnw
po.aible druq activity at the compound va •• utticient to
warrant ••• i.tane. on a nonreimburaable baaia.

JUL-22-1995

04:32

P.02~

DEPARTMENT

THE

TIlEASURY
,

OFFICE OF PUBLIC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960

Contact: Howard Schloss
(202) 622-2960

FOR IMMEDIATE RELEASE
July 21, 1995

STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
Mr. Brewster simply misunderstood the call. I did ask him to seek the truth, like the
rest of us, and not to join any effort to undermine law enforcement. Calls like this are made
by administrations all the time.
-30RR-461

For press releases, speeches, public schedules and official biographies, call ulIr 24-hour fax line at (202) 622-2040

D.C.• 20220 • (202) 622·2960

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYL

FOR IMMEDIATE RELEASE
July 24, 1995

Waco Update

Attached is an update based on recent testimony in the House
Waco hearings. The update notes that many of the items raised
in recent congressional testimony have already been investigated
and discussed.
References in the update are to the Treasury Department's
study of the actions of the Bureau of Alcohol, Tobacco and
Firearms at Waco in 1993. To receive copies of the pages cited
in the update, please contact the Office of Public Affairs at
(202)

622-2960.

-30RR-462

11:00am

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Old "New" Facts
•

Treasury oversight inadequate.
See Part Two, Section 5/ pp. 177-183:
Concludes inadequate and delineates steps taken to
improve oversight.

•

Secretary Bentsen not informed of the raid in advance.
Page 178, paragraph two.

•

Agents responsible for making the decision to go forward
didn't think the raid was compromised.
Pages 166-167j 89-92.
Review fully explains the flaws in their judgment and
concludes that they had sufficient information to
understand that the raid was compromised.

•

Shooting review conducted by ATF personnel was halted at the
request of the local U.S. Attorney's office.
Page 197.

•

In conducting its administrative review, Treasury
coordinated with the Department of Justice in order not to
interfere with ongoing investigations and prosecutions.
Page 2.

•

Intelligence gathering (including undercover operation) was
inadequate and existing intelligence was not adequately
evaluated by the raid planners and decisionmakers.
Pages 51-53; 143-148; 168-170; 186-188.

•

ATF didn't adequately consider option of arresting Koresh
off the compound.
Pages 114-1.42.

•

No complete written raid plan in advance of the operation.
Pages 207-208.

•

Some experts didn't believe that dynamic entry was a good
idea.
Appendix B.

Monthly Treasury Statement
Li L: i;,', i~f rR~~~iflt~j ;~nd Outlays
of the United States Government
,

J'"

For

FiscaT~~ai Ej9~ T-hreugh.Ju~

30, 1995, and Other Periods

Highlight

Military active duty pay, veterans benefits, and supplemental security income payments for
July 1, 1995 were accelerated to June 30, 1995.

This issue includes the semi-annual interest payment to trust funds investing in government
securities.

RECEIPTS, OUTLAYS, AND SURPLUS/DEFICIT
THROUGH JUNE 1995

1200
Contents

B
I
L
L
I

0
N
S

Summary, page 2
Receipts, page 6

800

Outlays, page 7

600

Means of financing, page 20
Receipts/outlays by month, page 26

400

Federal trust funds/securities, page 28

200

Receipts by source/outlays by
function, page 29

Explanatory notes, page 30

-200
Compiled and Published by

Department of the Treasury

Financial Management Service

Introduction
of receipts are treated as deductions from gross receipts; revoMng and manag&ment fuld receipts. raIrntusements and refunds of monies previouSly expended 11'8
treated as deductions from gross outlays; and Interest on the public debt (pubic
Issues) is recognized on the accrual basis. Major Information sources Include
accounting data reported by Federal entities. disbursing officers. and Federal

The Monthly Treasury Statement of Receipts SlId Outlays of the United StBtes

Government (MrS) is prepared by the FInancial Management Service. Department of
the Treasury. and after approval by the Fiscal AssIstant Secretary of the Tf88SIM'Y.ls
normally released on the 15th WOI1<day of the month following the reporting month.
The publication is based on data provided by Federal entities. disbursing officers.
and Federal Reserve banks.

Reserve banks.

Triad 01 PubllcllIIona
The MrS is part of a triad of Treasury financial reports. The Daily Treasury
Statement is published each working day of the Federal Government. It provides
data on the cash and debt operations of the Treasury based upon reporting of the
Treasury IlCCOIJ'It balances by Federal Reserve banks. The MTS Is a report of
Government receipts and outlays. based on agency reporting. The U.S. Government
AnnUBI Report is the official publication of the detailed receipts and outlays of the
Government. " is published annually in accordance with legislative mandates given
to the Secretary of the Treasury.

Audience
The MrS is published to meet the needs of: Those responsible for or interested
in the cash position of the Treasury; Those who are responsible for or interested in
the Government's budget resuhs; and individuals and businesses whose operations
depend upon or are related to the Government's financial operations.
Disclosure Statement
This statement summarizes the financial activities of the Federal Government
and off-budget Federal entities conducted in accordance with the Budget of the U.S.
Government. i.e .• receipts and outlays of funds. the surplus or deficit. and the means
of financing the deficit or disposing of the surplus. Information is presented on a
modified cash basis: receipts are accounted for on the basis of coI~; refunds

Data Sources and InfonneIIon
The Explanatory Notes section of this publication provides information c0ncerning the flow of data into the MrS and sources of Information relevant to the MrS.

Table 1. Summary of Receipts, Outlays, and the Deficit/Surplus of the U.S. Government, Fiscal Years 1994 and 1995,
by Month
[$ millions]
Period

Receipts

Outlays

Deficit/Surplus (-)

FY 1994
October
Novernber .......... ...... ...... ..........
December ........ .................. ......

January ...................................
February .. .................. ...... ........
March .... ...... ...... ........ ............
April ......................................
May ........ ........ ...... ...... ..........
June.............. ............ ...... ......
July .... ............ ...... ...... ...... .....
August .......... ...... ............ .......
Septernber ...............................

78.662
83.102
125.403
122.961
73.186
93.107
141.321
83.541
138.119
84.822
97.333
135.895

124.085
121.483
133.108
107.713
114.752
125.422
123.867
115.597
123.269
118.020
121.608
131.796

45.422
38.381
7.705
-15.248
41.566
32.315
-17.454
32.057
-14.850
33.198
24.275
-4.099

Y~~~Data ........................... ~~~~~~1~1~,~~7~,~~2~~~~~~~~1~1~,~~,~~~1~~~~~~~~~~1~~,=28:9~~~~~
FY 1995
October ................................. .
89.024
120.365
31.342
87.673
November ............................... .
124.915
37.242
December .............................. ..
130.810
134.941
4.130
131.801
January ................................. ..
115.171
-16.629
82.544
February ................................ ..
120.527
37.983
92.532
March .................................. ..
142.458
49.927
165.392
April ..................................... .
115.673
-49.720
90.405
May ..................................... .
129.355
38.950
147.868
June ..................................... .
134.296
-13.571
Y~r-~Data

.......................... .

1,018,048

1,137,702

'The receipt. outlay and deficit IigIns differ from the FY 1996 Budget. released by the Office
of Management and Budget on February 6. 1995. by $100 mIion due mainly to revisions in the
data folowing the release of the FInal September MonlhIy TIIIIIIUY Statement.

119,854

Table 2. Summary of Budget and Off-Budget Results and Financing of the U.S. Government, June 1995 and
Other Periods
[$ millions]

Current
Fiscal
Year to Date

This
Month

Classification

Total on-budget and off-budget results:
Total receipts ..

Budget
Estimates
Full Fiscal
Year'

Prior
Fiscal Year
to Date
(1994)

Budget
Estimates
Next Fiscal
Year (1996)'

147,868

1,018,048

1,346,414

939,401

1,415,456

115,998
31,870

751,934
266,114

995,158
351,256

686,129
253,272

1,045,095
370,361

134,296

1,137,702

1,538,920

1,089,296

1,612,128

119,478
14,818

931,546
206,156

1,246,936
291,984

889,828
199,468

1,307,105
305,023

............

+13,571

-119,654

-192,506

-149,895

-196,671

On-budget surplus (+) or deficit (-) ....
Off-budget surplus (+) or deficit (-)

-3,480
+17,051

-179,613
+59,958

-251,778
+59,272

-203,699
+53,804

-262,010
+65,338

.............

-13,571

119,654

192,506

149,895

196,671

Means of financing:
Borrowing from the public ...........................
Reduction of operating cash, increase (-) .........
..............................
By other means

8,491
-34,312
12,250

151,208
-24,598
-6,955

207,936
-4,058
-11,372

147,888
1,515
492

217,151

.............
..............

On-budget receipts ....
Off-budget receipts
Total outlays .
On-budget outlays
Off-budget outlays
Total surplus (+) or deficit (-)

Total on-budget and off-budget financing

... No Transactions.
Note: Details may not add to totals due to rounding.

'These figures are based on the FY 1996 Budget, released by the Office of Management and
Budget on February 6, 1995.

Figure 1. Monthly Receipts, Outlays, and Budget Deficit/Surplus of the U,S. Government, Fiscal Years 1994 and 1995

$ billions

180,---------------------------------------------------.
Outlays

160
1
1
1

80
60

../

Receipts

40
20
O~~~~~~~~~~~~~~~~~~~~~~~~~,

-20
-40
Deficit( -)/Surplus

-60-1

-80~11---r--TI---r--'I---r--'I---r--'Ir--r---Ir--,---,1--,---rl--,---rl--'---TI--II--'I

Oct.

Dec.

Feb.

Apr.

Jun,

Aug.

Oct.

Dec.

Feb.

Apr.

Jun.

-20,480

figure 2. Monthly Receipts of the U.s. Govemment, by Source, Fiscal Vears 1994 and 1995

$ billions

ITotal Receipts I

160
140
1

100~

Oct

Dec.

Feb.

Apr.

Jun.

Aug.

Oct.

FY
94

Dec.

Feb.

Apr.

Jun.

FY
95

Figure 3. Monthly OuUays of the U.S. Govemment, by Function, Fiscal Vears 1994 and 1995

$ billions
1Qn-~-------------------------------------------.

ITotal Outlays

1
1

.llnterest

ol-~~~~~~~~~~-,-,~.-~~~
Oct

Dec.

Feb.

Apr.

Jun. Aug.

Oct

FY
95

FY
94
4

Dec.

Feb.

Apr.

Jun.

Table 3. Summary of Receipts and Outlays of the U.S. Government, June 1995 and Other Periods
[$ millions]
This Month

Current
Fiscal
Year to Date

Individual income taxes ......................................... .
Corporation income taxes ....................................... .
Sodal insurance taxes and contributions:
Employment taxes and contributions (off-budget) ........... .
Employment taxes and contributions (on-budget)
. ......... .
Unemployment insurance .........
. .............. .
Other retirement contributions ...........
Excise taxes ................................
. .............. .
. .............. .
Estate and gift taxes ......................
. .............. .
Customs duties .............................
Miscellaneous receipts ........................... . .............. .

61,457
35.876

442,307
118.200

404.549
106.207

588,460
150,864

31.870
8.736
320
416
4,897
1,040
1,583
1,674

266.114
76,201
22,553
3,400
41,829
10,939
14,269
22.235

253,272
69,681
21,379
3,434
39,544
11.671
14,479
15,185

351,256
100,538
28,057
4,558
57,600
15,587
20,913
28,581

Total Receipts ................................................ .

147,868

1,018,048

939,401

1,346,414

(On·budget) ................................................ ..

115,998

751,934

686,129

995,158

(Off-budget) ............................................... ..

31,870

266,114

253,272

351,256

165
336
14
669
3,493
286
25,035
2,639
2,630
1,560
28,535
2.795
482
875
2,871
397
3,425

2.019
2.144
159
8,796
46,830
2,570
190,481
23,508
23,217
13,048
226.762
21,998
5.367
7,783
24,258
4,196
28,299

1,942
1.874
156
9,025
47,661
2,179
196,403
22,615
17,460
12,965
207,623
19.516
4.990
7.435
28,965
4,002
26.600

2,793
3,101
192
10,860
62,313
3,601
260,269
31,207
32,888
16,135
301,439
26,854
7,329
11,821
31.942
6,272
37,992

59,355
496
4,540
542
387
1.166
3,647
59
36,246

268,992
15,297
28,416
4,682
870
9,910
30,831
639
271,325

240,416
11,335
26,970
4,222
393
10.004
28,634
483
257,391

333,704
16,112
36,231
6,274
1,131
14.241
40,308
703
363,419

Classification

Comparable
Prior Period

Budget
Estimates
Full Fiscal Year 1

Budget Receipts

Budget Outlays
Legislative Branch ................................... . .......... .
The Judiciary ....
............. ..... ...
. .......... .
.. ........ ..
Executive Office of the President ............ . . .
Funds Appropriated to the President ...........
.. ......... .
.. ......... .
Department of Agriculture .......................
Department of Commerce .. . .. .. .. .. .. .. . .. .... .. ............ ..
Department of Defense-Military ............... . .............. .
Department of Defense-Civil .................. . .............. .
Department of Education ........................... .. ........ ..
Department of Energy ........................................... .
Department of Health and Human Services ................... .
Department of Housing and Urban Development .......... .
Department of the Interior
...................... .
Department of Justice ........ " ....... " .... " .................. .
Department of Labor ......... " ................................. .
Department of State ........................................ .
Department of Transportation ................................... .
Department of the Treasury:
Interest on the Public Debt .... .. ........................... .
Other .......................... ..
Department of Veterans Affairs ... .. ................... " ..... ..
Environmental Protection Agency
Ganeral Services Administration .. ................. ..." ...... .
National Aeronautics and Space Administration ............ .
Office of Personnel Management
......................... " .. .
Small Business Administration .................................. .
Social Security Administration ..... . ............................ .
Other independent agencies:
Resolution Trust Corporation ....... . ... " .............. ..
Other ............................... .
Undistributed offsetting receipts:
Interest ............ ""." .. "".
Other ............ "" .. "".

-521
-4,794

-8,060
460

3,911
2,543

-6,753
15,399

-39.948
-3,127

-91,602
-25,474

-84,870
-25,549

-91,465
-41,392

Total outlays ................................................. ..

134,296

1,137,702

1,089,296

1,538,920

(On·budget) ................................................. .

119,478

931,546

889,828

1,246,936

(Off'budget) ............................................... ..

14,818

206,156

199,468

291,984

Surplus (+) or deficit (-) ................................... .

+13,571

-119,654

-149,895

-192,506
-251,778
+59,272

(On-budget) ................................................ ..

-3,480

-179,613

-203,699

(Off'budget) ................................................ .

+17,051

+59,958

+53,804

'These flQures are based on the FY 1996 Budget. released by the Office of Management and
Budget on February 6, 1995.
Note: Details may not add to totais due to rounding.

Table 4. Receipts of the U.S. Govemment, June 1995 and Other Periods
[S mIIona]

Classlflc8tion

Receipts

RehMa
(Deduct)

Receipts

RehNa
(Deduct)

Receipts

Individual income talles:
Withheld .................................................... .
Presidential Election Campaign Fund ...................... .
Other ........................................................ .

140,901
8
123,053

Total-Individual income talles ........................ .

83,982

Corporation Income talles ..•••..•••.•••.•.•••••••••••••••••••

38,845

788

81,457

521,911

Receipts

to Date

IR.~sl
(Deduct)

Rec:eIpta

348,678
62
127,428

380,440
60
141,411

2,505

PrIor Flacel Y.r

CurNnt Flacel Y.r to Date

ThIs Month

79,804
14,743

478,188

71,819

404,549

118,200

118,823

10,418

108,207

442,307

35,878

132,943

24,483
2,583

197,296
14,710
1

214,450
14,357
-45

(0 0)

228,763

Social insurance talles and contributions:
Employment taxes and contributions:
Federal oId-age and survivors ins. trust fund:
Federal Insurance Contributions Act taxes ........... .
Self-Employment Contributions Act taxes ............ .
Deposits by States ................................... ..
Other ................................................... .

124,483
12,583

(0 0)
(0 0)

(00)
(0 0)

214,450
14,357

-45
(0 0)

27,066

212,007

14,354
1450

4,354
450

50,902
3,204

22,973
1,536

(0 0)

TotaJ-FDI trust fund ............................... .

4,804

54,107

24,509

Federal hospital insurance trust fund:
Federal Insurance Contributions Act taxes ........... .
Self-Employment Contributions Act taxes ............ .
Receipts from Railroad Retirement Board ............ .
DepoSits by States .................................... .

17,396
1999
359

7,396
999
359

66,982
5,982
359

61,748
4,869
394

(0 0)

61,748
4,869
394
(* 0)

(00)

Total-FHI trust fund ............................... .

8,754

73,323

67,011

Railroad retirement accounts:
Rail industry pension fund ........................... ..
Railroad Social Security equivalent benefit ........... .

194
-212

(O*)

194
-212

1,814
1,079

1,799
1,079

1,726
974

1,696
974

Total-Employment taxes and contributions ....... .

40,605

(00)

40,605

342,330

342,315

322,982

322,953

319
1

(00)

17,890
4,721
18

17,890
4,645
18

16,981
4,425
21
32

Total-Unemployment insurance ...................... .

327

320

22,629

22,553

21,459

Other retirement contributions:
Federal employees retirement - employee
contributions ............................................. .
Contributions for non-federal employees ................ .

408
8

408

3,332
69

3,359
76

Total-Other retirement contributions ................. .

416

3,400

3,434

Total-Social insurance talles and
contributions ....................................... .

41,348

41,341

388,359

388,289

347,878

109

347,787

Miscellaneous excise taxes2 .............................. ..
Airport and airway trust fund ............................. ..
Highway trust fund ........................................ ..
Black lung disability trust fund ............................ .

2,716

252

2,464

1,628
50

-162

1,789
50

21,795
4,111
16,824
462

1,002
21
341

20,793
4,091
16,483
462

23,339
3,760
13,032
463

699
24
327

22,640
3,737
12,704
463

Total-Ellcise talles .................................... .

4,987

4,897

43,192

1,383

41,829

40,594

1,050

39,544

Total-FOASI trust fund ........................... ..
Federal disability insurance trust fund:
Federal Insurance Contributions Act taxes ........... .
Self-Employment Contributions Act taxes ............ .
Receipts from railroad retirement account ............ .
Deposits by States ................................... ..
Other .................................................. ..

Unemployment insurance:
State taxes depoSited in Treasury ..................... ..
Federal Unemployment Tax Act taxes .................. .
Railroad unemployment taxes .......................... ..
Railroad debt repayment ................................ .

(0 0)

319
(00)

8
416

16,981
4,345
21
32
21,379

Ellcise talles:
593

593

Estate and gift talles ........................................ .

1,071

1,040

11,230

291

10,939

11,941

270

11,871

CuS10ms duties ............................................. ..

1,752

189

1,583

15,588

1,318

14,289

15,118

839

14,479

1,426
247

19,175
3,069

19,175
3,060

12,612
2,588

12,612
2,573

1,874

22,244

22,235

Miscellaneous Receipts:
Deposits of earnings by Federal Reserve banks ......... .
All other .................................................... .

1,426
248

Total -

Miscellaneous receipts ....................... .

1,875

15,200

15,185

Total -

Receipts ...................................... ..

151,440

3,572

147,888 1,115,488

97,419 1,018,048 1,023,520

84,118

939,401

Total -

On-budget .................................... ..

119,571

3,572

115,998

849,352

97,419

84,118

888,129

Total -

Off-budget ..................................... .

31,870

268,114

'In accordance with the provisions of the Social Security Act as amended, "Individual Income
Taxes Wrlhhekf' have ooen increesed and "Federal Insurance ContrIlutIon Act Taxes"
correspondingly decreased by $1.910 million to correct estimates for the quarter ending Jl.N 30,
1994. "Individual Income Taxes Other" have ooen decreased and "Self Employment Con1ributions
Act Taxes" correspondingly increased by $195 million to correct estimates for calendar year 1992
and prior.

751,934

770,248

268,114

253,272

21nc1udes 8IlIOU1tS for the windfal profits tax pu-suant to P.L. 96-223.
". No T1"III1SIICIions.

(. i

Less than $500,000.

Note: DetaIls may not add to totals due to rounding.

253,272

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods
[$ millions]

Classification

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Grosl !APPllcable ( Outlays
Outlays Receipts

Groll (APPlicable!
Outlays
Outlays Receipts

Gross !APPlicable! 0 tI
Outlays Receipts
u ays

Legislative Branch:

36
55

Senate
'-.'- ..... '- ......... .
House of Representatives ..................... .
Joint items ...............
.. ............ .
.......................... ..
Congressional Budget Office
Architect of the Capitol .....
.. .................... ..
Ubrary of Congress .
Government Printing Office:
Revolving fund (net) ........ .. ........ .
General fund appropriations ............ .
General Accounting Office .................... .
United States Tax Court ................. .
Other Legislative Branch agencies ........
. ........... .
Proprietary receipts from the public .......
. ........... .
Intrabudgetary transactions ................................. .

Total-Legislative Branch ............................... .

188

(

)

36
55

r ')

321
540

1
2

57
15
135

13
25

12
25

5
8

2
3

17
73
303
23
26

-1

-1
-1

-9

185

2,038

321
12

2,041

336

2,148

2
4

27
41
91

536

10
19

320
539
57
15
128
536

320
566
58
16
147
396

32
72
320
23
23

73
303
23
26
-10
-9

14
6

-8

2,019

1,967

2,037

1,773

2,144

1,876

27
41
91
159

29
42
85
156

219
2,685

681
3.523
2,468
57
36

319
552
58
16
140
396
32
72
320
23
23
-4
-8
1,942

The Judiciary;

Supreme Court of the United States ...................... .
Courts of Appeals, District Courts, and other judicial
services .................................................... .
Other ...................................................... ..

321
12

(

Total-The Judiciary ""'''' " ........ , ....... " ... ,' ... '

336

(* *)

)

88
4

19
2

1,771

1,874

Executive OHice of the President:
Compensation of the President and the White House
Office ....................................................... .
Office of Management and Budget ....................... ..
Other ........................................................ .

Total-Executive Office of the President

2
4
8

8
14

159

29
42

85
156

Funds Appropriated to the President:
International Security Assistance:
Foreign military loan program ........................... .
Foreign military financing program ....................... .
Economic support fund ................................... .
Peacel<eeping Operations ........................... .
Other ............................................ .
Proprietary receipts from the public
Total-International Security Assistance ............... .
International Development Assistance:
Multilateral Assistance:
Contribution to the International Development
Association ....................................... .
International organizations and programs " .......... .
Other ................................................... .
Total-Multilateral Assistance ....................... .
Agency for International Development:
Sustainable development aSSistance program ......... .
Assistance for eastern europe and the baltic States ..
Assistance for the new independent States of the
former soviet union ................................... .
Development fund for Africa .......................... ..
Operating expenses ................................... ..
Payment to the Foreign Service retirement and
disability fund ................. ..
Other .................................. .
Proprietary receipts from the public ............ .
Intrabudgetary transactions ..................... .
Total-Agency for International Development
Overseas Private Investment Corporation
Peace Corps .......................................... ..
Other ..................................................... ..
Total-International Development ASSistance
International Monetary Programs ............
. ........... .
Military Sales Programs:
Special defense acquisition fund .......... ' ........... ..
Foreign military sales trust fund ......... .
Kuwait civil reconstruction trust fund .... .
Proprietary receipts from the public ..... .
Other ................................................. .

Total-Funds Appropriated to the President ..........•

94
20
167

680
2,685
2,484

2,464

9
4

63
24

-51
172

5,915

63
24
-481
4,974

9
4

294

51
123

461

22
20
167

481
942

6,767

462

466

-466

929

5,838

743

469

10
36

277
1,490

469
277
1,490

637
128
327
1,092

112
25

263

976
263

1,025
188

624
557
363

177
488

624
557
363

384

45
168

132

-132

26
10
36

112
25

73
72
32

976

37
658

45
131
-658

189

44
46

572
-2

324

138

186

2,997

695

2,303

2,493

618

5
17
7

-13
17

36
166

200

-164

167

(' ')

166
70

58
149

389

156

233

4,761

897

233

-702

11
1,168

129
9.888

233
21
1,168

(

("')

1,150
3

2,108

219
3,523
2.468
57
36

1,439

)

(

128
9,255

669

20,018

11,222

-110
149

3,865

3,859

788

3,070

-702

-236

1
9,888

137
9,997

(

)

-1,150

143
-572
-2
1,875

)

-9,255
26
8,796

-236

234

..)

)

(

9,599

-9,599
51

11,550

9,025

51
20,575

-97
9,997

Table 5. Outlays of the U.S. Government, June 1915 and Other Periods-Continued
[$ millions]

l~a~1
Receipts

Clelllftc8t1on

Groll
OutIeys
Department of Agriculture:
Agricultural Research Service ............................... .

PrIor Fiscal Veer

Current Fiscal Veer to Date

This Month

IAppla~1
Receipts

Groll
Outleys

OutIeys

IAppla~1
Receipts

Groll
OutIeys

OutIeys

to Dete
OutIeys

541

558

541

35
37
4
41
40
36

322
331
31
375
386
546

309

326
35
355
380
511

326
35
355
380
510

66
19
29

697
1,847
544

697
1,847
92

739
1,881
1,321

739
1,881
971

-705

7,982

8,115
104
-130

15,812
204
1,614

)

16,097
104
1,022
2

-543

20,314

9,585

10,729

21,574

46
21
6

422
208
59

448

195
61

-35
45
29

1,905
676
313

2,315
354
146

-410
322
167

2,162
739
311

2,857
435

109

2,749
227
772

1,891

858
227
772

2,898
150
935

2,461

100
57

2,107
739
278
25

19,439
6,283
2,649
339

19,133
5,840
2,442
381

3,149

28,709

27,796

Other ...................................................... .

118
32
17
87

988
795
489
278

1,013
239
281
653

Total-Forest Service .................................. .

253

2,550

2,186

Other ........................................................ .
Proprietary receipts from the public ........................ .
Intrabudgetary transactions ................................. .

54
-54

393

364
-697

357

27
1,093

330
-1,093

(

Cooperative State Research Education and Extension

Service:
Cooperative state research activities .................... .
Extension Service ......................................... .

Other ...................................................... .
Animal and Plant Health Inspection Service ............... .
Food Safety and Inspection Sarvice ....................... .
Agricultural Marketing Service .............................. .
Farm Service Agency:
Salaries and expenses ................................... .
Conservation programs ................................... .
Federal crop insurance corporation fund ................ .
Commodity Credit Corporation:
Price support and related programs ................... .
National Wool Act Program ............................ .
Agricultural credit insurance fund ........................ .

407
2
121

Other ...................................................... .

(' ')

Total-Farm Service Agency .......................... .

646

Natural Resources Conservation Service:
Conservation operations .................................. .
Watershed and flood prevention operations ............. .
Other ...................................................... .
Rural Utilities Service:
Rural electrification and telephone fund ................. .
Rural development insurance fund ....................... .
Other ...................................................... .
Rural housing and Community Development Service:
Rural housing insurance fund ............................ .
Other ...................................................... .
Foreign Agricultural Service ................................. .
Food and Consumer Service:
Food stamp program ..................................... .
State child nutrition programs ............................ .
Women, infants and children programs .................. .
Other ...................................................... .
Total-Food and Consumer Service
Forest Service:
National forest system ................................... .
Forest and rangeland protection ......................... .
Forest service permanent appropriations ................ .

Total-Department of Agriculture ...................... .

19
30
1,112

(

1,189

46
21
6
395
89
41

430
45
12

321
100
57

212

3
54

(

)

5,438

1,945

)

451

1,152

29
697

)

(

350
5,509
1,498

10,303
204
116

7,358

14,216

377

-695
304
-67
437
150
935

)

3,493

61,846

15,016

46,830

62,271

14,610

47,661

33
30
29

259
248
281

249
248
281

204
197
240

192
197
240

)

160
41

1,453
327

(

)

1,413
96
99

1,438
327
53

1,401
96
73

200

1,857

1,818

1,608

1,571

)

4
-10

68
-93

-90

301

2,318

139

Department of Commerce:

33
30
29

Economic Development Administration ..................... .
Bureau of the Census ...................................... .
Promotion of Industry and Commerce ..................... .
Science and Technology:
National Oceanic and Atmospheric Administration ...... .
National Institute of Standards and Technology ........ .

Other ....................................................... .

160
41
3

Total-Science and Technology ....................... .

204

Other ........................................................ .

Proprietary receipts from the public ........................ .
Intrabudgetary transactions ................................. .
Offsetting governmental receipts ........................... .

Total-Department of Commerce ...................... .

(

)

(

266

2,713

(

)

(

)

(

142

)

2,570

(

)

(' *)

2,179

Table 5. Outlays of the U,S, Government, June 1995 and Other Periods-Continued
[$ millions]

Classification

Department of Defense-Military:
Military personnel:
Department of the Army ............. ..............
Department of the Navy ............ ,.
Department of the Air Force

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross IAPPlicable! Outlays
Receipts
Outlays

Gross lAPPlicable!
Outlays Receipts
Outlays

Gross !APPlic.8ble! Outla s
Outlays
Receipts
y

3,336
2,549
2.417

19,318
18,711
14.452

19,318
18,711
14,452

19,817
19,514
13,351

8,302

52.481

52,481

52,681

Operation and maintenance:
Department of the Army ... ...............................
Department of the Navy ... ..........................
Department of the Air Force ......... .... - .........
Defense agencies ...................................... ,

1,933
1,911
1.892
1,772

1,933
1,911
1,892
1,772

16,675
16,065
17.619
14,535

15,483
16,723
18,061
14,458

15,483
16,723
18.061
14,458

Total-Operation and maintenance .. .................

7.508

64.895

64,895

64,726

Procurement:
Department of the Army .. . . . . . . . . . . . . . . . . . , . . . . . . . . . . . .
..................
Department of the Navy ...
...............
Department of the Air Force
Defense agencies ........... .......................

543
2.046
1.438
375

5.550
16.108
15.672
2,940

5,550
16,108
15,672
2,940

6,152
19,542
17,680
3,137

4.403

40.270

40,270

46,512

ResearCh. development, test. and evaluation:
Department of the Army . . . . . . . . . . . .
Department of the Navy ............ ..............
Department of the Air Force
Defense agencies ................... ' ......................

422
614
1.067
746

422
614
1,067
746

3,785
6.514
9.381
5.977

3,785
6,514
9.381
5,977

4.263
5,808
9,631
6.270

4,263
5,808
9,631
6.270

Total-Research, development. test and evaluation ...

2.849

25,657

25,972

25.972

Military construction:
Department of the Army ......
Department of the Navy ................ ..................
, .......................
Department of the Air Force ..
........................
Defense agencies ..............

66
72
114
279

695
624
975
2.511

695
624
975
2,511

651
416
798
1,567

....................... ,

531

4,805

4.805

3,432

116
117
91
15

116
117
91
10

885
832
779
118

885
832
779
79

947
588
807
82

947
588
807
57

46
-34

4
168

154
271

906
-26

318
-131

318
-133

2,479
-261

(' OJ

("j

('OJ

("j

(0 OJ

21
1
174

(0 OJ

27
6
136

..............

Total-Military personnel

Total-Procurement

.................

Total-Military construction

Family housing:
Department of the Army ., ................................
Department of the Navy .............. ' ...................
Department of the Air Force ........... ...................
.............. ....................
Defense agencies
Revolving and management funds:
Department of the Army ..................................
Department of the Navy ................... ...............
Department of the Air Force , .............................
Defense agencies:
Defense business operations fund .............. , ......
Other ......................... ......................
Trust funds:
Department of the Army , ... ................. , ....
Department of the Navy ............................
Department of the Air Force ..............................
Defense agencies ...................... ..................
Proprietary receipts from the public:
...........
Department of the Army ............. , '
............
Department of the Navy ............ , '
...........
Department of the Air Force
...........
Defense agencies
Intrabudgetary transactions:
Department of the Army ..................................
............
Department of the Navy ..................
. . . . . . . , , .. .
Department of the Air Force
....... ...
Defense agencies .................
Offsetting govemmental receipts:
Department of the Army ... ..... ............ ............
.............
Defense agencies
,

46
-34

906
-26

(' OJ

("j

10
-129
-113
41

24.850

-10
129
113
-41
1
6
-4
5

1
6
-4
5

174
221
74
605
285

-221
-74
-605
-285
16
442
117
-140

16
442
117
-140

154
271

2,479
-266
(' OJ

11
6

16
(0 'j

136
88
124
354
204

155
484
120
-92

-88
-124
-354
-204
155
484
120
-92

-1

-2

-6

(' OJ

(0 OJ

(' .)

("j

(. OJ

(0 OJ

-184

25.035

1.231

190.481

824

198.403

.............

(* ')

,.,.

Total-Department of Defense-MIlitary

191.712

199.227

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
[S millions]
Current Fiscal Year to Date

T1IIs MamtI
Claulflcatlon
Gross tAppilcablel Outlays
Outlays Receipts

Gross IAppilcable
OutlaY' ReceiptS

OutlaY'

PrIor Fiscal Year to Date
Gross IApPllcabie' Outlay.
Outlays Receipts

Department of Oetense-Clvll
Corps of Engineers:
Construction, general ..................................... .
Operation and maintenance, general ..................... .
Other ...................................................... .
Proprietary receipts from the public ..................... .
............................ .

278

Military retirement:
Payment to military retirement fund ......................
Military retirement fund ....................................
Intrabudgetary transactiOns ................................
Education benefits ...........................................

2,368

Total-Corps of Engineers

Other .........................................................

764
999
1,029

79
105
94
-16

263

2,792

79
105
94

2
8

2,368

(' ')

2
8

11,470
20,703
-11,470
68
61

665
794
1,175

103

764
999
1,029
-103

103

2,688

2,634

11,470
20,703
-11,470
68
57

11,908
19,932
-11,908
131
57

127

665
794
1,175
-127

127

2,508

11,908
19,932
-11,908
131
53

Proprietary receipts from the public......................... ========1===-=1=======9===-=9=======8=======-8

T~~0e~~t~~~se-CIvIl
Depa~t

•••••••••••••••••••

==~~m====1=7==2~~=9==2=3~~=~===11=5==2=3=~=8==2=2=3=~===13=9==2=2=~=15

of Education:

Office of Elementary and Secondary Education:
Education for the disadvantaged ......................... .
Impact aid ................................................. .
School improvement programs ........................... .

Other .................................................... '"
Total-Office of Elementary and Secondary
Education .............................................. .

728
56
167
23

5,485
708
1,109
100

5,459
725
1,158
68

974

7,402

7,409

166

169

307
201
12
182

2,494

1,n1

108
1,208

2,423
1,714
96
1,087

-2

14
5,308
3,054
597
156

-39
5.308
3,054
597
156
426

1
5,482
-2.149
549
156
72

-38
5,482
-2,149
549
156
72

9,501

4.111

4,072

323
286

306
336
-74

120

323
286
-120

128

23,217

17,619

159

17,460

Office of Bilingual Education and Minority Languages
Affairs ...................................................... .
Office of Special Education and Rehabilitative ServIces:
Special education ......................................... .
Rehabilitation services and disability research ........... .
Special institutions for persons with disabilities ......... .
Office of Vocational and Adult Education ................. .

Office of Postsecondary Education:

College housing loans .................................... .
Student financial assistance .............................. .
Federal family education loans ........................... .
Higher education .......................................... .
Howard University ........................................ .
Other ...................................................... .

271
454
75
15
59

Total-Office of Postsecondary Education ............ .

874

Office of Educational Research and Improvement ........ .
Departmental management ................................. .
Proprietary receipts from the public ........................ .

33
40

Total-Department of Education ...................... ..

2,842

271
454
75
15
59

426

871

9,555
306
336

33
40
-10

2,630

23,345

1,022

1.022

9.011

9,011

8.822

95
285
13
37
58
18

1.050
2,429
325
487
158

1.050
2.429
86
325
487
158

1.062
2.284
264
308
425
213

Department of Energy:
Atomic

energy

defense activitieS ........................... .

Energy programs:
General science and research activities ................. .
Energy supply, RandO activities ....................... .
Uranium supply and enrichment activities ............... .
Fossil energy research and development ................ .
Energy oonservatlon ...................................... .
Strategic petroleum reserve .............................. .
Clean coal technology .................................... .
Nuclear waste disposal fund ..............................
Other .......................................................

24
103

(..)

24
103

252
756

252
755

209
664

209
663

Total-Energy programs ................................

632

(' ')

632

5,545

5,544

5,429

5,427

Power Marketing Administration. ..... ........ .... ...... .....
Departmental administration .,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proprietary receipts from the public .......... ..... ..... .....

122
32

129

1,283
350

1,262

-3

-206
350
-1,282
-361
-9

1,294
328

Intrabudgetary transacttons ..................................

-7
32
-96
-3

32
328
-1.269
-266
-109

Offsetting governmental receipts ............................

96
(..)

(..)

1,489
1,282

-361
9

1.269
-266
109

~~Department ~ ~ •••••••••••••••••••••••••••• =~1,~~~==~~~=~1~,~~=~1~5~~~28~=~~~7~~=~13~,~~==1~5;~~0~7==~~64;1~==12=,~~5
10

Table 5, Outlays of the U,S, Government, June 1995 Bnd Other Periods-Continued
[$ mlillonl]
Ttli. Mon1h

Current FIICeI Year to Date

Clalllitication
Gro.. !Appllcllblej
Outlay.
Receipts OutiaYI

Groll !APPIiC8ble
Outlay. Receipts

J Outlays

Prior Fiscal Year to Date
Gross !APPlicable! 0 tI
u ays
Outlays Receipts

Department of Health and Human Service.:
Public Health Service:
Food and Drug Administration ........... . .............. .
Health Resources and Services Administration .......... .
Indian Health Services .................................... .
Centers for Disease Control and Prevention ............ .
National Institutes of Health ............................. ..
Substance Abuse and Mental Health Services
Administration ............................................ .
Agency for Health Care Policy and Research ........... .
Assistant secretary for health
.................... ..

(' ')

70
238
175
187
951

622
1.871
1,587
1,361
8,129

226
-1
48

1,813
81
211

1,893

15.675

8.277
4,442

8,277
4,442

11.357
82

618
1,871
1,587
1,361
8.129

574
1.838
1,296
1,109
7.734

1,813
81
211

1,815
84
190

15.672

14.640

66,999
36,015

66.999
36,015

61,539
30,996

11,357
82

84.758
926

84,758
926

75,246
907

75.246
907

11,440

11.440

85.685

76,152

5.641
144

5,841
144

46.586
1.266

42.319
1.262

42,319
1,262

5.985

5,985

47.852

43,581

30.168

236,597

236.597

212.277

1.186

12.863
1.245
342

12.393
1.935
280

62
181

708
324

612
626

295

87
220
295

704
2.132
3,720

704
2,132
3,720

613
2.073
3,269

613
2.073
3.269

248
5

2,397
20

2,281

(0 0)

(' .)

Total-Administration for children and families ....... .

2,443

2.443

24,454

24,082

24.082

Administration on aging ..................................... .
Departmental management ................................ ..
Proprietary receipts from the public ....................... ..
Intrabudgetary transactions:
Payments for health insurance for the aged:
Federal hospital insurance trust fund .. , .............. .
Federal supplementary medical Insurance trust fund ..
Payments for tax and other credits:
Federal hospital insurance trust fund ................. .
Other .................................................... .

102
137

102
137
-1.766

706
350

706
350
-15,001

642
185

642
185
-13.203

-3,890

-32.063

-29,296

-29.296

-552

-3,953

-1,700

28,535

241.767

226,762

220.829

Total-PubliC Health Service
Health Care Financing Administration:
Grants to States for Medicaid ........................... .
Payments to health care trust funds ................... ..
Federal hOSpital insurance trust fund:
Benefit payments '" ................................... .
Administrative expenses ............................... ..
Interest on normalized tax transfers .................. .
Total-FHI trust fund
Federal supplementary medical insurance trust fund:
. ......................... ..
Benefit payments .........
Administrative expenses ..
. ......................... ..
Total-FSMI trust fund
Other
Total-Health Care Financing Administration .......... .
Administration for children and families:
Family support payments to States ..................... .
Low income home energy assistance ................... .
Refugee and entrant assistance ........................ ..
Payments to States for the job opportunitles and basiC
skills training program ............................. , .... ..
State legalization impact assistance grants ............. .
Payments to States for the child care and development
block grant
........................................... ..
Social services block grant ...
.. ................ ..
Children and families services programs ............... , .
Payments to States for foster care and adoption
assistance ................................................ .
Other ........................
.. ..................... .

Total-Department of Health and Human Servlcea

238
175
187
951

226
-1

48
1.894

(' ')

181
87

220

1.766

30,301

1,766

15.001

15.005

571
1,838
1,296
1.109
7.734
1,815
84
190

13.203

13,206

14.637

207,623

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
($ mIllIonSI

1~a4
Receipts

Gross

Outlays
Department of Housing end Urban Development:
Housing programs:
Public enterprise funds ................................... .
Credit accounts:
Federal housing administration fund ................... .
Housing for the eIder1y or handicapped fund ......... .
Other .................................................... .
Rent supplement payments .............................. .
Homeownership assistance ............................... .
Rental housing assistance ................................ .
Rental housing development grants ..................... .
Low-rent public housing .................................. .
Public housing grants .................................... .
College housing grants ................................... .
Lower income housing assistance ....................... .
Section 8 contract renewals ............................. .

Prior Fiscal Veer to Dete

Current Fiscal Veer to Dete

This Month
CleuHlcetion

Outlays

Gross

Gross lApplablei Outleys

OutIeys

Outleys

Receipts

\Applable\ 0utIa
Receipts
ys

133

116

-90
-18
62
12
10
56

-60
47

-29
-65
62
12
10
56

4.909
522

5.248
488

-339
34
445
119
89
489

4.446
690
333
57
80
494

4.836
527

-391
162
333
57

350

350
2
944

445

119
89
489

(

)

568
2.766
14
7.569
3.900
132

592
2.448
14
7.888
2.533
49

(

)

494
5
592

2
944
633

633

Other ...................................................... .

568
2.766
14
7.569
3.900
132

Total-Housing programs .............................. .

2,037

-7

2.044

21,655

5.830

15.825

19.743

5,461

14.282

-1

261

200

294

199

238
23

2.028
131
19

1.919
123

2.238

2.336

Public and Indian Housing programs:
Low-rent public housing-Loans and other expenses ...
Payments for operation of low-income housing
projects .................................................. .
Community Partnerships Against Crime ................. .
Other ...................................................... .

(••)

2.448

14
7,888
2,533

1,919
123

2,028
131
19

265

2,438

(

)

-1

-30

250

572

-321

760

1.119

-359

Total-Government National Mortgage Association ... .

-30

250

572

-322

760

1,120

-360

Community Planning and Development:
Community Development Grants ......................... .
Home investment partnerships program ................. .
Other ...................................................... .

392
115
27

3,184

392
115
19

241

3.184
863
154

2,619
527
214

2.619
527
119

Total-Community Planning and Development ........ .

534

526

4,288

4.202

3,360

3,265

Management and Administration ........................... .
Other ........................................................ .
Proprietary receipts from the public ........................ .
Offsetting govemmental receipts ........................... .

25
4

356
42
338

356
42
-338

364

-5

7,031

21,998

26,593

493

176

Total-Public and Indian Housing programs
Government National Mortgage Association:
Management and liquidating functions fund ............. .
Guarantees of mortgage-backed securities .............. .

Total-Department of Housing end Urban
Development ••••..••••.....•...•.•.••.•.•....•..•••.••...

238
23
4

267

(

)

(

)

(

)

200
(

)

863

-37

)

(

199

2,137

364
30

30
197
5

-197
-5

7,078

19,518

2,795

29,030

22
45

541
291
507

567

176
567

2,883

Department of the Interior:
Land and minerals management:
Bureau of Land Management:
Management of lands and resources ................. .
Other .................................................... .
Minerals Management Service ........................... .
Office of Surface Mining Reclamation and
Enforcement ............................................. .

230

225

Total-Land and minerals management ............... .

140

1.568

1,568

1,461

1.461

Water and science:
Bureau of Reclamation:
Construction program .................................. .
Operation and maintenance ............................ .

5
17

134

226
200
347
20
448
146

226
200
233
20

204
186
166
26
418
109

153

1,109

1.387
917

917

72
1.075

2,063

2.063

..2246

204
186
300
26
418
129

Total-Water and science ............................. .

104

1,262

Fish and wildlife and parks:
United States Fish and Wildlife Service ................. .
National Biological Survey ................................ .
National Park Service ..................................... .

97
18
128

937
1.138

937
104
1.138

Total-Fish and wildlife and parks .................... .

243

2.179

Other .................................................... .
Central utah project ...................................... .
United States Geological Survey ......................... .
Bureau of Mines .......................................... .

(

)

17
4

..46

(

)

104

114

448

125

135

1.252

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
($ millions)

This Month
Classification

Department of the Interior:-Continued
Bureau of Indian Affairs:
Operation of Indian programs
Indian tribal funds ............... .
Other........
. ......... .
Total-Bureau of Indian Affairs
Territorial and international affairs
Departmental offices
Proprietary receipts from the public .
Intrabudgetary transactions
Offsetting governmental receipts
Total-Depanment of the Interior
Department of Justice:
Legal activities ...................... .
Federal Bureau of Investigation
Drug Enforcement Administration
Immigration and Naturalization Service
Federal Prison System .......... .
Office of Justice Programs ...... .
Other
Intrabudgetary transactions .....
Offsetting govemmental receipts
Total-Department of Justice
Department of LabOr:
Employment and Training Administration:
Training and employment services ..................... ..
Community Service Employment for Older Americans .. .
Federal unemployment benefits and allowances ...... .
State unemployment insurance and employment service
operations ................................................ .
Payments to the unemployment trust fund .......... .
Advances to the unemployment trust fund and other
funds
.......... .
Unemployment trust fund:
Federal·State unemployment insurance:
State unemployment benefits ....... .
State administrative expenses ... .
Federal administrative expenses
Veterans employment and training .................. .
Repayment of advances from the general fund .... .
Railroad unemployment insurance ............ .
Other ........................... .
Total-Unemployment trust fund
Other .......................... .
Total-Employment and Training Administration .. .
Pension Benefit Guaranty Corporation ............ . .. .
Employment Standards Administration:
Salaries and expenses
Special benefits .... . .......... .
Black lung disability trust fund
Other.........
. ......... .
Occupational Safety and Health Administration
Bureau of Labor Statistics
Other
........... .
Proprietary receipts from the public .
Intrabudgetary transactions
Total-Depanment of Labor ............................ .

Gross \APPIiCable
Outlays
Receipts

Outlays

Current Fiscal Yaar to Date

Prior Fiscal Year to Date

Gross -[APPlicabl1
Outlays Receipts
Outlays

Gross jAPPlicablel 0 tI
Outlays
Receipts
u ays

28
62

1,088
216
342

186

1,645

-4

-4
-131
-41

-209

186

(

)

131
-41

634
194
156
66
159
247

152

-7

1,088
216
334

1,020
211
349

1,020
211
342

1,637

1.580

1,573

377

74
-1,364
-209

228
105

1,364

482

6,896

194
156
66
159
237
77
45

1,916
1,503
576
1,219
2,097
523
584
-45

-1

1,473
-219

228
105
-1,473
-219

-3

1,529

5,367

6,606

1,872
1,529
568
1,117
1,782
658
427
-27

615

1,976
1,503
516
1,279
2,002
523
584
-45
-615

710

7,783

7,926

2,964

1,615

4,990

404

1,872
1,529
568
1,117
1,694
658
427
-27
-404

492

7,435

-54

875

8,493

466
39
18

3,293
299
157

3,293
157

2,964
292
117

207

619

2,547

16,591
2,388

16,591
2,388
161
138

21,837
2,300
142
139

21,837
2,300

938

299

292
117

1,720
253
11
18

4
2

49
14

52
15

2,008

19,341

24,485

2,568

23,840

30,679

1,056

-147

916

181
155
432
104
221
206
352

172
182
451
97
219
205

21
150
49

10
24
24
38

(. 0)

-69
2,889

161
138
49

181

150

155

49
10
24
24

432
104
221
206

352

1,204

(* *)

-69

-1.079

2,871

25,467

1,209

142
139

1,188

172
182
451
97
219
205
357

357

-5

-1,079

-3,121

24,258

30,156

-273

-2
-3,121

1,191

28,965

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Contlnued
[t "..,.]

Thll MontI!
Cilulftcetlon
Groaa
OutIaya

I~I
Rec:eIpta

0ud8yI

CunwIt FIeceI YHf to Date

Prtor FIIC8I Year to Dlte

IIAppliceble
Recelpla

Groal IApPllcablel OutleYI
OutIeys Receipts

GIaIa

OutIaya

Department of State:
Administration of Foreign Affairs:
Diplomatic and consular programs ....................... .
Acquisition and maintenance of buildings abroad ....... .
Payment to Foreign Service retirement and disability
fund ...................................................... .
Foreign Service retirement and disability fund .......... .
Other ...............................•.......................

170
55

170

1.191
399

1.249
422

129
38
33

38
33

335
366

129
335
366

125
301
208

Total-Administration of Foreign Affairs .............. .

295

2.421

2.305

Intematlonal organizations and conferences ............... .
Migration and refugee assistance .......................... .
Other ........................................................ .
Proprietary receipts from the public ........................ .
Intrabudgetary transactions ................................. .
Offsetting govemmental receipts ........................... .

23
66
13

1.334
526
97

1.183
558
132

(* *)

(

)

-182

-176

397

317

4,111

4,196

4,002

Federal Highway Administration:
Highway trust fund:
Federal-aid highways ................................... .
Other .................................................... .
Other programs ........................................... .

1.810
19
18

13.567
138
145

12.847
106
163

Total-Federal Highway Administration ................ .

1.847

13.850

13.117

National Highway Traffic Safety Administration ............ .

201

191

Federal Railroad Administration:
Grants to National Railroad Passenger Corporation .... .
Other ...................................................... .

(* *)

708
170

708
162

425
280

425
270

Total-Federal Railroad Administration ................ .

878

870

705

696

Federal Transit Administration:
Formula grants ............................................ .
Discretionary grants ..................................... ..
Other ...................................................... .

204
187
39

643
1.519
1.245

96
1.196
1.573

429

3.407

2.865

Federal Aviation Administration:
Operations ., .............................................. .

123

1.417

1,417

1.914

Airport and airway trust fund:
Grants-in-aid for airports ............................... .
Facilities and equipment .............................. ..
Research. engineering and development .............. .
Operations .............................................. .

124
213
18
204

1,288
1.962
169
1.933

1.136
1.628
156
1.625

1.136
1.628
156
1,625

559

5.352

4.546

-1

Total-Department of State .•............................
Department of Transportation:

Total-Federal Transit Administration

Total-Airport and airway trust fund

............... .

559

5.352

)

-1

(* *)

-2

682

6.770

6.768

6,460

6.459

Coast Guard:
Operating expenses ..................................... ..
Acquisition. construction. and improvements ............ .
Retired pay ............................................... .
Other ...................................................... .

258
28
42
29

1.898
191

)

223

1.898
191
394
219

1.821
248
373
260

1.821
248

(

258
28
42
28

256

Total-Coast Guard .................................... .

357

(* *)

357

2.707

2.703

2.701

2.697

Maritime Administration ..................................... .
Other ........................................................ .
Proprietary receipts from the public ........................ .
Intrabudgetary transactions ................................. .
Offsetting govemmental receipts ........................... .

65
19

5
1
3

60
18

524
261

191

332

642

-3

254

258

-6

271
5
7

371

Total-Department of Transportation ................. ..

3,443

Other ...................................................... .
Total-Federal Aviation Administration

(

394

(

-6

3,425

)

21,517

(* *)

-79

291

28,299

373

10
26,951

253

-7

10
-51

350

26,600

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
[$ millions]

Classification

Department of the Treasury:
Departmental offices:
Exchange stabilization fund
Other ........ " ...............

.......................
.. . .. . , . . . .

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Groll IAPPlicablel
Outlays
Receipts
Outlays

GrOll IAPPlicablel
Outlays Receipts
Outlays

Gross IApplic.ableI Outla s
Outlays
Receipts
y

-348
44

-350
44

-2,192
161

262
11
7

-2,208
161

-1,054
131

262
11
7

175
1,751
742
777
70

167
1,751
407
2
116

293

3,516

2,444

2.444

553

338

337

26
15
120
-12
-2
47

277
150
1,315
-12
-112
239

282
148
1,421
-9
21
220

149
333
145

1,345
3,064
1,161

1,362
2.791
912

1,362
2,791
912

437

14,689

191
-1

2,220
1

(' .)

2,220
1

10,768
745
1,922
-2

Total-Internal Revenue Service ........................

1,253

,22,480

r .)

22,480

18.498

18,498

................................
. . .. . . . .. . . . .. . ... . .. .. . .. .

48
29
15

48
27
13

396
302
123

201
83

396
101
41

367
281
134

19,716
39,639

173,941
95.051

173,941
95,051

153,840
86,576

59,355

268,992

240,416

7
-389

41
3,260

41
-3,260

389

-1,124
-74

-7,380
785

-7,380
-785

-8,668

74
469

59,851

288,633

4,345

284,289

255,009

. . . . , . . .. , .. .

Financial Management Service:
Salaries and expenses
.... , ' ... , .....
Payment to the Resolution Funding Corporation
Claims, judgements, and relief acts ..................... ,
Net interest paid to loan guarantee financing accounts
, ..........
Other ........ , .................... .......... ,
Total-Financial Management Service

.......

Federal Financing Bank ............................
Bureau of Alcohol, Tobacco and Firearms:
Salaries and expenses ................ ,.
Intemal revenue collections for Puerto Rico ..............
United States Customs Service ........ , ....................
Bureau of Engraving and Printing ...........................
. ... , ... , ......
United States Mint ..................
Bureau of the Public Debt
.............. , ... , ...........
Internal Revenue Service:
Processing, assistance, and management ................
Tax law enforcement ......................................
Information systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment where earned income credit exceeds liability
for tax ........................................ , ...........
Health insurance supplement to earned income credit ..
Refunding intemal revenue collections, interest .........
Other ....
. ........... .....................

United States Secret Service
Comptroller of the Currency
Office of Thrift Supervison

Interest on the public debt:
Public issues (accrual baSiS) ..............................
Special issues (cash basis) ...... .................
Total-Interest on the public debt

.............

Other ....................................
Proprietary receipts from the public .......
Receipts from off-budget federal entities ...................
Intrabudgetary transactions ..................................
Offsetting govemmental receipts ............................
Total-Department of the Treasury

.....................

2
2

7
-1,124
60,320

227
89

-1,063
131

367
54
45

2,349

42
-2,349

584

-8,668
-584

3,258

251,752

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
[$ mHlIona]
This Month

Current FlICeI Year to Oete

Prior FlICeI Veer to Dele

Groll IAppliceblel OutIeys
OutIeys Rec:eIpII

Groll IAppilceblel OutIeys
OutIeys Receipts

Groll /APPllcebiel Outie s
Outieys RecelplS
y

Clesslficatlon

Department of Veterens AHelrs:
Veterans Health Administration:
Medical care .............................................. .
Other ...................................................... .

Veterans Benefits Administration:
Public enterprise funds:
Guaranty and indemnity fund .......................... .
Loan guaranty revolving fund .......................... .
Other .................................................... .
Compensetion and pensions ............................. .
Readjustment benefits .................................... .
Post-Vietnam era veterans education account .......... .
Insurance funds:
National service life .................................... .
United States government life ......................... .
Veterans special life .................................... .
Other ...................................................... .

1,466
60

41
12
2,904

45
38
33

1,466
37

11,947
524

713
355
133
13,368
977
49

3
-20
2,904

106

108
2
11
9

108
2

Total-Veterans Benefits Administration .............. .

3,285

Construction ................................................. .
Departmental administration ................................ .
Proprietary receipts from the public:
National service life ....................................... .
United States government life ........................... .
Other ...................................................... .
Intrabudgetary transactions ................................. .

50
-15

Total-Department of Veterens AHeirs

75
190

393
308
107

11,947
319

11,208
512

320
47
26
13,368
977
49

1,164
453
285
12,854
906
65

940
14
-61
33

926
14
99

169

940
14
109
33

3,095

16,689

977

15,712

50
-15

467

(* *)

738

467
738

-64

201

541
357
192

11,208
311

624
86
94
12,854
906
65

169

926
14
-70

16,766

1,268

15,498

498
739

(* *)

498
739
-259

(* *)

-22

204

-204

259

(* *)

-70

547

-547

996

-996
-28

2,725

26,970

(* *)

-17

305

4,540

30,349

(* *)

70
78
217
146
45

656
1,026
1,780
1,086
598

-12

-2

542

4,896

336
38
14

398
228
243

(* *)

4,845

204

1,933

-17

-28

28,416

29,695

656
1.026
1,780
1,086
597
-206
-250

627
958
1,444
1,030
575

Environmental Protection Agency:
Program and research operations .......................... .
Abatement, control, and compliance ....................... .
Water infrastructure financing .............................. .
Hazardous substance superfund ........................... .
Other ........................................................ .

70
78
217
146
45

Proprietary receipts from the public ........................ .
Intrabudgetary transactions ................................. .
Offsetting governmental receipts ........................... .

Total-Environmental Protection Agency ..••..•••.•••.•

(* *)

206
-250

556

3
153

-250

-8

214

4,682

4,385

398
228
243

197
36
163

627
958
1,444
1,030
573
-153
-250

-7

163

4,222

Generel Services Administration:
Real property activities ..................................... .
Personal property activities ................................. .
Other ........................................................ .

336
38
14

Proprietary receipts from the public ........................ .

Total-Generel Services Administration ••••••....•.••••

387

(* *)

387

870

2,239
1,619
1,441
2,966
1,300
239
95
11

(* *)

870

396

197
36
163

-3

393

Netlonel Aeroneutics end Space Admlnistrellon:

479

329

164
160
3

Other ........................................................ .

29
1
1

2.239
1.619
1.441
2,966
1,300
239
95
11

Total-Netlonel Aeroneutics end Space
Administration .......................................... ..

1,166

9,910

334

2,992

3,253

3,253
126
-60
-2

28,696
1,335
11,695

Human space flight ......................................... .
Science, aeronautics and technology ....................... .
Mission support ............................................. .
Research and development ................................. .
Space flight, control and data communications ............ .
Construction of facilities ................................... ..
Research and program management ....................... .

4,866
3,611
301
1,213

4,866
3,611
301
1,213
12

9,910

10,004

2,992

2,874

28,696
-593
-289
50

27,039
1,024
11,367
110

-3

-25

3,847

44,743

30,831

42,389

Office of Personnel Menagement
Government payment for annuitants, employees health
and life insurance benefits ................................ .
Payment to civil service retirement and disability fund .... .
Civil service ratirement and disability fund ................. .
Employees life insurance fund .............................. .
Employees and retired employees health benefits fund ... .
Other ....................................................... ..

265

1,340

139
1,400

-2

1,928
11,984

Intrabudgetary transactions:
Civil service retirement and disability fund:
General fund contributions ............................. .
Other .................................................... .

-3

Totel-Offlce of Personnel Manegement .............. .

5,186

1,539

13,912

1,937
11,818

27,039
-913
-450
110

13,755

28,634

-25

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
[$ millions]

Classification

Small Business Administration:
Public enterprise funds:
Business loan fund
Disaster loan fund
Other ..... .
Other ... .
Total-Small Business Administration
Social Security Administration:
Payments to Social Security trust funds .....
Special benefits for disabled coal miners
Supplemental security income program ...... .
Office of the Inspector General .............. .
Federal Old-age and survivors insurance trust fund (offbudget):
Benefit payments ......... .
Administrative expenses ...... .
Payment to railroad retirement account ....... .
Other
.............. .
Total-FOASI trust fund
Federal disability insurance trust fund (off-budget):
Benefit payments .............................. .
Administrative expenses ................... .
Payment to railroad retirement account
Other
............. .
Total-FDI trust fund
Proprietary receipts from the public:
On-budget .............. ..
Off-budget
Intrabudgetary transactions:
On-budget ................... .
Off-budget' .................. .

Total-Social Security Administration
Other independent agencies:
Board for International Broadcasting ....................... .
Corporation for National and Community Service ......... .
Corporation for Public Broadcasting
............... .
District of Columbia:
Federal payment ... . ..................... .
Other .............................................. .
Equal Employment Opportunity Commission
Export-Import Bank of the United States ........... .
Federal Communications Commission .............. .

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross IAPPlicablel Outlays
Outlays Receipts

Gross IAPPllcablel 0 tI
Outlays Receipts
u ays

Gross IAPPllcablel 0 tI
Outlays
Receipts
u ays

53
29
1
37

43
16
2

-1

(")

120

10
13

307
177
11

311
384
15
426

1,136

19
59
4.204

408
175
17
417

308
216
10

100
-41

207
3
425

C')

417

496

639

1,017

534

483

3.871
542
19.543

4.152
584
18.082

24.281
146
4.052

215.657
1.303
4.052

206,459
1.209
3.420

206.459
1.209
3.420

28,479

28.479

221.012

211.087

3,431
77
68

3.431
77
68

29.854
796
68

27.312
735
106

3.576

30.717

28.152

72
1

-72

484

-484

-1

-9

-17

-3.870

36,248

271,817

29
40

182
310
286

(")

-17
36,321

508
10

-508
-10
-4,147

-3.870

-4.147

271,325

257,910

182
310
286

144
146
275

12
1
973
38

714
-7
178
68
88

698
1
170
838
105

9.159
1,013
955

-7.437
-925
673
4

2.227
19
1.670
3

8,565
557
2,523

(. 'J

1.722
88
1.628
4

-6,338
-537
-853
3

714
5
179
1.041
127

492

518

257,391
144
146
275
698

21
203
20

C·)
299
5

(•• )
21
-96
15

Federal Deposit Insurance Corporation:
Bank insurance fund ............... .
Savings association insurance fund
FSLlC resolution fund ............ .
Affordable housing and bank enterprise

114
54
18

2,309
435
288

-2.195
-381
-270

Total-Federal Deposit Insurance Corporation

185

3.031

-2.846

3,441

11.126

-7.685

3.920

11,645

-7,725

132
148
31
26
8
3
34
8

100
148
31
23

432
1,773
215
229
63
28
329
164

266

166
1.773
215
212
63
28
329
163

309
2,807
157
195
65
31
297
163

306

3
2.807
157
195
65
31
297
163

12
5

266
5
4

-254

-19
54
32

223
54
48

Federal Emergency Management Agency:
Public enterprise funds
Disaster relief
............................. ..
Emergency management planning and assistance ."
Other
..................................... .
Federal Trade Commission ...... .
Interstate Commerce Commission ................ .
Legal Services Corporation ...................... ..
National Archives and Records Administration .... .
National Credit Union Administration:
Credit union share insurance fund
Central liquidity facility
Other
............ ..

(")

(' .)

3
34
8

-27
6

-4

(")

("J

-8

-11

(")

169
-773

1,610
28

(

..)

-242
(>0)

-17

Table 5. Outlays of the U.S. Government, June 1995 and Other Periods-Continued
[$ millions]

Classification

1"PPk:a*1
Receipts

Gross
Outlays
Other independent agencies:-Continued
National Endowment for the Arts .......................... .
National Endowment for the Humanities ................... .
National Labor Relations Board ............................ .
National Science Foundation ................................ .
Nuclear Regulatory Commission
......................... .
Panama Canal Commission ................................. .
Postal Service:
Public enterprise funds (off-budget) ...................... .
Payment to the Postal Service fund ..................... .
Railroad Retirement Board:
Federal windfall subsidy .................................. .
Federal payments to the railroad retirement accounts .. ,
Rail industry penSion fund:
Benefit payments ....................................... .
Advances from FOASDI fund .......................... .
OASDI certifications .................................... .
Administrative expenses ................................ .
Interest on refunds of taxes ........................... .
Other .................................................... .
Intrabudgetary transactions:
Payments from other funds to the railroad
retirement trust funds .............................. .
Other ................................................. .
Supplemental annuity pension fund:
Benefit payments ....................................... .
Interest on refund of taxes ............................ .
Railroad Social Security equivalent benefit account:
Benefit payments ....................................... .
Interest on refund of taxes ............................ .
Other ...................................................... .

13
15
12
260
41
48

3
50

4,770

24,584

Prior Flscel Veer to Date

Current Flscel V. .r to Date

This Month
Outlays

13
15
12
260
37

-2

1"PPk:a*j
Receipts

Gro..
OutIeys

131
123
128
1,969
396
416

384
465
41,261

OutIeys

Gross
OutIeys

IApplk:ablel
Receipts

OutIeys

131
123
128
1,969
12
-49

129

120
127
1,876
397

120
346

389

421

-3,972
107

35,037
107

37,116

127
1,876
51
-32
-2,079
107

186

37,289
107
190
172

190
172

204

2,112
-824
824
54
16

2,124
-814
814
54
15

2,124
-814
814
54
15
5

(* *)

235
-92
92
7

(* *)

2,112
-824
824
54
16
5

-4,120
227

-4,120
55

-3,526
194

r *)

(* *).

408

3,671

3,590

(* *)
(* *)

(* *)

(* *)
1

Total-Railroad Retirement Board ..................... .

-3,213

2,226

2,773

Resolution Trust Corporation ............................... .
Securities and Exchange Commission ..................... .
Smithsonian Institution ...................................... .
Tennessee Valley Authority ................................. .
United States Information Agency .......................... .
Other ........................................................ .

149

3,959
89
317
6,971
830
2,080

12,039

7,291
872
1,847

6,298

1,572

-8,080
89
317
1,217
830
508

14,859
41

143

-521
4
36
139
84
137

1,034

3,911
41
291
992
872
813

9,340

-5,315

88,580

74,181

-7,821

78,548

70,092

8,454

(* *)

Total-Other independent agencies

36
631
84
279
4,025

Undistributed offsetting receipts:
Other interest ............................................... .
Employer share, employee retirement:
Legislative Branch:
United States Tax Court:
Tax court judges survivors annuity fund ........... .
The Judiciary:
Judicial survivors annuity fund ......................... .
Department of Defense-Civil:
Military retirement fund ................................ .
Department of Health and Human Services:
Federal hospital insurance trust fund:
Federal employer contributions ...................... .
Postal Service employer contributions .............. .
Payments for military service credits ............... .
Department of State:
Foreign Service retirement and disability fund ........ .
Office of Personnel Management:
Civil service retirement and disability fund ............ .
Social Security administration (off-budget):
Federal Old-age and survivors insurance trust fund:
Federal employer contributions ...................... .
Payments for military service credits ............... .
Federal disability insurance trust fund:
Federal employer contributions ...................... .
Payments for military service credits ............... .
Independent agencies:
Court of veterans appeals retirement fund ........... .
Total-Employer share, employee retirement ......... .

670

492

5,754
(* *)

10,948

291

r *)

(* *)

-1,030

-9,187

-9,602

-152
-48

-1,366
-419

-1,343
-395

-9

-81

-82

-920

-7,365

-7,326

-456

-3,872
17

-4,056

-81

-692
-17

-436

(* *)

2,696

-22,981

-23,241

Table 5. Outlays of the U.S. Govemment, June 1995 and Other Periods-Continued
[$ millions]

Classification

This Month

Current Fiscal Year to Date

Prior Fiscal Yeer to Date

Gross /APPlicable /
Outlays Receipts
Outlays

Gross /APPlicablel
Outlays Receipts Outlays

Gross /APPlicabiel
Outlays Receipts
Outlays

Undistributed offsetting recelpts:-Contlnued
Interest received by trust funds:
The Judiciary:
Judicial survivors annuity fund ......................... .
Department of Defense-Civil:
Corps of Engineers .................................... .
Military retirement fund ................................ .
Education benefits fund ................................ .
Soldiers' and airmen's home permanent fund ........ .

-7

..63

( )
(" ")

("")
("")

Other .................................................... .
Department of Health and Human Services:
Federal hospital insurance trust fund ................. .
Federal supplementary medical insurance trust fund .,
Department of Labor:
Unemployment trust fund .............................. .
Department of State:
Foreign Service retirement and disability fund
Department of Transportation:
Highway trust fund ........................... .
Airport and airway trust fund ................ .
Oil Spill liability trust fund .............................. .
Department of Veterans Affairs:
National service life insurance fund ................... .
United States government life Insurance Fund ....... .
Environmental Protection Agency ........................ .
National Aeronautics and Space Administration ......... .
Environmental Protection Agency ........................ .
Civil service retirement and disability fund ............ .
Social Security administration (off-budget):
Federal old-age and survivors insurance trust fund .. ,
Federal disability insurance trust fund ................. .
Independent agencies:
Railroad Retirement Board ............................. .

-14

-13

-21
-10.727
-35

-13
-10,147
-41

-13
-10.147
-41

-1

-21
-10.727
-35
-6
-1

-6

-8

-1

-5.407
-811

-5,407
-811

-10.814
-1.795

-10.560
-2.058

-1.240

-2.683

-2,683

-2.466

-311

-611

-570

-490
-332

-1.116
-742

(0 ")

-1,372
-821

(>0)

-1.372
-821

-6

-1.116
-742
-6

-7

-531

-531
-4

-1.071

-9
-2

-1.078
-10

-1

-1
-1

-4
("")
("")

(0 .)
(" 0)

-13,955

-13.955

-27.992

-26.072

-26,072

-15.878
-989

-31.301
-1.859

-28,379
-664

-41

-41
-1
-11

-595
-16
-187

-456
-11
-122

-456

Other ...................................................... .

-1
-11

Total-Interest received by trust funds ............... .

-39.948

-91.602

-91,602

-84.870

Other .................................................... .

Rents and royalties on the outer continental shelf lands .,
Sale of major assets ....................................... .
Spectrum auction proceeds ................................. .

431

-431

1,882

-1,882

610

-610

-11

-122
-84.870
2.308

-2,308

Total-Undistributed offsetting receipts •.•••.••••.•••.• =-=4=2~,6~44====43~I=-=43~,0~7::::S=-=I=I=4::::,S=8=4==2:::::,=49=2=-=1=1=7::::,0=7=6=-:::1=08:::::,=11=1===2::::,308===-=1=10=,,4=1,,;,9
Total outlays ................................................. =1=5=2::::,I=OS==1=7~,8~O::::8==13=4~,2=9=6=1::::,2=92:::::,=20=7==1=54=,50=5=1~,1=3=7::::,7=02=1:::::.=236===,6==7=2==14=7~.3=7=6=:::::1.=08=9~.2=96=
Total on-budget .......................................... .
Total off-budget .......................................

0 ...

132,702

13.223

19,403

4,585

119.478 1.044.782
14.818

247,425

113.236
41,270

931.546 1.000.078
206,156

236,594

110.249
37,126

889.828
199,488

Total surplus (+) or deficit .............................. ..

+13,571

-119,654

-149.895

Total on-budget .......................................... .

-3.480

-179,613

-203.899

Total off-budget .......................................... .

+17.051

+59,958

+53,804

MEMORANDUM

[$ millions]

Receipts offset against outlays
Current
Fiscal Year
to Date
Proprietary receipts ..................................................... .
Receipts from off-budget federal entities .............................. .
Intrabudgetary transactions ............................................. .
Governmental receipts .................................................. .
Total receipts offset against outlays ............................... .

37,409

Comparable Period
Prior Fiscal Year

35,669
170,880
~
208,063

... No Transactions.
(' .) Less than $500.000
Note: Details may not add to totals due to rounding

'Includes FICA and SECA tax credits. non-contrlbutory military seMce credHs, special benef~s
for the aged, and credij for unnegotiated OASI benefH checks.
~ Postal Service accounting Is composed of thirteen 28-day accounting periods. To
conform with the MTS calendar-month reporting basis used by all other Federal agencies. the MTS
reflects USPS results through June 23rd and estimates for $406 million through June 30th.

Table 6. Means of Financing the Deficit or Disposition of Surplus by the U.S. Government, June 1995 and Other Periods
[$ millions]
Net Trenucllons
(-) denotes net rHuctIon of 8IIher
liability or ..... ac:counta

Aaaeta .nd LIabilities
Directly Related to
Budget Oft-budget ActIvIty

FIscal VM' to

This Month
This VM'

Account a.lencea
CurNnt FIscal VM'
BegInning of

oat.

PrIor VM'

This VM'

CIoN of
ThIs month

This Month

U.bllity .ccounts:
Borrowing from the public:
Public debt securities, issued under generaJ Financing authorities:
Obligations of the United States, issued by:
United States Treasury ............................................ .
Federal Financing Bank ............................................ .

47,446

258,622

234,313

4,6n.750
15,000

4,888,926
15,000

4,936,372
15,000

Total, public debt securities ..................................... .

47,446

258,622

234,313

4,692,750

4,903,926

4,951,372

Plus premium on public debt securities ...................... .
Less discount on public debt securities ...................... .

-8

-71

-17

1,333

1,269

1,247

3,183

-9,366

78,831

80,568

1,262
81,814

Total public debt securities net of Premium and
discount .................................................... .

46,192

255,368

243,662

4,615,453

4,824,629

4,870,821

Agency securities, issued under special financing authorities (see
Schedule B. for other Agency borrowing, see Schedule C) ......... .

198

-1,324

2,432

28,185

26,663

26,861

Total federal securities ............................................... .

46,390

254,044

246,094

4,643,638

4,851,292

4,897,682

37,962

103,476

86,211

1,213,104

1,278,619

1,316,581

640

-11,995

1,684

2,261

2,324

Deduct:
Federal securities held as investments of govemment accounts
(see Schedule D) ............................................... .
Less discount on federal securities held as investments of
govemment accounts ........................................ .
Net federal securities held as investments of govemment
accounts .................................................... .

37,899

102,836

98,206

1,211,421

1,276,358

1,314,257

Total borrowing from the public ......................... .

8,491

151,208

147,888

3,432,218

3,574,934

3,583,426

Accrued interest payable to the public ................................... .
Allocations of special drawing rights ..................................... .
Deposit funds ............................................................. .
Miscellaneous liability accounts (includes checks Outstanding etc.) ..... .

9,204
-35
4,583
-6,724

1,424
497
3,244
672

-1,248
147
-749
152

43,287
7,189
7,327
4,936

35,508
7,721
5,988
12,334

44,712

Total li.bility .ccounts ............ , ...................................... .

15,519

157,045

148,190

3,494,959

3,838,485

3,852,004

Cash and monetary assets:
U.S. Treasury operating cash:'
Federal Reserve account ............................................. .
Tax and loan note accounts ......................................... .

16,331
17,981

14,129
10,469

-7,933
6,418

6,848
29,094

4,646
21,582

2O,9n
39,583

7,686
10,571
5,610

Asset .ccounts (deduct)

Balance ............................................................. .

34,312

24,598

-1,515

35,942

26,228

60,540

Special drawing rights:
Total holdings ......................................................... .
SDR certificates issued. to Federal Reserve banks ................. .

-54

U98

528

9,971
-8,018

11,923
-8,018

-8,018

1,953

3,905

3,851

31,762

31,782
9,852
-27,307

-98

11,869

Balance ............................................................. .

-54

1,898

528

Reserve position on the U.S. quota in the IMF:
U.S. subscription to international Monetary Fund:
Direct quota payments ............................................. .
Maintenance of value adjustments ................................ .
Letter of credit issued to IMF ....................................... .
Doilar deposits with the IMF ......................................... .
Receivable/Payable (-) for interim maintenance of value
adjustments .......................................................... .

-190
-2,614

-45

2,689
-1,384
-1

795
-134

-25,923

31,762
10,042
-24,693

-96

-53

2,706

762

-578

-837

-2,781

-75

Balance ............................................................. .

-143

2,066

12,069

14,2n

14,135

Loans to International Monetary Fund ................................. .
Other cash and monetary assets ...................................... .

-3,725

7,028

(* *)

-675

21,416

(*'
32,169

(*'
28,444

7,163

Total cash and monetary assets .................................... .

30,390

35,590

-1,576

71,379

76,579

106,969

Net activity, guaranteed loan financing ................................... .
Net activity, direct loan financing ......................................... .
Miscellaneous asset accounts ............................................ .

-374
99

-1,734

-9,806

-482

-11,166
17,169

-11,540

-945

-2,369
3,398
-2,657

Total a .... accounts ................................................... ..

29,170

37,918

-3,204

Excess of liabilities (+) or ...... (-) ................................... .

13,851

+119,129

+149,394

Transactions not applied to current year's surplus or deficit (see
Schedule A for Details) .................................................... .

525

501

Total budget and off-buclget federal entitles (financing of deftcIt (+)
or disposition of surplua (-» ........................................... .

-13,571

+119,854

+149,895

'Major SOI6C8S of information used 10 cIeIern*Ie Treasuy's operating cash income include
Federal Resave Banks, the Treasuy Regional FinIn:e Centers, the Internal Revenue Senrice
Centers. the BInau of the PubIc Debt and various electronic systems. Deposits are reflected as
received and withdrawals are reflected as processed.

4,542

12,726
-1,386

-922

17,268
-1,888

72,914

81,880

110,130

+3,422,045

+3,554,825

+3,541,174

446

525

+3,555,271

+3,541,899

+3,422,045

... No TI'III188CIions.
(. j Less than $500,000

Note: Details may not add to totals due to roundiIg

Table 6.

Schedule A-Analysis of Change in Excess of Liabilities of the U.S. Government, June 1995 and
Other Periods
[$ millions]
Fiscal Year to Date
Classlflc:atlon

This Month
This Year

Exeess of liabilities beginning of period:
Based on composition of unified budget In preceding period
Adjustments during current fiscal year for changes in composition
of unified budget:
Revisions by federal agencies to the prior budget results ..... .
Excess of liabilities beginning of period (current basis)

Prior Year

3.554.825

3,422,146

3,218,965

(' .)

-101

526

............... .--~~~----~---------3,554,825
3,422,045
3,219,491

==================

Budget surplus (-) or deficit:
Based on composition of unified budget in prior fiscal yr .......... .
Changes in composition of unified budget ..... .. .................. ..

-13,571

119,654

149,895

----------------------------13,571
119,654
149,895
====================
3,480
179,613
203,699

Total surplus (-) or deficit (Table 2) ................................. ..
Total-on-budget (Table 2)
Total-off-budget (Table 2)

Transactions not applied to current year's surplus or deficit:
Seigniorage ............................................................ .
Profit on sale of gold ................................................ ..

-17,051

-59,958

-53,804

-525

-501

(

-79

-525

-501

-79
(

)

------------------------~--

Total-transactions not applied to current year's Surplus or
deficit ............................................................... .

====================
Exeess of liabilities close of period ................................. ..
3,541,174
3,541,174
3,368,885
Table 6. Schedule 8-Securities Issued by Federal Agencies Under Special Financing Authorities, June 1995 and
Other Periods
[$ millions]
Net Transactions
(-) denotes net reduction of
liability accounts

Account Balanc:es
Current Fiscal Yeer

ClaSSification
Beginning of

Fiscal Year to Date
This Month

This Year
Agenc:y securities, Issued under special financing authorities:
Obligations of the United States, issued by:
Export-Import Bank of the United States ............................... .
Federal Deposit Insurance Corporation:
FSUC resolution fund .................................. .. ........... ..
Obligations guaranteed by the United States, issued by:
Department of Defense:
Family housing mortgages ............................................ .
Department of Housing and Urban Development:
Federal Housing Administration ...................................... ..
Department of the Interior:
Bureau of Land Management ......................................... .
Department of Transportation:
Federal Transit Administration ......................................... .
Coast Guard:
Family housing mortgages .......................................... .
Obligations not guaranteed by the United States, issued by:
Legislative Branch:
Architect of the Capitol ................. ,.. . .. . . . . . . . . . . .. . .......... .
Independent agencies:
Farm Credit System Financial ASsistance Corporation ............... .
National Archives and Records Administration ....................... .
Tennessee Valley Authority ........................................... .
Total, agency securities , ......................................... ,

(

-145

189

158

)

-75

112

)

r 'j

(

-31

This Month

(

-32

This Year

Prior Year

Close of
This month

)

(

)

-547

(

... No Transactions.

(

184

185

187

194

-2
-1,263

3,188

1,261
298
26,121

1,261
296
24,665

1,261
296
24,858

198

-1,324

2,432

28,185

26,663

26,861

(. 'J Less than $500.000
Note: Details may not add to totals due to rounding.

)

Table 6. Schedule C (Memorandum)-Federal Agency Borrowing Financed Through the Issue of Public Debt Securities,
June 1995 and Other Periods
[$ millions]
Account Balances
CumHlt FlSCIII Veer

Tranuctlons
ClaMiftc:atlon

Beginning of

Fiscal Veer to D...
This Month

This VHr
BorrowIng tram the Treasury:
Funds Appropriated to the PresIdent:
International Security Assistance:
Foreign military loan program ........................................ .
Agency for International Development:
International Debt Reduction ........................................ ..
Housing and other credit guaranty programs ...................... ..
Private sector revolving fund ........................................ .
Overseas Private Investment Corporation .............................. .
Department of Agriculture:
Farm Service "Agency:
Federal aop insurance corporation fund ............................ .
Commodity Credit Corporation ...................................... ..
Agricultural credit insurance fund .................................... .
Natural Resources Conservation Service ............................. ..
Rural Utilities Service:
Rural electrification and telephone revolving fund ................... .
Rural Telephone Bank ............................................... .
Rural deveiopment insurance fund .................................. ..
Rural communication development fund ............................ ..
Rural housing and Community Development Service:
Rural housing insurance fund ........................................ .
Self-help housing land development fund .......................... ..
Rural Business and Cooperative Development Service:
Rural development loan fund ........................................ .
Rural economic development loan fund ............................. .
Foreign Agricultural Service ............................................ .
Department of Education:
Federal direct student loan program .................................. ..
Federal family education loan program ................................ .
College housing and academic facilities fund .......................... .
College housing loans .................................................. .
Department of Energy:
Isotope production and distribution fund ............................. ..
Bonneville power edministration fund .................................. .
Department of Housing and Urban Development:
Housing programs:
Federal Housing Administration ...................................... .
Housing for the ederIy and handicapped ............................ .
Public and Indian housing:
Low-rent public housing .............................................. .
Department of the Interior:
Bureau of Reciamation Loans .......................................... .
Bureau of Mines. Helium Fund ....................................... ..
Bureau of Indian Affairs:
Revolving funds for loans ............................................ .
Department of Justice:
Federal prison industries. incorporated ................................ ..
Department of Transportation:
Federal Highway Administration:
High priority quarters loan fund .................................... ..
Federal Railroad Administration:
Railroad rehabiitation and improvement
financing funds ...................................................... .
Amtrak COITidor improvement loans ................................ ..

-537

-235
-2

Thla VHr

PrIor Veer

750

759

315
125
1

315
125
1
16

315
125
1
39

-8.107
-1.748

-113
-9.087
-1.225

16.909
4.028
4

9.339
2.280
4

8.802
2.280

8.881
670
2.806
25

8.646
668
2.806
25

5.689
1

5.709

27
-202
561

8.193

1.212

2.036

4.497

(* *)

40
11

29
10

21
19

385

583

61
27
680

4.868

291
14
(* *)

5.302
1.605
181
411

5.302

433
1.605
162
411

-14
35

266

14
2.617

2.652

-21
-770

-475

783
8.484

762
7.714

-135

135

11
252

13
252

1
2

1
3

(* ')

(* *)

(* ')

-1

586

2.091
25

61
30

680

1.605
181
411

(* ')

(* *)

(* ')
27

-18.719

-13.726

94.357

77.739

75.638

586

903

612
1.158

(* *)

7
1

181
1.107
1
1
2

767
2.011
1
13
2

2.011
1
13
2

(*')

453
83
715

(* ')

-2.101

Thla Month

413

Other .................................................................. .
Federal Aviation Administration:
Airaaft purchase loan guarantee program .......................... .
Minority businesS resource center fund ................................ .
Department of the Treasury:
Federal Financing Bank revolving fund ................................ .
Department of Veterans Affairs:
Guaranty and indemnity fund .......................................... .
Loan guaranty revolving fund .......................................... .
Direct loan revolving fund .............................................. .
Native american veteran housing fund ................................ ..
Vocational rehabilitation revolving fund ................................ .

405

345

21
-1

CIoN of
Thla month

767

Table 6. Schedule C (Memorandum)-Federal Agency Borrowing Financed Through the Issue of Public Debt Securities
June 1995 and Other Periods-Continued
'
[$ millions]

Account Balances
Current Fiscal Year

Transactions
Classification
Fiscal Year to Date

Beginning of

This Month
This Year
Borrowmg from the Treasury. Continued
Environmental Protection Agency:
Abatement. control, and compliance loan program
Small Business Administration:
Business loan and revolving fund
Disaster loan fund .
Independent agencies:
District of Columbia
Export·lmport Bank of the United States
Federal Emergency Management Agency:
National insurance development fund ...
Disaster assistance loan fund ......
. ..................... .
Pennsylvania Avenue Development Corporation:
Land aquisition and development fund
Railroad Retirement Board:
Rail industry pension fund ........................................ .
Social Security equivalent benefit account
Smithsonian Institution:
John F. Kennedy Center parking facilities
Tennessee Valley Authority ................... .
Other ......................................... .
Total agency borrowing from the Treasury
financed through public debt securities issued

-2,503

This Month

114
2,350

293
6,996

147
30

811

2,632

2,662

147
2,662

169

3
84

3
253

-642

2,128
2,781

2,128
4,564

2,128
2,061

20
150

-720

..)

r .)

("')

-5,200

-20,430

-16,272

163,642

148,412

143,212

-31

-205

-195

3,785

3,612

3,581

-755

-3,365

-1,675

6,063

3,453

2,698

-56

-60

~296

21,916
3,675

21,912
3,675

21,856
3,675

-760

-945

24,391

23,631

-47

-49

1,624
-145

1,624
-192

(

Borrowing from the Federal Financing Bank:
Funds Appropriated to the President:
Foreign military financing program .............. .
Department of Agriculture:
Farm Service Agency:
Agriculture credit insurance fund ................................ .
Rural Utilities Service:
Rural electrification and telephone revolving fund .............. .
Rural development insurance fund ................... . ............ .
Rural housing and Community Development Service:
Rural housing insurance fund .
Department of Defense:
Department of the Navy .................. .
Defense agencies ......................... .
Department of Education:
Federal family education loan program ...
Department of Health and Human Services:
Medical facilities guarantee and loan fund
Department of Housing and Urban Development:
Low rent housing loans and other expenses .... '" ................... .
. ............ .
Community Development Grants .....................
Department of Interior:
Territorial and international affairs ........... .
Department of Transportation:
Federal Railroad Administration ............. .
Federal Transit Administration ..
Department of the Treasury:
Financial Management Service ................... .
General Services Administration:
Federal buildings fund .......... .
Small Business Administration:
Business loan fund ............ .
Independent agenCies:
Export·lmport Bank of the United States ............... .
Pennsylvania Avenue Development Corporation .......... .
Postal Service .......... ..
. ............. .
Resolution Trust Corporation ...... . .................... .
Tennessee Valley Authority ............................. .
Total borrowing from the Federal Financing Bank •• , •.• " ... , •.• ,

This Year

Prior Year

147

Close of
This month

(' .)

-4,790

-23

-10

-58
-14

-54
-16

1,747
110

1,689
96

-1

(' 0)

-2
488

15
665

-665

-30
-11

102

253

1,780

1,893

1,882

-20

-135

-74

581

465

445

-504
12

-1,280
91
-1,358
-10,742
-200

-1,411
75
-258
-2,785
-1,950

3,926
250
8,973
26,519
3,400

3,150
328
7,615
16,518
3,200

2,646
340
7,615
15,777
3,200

-18,720

-13,726

109,360

92,741

90,639

-741
-2,101

NO Transactions.
(•• ) Less than $500,000
Note: Details may not add to totals due to rounding

Note: This table includes lending by the Federal Financing Bank accomplished by the purchase
of agency financial assets, by the acquisition of agency debt securities, and by direct loans on
behalf of an agency. The Federal Financing Bank borrows from Treasury and issues its own
securiU8s and in tum may loan these funds to agencies in lieu of agencies borrowing directly
through Treasury or issuing their own securities.

Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, June 1995 and
Other Periods
[$ mIIIIon8]

Securltle. Held e. Inve.tment.

Net Purche... or Sales (-)
Cleulflcetlon

Thl. VHr

Federal funds:

Total public debt securities ...........................................
Total agency securities ................................................
Total Federal lunds

.............................................

Beginning 01

FllC8I VHr to Dete
This Month

Department of Agriculture .................................................
Department of Commerce .................................................
Department of Defense-Military:
Defense cooperation account ...........................................
Department of Energy .....................................................
Department of Housing and Urban Development:
Housing programs:
Federal housing administration fund ..................................
Govemment National Mortgage Association:
Management and liquidating functions fund:
Public debt securities ...............................................
Agency securities ...................................................
Guarantees of mortgage-backed securities:
Public debt securities ...............................................
Agency securities ...................................................
Other .....................................................................
Department of the Interior .................................................
Department of Labor .......................................................
Department of Transportation .............................................
Department of the Treasury ...............................................
Department of Veterans Affairs:
Canteen service revolving fund .........................................
Veterans reopened insurance fund ......................................
Servicemen's group life insurance fund .................................
Independent agencies:
Export-Import Bank of the United States ..............................
Federal Deposit Insurance Corporation:
Bank insurance fund ..................................................
Saving~ association insurance fund ...................................
FSLlC resolution fund .................................................
Federal Emergency Management Agency:
National flood insurance fund .........................................
National Credit Union Administration ....................................
Postal Service ............................................................
Tennessee Valley AuthOrity ..............................................
Other .....................................................................
Other .......................................................................

Current FlICeI VHr

Thl. VHr

Prior VHr

Clo. . of
Thl. month

This Month

(

)

1
16

-30

-4
444

-4
410

5
4,527

1
5,001

1
4,971

510

-160

479

5,742

5,072

5,582

-9
-4

-6
462
-11,783
13
1,652

3,713
1
193
2,722
5,330
974
7,452

4,036
1
184
3,409
5,566
1,019
1,036

4,064
1
154
3,355
5,508
1,019
1,854

37
524
41

43
517
4

43
536
4

(

-1

(

)

351

(

)

346
(

-29
-54
-58
1
819

-38
633
178
46
-5,598

)

6
12

)

-38

3
14
-108

-125

233

108

2,316
379
206

7,549
929
-705

6,421
538
1,316

13,972
2,493
1,649

19,206
3,042
739

21,522
3,422
945

20
96

-152
264
2,601
-2,712
217
335

-71
259
2,430
502
82
-202

200
3,052
1,271
3,954
1,017
2,626

48
3,296
4,387
1,242
1,214
2,865

48
3,316
3,872
1,242
1,234
2,961

3,601

4,212

2,830
-4

61,564
17

62,175
17

65,776
17

3,801

4,212

2,828

81,581

62,192

65,7113

4
5
27

13
5
31

27
195

245
273

284
291

283
291

(

20
-515

Trust funds:
Legislative Branch:
Library of Congress .....................................................
United States Tax Court ................................................
Other .....................................................................
The Judiciary:
Judicial retirement funds .................................................
Department of Agriculture .................................................
Department of Commerce .................................................
Department of Defense-Military:
Voluntary separation incentive fund .....................................
Other .....................................................................
Department of Defense-Civil:
Military retirement fund ..................................................
Other .....................................................................

(

)

..
....

(

)

(

-1

(
(

)
)

)

38
18

(

)

(

)

(

)

(

( )

)

-19
-1

-9
-67

-37
7

763
157

772
91

753
90

-1,307
-9

11,208
81

11,987
31

105,367
1,307

117,882
1,397

116,575
1,388

Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, June 1995 and
Other Periods-Continued
[$ millions]

_.
Securities Held as Investments
Current Fiscal Year

Net Purchases or Sales ( )
Classification

Fiscal Year to Date

Beginning of

This Month
This Year

I Prior Year

This Year

I This Month

Close of
This month

Trust Funds-Continued
Department of Health and Human Services:
Federal hospital insurance trust fund ....... .
Federal supplementary medical insurance trust fund
Other
.............................. .
Department of the Interior
Department of Justice
Department of Labor:
Unemployment trust fund ........... .
Other ............................... .
Department of State:
Foreign Service retirement and disability fund .... .
Other ............................................. ..
Department of Transportation:
Highway trust fund
Airport and airway trust fund
Other .............................. .
Department of the Treasury ........ .
Department of Veterans Affairs:
General post fund. national homes
National service life insurance ................. .
United States government life Insurance Fund
Veterans special life insurance fund
Environmental Protection Agency
NaUonai Aeronautics and Space Administration ...
Office of Personnel Management:
Civil service retirement and disability fund ..
Employees life insurance fund .................. .
Employees and retired employees health benefits fund
Social Security Administration:
Federal old-age and survivors insurance trust fund
Federal disability insurance trust fund ......... .
Independent agenCies:
Harry S. Truman memorial scholarShip trust fund
Japan-United States Friendship Commission
Railroad Retirement Board
.................... .
Other ......................................... .

4.337
452
21
103
-7

6.843
--589
127
173
49

5.520
289
139
26
52

128.716
21,489
836
234

131.222
20,448
941
304
56

135.559
20.900
963
407
49

-413

6.918
-25

2.419

-30

39.788
59

47.119
42

46.706
34

283

557
-15

478
12

7.179
50

7.453
35

7.737
35

221
338
-22
-28

1.684
-514
202
-98

-1.648
-144
-100
-50

17.694
12.206
1.683
247

19.157
11.354
1.907
176

19.378
11.692
1.885
149

--1

(" 0)

428

..)

323

61
47

58
680

384
-7
66
528

38
11.852
115
1.509
6.250
16

37
11.748
108
1.506
6.883
16

37
12.176
109
1.567
6.930
16

-8

(

..)

(

-7
(' .)

12.027
124
58

9.966
589
295

9.801
923
581

338.889
14.929
7.573

336.828
15.642
7.810

348.854
15.519
7.868

14.997
2.396

32.718
26.652

54.164
-2.183

413.425
6.100

431.146
30.356

446.143
32.751

..1)

1
(" .)

-1

1.266
129

-150
101

53
17
12.203
226

54
17
12.938
357

54
17
13.469
356

34.361

99.264

83.384

1.151.523

1.216.427

1.250.788

Total trust funds ............................................... ..

34,361

99.264

83,384

1.151,523

1,216,427

1,250,788

Grand total ................................................................. .

37,962

103,476

86,211

1,213,104

1,278,619

1,316,581

Total public debt securities ................... .

..)
..)

(
(

531

... No Transactions

(

Note: Investments are in public debt secunties unless otherwise noted.
Note: Details may not add to totals due to rounding

(' 'J Less than $500.000.

Table 7. Receipts and Outlays of the U.S. Government by Month, Fiscal Yea' 1995
[$ millions]

Ftsc:eI
Clalllflc:ation

Oct.

Nov.

Dec.

Jan.

Feb.

March

AprIl

May

June

July

Aug.

Y.,

Sept.

om.

Com-

..rBIe
PerIod
PrIor

F.Y.

Receipts:
Individual income taxes .................
Corporation income taxes ...............
Social insurance taxes and
contributions:
Employment taxes and
contributions .........................
Unemployment insurance .............
Other retirement contributions ........
Excise taxes .............................
Estate and gift taxes ...................
Customs duties ..........................
Miscellaneous receipts ...................
Total-Receipts this yea,

...........

43,659
3,055

37,414
1,497

31,263
1,073
351
4,272
1,202
1,848
2,300
89,024

33,786
3,249
352
5,518
1,220
1,827
2,811

53,736
31,915

61,457
35.876

442.307
118.200

404.549
106.207

38,646 50,423
3,061
320
354
413
4,602
5,143
1,906
1,218
1,349
1,470
3,774
3,612
92,532 165,392

37,226 40,605
10,601
320
416
355
4,770
4,897
1,040
1,339
1,471
1,583
2,719
1,674
90,405 147,888

342,315
22,553
3,400
41.829
10,939
14,269
22,235
1,018,041

322,953
21,379
3,434
39,544
11.671
14,479
15.185

61,027 115,998

751,134

29,378

31,870

_,114

......
......
......

253.272

2.019
2.144
159

1.942
1.874
156

4.974

5.838

3,865
-42

3,070
116

79,162
3,258

33,863
2,060

26,846
14,863

35,708 38,990
230
1,069
420
383
4,587
4,555
1,092
1,005
1,747
1,539
1,375
1,839
87.673 130,810 131,801

35,667
2,630
357
3,485
916
1,435
2,131
82.544

76,441
23.482

29,729
2.193

......
......
......

(On-budget) .... " .. " ..............

65,384

62,083 103,860 101,036

54,405

61,970 126,170

(Oft-budget) ........................

23,639

25,590

26,950

30,765

28,139

30,562

Total-Receipts prior year ...........

78,662

83,102 125,403 122,961

73,186

93,107 141,321

83,541 138,119

(On budget) ...........................

55,858

58,695

99,709

94,390

47,191

64,611 104,306

55,361 106,008

(Off budget) ...........................

22,804

24,407

25,694

28,571

25,995

28,497

37,015

28,179

32.110

354
184
18

217
169
17

333

222
214
21

174
188
15

166

303
26

348

178
202
18

191
200
15

185
336
14

3,255

310

271

203

101

213

221

227

172

726
-381

367
452

443
18

471
94

427
133

327
-372

575
-749

296
498

233
265

1,760
5.839
305

2,983
3,850
300

1,869
3,637
304

1,115
4,191
308

745
3,521
262

966
4.547
291

244
3,960
227

-44
4.155
287

-646
4,139
286

8,991
37.839
2.570

11,442
36.219
2.179

3,713
6.118
4.254

5,701
7,837
4,754

8,203
7,312
4,727

3,280
6.720
4,984

5,914
7.566
4,715

8,404
7,915
4.744

3.138
6.749
4.399

5,826
7.169
3,268

8.302
7.508
4.403

52,481
64.895
40.270

52.681
64.726
48.512

2.501
425
247

2,896
537
242

3,211
436
305

2,752
575
277

2.675
505
275

3.389
719
324

2.417
514
267

2.965
564
305

2.849
531
334

25.657
4.805
2.574

25.972
3.432
2.399

147
275
17,680

-311
-222
21,435

942
42
25,178

-757 -1,373
-284
21
17,548 20.298

78
-212
25.361

-251
-405
16,828

990
10
21.117

892
216
25.035

357
-558
190.481

2.838
43
198.403

2,638
1,949
1,683

2,656
2,322
1,330

2,553
3,888
1,743

2,592
2,764
1,328

2.542
2.593
1,255

2,674
2.691
1,588

2.592
1.974
1,168

2.621
2.406
1.353

2.639
2,630
1.580

23.508
23.217
13.048

22.615
17.460
12,965

1,603

1,588

1,761

1,824

1,829

1,726

1,646

1.802

1.893

15.672

14.637

6,622
7,834

7,545
8,942

7.321
9,757

7.215
8,630

6,694
8.838

8.448
11,171

7,239
8.680

7.637
10.394

8.277
11,440

66.999
85.685

61,539
76.152

4,799
3,055

5,290
3,092

5,837
3,015

5,014
4,950

4,712
3,796

5,987
4.467

4.527
5.405

5.701
3.815

5.985
4,466

47.852
36.061

43.561
31.004

2.639
2,858
2.443
-7.083 -5,415 -5.969

24.454
-49.961

24.082
-43.372

39,222

939.401
686.129

Outlays
Legislative Branch .......................

The Judiciary ............................
Executive Office of the President .......
Funds ApprOpriated to the President:
International Security Assistance .....
International Development
Assistance ...........................
Other ..................................
Department of Agriculture:
Commodity Credit Corporation and
Foreign Agricultural Service .........
Other ..................................
Department of Commerce ...............
Department of Defense:
Military:
Military personnel ........•..........
Operation and maintenance ........
Procurement ........................
Research, development, test. and
evaluation .........................
Military construction ................
Family housing .....................
Revolving and management
funds ..............................
Other ...............................
Total Military ...................
Civil ...................................
Department of Education ................
Department of Energy ...................
Department of Health and Human
Services:
Public Health Service .................
Health Care Financing Administration:
Grants to States for Medicaid .....
Federal hospital ins. trust fund ....
Federal supp. mad. ins. trust
fund ...............................
Other ...............................
Administration for children and
families ...............................
Other ..................................
Department of Housing and Urban
Development ...........................
Department of the Interior ..............
Department of Justice ...................
Department of Labor:
Unemployment trust fund .............
Other ..................................
Department of State ....................
Department of Transportation:
Highway trust fund ...................

,
,

2,812
3,151
2,728
2,519
-4,508 -4,490 -4,473 -6,540

2.524
2.781
-5,462 -6.021

908

2,426
582
818

2.394
557
749

2.009
567
1.094

2,227
553
730

2,694
671
915

2,707
499
920

1.843
574
774

2.795
482
875

21.998
5,367
7.783

19.516
4.990
7.435

1,650
702
488

1,854
-170
841

2,001
469
664

2,543
653
201

2,330
621
488

2.762
331
411

2,131
768
371

2,062
679
335

2,008
863
397

19.341
4.918
4.196

24.485
4.460
4.002

1,797

1,765

1,418

1.183

1,351

1,307

1,245

1.810

1.829

13.705

12.954

2.903
883

Table 7.

Receipts and Outlays of the U.S. Government by Month, Fiscal Year 1995-Continued
[$ millions]

Classification

Oct.

Nov.

Dac.

Jan.

Feb.

March

April

May

June

July

Aug.

Sept.

Fiscal
Year
To
Date

Comparable
Period
Prior
F.Y.

Outlays-Continued
Other ..................... ...... .....
Department of the Treasury:
Interest on the public debt ..... .....
Other ............................ .....
Department of Veterans Affairs:
Compensation and pensions .... .....
National service life ............. .....
United States govemment life .. , ....
Other ... ........................ , ....
Environmental Protection Agency
, ....
General Services Administration ... , ....
Naftonal Aeronautics and Space
.... ......... .....
Administration
Office of Personnel Management
.....
Small Business Administration .... .....
Social Security Administration:
Federal Old-age and survivors ins.
trust fund (off·budget) ...............
Federal disability ins. trust fund (offbudget) .................. ... ........
Other ..................... ............
Independent agencies:
Fed. Deposit Ins. Corp.:
Bank insurance fund ...............
Savings association insurance
fund ...............................
FSLlC resolution fund .............
Affordable housing and bank
enterprise ... ..... .... ,. " ......
Postal Service:
PubliC enterprise funds (offbudget)
...........
Payment to the Postal Service
fund
.....
Resolution Trust Corporation ........
Tennessee Valley Authority
........
Other independent agencies
........
Undistributed offsetting receipts:
Employer share, employee
retirement ................... ........
Interest received by trust funds .....
Rents and royalties on outer
continental shelf lands .. ... .......
Other .. ................ ... .........

1,647

1,734

1,637

1,905

1,463

1,902

1,326

1,383

1,596

14,594

13,647

19,732
34

24,912
-308

57,320
1,336

20,069
145

19,259
3,010

20,693
4,375

20,883
3,732

26,769
2,476

59,355
496

268,992
15,297

240,416
11,335

105
64
1
1,528
438
-651

1,457
70
1
1.184
474
639

2,824
83
2
1,344
538
462

81
71
1
1,827
520
-717

1,492
79
1
1,429
429
431

2,894
106
2
1,614
678
544

93
94
1
1,640
493
-767

1,518
81
1
1,584
571
540

2,904
86
2
1,548
542
387

13,368
736
13
14,298
4,682
870

12,854
667
14
13,436
4,222
393

845
3,410
65

1,143
3,118
145

1,203
3,460
64

926
3,324
58

1,072
3,337
64

1,284
3,556
77

1,028
3,548
53

1,245
3,431
55

1,166
3,647
59

9,910
30,831
639

10,004
28,634
483

23,413

23,36B

23,810

24,392

24,220

24,310

24,495

24,525

28,479

221,012

211,087

3,289
287

3,244
2,157

3,348
4,079

3,417
78

3,415
2,201

3,492
4,255

3,460
126

3,476
2,219

3,576
4,193

30,717
19,595

28,152
18,152

-127

-208

-496

-1,193

-1,977

-536

-305

-398

-2,195

-7,437

-6.338

-2
-87

-13
430

("")

-91
-149

-361
331

-37
-16

-15
-14

-24
416

-381
-270

-925
673

-853

.... ,

.,",.

(")

-467

-326

101

-396

-494

-1,268

-706

-602

186

-3,972

-2,079

61
-471
265
2,720

-699
92
1,572

-348
42
1,452

23
-436
24
1,461

...

-2.001
119
1,710

23
-1,078
142
1,260

......

-1.502
239
1.647

-1.024
156
1.244

-521
139
-2,273

107
-8.080
1,217
10.793

107
3.911
992
11,247

-2.416 -2,564
-5,727 -38,216

-2,557
-95

-2,491
-634

-2,671
-251

-2,554
-596

-2.590 -2,696
-5.524 -39,948

-22.981
-91.602

-23.241
-84,870

-158

43
-610

-1,882
-610

-2,308

(")

......................... 120,365 124,915 134,941 115,171 120,527 142,458 115,673 129,355 134.296

1,137,702

("")

-2,442
-611

....

-154

-160

-106

-353

-197

(")

......

(")

-366

......

-431

Totals this year:
Total outlays

........................

95,307

99,464 123,643

(Off-budget) ........................

25,059

25,452

(On'budget)

.....
........................

Total-surplus (+) or deficit (-)
(On' budget)

(Off'budget) ........................
Total borrowing from the public

....

-31,342 -37,242

931,546

25,282

26,478

25,045

14,818

206,156

-4,130 +16,629 -37,983 -49,927 +49,720 -38,950 +13,571

-119,854

......
......
......

25,951

26,773

-3,480

-179,813

......

+138 +15,653

+5,483

+1,661

+4,610 +14,178

+2,604 +17,051

+59,958

......

32,457

40,528 -13,316

13,337

38,964

13,645 -27,638

44,740

151,208

(Offbudgei)

23.523

(Offbudgel) .

89,889

11,297

-1,420

100,562

(On·budget)

......

90,628 102,581 119,478

-29,922 -37,381 -19,783 +11,147 -39,644 -54,537 +35,542 -41,554

(On·budgei)

TO/al·surplus (+) or dl'[icit (-) prIOr
year

(")

94,050 116,507

8,491

124.085 121.483 133.108 107.713 114.752 125,422 123.867 115,597 123.269

Total·outlays prior year

-537

96,719 121.425

83.521

88.835 100,259 100,620

24,764

24,192

25.917

-45.422 -38.381

25.871

...

147,888
1.089.296

889.828

15.108

199.468

-7.705 +15.248 -41.566 -32,315 +17.454 -32,057 +14,850

.... -/49.895

11.683

25.164

. . . . . . . -44.704 -38.024 -21.717 +10,869 -41.644 -35.648

-719

23,247

89,726 108,161

....

-357 +14.012

+4.379

+77

... No transactions.
(' 0) Less than $500.000.

Note: Details may not add to totals due to rounding.

+3.686 -34.365

+3.333 +13.768

-2.152

.... -203,699

+2,308 +17.002

+53.804

Table 8. Trust Fund Impact on Budget Results and Investment Holdings as of June 30, 1995
[$ millions]

SecurItIes held es 1nvestment8
Current Fiscal v..,

Fiscal Veer to Dete

This Month
Cleulftcetlon

Beginning of
Receipts

OutIeys

Excess

Receipts

OutIeys

Excess
This V. .r

IThis Month

CIoM 01
ThIs Month

Trust receipts, outlays, end Investments
held:
Airport ........................................ .
Black lung disability ......................... .
Federal disability insurance .................. .
Federal employees life and health .......... .
Federal employees retirement ............... .
Federal hospital Insurance .................. .
Federal oId-age and survivors insurance ... .
Federal supplementary medical insurance .. .
Highways .................................... .
Military advances ............................ .
Railroad retirement .......................... .
Military retirement ........................... .
Unemployment ............................... .
Veterans life insurance ...................... .
All other trust ................................ .

12,206

11,354

11.692

30,356
23,452
344,570
131,222
431,146
20,448
19,157

32,751
23.387
356.679
135.559
446,143

1,345

6,100
22,503
346,317
128,716
413,425
21,489
17,694

--633
1,610
10,680
6,966
393
1,255

12,203
105,367
39,788
13,4n
12,240

12,938
117,882
47.119
13,362
13,420

13,469
116.575
46.706
13,852
13,497

1,151,523

1,218,427

1,250,788

-520
34
26,213
882
10,638
4,922
29,n4
244

12,319
3,559
14,937
393
250
-18
3,257
-1,401
-380
512
12

39,681
90,607
250,786
48,096
17,599
9,255
7,539
31,383
26,307
1,285
4,353

5,352
432
30,717
-882
29,043
85,685
221,012
47,852
16,255
9,888
5,929
20,703
19,341
893
3,097

82,141
51,085

36,043

589,120
171,934

495,317
171,934

47,099

11,056

36,043

417,185

323,383

93,802

Totel Federal fund receipts end outlays....
Less: Interfund transactions ..................

104,028
248

128,499
248

-22,471

628,809
483

840,088
483

-213,457

Federal fund receipts and outlays on the
basis of Table 4 & 5 .........................

103,780

126,251

-22,471

626,126

839,583

-213,457

25,264

925
50
15,612
14,999
43,416
6,3n
2,280
1,150
3,917
967
1,628
558
428

559
49
3,576
65
3,293
11,440
28,479
5,985
2,030
1,168
659
2,368
2,008
46
416

D •.••••••••••••••••••••••••••••••••••••••••
Less: Interfund transactions ................... .

98,183
51,085

Trust fund receipts and outlays on the baSis
of Tables 4 & 5 ....... ...... ...... ............

5,8n

366
1
2,300

4,832
465
56,930

--65

20,900
19,376

Totel trust fund receipts end outlays
end Investments held from Teble 8-

Less: offsetting proprietary receipts .......... .

3,011

Net budget receipts .. outIeys ...............

147,888

134,298

13,571

... No transactions.

1,018,048 1,137,702

-119,854

Note: Details may not add to totals due to rounding.

Note: Interfund receipts and outtays are transactions between Federal funds and trust funds
such as Federal payments and contributions, and interest and profits on investments in Federal
securities. They have no net effect on overalt budget receipts and outlays since the receipts side of
such transactions is offset against bugdet outtays. In this table, Interfund receipts are shown as an
adjustment to arrive at total receipts and outtays of trust funds respectively.

Table 9.

Summary of Receipts by Source, and Outlays by Function of the U.S. Government, June 1995
and Other Periods
[$ millions)
Classification

This Month

Fiscal Year
To Date

Comparable Period
Prior Fiscal Year

Individual income taxes ............ .
Corporation income taxes ...... .
Social insurance taxes and contributions:
. .............. .
Employment taxes and contributions .......
Unemployment insurance ...................................... ..
Other retirement contributions ................................. ..
Excise taxes ................................................. ..
Estate and gift taxes .......... .................. .. ........ .
Customs ....................................................... .
Miscellaneous ............
. .............. ..

61.457
35.876

442.307
118.200

404.549
106.207

40.605
320
416
4,897
1,040
1,583
1,674

342.315
22,553
3,400
41,829
10,939
14,269
22,235

322,953
21,379
3,434
39,544
11,671
14,479
15.185

Total ........................................................ .

147,868

1,018,048

939,401

National defense ............... .
International affairs ..............
. .......... .
General science, space, and technology ............ .
Energy............. ..... ............
.. ......... ..
Natural resources and environment .................. .
Agriculture ....... .. . .. .. . .. .. . .. . .. ..
.. ......... ..
Commerce and hOUSing credit .....
. ................... ..
Transportation .......................... , ........... ..
Community and Regional Development .......... .
Edl.'C8tion, training, employment and social services
Health ...................................
. ................ .
Medicare ... ............ ............
.. ................... .
Income security ..........................
.. .......... .
Social Security
. .. . .. .. . ..
. .................... .
Veterans benefits and services .........
.. .............. .
Administration of justice ..................
.. .................. .
General government .....................
.. .............. .
Interest .... ............ .... ..............
.. ............ ..
Undistributed offsetting receipts ....... .. ............ ..

26,148
818
1,521
601
1,698
-328
-3,041
3,432
1,035
4,480
10,543
15,663
16.426
32.058
4,552
1,419
1,781
18,617
-3,127

200,174
12,575
12.929
3.618
17.486
10.809
-17,905
28,153
7,658
39,251
86.161
116,568
166,394
251,723
28,560
11,657
10,586
172,381
-25,473

207.936
13,044
12.940
3,556
16,367
14,204
-4,620
26.260
7.171
32,370
80,090
106,576
162,987
239,234
27,171
11,277
6,747
149,735
-25,548

Total •....•..••...••.•••............................•.........

134,296

1,137,702

1,089,296

RECEIPTS

NET OUTLAYS

Note: Details may not add to totais due to rounding.

Explanatory Notes
1. Flow o. Data Into Monthly Treasury Statement
The Monthly Treasury Statement (MTS) is assembled from data in the
central accounting system. The major sources of data include monthly
accounting reports by Federal entities and disbursing officers, and daily
reports from the Federal Reserve banks. These reports detaii accounting
transactions affecting receipts and outlays of the Federal Government
and off-budget Federal entities, and their related effect on the assets and
liabilities of the U.S. Govemment. Information is presented in the MTS on
a modified cash basis.

the employee and credits for whatever purpose the money was withheld.
Outlays are stated net of offsetting collections (including receipts of
revolving and management funds) and of refunds. Interest on the public
debt (public iSSues) is recognized on the accrual basis. Federal credit
programs subject to the Federal Credit Reform Act of 1990 use the cash
basis of accounting and are divided into two components. The portion of
the credit activities that involve a cost to the Government (mainly
subsidies) is included within the budget program accounts. The remaining
portion of the credit activities are in non-budget financing accounts.
Outlays of off-budget Federal entities are excluded by law from budget
totals. However, they are shown separately and combined with the onbudget outlays to display total Federal outlays.

2. Notes on Receipts
Receipts included in the report are classified into the following major
categories: (1) budget receipts and (2) offsetting collections (also called
applicable receipts). Budget receipts are collections from the public that
result from the exercise of the Government's sovereign or governmental
powers, excluding receipts offset against outlays. These collections, also
called governmental receipts, consist mainly of tax receipts (including
social insurance taxes), receipts from court fines, certain licenses, and
deposits of earnings by the Federal Reserve System. Refunds of receipts
are treated as deductions from gross receipts.
Offsetting collections are from other Government accounts or the
public that are of a bUSiness-type or market-oriented nature. They are
classified into two major categories: (1) offsetting collections credited to
appropriations or fund accounts, and (2) offsetting receipts (Le., amounts
deposited in receipt accounts). Collections credited to appropriation or
fund accounts normally can be used without appropriation action by
Congress. These occur in two instances: (1) when authorized by law,
amounts collected for materials or services are treated as reimbursements to appropriations and (2) in the three types of revolving funds
(public enterprise, intragovernmental, and trust); collections are netted
against spending, and outlays are reported as the net amount.
Offsetting receipts in receipt accounts cannot be used without being
appropriated. They are subdivided into two categories: (1) proprietary
receipts-these collections are from the public and they are offset against
outlays by IiIgency and by function, and (2) intragovernmental fundsthese are payments into receipt accounts from Governmental appropriation or funds accounts. They finance operations within and between
Government agencies and are credited with collections from other
Government accounts. The transactions may be intrabudgetary when the
payment and receipt both occur within the budget or from receipts from
off-budget Federal entities in those cases where payment is made by a
Federal entity whose budget authority and outlays are excluded from the
budget totals.
Intrabudgetary transactions are subdivided into three categories:
(1) interfund transactions, where the payments are from one fund group
(either Federal funds or trust funds) to a receipt account in the other fund
group; (2) Federal intrafund transactions, where the payments and
receipts both occur within the Federal fund group; and (3) trust intrafund
transactions, where the payments and receipts both occur within the trust
fund group.
Offsetting receipts are generally deducted from budget authority and
outlays by function, by subfunction, or by agency. There are four types of
receipts, however, that are deducted from budget totals as undistributed
offsetting receipts. They are: (1) agencies' payments (including payments
by off-budget Federal entities) as employers into employees retirement
funds, (2) interest received by trust funds, (3) rents and royalties on the
Outer Continental Shelf lands, and (4) other interest (i.e., interest collected
on Outer Continental Shelf money in deposit funds when such money is
transferred into the budget).

4. Processing
The data on payments and collections are reported by account symbol
into the central accounting system. In turn, the data are extracted from
this system for use in the preparation of the MTS.
There are two major checks which are conducted to assure the
consistency of the data reported:
1. Verification of payment data. The monthly payment activity reported by
Federal entities on their Statements of Transactions is compared to the
payment activity of Federal entities as reported by disbursing officers.
2. Verification of collection data. Reported collections appearing on
Statements of Transactions are compared to deposits as reported by
Federal Reserve banks.

5. Other Sources o. In'ormation About Federal Government
Financial Activities

• A Glossary of Terms Used in the Federal Budget Process, January
1993 (Available from the U.S. General Accounting Office, P.O. Box 6015,
Gaithersburg, Md. 20877). This glossary provides a basic reference
document of standardized definitions of terms used by the Federal
Governmel')t in the budgetmaking process.
• Daily Treasury Statement (Available from GPO, Washington, D.C.
20402, on a subscription basis only). The Daily Treasury Statement is
published each working day of the Federal Government and provides data
on the cash and debt operations of the Treasury.
• Monthly Statement of the Public Debt of the United States
(Available from GPO, Washington, D.C. 20402 on a subscription basis
only). This publication provides detailed information concerning the public
debt.
• Treasury Bulletin (Available from GPO, Washington, D.C. 20402, by
subSCription or single copy). Quarterly. Contains a mix of narrative, tables,
and charts on Treasury issues, Federal financial operations, international
statistics, and special reports.
• Budget of the United States Government, Fiscal Year 19 _
(Available from GPO, Washington, D.C. 20402). This publication is a
single volume which provides budget information and contains:
-Appendix, The Budget of the United States Government, FY 19_
-The United States Budget in Brief, FY 19 _
-Special Analyses
-Historical Tables
-Management of the United States Government
-Major Policy Initiatives

3. Notes on Outlays
Outlays are generally accounted for on the basis of checks issued,
electronic funds transferred, or cash payments made. Certain outlays do
not require issuance of cash or checks. An example is charges made
against appropriations for that part of employees' salaries withheld for
taxes or savings bond allotments - these are counted as payments to

• United States Government Annual Report and Appendix (Available
from Financial Management Service, U.S. Department of the Treasury,
Washington, D.C. 20227). This annual report represents budgetary
results at the summary level. The appendix presents the individual receipt
and appropriation accounts at the detail level.

Scheduled Release
The release date for the July 1995 Statement
will be 2:00 pm EST August 21, 1995.

For sale by the Superintendent of Documents. U.S. Govemment Printing
Office. Washington. D.C. 20402 (202) 512-1800. The subscription price is
$35.00 per year (domestic). $43.75 per year (foreign).
No single copies are sold.

The Monthly Treasury Statement is now available on the Department of Commerce's Economic Bulletin Board.
For information call (202)482-1986.

DEPARTMENT

TREASURY
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYL

I ,
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THE

TREASURY

NEWS
'''VEJ'il)'~, ~Y'I·! WASHINGTON, D.C .• 20220· (202) 622·2960

, 'i )

FOR IMMEDIATE RELEASE
July 24, 1995

STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN

"I met today with Deputy Prime Minister and Finance Minister of Poland Grzegroz Kolodko
to discuss Poland's continued strong economic performance. Since the conclusion of its Paris
and London Club debt reduction agreements, Poland has rapidly rebuilt its credit reputation.
The government's recent successful $250 million Eurobond issue marks another milestone in
the restoration of the international financial community's confidence in Poland.
The United States Government has actively supported Poland since it implemented its bold
steps toward a market economy in 1990. We helped mobilize the support of the international
financial institutions and contributed to the Polish Stabilization Fund and the Polish Bank
Privatization Fund.
We urge the Polish Government to finish the job of macroeconomic stabilization and set
privatization on a fast track as it strives for OECD and European Union membership."
-30-

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TREASURY!

'NEWS

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANlAAVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 24, 1995

STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN
"I met this morning with Sir Leon Brittan. He updated me on the efforts to encourage other
countries in the World Trade Organization to maintain their offers on financial services. I
welcomed these efforts, but reiterated that the United States' position on financial services is
unchanged. Our commitment will remain those that we submitted on June 30. We do look
forward to continued participation in the multilateral process in Geneva. "
-30-

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TREASURY,
l~t.JG

EWS

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

&rea's Global Reach
Re~ by Assistant Secretary of to! Treaswy
Jeffrey Shafer
U.S.-&rea B~iness ComciI
.lJIy 24, 1995

Introduction
I am delighted to be here to speak with you this aftemoo~ on the eve of President
Kim's visit to the United States. Our cOlmtries have come a long way together over the past
few years, and I feel confident in saying that our bilateral relationship is as strong as ever.
Economic and corrnnercial relations are a pillar of that relationship. While we in government
playa role, you as corporate leaders are the pri:maIy agents in building bilateral economic
ties. It is a special privilege to share with you my thoughts about where Korea's economy is

headed.
Two years ago Under Secretary Swmners addressed your group, and outlined a few of
the issues he believed would be important as Korea continues its leap toward top-tier
economic status. I think it is appropriate today to pause and take stock of some of the
transfonnations that have occurred over the last few years, and discuss some of the challenges
Korea still faces as that transfonnation continues. In particular, I want to highlight what I -and what r know many Koreans believe is essential for the nation's and its private sector's
continued success: segyehwa, or as it is translated into English, globalization

F.collOmc Success
The speed with which South Korea has climbed from developing status to near the top
tier of economic might is, to put it mildly, breathtaking. Only three decades ago Korea's per
capita income amOlmted to a bare $100. Today it is $8,500, and rising steadily. For over 30
years, Korea's real economic growth has averaged above 8 percent. Korean exports have
climbed from only $43 million in 1962 to $96.4 billion last year, a full $20 billion more than
three years ago. Perhaps most remarkable, a nation that only 45 years was emerging from a
centmy of foreign domination has become the eleventh largest economy in the world, with
one of the most impressive industrial bases in Asia In fact, preliminary data indicate that
Korea's GNP is now larger than Russia's.

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Despite these successes, I think it is fair to say that when Under Secretary Summers
first addressed this audience two years ago, both our nations were experiencing a moment of
some lUlcertainty. Both were pulling out of recession, with prospects for economic growth
still lUlcertain New leaders committed to change and refonn had taken the helm in both
Korea and the United States.
The past two years have brought nruch good. Korea, like the United States, has
enjoyed a strong economic recovety, with real GDP growth at 8.4 percent in 1994 and 9.9
percent over the first quarter of this year. President Clinton made his first bilateral visit
outside the G-7 countries to Korea, and our two cmmtries have anchored their regional
cooperation through joint participation in APEC, where Korea assumes a vety high profile.
On the security front Korea has successfully navigated a difficult period with North
Korea, suffering no economic loss of confidence or significant depreciation of the won. The
United States and Korea have not wavered in their joint security commitments, as we
continue to meet the challenges posed by Korea's neighbor.
Korea faces domestic political challenges as well. The defeat of the ruling party in
local elections means that power must now be shared between local and central authorities,
for the first'time in 35 years. Perhaps that situation is not so dissimilar from what now exists
in the United States. It is difficult. But it is part of public life in a vigorous democracy.

Globalization am Integmtion
. In short, Korea appears to have weathered recent challenges successfully, while laying
a vety strong fOlUldation for continued political and economic success. But despite these past
achievements - or perhaps because of them -- a basic challenge remains. The time has come
for Korea to choose how it can best make the leap fotward into the ranks of the major
economic players. It is time for Korea to choose how it can attain its proper economic role
both in hia, and worldwide.

Events ,over the past two years suggest that Koreans have in fact decided how such a
leap can be achieved. The answer suggested by the actions both of Korea's government and
its private sector, is globalization -- segyehwa. The time is ripe for Korean industry and
finance to become fully integrated in a world economy that is ever more driven by free flows
of trade and capital. And the time is ripe for Korea to open itself fully to the world
Korea's government has over the past severnl years taken a number of steps to signal
its recognition that the way fotward lies through global integration.
o

Average tariff levels have dropped considerably over the past decade, from,
21.9 percent in 1984 to 7.9 percent last year. hnports have risen in parallel.

Half the sectors on Korea's "import diversification" list are due to be liberalized
over the next five years, with cars among them Teleconnmmications and
construction should be largely open to foreigners by 1998.

Perhaps most indicative of Korea's aspirations, the government submitted an
application to join the OECD in March of this year. That application is now
being considered, and we look forward to the membership process as providing
a very fruitful arena for continued progress in Korean liberalization and
integration.

Private Sector Invigoration
The actions taken by Korea's government would offer little hope of success were they
not matched by Korean businesses' determination to expand their global reach. That is why I
think it is so encouraging that scarcely a week goes by without reports that Korean industries
have set their sites on new global goals:
o

Hytmdai looks set for a record year of exports and is undertaking important
overseas acquisitions.

Daewoo has announced a world management strategy to establish 600
companies overseas, and has already embarked on a host of overseas projects,
from a $1.5 billion auto-parts plant in China's Shandong province to automotive
facilities in Uzbekistan and Romania

Samstmg's chainnan has annOlmced that he would like overseas sales to rise to
30 percent from their present 20 percent by the year 2000. Samstmg too is
embarking on important overseas ventures.

Korean films have even ventured into the most exciting realms of the U.S.
entertainment industry. Cheil Foods and Chemicals has annowced it will take
an 11 percent stake in DreamWorks, the new Hollywood studio, in the hope of
becoming the first major nrultimedia entertainment group in Asia

All told, it is estimated that Korea's Chazbol (conglomerates) -- which today
have less than 5 percent of their assets outside Korea -- will spend more than
$20 billion by the year 2000 to set up overseas production bases and acquire
interests in foreign finns. That is a major restructuring by Korea's most
important industrial giants, and an important indicator of the nation's new
global orientation.

The hqxlI1ance of libernlizaCion
The private sector's global detennination shows a recognition that the route toward
first-tier economic status lies outward, not inward. Korea can and should eI1ioy the same
success over this last lap of development that it has enjoyed over the past 45 years. And yet,
I believe Korea faces an importa1}.t danger -- the danger of believing that this final burst of
industrialization can be engineered using yesterday's tools. It would be a serious mistake for
Korea to seek to manipulate the same policy levers, and follow the same policy prescriptions
that the nation depended upon to accomplish its initial burst of development.

Korean industries over the past four decades have relied to some degree on protected
domestic markets as a secure source of profits. Industries were offered easy access to
directed credit by a government intent on concentrating industrialization in sectors deemed
apPIOpriate. Cheap labor allowed firms to grow rapidly, without wonying about other factors
for competitiveness.
Economists debate the extent to which the success Korea has enjoyed over the past
forty years resulted directly from such fonns of economic regimentation and control, or
whether other factors were at work. Whatever the answer for the past, I am convinced that
such policy stances are no longer appropriate. They can only act as a drag on a private sector
that is poised for growth, and ready to attain top-tier status if the last economic shackles are
removed.
Change is never easy. Weaknesses bred by the very policy levers relied upon in the
past now threaten to hamper the Korean march fOIWclfd Cheap credit for larger finns
allowed them to expand - perhaps too easily - to the detriment of smaller finns. That has
left Korea with an tmbealthy concentration of industrial power -- some 20 percent of the
cotm.try's manufacturing output in the hands of 10 :finns - far more than in the rest of Asia
The dearth of sma1l :finns means that Korea's tmYor manufacturing conglomerates cannot tum
to a rich domestic subcontracting netwOIk, as can Japan's, but nrust import many of their
inputs.

More broadly, there are indications that Korea is falling behind its Asian neighbors in
terms of overall competitiveness. The Swiss International Management Development
Institute, for example, rated Korea as only the 24th most competitive out of 41 coWltries -- as
compared to Singapore, which came in 2nd, Hong Kong, which was 4th, and Taiwan,
Malaysia and Thailand, all of which were deemed more competitive. I would not make too
nruch of these economic beauty contests. But they are at least a signal to take stock of
whether Korea has got all the elements in place that it will need to continue its advance.
The challenges are apparent. If Korea's finns are to reach outward, then Korea must
have the foresight to allow fur greater competition at home, and thereby strengthen the
domestic base. Liberalization, across all sectors, will foster the kind of competition that will
invigorate Korea's private sector. That is the only way to ensure a solid fOlUldation from
which the private sector can venture abroad. Without such a fomdation, globaliWion will be
seriously weakened from the start.
Fmancial Sedor libetalization

In my remaining time, I would like to focus on the sector which most concerns the
Treasmy Department, and whose liberalization is absolutely crucial for Korea's continued
success: financial services. Decontrol of the financial sector is essential, if Korea's
businesses are to gain access to the capital needed to fimd their expansion abroad, while
benefitting from the investment and financing teclmiques which only a deep financial sector
can provide. This sector is a key part of the infrastructure that supports the entire economy.

The problems posed by Korea's still stilted financial sector are apparent. After years
of pursuing state-mandated "policy loans," Korea's banks are among the least efficient in the
world, with a rettnn on equity that has averaged half or even one-third that of other fast
gro~ ~ian states. Domestic finDs face a high .co~ of capital, raising costs and banning
therr ability to expand and compete globally. Restnct:J.ons on access to offshore financing
compolIDd the problem, and build finther inefficiencies into the economy. The overall
weakness of Korea's financial sector will continue, lIDless it is exposed to more foreign
competition, and entry by the best global finns.
The Korean govennnent has taken some important steps over the past two years on the
road to financial liberalization Progress has been made on decontrolling domestic interest
rates, and cutting reliance on "window guidance." The ceiling on foreign ownership of South
Korean securities has been lifted from I0 percent of finn equity in 1992 to a scheduled 15
percent this month. Two South Korean firms were listed on the New York stock exchange
this year. Limits on off shore bond issuance by South Korean firms are being raised, and are
scheduled to be eliminated by the year 2000
These are, as I have said, important first steps. But they are not nearly as far as I
believe Korea should go if its private sector is to benefit from far easier access to capital, and
a first-class financial system able to support an industrial giant.
We continue to engage Korea in bilateral financial policy talks, as we did in the
context of the GATS financial services discussions. The OECD process will provide another
useful foann for making finther progress. In that context, I want to focus on some steps that
Korea should be considering in the context of removing the shackles from the financial
system
In my view, a key concern for Korea's economic authorities should be the
development of long-tenn capital markets. On the equities side, one step that we have
discussed at length with the Ministry of Finance and Economy is foreign participation in the
stock market. The etnTent 3% individual and 15% aggregate caps on foreign ownership of
listed shares should be abolished sooner rather than later.

Broadening and deepening the Korean stock exchange through expanded foreign
competition will bring a mnnber of beneficial effects. Removing the equity caps will send a
signal to foreign investors that Korea is opening its doors for the long-term Rather than the
"hot money" which the Bank of Korea and Ministry of Finance and Economy fear, I think
you will see an influx of capital from investors who are interested in Korea's long-tenn
growth prospects. Expanded access for foreign in,:,estors ~ also aid in m~ Korea's
heavy capital demand in the coming decade -- partIcularly m areas such as infrastructure
finance.
In the bond market as well, Korea should move to lift current restrictions. We
welcomed measmes to open convertible bonds issued by small and medimn-size enterprises
last year. However, the most important part of the market -- bonds i~sued by blue chip
Korean finns -- is still closed to foreign investment. Bonds, along WIth stocks, have become

an increasingly important source of financing for Korean finns. In 1993, for example,
corporations raised $23.5 billion through stocks and bonds, compared with $1.1 billion in
1980. Opening the bond market will help to continue the trend away from an unhealthy overreliance on indirect financing from banks.
Unfortunately, Korea's latest 5-year financial sector plan gave no indication that bonds
issued by large Korean finns will be opened to foreign investors in the near future. There is
an explanation for this. Part and parcel of further opening will be further decontrol of
interest rates. Officials from MFE have infonned us that the interest rate differential is now
too great to allow foreign investors access to the most sought-after Korean bonds - for fear
that the more attractive rates in Korea would bring an unwanted influx of foreign capital. We
hope to see progress on this lDlderlying problem soon Interest rates on the bulk of deposits
are scheduled for liberalization in 1996-97. Korea has made good progress so far, and has
even accelerated decontrol of some interest rates. We look to Korea to continue this.
Steps like these will not be easy. They may pose near-tenn difficulties for weak
banks. There can be no guarantee against stockmarket volatility and perhaps CWTency
.pressure. On the other hand, over'the long-nm, .liberalization is the only way to ensure that
Korea's global industrial expansion rests on a solid foundation These steps are critical, if
Korea is to have a financial sector worthy of a nation aspiring to global industrial might.
The Uruguay Room

As you know, our bilateral talks on financial services with Korea have been matched
by efforts to achieve a multilateral agreement on financial services through the GATS. We
tried hard for a good agreeinent, but the offers many other countries put on the table did not
constitute a sufficient basis for our accepting a full MFN obligation
Let me emphasize that the commitment that the United States did ultimately make in
the GATS will guarantee foreign finns already established on our soil the right to maintain all
current operations. On the other hand, our MFN exemption will pennit us to differentiate
among countries going forward, depending on how rrruch access they are willing to accord to
us. Let me emphasize that while we may choose to differentiate among countries, we are not

required to do so. We have long had the most open financial markets in the world, and will
continue to seek to keep them open to those who open further to our own finns.
Conclmion

In conclusion, let me say that the need for further steps by Korea must not obscure
just how far Korea and the United States have come. If Korea's growing economic power has
risen global expectations of Korea, that is a good thing, not a negative. It shows how 1I1l.lCh
economic potential Korea now enjoys, and just how close Korea is to completing its final leap
into the top ranks of global economic powers. I am convinced that through cooperation and
dialogue on trade, progress on Korea's OECD membership, and continued mutual cooperation
on security, the U.S.-Korea relationship will prosper, even as Korea succeeds in its last
economic leap forward.

DEPARTMENT

THE

TREASURY

TREASURY (;cI1~ ~N E W S

~8q~~"""II"II"""""""""".
D.C.. 20220· (202) 622-2960

ornCE OF PUBUC AFFAlRS • 1500 PENNSYLVANIA AVENUE, N.W .•

WA5HINCTO~,

Statement of

RONALD K. NOBLE
II nder Secretary of the Treasury for Enforcement
Before The
Subcommittee on Crime
Committee of the Judiciary
and the
Subcommittee on National Security, International Affairs,
and Criminal Justice,
Committee on Government Reform
House of Representatives
l\1ondav. , July, 24, 1995

RR-466

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

MR. CHAIRMAN, (HAVE A LONGER STATEMENT THAT I WOULD LIKE
TO SUBMIT FOR THE RECORD.
I SPEAK TODAY IN BEHALF OF THE BRAVE MEN AND WOMEN OF ATF.
AFfER THE FAILED RAID, THE DEATHS OF 4 ATF AGENTS, AND THE
TRAGIC FIRE AT WACO, PRESIDENT CLINTON DIRECTED THAT TREASURY
AND JUSTICE CONDUCT VIGOROUS AND THOROUGH EXAl\UNATIONS OF
WHAT HAD LED TO THE LOSS OF LAW ENFORCEMENT AND CIVILIAN
LIVES.
SECRETARY BENTSEN DESIGNATED ME TO LEAD THE TREASURY
DEPARTMENT'S REVIEW. HE DEMANDED THAT THE INVESTIGATION BE
HONEST, UNCOl\1PROMISING, AND COMPREHENSIVE.
SECRETARY BENTSEN APPOINTED THREE INDEPENDENT REVIEWERS
TO PROVIDE AN ASSESSMENT OF THE TREASURY DEPARTI\1ENT'S
INVESTIGATION AND REPORT ON ATF'S INVESTIGATION OF DA VID KORESH
AND RAID OF HIS COMPOUND ON FEBRUARY 28, 1993.

(MORE)

PART I: ASSESSMENT OF TREASURY'S REPORT
HERE'S WHAT THE INDEPENDENT REVIEWERS SAID ABOUT THE
TREASURY DEPARTMENT'S INVESTIGATION AND REPORT IN LETTERS
SUBMITTED TO SECRETARY BENTSEN IN 1993.
PULITZER PRIZE WINNING JOURNALIST EDWIN O. GUTHMAN STATED,
"IN APPOINTING THE PANEL OF INDEPENDENT REVIEWERS YOU SAID YOU
EXPECTED A "THOROUGH, COMPREHENSIVE AND UNCOMPROMISING"
CRITIQUE AND THAT, SIR, IS \VHAT HAS BEEN GIVEN TO YOU." •.. "IT WAS
A PRIVILEGE TO PARTICIPATE IN THE REVIEW Al'I'D IN SO DOING, I I\1UST
SA Y I GAINED A ENORMOUS RESPECT FOR THE PROFESSIONALISM AND
DEDICATION WITH WHICH THE INVESTIGATIVE TEAM LEADERS AND THEm
AGENTS CONDUCTED THEMSELVES AT ALL TIMES."
HENRY RUTH, A FORMER CHIEF WATERGATE PROSECUTOR, STATED:
"THE REPORT INSIGHTFULLY FULFILLS THE PURPOSE OF THIS SELFEVALUATION. THE IMPARTIALITY, INTEGRITY, THOROUGHNESS AND
KNOWLEDGE OF THE INTERNAL REVIEW TEAM MEJ\;IBERS HAVE BEEN
EVIDENT THROUGHOUT TIlE FIVE MONTH, INTENSIVE INVESTIGATIVE
PROCESS •••• MR. RUTH CONCLUDES "IT IS MY HEARTFELT HOPE THAT
YOU, [SECRETARY BENTSEN] AS A NATIONAL LEADER, CAN LEAD THE
CHANGE OF ORIENTATION, THOUGHT AND ACTION SO THAT NO MORE
MEN, WOMEN AND CHILDREN NEED DIE IN THESE MOST DIFFICULT OF
CIRCUMSTANCES. "
CHIEF WILLIE WILLIAMS OF THE LOS ANGELES CITY POLICE
DEPARTMENT STATED: "I HAVE FOUND THAT THE INVESTIGATIVE TEAM
WHICH YOU ASSEMBLED IS OF THE HIGHEST QUALITY AND INTEGRITY.
THESE MEN AND WOMEN HAVE WORKED TIRELESSLY TO UNCOVER THE
FACTS SURROUNDING THE EVENTS WHICH LED UP TO AND INCLUDED THE
RAID ON DAVID KORESH'S RESIDENCE NEAR WACO, TEXAS ON THE 28TH
OF FEBRUARY 1993."
THE VIEW OF THE REVIEWERS HAS BEEN HEARD AND ECHOED BY
THE INDEPENDENT INSPECTOR GENERAL'S OFFICE, MEMBERS OF
CONGRESS FROM TREASURY'S OVERSIGHT COMMITTEES AND MAJOR
NEWS PUBLICATIONS THROUGHOUT THIS COUNTRY. I WOULD ASK THE
COMMITIEE TO INCLUDE IN THE RECORD THE LETTERS FROM THE THREE
REVIEWERS TO SECRETARY BENTSEN.
TREASURY'S OFFICE OF THE INSPECTOR GENERAL DETERMINED
THAT THE REPORT "PROVIDES AN ACCURATE ACCOUNT OF THE EVENTS,"
3

THEN ARIZONA SENATOR DENNIS DECONCINI FOUND IT "THOROUGH,
IMPARTIAL, AND SELF-EFFACING." REPRESENTATIVE JIM LIGHTFOOT OF
IOWA DESCRIBED THE REPORT AS "THOROUGH IN ITS FINDINGS."
THE WALL STREET JOURNAL CHARACTERIZED IT AS "EXTENSIVELY
DETAILED. II 11IE WASHINGTON POST SAID IT WAS A "THOROUGH AND
CANDID ACCOUNT." 11-1E LOS ANGELES TIMES WROTE, "(D]ESPITE ALL
THAT 'VENT \VRONG WITH THE RAID BY THE [ATFJ ON THE BRANCH
DAVIDIAN COl\IPOUND LAST FEBRUARY, THE THOROUGH AND COMPLETE
REPORT RELEASED ... BY THE TREASURY DEPARTMENT SHOWS TIIAT
I'vIUCH IN ITS AFTEMIATH IS GOING RIGHT.II THE NEW YORK TIMES
CALLED IT IIBRUTALLY DETAILED." AND JUST LAST WEEK, TIME
MAGAZINE STATED:
PERHAPS THE HARSHEST CRITIC OF THE ATF'S WACO RAID WAS THE
BUREAU'S OWN MASTER, THE TREASURY DEPARTMENT. IN THE
RAID'S AFTERl\fATH, THE DEPARTMENT LAUNCHED AN
INVESTIGATION BY VETERAN AGENTS FROM ITS OTHER LAW
ENFORCEMENT AGENCIES, BACKED UP BY INDEPENDENT OUTSIDE
REVIEWERS, INCLUDING WILLIE WILLIAMS, THE LOS ANGELES
CHIEF OF POLICE. THE RESULT WAS A SOD-PAGE INDICTMENT THAT
PULLED NO PUNCHES, YET WHOSE DETAILS, SURPRISINGLY, WENT
LARGELY UNREPORTED.
YET, AT THESE HEARINGS, THE VERY PEOPLE WHO ARE MOST
CRITICIZED IN THE REPORT HAVE BALDLY ASSERTED THAT THE REPORT
IS ONLY 70% ACCURATE. CERTAIN MEMBERS OF THIS COMMITTEE HAVE
ACCEPTED THAT FIGURE AS GOSPEL WITHOUT ANY CONSIDERATION OF
THE SOURCE OR EVIDENCE TO SUPPORT THAT NUl\1BER. INDEED, NONE OF
THOSE CRITICIZED ARTICULATED WHAT, IF ANY, FACTS IN THE REPORT
WERE INACCURATE, NOR WHAT ANALYSIS IS FLAWED. AS SECRETARY
BENTSEN OBSERVED, IT IS NOT SURPRISING THAT MR. SARABYN, MR.
CHOJNACKI, AND MR. HARTNETT DISAGREE WITH SOME OF THE
CONCLUSIONS OF THE REPORT, BECAUSE THEY ARE AMONG THOSE WHO
WERE CRITICIZED AND WERE DETRIMENT ALLY AFFECTED AS A RESULT OF
THE REVIEW'S FINDINGS. AT TODA V'S HEARING I HAVE WITH ME ALMOST
ALL OF THOSE WHO WORKED ON THE REPORT; THEY ARE THE FINEST
GROUP OF AGENTS AND COLLEAGUES WITH WHOM I EVER HAVE BEEN
ASSOCIATED. THEIR DEDICATION, COMPETENCE AND INTEGRITY
COMBINED TO GENERATE WHAT MANY CONSIDER THE FINEST
EXAMINATION OF A LAW ENFORCEMENT ACTION EVER PRODUCED. WE
STAND BY THE REPORT'S FACTS, ANALYSIS AND CONCLUSIONS, AS DO OUR
INDEPENDENT, OUTSIDE REVIEWERS. IF THE REPORT IS ONLY 70%
ACCURA TE AS THOSE CRITICIZED HAVE ASSERTED, SHOW US THE 30%
4

INACCURACIES. IN REALITY, IT IS ACCURATE AND THERE HAS BEEN NO
COVER-UP.
FOR THE RECORD, NONE OF THE MEMBERS OF THE TEAM THAT
GENERATED THE TREASURY DEPARTMENT'S REPORT ON WACO WERE
INTERVIEWED PRIOR TO THIS HEARING TO DETERMINE WHAT THEY
THOUGHT ABOUT THE REPORT. SO LET ME NOW ASK THE AGENTS,
LA WYERS AND INDIVIDUALS \VI-IO GATHERED THE FACTS AND PERFORMED
THE ANALYSIS FOR THE DEPARTMENT OF THE TREASURY'S REPORT ON
ATF'S INVESTIGATION OF DAVID KORESH TO STAND.
THANK YOU.
THE AMERICAN PUBLIC HAS A RIGHT TO KNOW THA T ONE OF ITS
MAJOR DEPARTl\1ENTS, THE TREASURY DEPARTMENT, ALREADY HAS
EXAMINED ISSUES CONFRONTED BY THIS HEARING AND THAT TREASURY'S
EXAMINATION WAS COMPREHENSIVE, CANDID AND ACCURATE. BY
RECOGNIZING THIS FACT, THESE HEARINGS CAN HELP TO RESTORE
CONFIDENCE IN THIS COUNTRY'S PUBLIC SERVANTS. TO IGNORE OR DENY
THE QUALITY OF THE TREASURY DEPARTMENT'S SELF EXAMINATION
COULD FEED THE PARANOIA AND SUSPICION OF A SMALL SEGMENT OF
THE AMERICAN PUBLIC.

PART II: MAJOR FINDINGS IN TREASURY'S REPORT
WHAT DID THE TREASURY DEPARTMENT REPORT FIND BACK IN
SEPTEMBER, 1993?
THE TREASURY REPORT CONCLUDED THAT ATF AT THE REQUEST OF
THE WCAL SHERIFF PRO PERL Y INITIATED AN INVESTIGATION INTO DAVID
KORESH AND HIS FOLLOWERS BASED ON INFORMATION PROVIDED BY THE
SHERIFF. THIS INVESTIGATION \V AS PREDICATED ON EVIDENCE THAT
FEDERAL CRIMINAL FIREARMS AND EXPLOSIVES LA WS WERE BEING
VIOLATED. IT \VAS NOT BASED ON KORESH'S RELIGIOUS BELiEFS.
THE TREASURY REPORT CONCLUDED THAT THERE WAS PROBABLE
CAUSE TO BELIEVE THAT PEOPLE INSIDE THE BRANCH DAVIDIAN
COMPOUND WERE MANUFACTURING ILLEGAL MACHL\1E GUNS AND
EXPWSIVE DEVICES, AND CONCLUDED -- AS DID THE MAGISTRATE-JUDGE
WHO REVIE\VED AND APPROVED THE WARRANT. NO FACTS HAVE
EMERGED THAT UNDERMINE THAT CONCLUSION.
INDEED, AFTER THE APRIL 19 FIRE, THE TEXAS RANGERS
RECOVERED 48 ILLEGAL MACHINE GUNS, ILLEGAL EXPLOSIVE DEVICES,
AND ILLEGAL SILENCERS Al\T)) HUNDREDS OF TIIOUSA~DS OF ROUNDS OF
AMMUNITION FROM TIlE COl\1POUND.
SINCE THE TREASURY REPORT WAS ISSUED, :":LEVEN BRANCH
DA VTUIANS WERE BROUGHT TO TRIAL AND EIGHT WERE CONVICTED OF
THE VERY FIREARMS OFFENSES THAT ATF INVESTIGATED. AT THAT TRIAL,
NONE OF THE DEFENSE LA WYERS CHALLENGED THE VALIDITY OF THE
SEARCH WARRANT. INDEED, I UNDERSTAND THAT ONE OF THOSE DEFENSE
LA WYERS TESTIFIED LAST FRIDA Y THAT THE W ARRANT WAS LEGALLY
SUFFICIENT.
THE TREASURY REVIE\V TEAM AND THE SIX TACTICAL OPERATIONS
EXPERTS , ALL CONCLUDED THAT ATF'S RAID PLANNING WAS SERIOUSLY
FLAWED. SPECIFICALLY, ALMOST T\VO YEARS AGO THE REPORT
CONCLUDED THAT:
FIRST, INTELLIGENCE-SYSTEM FLAWS, INCLUDING AN Il\1PROPERLY
CONDUCTED UNDERCOVER OPERATION, SERIOUSLY COMPROMISED THE
PLANNING FOR WARRANT SERVICE.
SECOND, BECAUSE OF THE FLA WED INTELLIGENCE GATHERING AND
PROCESSING SYSTEM, THE PLANNERS DID NOT GIVE SUFFICIENT
ATTENTION TO OTHER OPTIONS, SUCH AS, TRYING TO ARREST KORESH
6

AWAY FROl\1 THE COMPOUND.
THIRD, ATF SHOULD HAVE CONSULTED WITH EXPERTS IN ORDER TO
BETTER UNDERSTAND KORESH'S LIKELY RESPONSE TO DIFFERENT LAW
ENFORCEMENT OPTIONS.
FOURTH, THE PLANNERS DID NOT DEVEWP A MEANINGFUL
CONTINGENCY PLAN. DESPITE THE FLAWS IN THE PLANNING PROCESS,
FOUR OF THE REVIEW'S FIVE TACTICAL EXPERTS WHO ADDRESSED THIS
ISSUE CONCLUDED THAT THE PLAN HAD A REASONABLE CHANCE OF
SUCCESS IF ALL OF THE PLANNERS' MAJOR FACTUAL ASSUT\1PTIONS HAD
BEEN CORRECT.
THE TREASURY REPORT CONCLUDED THAT THE ATF DID NOT
MISLEAD THE U.S. MILITARY OR THE TEXAS NATIONAL GUARD IN
OBTAINING THEIR ASSISTANCE. NEVERTHELESS, THE REVIEW FOUND
THAT THE STANDARDS FOR NON-REWBURSABLE MILITARY SUPPORT
WERE UNCLEAR, AND THAT MORE PRECISELY DEFINED CRITERIA NEEDED
TO BE DEVELOPED. ALTHOUGH I HAVE NOT WATCHED ALL THE
TESTIMONY, IT IS MY UNDERSTANDING THAT THE MILITARY WITNESSES
TESTIFIED THAT THE ASSISTANCE PROVIDED ATF WAS LEGAL AND
APPROPRIATE AND NONE TESTIFIED THAT ATF HAD LIED TO THE
MILITARY. I ALSO UNDERSTAND THAT CONGRESSMAN MCCOLLUM IN
EFFECT TOOK THE l\lILITARY-RELATED CHARGES OFF THE TABLE IN HIS
STATZMENT THIS MORNING.
THE TREASURY REPORT ALSO FOUND THAT THE TREASURY
DEPARTMENT IN WASHINGTON, D.C., DID NOT REQUIRE SUFFICIENT
ADV ANCE NOTICE OF SIGNIFICANT ENFORCEMENT OPERATIONS TO
EXERCISE MEANINGFULLY ITS OVERSIGHT OF THESE OPERATIONS.
NEVERTHELESS, WHEN INFORl\1ED OF THE PLAN IN THIS CASE, THE
OFFICE OF ENFORCEMENT STOPPED THE OPERATION UNTIL ATF
DffiECTOR HIGGINS GAVE CERTAIN ASSURANCES ABOUT THE RAID PLAN.
THE REPORT ALSO CONCLUDED THAT THE RAID SHOULD NOT HAVE
GONE FORWARD ONCE ATF LEARNED THAT KORESH KNEW THAT ATF WAS
COMING 45 MINUTES IN ADVANCE OF THE RAID. THE REPORT FOUND THAT
THE RAID COMMANDERS FAILED TO APPRECIATE THE SIGNIFICANCE OF
THE INFORMATION PROVIDED BY THE UNDERCOVER AGENT ON THE
MORNING OF THE RAID AND THE DANGERS OF PROCEEDING WHEN
SURPRISE AND THE DA VIDIANS' CONDUCT WERE NOT AS PLANNED.
THE REPORT ALSO STATED THAT THE FLAWED DECISION TO GO
FORWARD WAS NOT SOLELY A QUESTION OF INDIVIDUAL RESPONSIBILITY
7

ON THE PART OF THE RAID PLANNERS. IT WAS ALSO THE RESULT OF
SERIOUS DEFICIENCIES IN THE INTELLIGENCE GATHERING AND
PROCESSING STRUCTURE, POOR PLANNING AND PERSONNEL DECISIONS,
AND A GENERAL FAILURE OF ATF MANAGEMENT TO CHECK THE
MOMENTUM OF THE OPERATION AS THE CIRCUMSTANCES DEMANDED.
MOREOVER, IT FOUND THAT ATF AND TREASURY BORE RESPONSIBILITY
FOR ATF'S LATE NOTIFICATION ON THE 26TH.
THE TREASURY REVIE\V ALSO UNCOVERED AND REPORTED
DISTURBING EVIDENCE OF MISLEADING STATEMENTS AND OF DELffiERATE
ATTEMPTS BY THE RAID COMMANDERS, PHIL CHOJNACKI AND CHUCK
SARABYN, TO SHIFT BLAME TO THE UNDERCOVER AGENT, ROBERT
RODRIGUEZ.
FINALLY, THE REPORT CONCLUDED THAT ATF AGENTS WERE
BRAVE, LOYAL AND DISCIPLINED FOLLOWING DA VID KORESH'S
MURDEROUS Al\tIBUSH. THEY RISKED THEIR OWN LIVES TO SAVE ONE
ANOTHER AND TO REDUCE THE CHANCE THAT INNOCENT DA VIDIANS
WOULD BE KILLED.

PART III: IMPORTANCE OF TREASURY'S REPORT TO ME
WHY DO I CARE ABOUT THE TREASURY DEPARTMENT'S REPORT?
I FEEL VERY STRONGLY ABOUT THE TREASURY REPORT, AND I'D
LIKE TO TELL YOU WHY. I DON'T BELIEVE A DA Y HAS PASSED SINCE
FEBRUARY 28, 1993 THAT I HA VEN'T THOUGHT ABOUT THE MURDERS OF
CONWA Y LEBLEU, TODD MCKEEHAN, ROB WILLIAMS AND STEVE WILLIS. I
WAS IN A POSITION TO INFLUENCE THE ACTING ASSISTANT SECRETARY
FOR ENFORCEMENT NOT TO PERMIT THE RAID TO PROCEED -- NO MATTER
WHAT ASSURANCES ATF'S THEN DIRECTOR, STEVE HIGGINS, GAVE HIM. I
GA VE THE SAME ADVICE -- FIRST, TO STOP THE RAID, 1 lIEN TO PERMIT IT
TO GO FORWARD -- THAT I WOULD HAVE FOLLOWED, HAD I BEEN THE
ASSISTANT SECRETARY FOR ENFORCEl\tENT. I HAVE NEVER SHIED AWAY
FROM TAKING RESPONSIBILITY FOR MY ADVICE, NOR DO I NOW.
IN EARLY MARCH 1993, I ATTENDED FUNERALS OF THREE OF THE
FOUR MURDERED AGENTS. TWO WERE HELD THE SAME DA Y IN DIFFERENT
STATES, SO I COULD ONLY ATTEND THREE. I DO NOT HAVE THE
VOCABULARY TO DESCRIBE THE IMPACT OF ATTENDING THE FUNERAL OF
A LA W ENFORCEMENT OFFICER SLAIN IN THE LINE OF DUTY. POLICE
OFFICERS FROM THROUGHOUT THE COUNTRY -- STATE, LOCAL AND
FEDERAL -- ATTEND OR SEND FLOWERS IN RECOGNITION OF THE UNITY OF
LAW ENFORCEMENT. MOREOVER, I FELT THAT THE SURVIVING FAMILY
MEMBERS GAVE ME MORE COMFORT THAN I GAVE THEM.
I REMEMBER HOLDING CONWAY LEBLEU'S SON CAMERON'S HAND
WHILE I KNELT BEFORE HIM. HE WAS 18 MONTHS OLD. I REMEMBER ROB
WILLIAMS' MOTHER HOLDING ME IN HER ARMS FOR A LONG TIME AND
TELLING ME THAT EVERYTHING WOULD BE O.K. I REMEMBER STEVE
WILLIS'S FATHER'S STRENGTH. HE SAID THAT HE WAS PROUD OF HIS SON
BECAUSE HE DIED DOING WHAT MADE HIM HAPPY. WHILE I WASN'T ABLE
TO ATTEND TODD MCKEEHAN'S FUNERAL, I LATER SPOKE WITH HIS
FATHER WHO SAID: "PLEASE SEND ME A COpy OF YOUR REPORT OF WHAT
HAPPENED AT WACO !3EFORE IT'S MADE PUBLIC; I WANT TO KNOW THE
TRUTH."
THREE FUNERALS IN THREE STATES IN THREE DAYS. I AM
REMINDED EVERY DAY OF THE DANGEROUS WORLD IN WHICH LAW
ENFORCEMENT OPERATES.SINCE JOINING TREASURY I HAVE ATTENDED 14
FUNERALS OF TREASURY AGENTS AND EMPLOYEES KILLED IN THE LINE
OF DUTY AND 8 FUNERALS AND MEMORIAL SERVICES OF NON-TREASURY
AGENTS. I DO NOT FORGET THAT FOUR ATF AGENTS WERE MURDERED;
THREE WIVES ARE WIDOWED; CHILDREN ARE WITHOUT A FATHER AND
9

PARENTS, BROTHERS AND SISTERS ARE WITHOUT A LOVED ONE. DURING
THE WACO FUNERALS I SAW AND MET ATF AGENTS FOR WHOM I WOULD
ONE DAY BE RESPONSIBLE. I SA W THE BOND AMONG THEM. MEN AND
WOMEN CRIED OPENLY AND PROUDLY AS THEY LAID THEIR BRETHREN T(
REST. BLACK AND WHITE AGENTS HELD EACH OTHER. FEMALE AND MALI
AGENTS HELD EACH OTHER.
I DON'T BELIEVE THAT CONWAY LEBLEU HAD BEEN BURIED BEFORI
PRESS REPORTS SURFACED TIIAT ATF WENT FOR\VARD WITH THE RAID
AFfER LEARNING THAT KORESH HAD BEEN TIPPED TO THE PLANNED RAID
ON RAID DAY. ATF MANAGEMENT DID NOT CONFIRM THIS FACT; IT
DENIED IT PUBLICLY AND FREQUENTLY.
I COMMITTED MYSELF TO FIND THE TRUTH USING THE MOST
COMPREHENSIVE AND AUTHORITATIVE REVIEW PROCESS POSSIBLE. AND,
SINCE I DON'T DO THE WORK OF THE BRAVE AND GOOD ATF AGENTS WHO
RISK THEIR LIVES EACH AND EVERY DAY ENFORCING THE LAW AGAINST
THE COUNTRY'S MOST DANGEROUS CRIMINALS, I COMMITTED MYSELF TO
ENSURING THAT THEY HAVE THE LEADERSHIP, TRAINING, RESOURCES,
AND SUPPORT NECESSARY FOR THE WORK THEY DO.
BY SETTING OUT THE TRUTH, THE TREASURY REPORT HONORED THE
MEMORIES OF THE ATF AGENTS KILLED AT \VACO. BY INSTITUTING
REFORMS, TREASURY AND ATF HAVE WORKED TO ENSURE THAT A
TRAGEDY OF THIS KIND NEVER AGAIN OCCURS. THERE HAS BEEN A WT
OF DISCUSSION AT THESE HEARINGS ABOUT THE NEED TO RESTORE FAITH
IN FEDERAL LAW ENFORCEMENT. I DO NOT BELIEVE THE AMERICAN
PEOPLE NEED THEIR FAITH RESTORED; THEY HAVE FAITH IN FEDERAL
LAW ENFORCEMENT. LAST WEEK AS THESE HEARINGS CONTINUED,
EVERYDA Y WORK CONTINUED FOR LINE AGENTS OF THE BUREAU OF
ALCOHOL, TOBACCO AND FlREA~IS. THAT WORK OFTEN PLACES THEM
IN THE MOST DANGEROUS NEIGHBORHOODS PURSUING THE COUNTRY'S
MOST VIOLENT CRIMINALS.
ON THE MONDAY BEFORE THESE HEARINGS BEGAN, AN
UNDERCOVER ATF AGENT SHOT AND KILLED A SUSPECTED MEMBER OF A
MURDEROUS CRACK DISTRIBUTION RING IN A CRWE RIDDEN NEW
ORLEANS NEIGHBORHOOD WHO, WHILE POINTING A BERETTA 9 MM SEMIAUTOMA TIC PISTOL, THREATENED TO "BLOW THE HEADS OFF" OF BOTH
THE AGENT AND ANOTHER PERSON. THE AGENT, A WACO VETERAN, WAS
WORKING ON A DRUG ENFORCEMENT ADMINISTRATION TASK FORCE
ALONG WITH OFFICERS FROM THE NEW ORLEANS POLICE AND THE
JEFFERSON PARISH SHERIFF'S OFFICE. THE TASK FORCE TARGETS
VIOLENT NARCOTICS OFFENDERS. WE THUS MUST REMEMBER THE
10

VIOLENT WORLD IN WHICH ATF AGENTS OPERATE.
WHEN THE NEW ORLEANS TIMES-PICAYUNE REPORTED ON THE
EPisODE ON THE FRONT PAGE, IT DID NOT MENTION WACO. THE PEOPLE
OF NEW ORLEANS, KNOW THAT WHATEVER MISTAKES ATF MADE T\VO
YEARS AGO, IT CARRIES OUT A CRITICAL, DIFFICULT AND DANGEROUS
LAW ENFORCEMENT MISSION, FIGHTING VIOLENT NARCOTICS
OFFENDERS, AND ARMED CAREER CRIMINALS, GANGS, ILLEGAL GUN
TRAFFICKERS, ARSONISTS, AND BOMB-MAKERS. ATF AGENTS DAILY PLACE
THEm LIVES ON THE LINE TO HELP MAKE OUR CITIZENS SAFER. IF THE
AMERICAN PEOPLE ARE REMINDED OF THAT DURING THESE HEARINGS, I
BELIEVE THE l'rflSSION OF LAW ENFORCEMENT AND ATF \VILL BE
STRENGTHENED AS A RESULT.

PART IV: CHANGES AT TREASURY AND ATF SINCE WACO

WHAT HAS CHANGED SINCE THE REPORT WAS RELEASED?
FIRST, ATF HAS NEW LEADERSHIP. DIRECTOR HIGGINS ANNOUNCED
HIS INTENTION TO RETIRE BEFORE PUBLICATION AND WITHOUT READING
THE TREASURY REPORT. SECRETARY BENTSEN SELECTED JOHN MAGA W ,
THEN DIRECTOR OF THE SECRET SERVICE TO BECOME THE NEW ATF
DIRECTOR. AFTER ISSUING THE REPORT, SECRETARY BENTSEN PLACED
FIVE ATF OFFICIALS ON ADMINISTRATIVE LEA VE, INCLUDING MR.
HARTNETT, MR.CHOJNACKI, AND MR SARABYN.
MR. HARTNETT AND MR. CONROY RETIRED RATHER THAN
CHALLENGE THE REPORT'S FINDINGS. IHR. TROY ACCEPTED A DEMOTION
IN LIGHT OF THE REPORT'S FINDINGS. l\ffi. SARABYN AND MR. CHOJNACKI
WERE FIRED BECAUSE THEY REFUSED TO ACCEPT GIVING UP THEIR GUNS,
BADGES AND ABILITY TO ENFORCE FEDERAL CRIJ\1INAL LAW.
EVENTUALLY THEY APPEALED THE FIRING AND ULTIMATELY AGREED TO
GIVE UP THEIR GUNS, BADGES AND RANK. ATF DIRECTOR MAGAW
BELIEVED THAT IT WAS IN THE BEST INTEREST OF HIS BUREAU THAT ATF
SETTLE WITH THEM TO A VOID THE POSSIBILITY THAT THE MSPB WOULD
LATER REINSTATE THEM WITH GUNS AND BADGES DESPITE THE VALIDITY
OF THE REPORT'S FINDINGS.
THE SECOND CHANGE IS THAT I ISSUED A DIRECTIVE IN AUGUST,
1993, REQUIRING THAT THE OFFICE OF ENFORCEMENT BE INFORMED OF
ANY SIGNIFICANT OPERATIONAL MATTERS THAT AFFECT ANY OF THE
BUREAUS' MISSIONS, INCLUDING MAJOR, HIGH-RISK LAW ENFORCEMENT
OPERATIONS.
THIRD, I INSTITUTED NEW GUIDELINES FOR SENSITIVE UNDERCOVER
OPERATIONS. ATF, CUSTOMS, AND SECRET SERVICE NOW HAVE ALL
SENSITIVE UNDERCOVER OPERATIONS REVIEWED BY A MULTI-AGENCY
COMl\DTTEE TO ENSURE MAXIMUM PLANNING AND OVERSIGHT. THE
MULTI-AGENCY COMMITTEE INCLUDES NOT ONLY REPRESENTATIVES
FROM ALL TREASURY ENFORCEMENT BUREAUS, BUT ALSO
REPRESENTATIVES FROM THE DEPARTMENT OF JUSTICE'S CRIMINAL
DIVISION. THIS PROCEDURAL SAFEGUARD SHOWS THE INCREASED
OVERSIGHT BY TREASURY OFFICIALS OVER THE MOST SENSITIVE AND
DANGEROUS LAW ENFORCEMENT OPERATIONS OF THE BUREAUS. INDEED,
HAD THE UNDERCOVER GUIDELINES BEEN IN PLACE IN 1992 AND EARLY
1993, THE INVESTIGATION OF KORESH WOULD HAVE COME UNDER CLOSE
SCRUTINY BY A SIZABLE GROUP OF AGENTS AND LA WYERS FROM A
12

BROAD SPECTRUM OF ENFORCEMENT AGENCIES.
FOURTH, \-VE TOOK STEPS TO IMPROVE OVERSIGHT, INCLUDING
FO~1AL AND INFORMAL COM~fUNICATION BETWEEN TREASURY'S LA W
ENFORCE1\1ENT BUREAUS AND TREASURY. TO THAT END, I ESTABLISHED A
WEEKLY 1\'IEETING BETWEEN THE tINDER SECRETARY'S OFFICE AND THE
HEADS OF EACH OF THE TREASURY ENFORCEMENT BUREAUS AND KEY
OFFICES. I ALSO HAVE PERIODIC ONE ON ONE MEETINGS \VITH EACH OF
THESE BUREAU HEADS WHERE POLICY MATTERS ARE DISCUSSED IN
GREATER DETAIL. OF COURSE, I ALSO SPEAK REGULARLY AND
INFOR1\IALLY WITH THE BUREAU HEADS ON BOTH SIG\fIFICANT AND MORE
ROUTINE l\1A TTERS.
FINALLY, I REACTIVATED THE TREASURY ENFORCEJ\.1ENT COUNCIL
(TEC). THE TEC CONSISTS OF ALL THE BUREAU HEADS. THERE ALSO ARE
TEe WORKING GROUPS THAT FOCUS O~ MORE SPECIFIC SUBJECT
MATTERS.
BASED ON THESE REFORl\1S, AN OPERATION CONTEMPLATED BY ANY
TREASURY BUREAU OF THE SCOPE AND COMPLEXITY OF THE WACO RAID
WILL COJ\.1E TO THE ATTENTION OF A VARIETY OF LA W ENFORCEMENT
AUTHORITIES AS WELL AS MY OFFICE WELL IN ADV Ar\CE OF THE
PLANNED ACTION. ORDINARILY, OPERATIONAL MATTERS ARE THE
DOMAIN OF LA\\, ENFORCEJ\.1ENT BUREAU HEADS. THE JOB OF TREASURY
IS TO ENSURE THAT THE BUREAUS HAVE STRONG LEADERSHIP AND HIGH
STANDARDS FOR PERSONNEL, INSTITUTE PROPER TR AINING, ARE
SUPPORTED WITH ADEQUATE RESOURCES, AND ENFORCE THE LAWS
IMPARTIALLY.

DEPARTMENT

TREASURY

THE

)",NEWS

~8~9.

. . . . . . . . . . . . . .

TREASURY

._ _ _ _ _ _ _ _ _ _ _ _

OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

July 24, 1995

Monthly Release of U.S. Reserve Assets

The Treasury Department today released U.S. reserve assets data for the month of
June 1995.
As indicated in this table, U.S. reserve assets amounted to $90,063 million at the end
"f June 1995, down from $90,549 million in May 1995.

U _So Reserve Assets
tin millions of <loHars)
End
of
Month

Total
Reserve
Assets

~peclal

Gold
Stock 11

Drawing
Rights 1111

Foreign
Currencies
~I

Reserve
PositwIl
in IMF 2/
~

1995
May

90,549

11,054

11,923

53,294

14,278

June

90,063

11,054

11,869

52,864

14,276

11
11

:JI

1.1

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 hasis
beginning July 1974.
Includes allocations of SDRs by the IMF plus transactions in SDRs.
Includes holdings of Treasury and Federal Reserve System; beginning November 1978,
these are valued at current market exchange rates or, where appropriate, at such other
rates as may be agreed upon hy the parties to the transactions.

RR releases,
467
,n; . lb·IOgrap h·les, ca II our 24-h ourfiax /.me at (2 02) 622-2040
For press
speeches, public schedules and OJJ'ClU

PUBLIC DEBT NEWS
Department at the Treasurv •

Bureau of !he Public Deb! • Washing-ton, DC 20239

CONTACT: Office of Financinq

FOR IMMEDIATE RELEASE
July 24, 1995

202 219 3350

RESULTS OF TREASURY'S AUCTION OF i3-WEEK BILLS
'T'f>nap.rf! tC'lr

~1::\,?e:,~

mi Ilion ot l::\-wp.p.k h1118 \-.0 hf> lAR1lf>rl

July 27, 1995 and to mature Oc,tober 2'5, 1995 were
occepted todoy (CUSIP: 912794V43).

RANGE OF ACCEPTED
COMPETITIVE BIDS:
Di fI<:C'llmr.

TnVf> FI!-. mp.n r.

Rate

Price

S.44%"

5.61%-

98.625

La .....
High

C;.47~

C;.~4~

"1iLt;17

Averaqe

5.47'0'

5.'54~

98.'517

'T'f>nap.r!=l

rir.

r.hf> high aiRcCJlm!-. r:=J!-.f> wp.rp. :=J11C'lr.t-:f>a

:n1;".

The investment rate is the equivalent coupon-issue yield.

Received
S~0,700,"~R

Accepted
0t;7

sn, ?t;c"

Type
r.(")mpp. t: , !-. ; VP.

S4S,7~4,~??

Noncompetitive
Subtotol, Public

Federal Reserve

$R,~e;?,7?1

1.343.84'5

1.343,84'5

$47,138,168

p,706,567

3,1'52,500

3,1"52,500

400 000

400,000
$13,2"59,0'57

Foreign Officiol
TnRr.it-:1lr.iC'ln8

TOTALS
5.45 - 98."522

RR-468

$50,700,"5"58
5.4"5 - 98."520

UBLle DEBT/i,NEWS
Department of the Treasury •

Bureau of the Public Debt - Washington, DC 20239

HUG j !.; "J UJ j 0 8 8
CONTACT: Office of Financing
202-219-3350
"
l.,

FOR IMMEDIATE RELEASE
July 24, 1995

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,255 million of 26-week bills to be issued
July 27, 1995 and to mature January 25, 1996 were
accepted today (CUSIP: 912794W75).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.45%
5.46%
5.46%

Investment
Rate
5.70%
5.71%
5.71%

Price
97.245
97.240
970240

Tenders at the high discount rate were allotted 43%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

RR-469

Received
$54/710,036

Accepted
$13,254,712

$46,662,510
1,321,626
$47,984,136

$5,207,186
1,321,626
$6,528,812

3,350,000

3,375,900
$54,710,036

3,375,900
$13,254,712

n E

ART !VI E 1\1 T

0 1;

THE

T REA S lJ R Y

'IREASUR¥

(IJ) NEW S

J7~9~~"""""""""""""""""
omcr OF PUBUC: AFFAIRS. gOO PENNSYI.VANIAAVE:Nm,.N.W
•• WASIUNGTON, D.C." ~0220. (%0%) 62%-2960
FOR IMMEDIATE RELEASE
July 24, 1995

waco upaate
Attached is an
Waco hearings.

upn~r.p. bas~d

on recent t9stimony in the House

-30-

RR-470

3;OOpm

- , Fur press releases, $JJeCches. jmhli(: Jr.hP.dJJII'S and official biograph;', coli OW' 31-hourfa lim at (202) 622·2040

•

I~ 001

Statement of Edwin O. Guthman
July 24, 1995

It bas been blOUgll( to my au.ention that dur1ng the testimony thi~ morning, there was
a suggestion that Ron Noble and tk individuals

woo conducted the Treasury investigation

and prepared Ihe ntport were involved in "a covcrup." NotlUng !;ould be r~1..hcr frum the

Truth. A!II One ot' the- three independent reviewers of that report, I worked closely w:th Mr.
Noble and the

review team. As J ~tated in my Seprember 26. 1993, letter to Secretary Lloyd

Bentsen, "I fully suppon the [ep(lrt'~ findings of fact anl11ts t.:ondusions and
recOllllllendations. II

The other inderendent review~r5 and I received pn3mpt and eomplete access to flU

iulL':rvic:w repon.o;;. evidence. expert rt!l'oru. and orher n1l1terials we

reque~ted.

Bvery

question that we Mkc<i wa~ answered_ In lludiLiUI] , we Dot only helped ~lde the cour~e of

the investiga.tion but also participated in the inteIView5 of the raja plarwc:rs. includini Charles
Sarabyn. We were denied nothing. and there

no evidcnoc that undermines lhc

~rcd.ibility

and ;nregrity of the review process.

Treasury Secretary Bentsen dC::llliilldeU a lhorougb.. comprebenstve. and

uncompromising critique of the condu,t of Treasury and ATf official) in connectiun with the
rebruar)' 28 tragedy near Waco_ That is precisely what bQ received. The u.naub~tantiatcd
clUlrge of a coverup is JUSt plain wrong. Every Consrc~~-jonal Commirt~~ lw: the
~Iponsibility to vouch

DOt been done here.

for the

II:;CUracy

of tht: wiuJc:ases on

which It reUes.

That clearly bas

RCP. MCCOLLUM: Wh)' do YOU bl!li@",e
ar. in that ~cpo~t~

.tate.ents

ilho••

o",i.~5jon~ and f.d:;e

M.. ~TNSTT:

1 belie.,.. thilt t .... ~ we". ~ol'lC:8rnad ~bout ~he
from the ~di. t~a~ t~ey co~lgn·t jw.~ say that ~.nAn~m~nt at
the ~c.n~ there ~~e .j~~ake5. but th~t ~as~'~ ~ne tone 01 the ~.port_
1~11~C

They f.11 that thay had to ~r~te a .~athlna reDort. which ~~de a 1Q.
of peOple ~uff.r. l1ke ChuCk and ~n. . of tho •• o~her ~~ople cown there
'"at _uera just doing thei.", job, "II~ It; wa§. I think. \o'@,..y bl.aeed .,uS
... nfaarly ",,..ittet"_

H".'rNI&TT,
r ~hi"k Ltley "el'C 11 ke -- a~d 1 001'1' t know if
is • ter~ th~t I would ysa.
I VQ~ld ~ay cnat they felt th~t
they h~~ to, ~t least ~hwn it came to thp pr8• • ~ ehow ~nst thwy wer~
t.ktng s~e very ~trol'l~ .ctj~, and they w~ren·t reSDon.ibl~ (or
MR_
COY.~up

~OINT HEARING; HOUSE
RI~OR" AND OVERSIGHT

JUDICIARY ~TE/eQJ~ SBOMTE AND HOUSE
CMTE/NATIONAl SECURITY. INTERNATtON~

GOYERN~NT
Ar~AIRS &
DA~IDIANS' COftPOUND

CRIMINAL JUSTICE SBC"TE
R£: REVltu or SIEGe OF BRANCH
IN ~ACO, TX
CHMNI REPS. BILL ~LLUM (R-~L) ~ alL~ ZELJrF

(~-NH)

WITNESSESI DICK REAVIS. AUTHOR. ""SIiES 0,. WACO"; STUART '-IRISHT. ~I)JTOR~
~~AGEDDON IN WACO";
~-1~-38-E
p~o@. 3

RAY JOHN. ASST

u.s. ATTORNEV

ArT~RHOON ~SSION

anything. and thec;a ",anage'"5 Gow" there had done
~hat ju~t was not th~ c_8e.

W~D., 3ULY
P~"-

1~.

-- 1!17

thi~

inb;~"\i.ol'lally,

~nd

REP. MCCOLLUMC
t~.

tn_

fir.t
1"al0?

ti~~

That's

I'IR. '1ARTNETi':

REP.

You Ci_id earli.l" ~t\at ~he ~le_nt of surprise,
hearQ of It wa~ vh.n t~a' -- after the day ot

ev~r

~CCOLLUMI

cor,.~ct.

Is 'ha,

gd",t

YQU~

Concprn1

HARTNETT: Certainly. it is DtCau5e I t~ink th~~ t~e ~@~i~
WD on i~ and 1 wOuld kA~. to ~~y ~h.t t w5ed it. too. we all
.tart~d using it after the raid, tnd ~t wa~ a fooli~k thing to ~os&rt of 9wt trapD.~ by the Media, 'r.pped _yaelf. Hut 1t th~ovs ~
~.

pic~ed

di1fQ~Q"t

whole
• nd I

.jl"ltit

p.r~p@ctl~E on Wn&~ tho •• co".ftd~~s ~,~ down tnere •
1 think it i c t)l!ree veeka ago I saw the A~Gi ctaf'\t .

sS$c~e~al'y Noble on a na~lonal
(lrdet"~d those Coeaal'ld~r. not

."Oadc:a.!t.t &,ay ~I'.t TreaS ... ry ~n~ ".t-had
to
1orw"rd 11 they la.t~ho e\cfQent Qr
cu,,~pico, ~n. I . . Lhe only DerSOn who was giviftg prin~lpally a1T~~~
"',. d~r 1i ~ 0 t ",o58 (' "nuII4nde, e t
and I lIev.r qavt! such ~I'I 0" de ... , and I

neve" r.c;c:ived .",I<.h .an order.
No~

~afety
anti

we did t.lk aDcut ~afety.
t a.4ft we .u!t.t h.ve ~.IKe~ abou~
100 \i~P4T~. Di~ec.o~ ~dllea ~e ~h. night before 'he reid

Q.414.

!UL-23-1995 01:49

"'.

41 ..... _

... ,.,.

. . ~t'~1"Ift

...

~ .... , . . . . . ~

....

on..

.,~

....v ...........

• •" ••

P.02-'04

1~9!

JU~-2q-SS

11.48 FRO",

"'•• " .. , en.
,.aid.

TRY TASK FORe.

"NU' • ...~.rt.d

ID,

PAC.

2828225993

uslt"; i.t, au.. 0"''' Public;

.r'.1"S"

.fter

~he

We ..,111 undoubt.dl~ pursu~ que~tioning .1onq these line5 furth.y
as the h •• rlnqs proq...... Thanlc you, P'lr. Hartnett.

"R. AGUILERA:

Sir. if J "'4)' inter,leet:. I
Hartn.t~r Chu~k Sarabyn, and
told them that I didn't r.~all

.attended. m@t!!ting with
I was •• ked the same
question, an~ I
QuitQ ~learly. but I do
beli@v. ~hat the .l.~ent of surpTise Wa& .~ked by ~r. Higgins.
If the
@le.e~t of su~pri.e was going to be le.c, d~'t continue on th. raid.
~r.

Hiegl"."

"~.

"CCO~LUM:

REP.

When WAS

~hi~ ~a.ting that YOu ~ttendvd,

"r.

Aguilera?

"R. AGUI~ERA:
head~u.r'.rs with

This was the
Chuck

Sar~byn

~eetlni that 1 w.nt
~. ~&rtnet'.

up to

and

JOINT HEARINGI HOUSE JUDICIARY C"TE/CRl~ SBC"T£ AND HOUSE GOVERN"ENT
AND OVERSIGHT CMTE/NATIONAL SECURITY. INTERNATIONA~ ~rrAIRS L
CRll""IlNAL ~USTICE SBC~TE
RE~ REVIEW OF SIEGE 0' BRANcH DAVIDIANS' CQ~OUND
IN WACO. TI
C~: REPS. BILL hCCOLLU~ (~-~~) • SILL z£Lrry CR-NH)

RE~C~~

"UTNESS£S: DICK REAVIS, AUTHOR, "ASHES OF"' WACO-; STUART WRIGHT. EDITOR.
"ARI"'IAGEDDON IN WACO"; RAY JOHN, ASST U.5. ATTDRNEY
WED •• .JlLY 19, 1~9S
~-19-38-E

"R.
REP.

thi5.

p.gea 4

AGUIL~RA!

AFTERNOON SESSrON -- 1:17 P6M.

It was prior to the

I""ICeOLLUP'I:

Ho,", long belo,. •• rO\l~,'l~?

REP. I1CCOLLUM:
All right.
Thank yo~ very ~~ch.

REP.

~aid.

"r.

Wv will have to co.,,, bo1C:.C and revisi.t

"r.

Aguilera,
Yon testified that all rifle or all
to b~ emptied by the ATF, end 1 w~lG Just like -this is • o.rtin41nt Qu.~tio". ,,"d you h~"e tndi~.ted 'ha~ ~our weapon
wa. loaded.
D,d you mi •• -- ~id you violate any ~ule ~Y,th~t?
Q~" cha.be~.

t
~ere

MR. AGUILERA:
until toCl.y.

REP.

Cidn't

~iolate

any ,.ule5.

n.~er

heard of that

VIa d

IO.i.U.1.

Cono~rn

for Children shown by ATF:

ATF ~~r~~red information a~out Kir1 Jewsll to the Child
ProteQtivQ Servicec of Tex~ ••

ATF a.signed ATF aqents to comfort children af~er
One of tho~Q a9.nts was woun4e~.

eompound

was .ocurp..

ATP approvo4 ",000 dollar5 to provide food, .helter
and transpor~ation fer those ch11rl~8n and their parents

who

wiahad to escape David Rore.h.

meal SCheduled for February 28, 1993 tor the children
waf: Hcf)onOllc:i'. "Ilappy Me4ls." Th~bQ IDeal~ were to be hrouqh~ 'to
the sc~nQ by a National G~ard helicopter.

The lunch

~Tr

ne90tiator vas responsiole for the

~u~c8s8ful ~.lease

21 persons.

s.v~ral

89@nts had candy in their poekats for the children.

TREASURY

NEWS

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
July 24, 1995

TESTIMONY BY RONALD K. NOBLE
UNDER SECRETARY OF THE TREASURY FOR ENFORCEMENT
BEFORE THE
SUBCOMMITTEE ON CRIME
COMMITTEE OF THE JUDICIARY
AND THE
SUBCOMMITTEE ON NATIONAL SECURITY, INTERNATIONAL AFFAIRS
AND CRIMINAL JUSTICE,
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES

RR-471

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

TESTIMONY
by
RONALD K. NOBLE
Under Secretary of the Treasury for Enforcement
Before The
Subcommittee on Crime
Committee of the Judiciary
and the
Subcommittee on National Security, International Affairs, and Criminal Justice,
Committee on Government Reform
House of Representatives
Monday, July 24, 1995
I welcome the opportunity to testify on the tragic events at the Branch
Davidian compound near Waco, Texas, as they involve ATF and the
Department of the Treasury. My testimony will focus on the Treasury review,
the investigative report on these events conducted by the Treasury Department,
and on the policy issues that emerged from them. I would ask the Committees
to consider making the full Treasury report, published in September 1993,
entitled, "Report of the Department of the Treasury on the Bureau of Alcohol,
Tobacco, and Firearms Investigation of Vernon Wayne Howell also known as
David Koresh" part of the permanent record of these hearings.

On February 28, 1993, four ATF agents were killed while serving
lawful warrants for the arrest of David Koresh, and for a search for suspected
illegal firearms and explosives at the Branch Davidian compound. After the
siege conducted by the FBI, and the fire set by the Branch Davidians that ended
it, the Texas Rangers found 48 illegal machine guns, seven illegal explosives of
1

various types, nine illegal silencers, and hundreds of thousands of rounds of
ammunition in a search of the crime scene. A jury in Texas convicted eight of
eleven Branch Davidian defendants of crimes relating to these firearms. Eight
convicted defendants received sentences ranging from three to forty years, with
seven of eight defendants serving sentences of forty years imprisonment.
As the Treasury Report recounted, and the trial record confirmed, David
Koresh

~ew

45 minutes before ATF agents arrived that ATF agents were

coming to serve warrants at Mt. Carmel. Rather than submitting to the search
and arrest warrants, David Koresh armed himself and his followers, ambushed
and killed the federal law enforcement officers. As a result of David Koresh's
decision, ATF agents Conway C. LeBleu, Todd W. McKeehan, Robert J.
Williams, and Steven D. Willis died. Had David Koresh not committed
suicide, we may fairly surmise he would be in federal prison today, serving a
prison sentence of at least forty years for firearms violations, and he would
have been tried for murder along with his followers, and possibly for other
crimes as well.
Any suggestion that David Koresh's murderous response to federal agents
coming to serve a warrant - a warrant for his own arrest on firearms charges
based on evidence that was located with him in the compound -- was excusable,
or reasonable, or even rational under our system of law is outrageous. And, to
lay blame on law enforcement or the federal government for the murder of
federal agents, and the deaths of innocent women and children and others, is to
ignore the reality that Koresh and the Davidians used their illegally
manufactured machine guns to ambush agents performing their duty.. Indeed,
Koresh is to blame for the deaths of almost one hundred people; it was his
overreaction and decision to ambush agents that began this tragedy.
2

At the same time, a law enforcement operation in which four agents and
as many as six others die must be viewed as a tragedy and a failure for law
enforcement. Koresh's direct responsibility for those deaths, and the many
more that followed, does not exempt law enforcement from scrutiny. We must
ask the question, did so high a price have to be paid in order to carry out the
government's responsibility to enforce the law? The Treasury Report on the
Waco incident concluded that this price should never have been paid. The
Report is the most exhaustive, comprehensive, and accurate study of the
incident to date. As I will describe in detail below, we concluded that the ATF
agents who were sent to execute the search and arrest warrants at the Davidian
compound conducted themselves with dedication, discipline, and often heroism.
We also concluded in great and unsparing detail that ATF made serious errors
in its planning and execution of the raid, and that the Treasury Department's

oversight role in law enforcement operations should be strengthened.
The Treasury Report was issued in September 1993. Shortly before its
publication, ATF Director Steven Higgins announced his decision to retire.
After issuing the Report, Secretary Bentsen placed five ATF officials on
administrative leave -- the Associate Director for Law Enforcement, the Deputy
Associate Director for Law Enforcement, and the Chief of the Intelligence
Division, the operation's Incident Commander (Special Agent in Charge, ATF
Houston Division) and the operation's Tactical Coordinator (Assistant Special
Agent in Charge, Houston). The law enforcement officials, who occupied the
most senior law enforcement positions in the bureau after the director, chose to
retire. The intelligence chief agreed to take a downgrade to a position outside
of the Senior Executive Service.
3

In sum, the entire top management of ATF dealing with law enforcement
matters has been replaced.
Secretary Bentsen selected John Magaw, then Director of the Secret
Service to become the new ATF director. Director Magaw will testify about
the lessons learned from Waco and the changes he has made in ATF. And I
will discuss changes in Treasury oversight.
Th~se

changes along with the passage of time have greatly strengthened

ATF. ATF performs essential and often dangerous work on behalf of the
American public every day. An ATF explosives expert, working with a
member of the New York City Bomb Squad, discovered the key piece of
evidence that enabled ATF, the FBI, and the New York City Police to identify
and bring to justice the perpetrators of the World Trade Center bombing.
ATF special agents and explosives experts have uncovered key evidence in the
Oklahoma City bombing investigation. ATF routinely takes weapons off the
street, out of the hands of criminals, making our communities safer. It is ATF
that continues to investigate illegal conversion of weapons and seeks to stem the
flow of illegal weapons to the streets of our cities.
My goal today is to provide both Committees with a thorough
understanding of the Treasury's Report on what happened at Waco, of how
Treasury and ATF have responded to that Report, and of the vitally important
mission of ATF.

The Treasury Report
After the failed raid and the deaths of four ATF agents, and the fire at
Waco, President Clinton directed the Treasury and Justice Departments to
4

conduct vigorous and thorough investigations of what had led to the loss of law
enforcement and civilian lives.
Secretary Bentsen designated me to lead the Treasury Department's
review of ATF's and Treasury's involvement. The Review was to extend from
the beginning of the investigation through the unsuccessful effort to execute
search and arrest warrants and its immediate aftermath. He demanded that the
investiga~ion

be honest, uncompromising, and comprehensive.

As Secretary Bentsen testified on Friday, he appointed three independent
reviewers of national prominence and the highest integrity -- Pulitzer Prize
winning journalist Edwin Guthman, Watergate prosecutor Henry Ruth, and Los
Angeles Police Chief Willie Williams. Their role was to provide independent
guidance to the investigation, consider its findings, and assess the final report.
They received no payment for their services. I hereby request consent to
include the letters of the three reviewers to Secretary Bentsen in the record of
these hearings. Treasury's office of the Inspector General monitored the work
of the Review team to ensure that the Review was thorough and unbiased.
Assisted by the Project Director, Geoff Moulton, I assembled an
investigative team of seventeen senior investigators from the Secret Service, the
Customs Service, the IRS, and the Financial Crimes Enforcement Network.
No ATF personnel took part in the Review.
Again to ensure independence, the review team consulted with ten nonTreasury experts in tactical operations, firearms, and explosives. Like the
independent reviewers, these ten experts served without pay. By independent, I
mean that they were asked to report their own views, not those of the
Department of the Treasury. The reports of the independent experts are
published as appendices to the Treasury Report.
5

We all know how difficult it is for any organization to judge its own. It
can be especially painful in the law enforcement community where success, and
sometimes survival, depends on camaraderie and loyalty. One of the senior
executives in my office likened the Waco review to conducting open heart
surgery on yourself, without anesthesia.
In choosing the members of the review team, my first priority was to
assemble..the best investigative team possible, composed of individuals with the
integrity and the commitment to fmd out exactly what happened. I can assure
you, the review team exceeded my highest hopes in this regard. At the same
time,- we also ensured that the investigation team reflected the diversity of this
country by including people of color and women. Indeed, the Waco review
team included 8 African-Americans, 7 women, 1 Hispanic-American, and 1
Asian-American. In my view Americans needed to know that their government
was diverse and intent on conducting a thorough self-examination of itself.
Over a 5-month period, between May and October 1993, members of the
team travelled the country and conducted over 500 interviews to determine what
happened near Waco and why. We received unqualified cooperation from more
than a hundred ATF agents who were interviewed. Without their support, our
difficult task would have been rendered all but impossible.
There has been a question raised in this hearing whether Treasury
engaged in a cover-up designed to hide exculpatory information and did not
seek to fmd the truth. Both the ATF shooting review and the Treasury
administrative review coordinated with the Justice Department and the Texas
Rangers so that the murder case would not be compro'mised. This fact was not
hidden. Pages 2 and 7 of the Treasury Report state that the Review was
conducted carefully to avoid interfering with criminal prosecutions. The Texas
6

Rangers conducted a prompt, vigorous investigation and shared their
investigative reports with Treasury. Any exculpatory information uncovered
during the Treasury Review was shared with the Department of Justice so that
it could be provided to defense counsel.
Secretary Bentsen issued the Report on September 30, 1993. It is 220
pages long, followed by extensive appendices by independent experts. Major
newspapers praised the report for its candor and thoroughness.
I appeared before the House Appropriations Subcommittee on Treasury,
Postal, and General Government on October 22, 1993, and testified on the
Treasury Report.
A report of this complexity and length, with such significant
consequences for a government agency, inevitably will have its detractors.
But I believe the Treasury Report is the closest to a complete and truthful
statement of the facts under examination that is humanly possible in an
undertaking of this kind. In this Report, Treasury presented the full facts to the
American people. In the two years since the Report was published, even with
the renewed focus on Waco, I have heard nothing credible that has led me to
question the Report's methodology, its findings, or its recommendations. The
only testimony critical of the Report has come from the people who were
responsible for the raid and for permitting misinformation to be spread
following the failed raid.
To maintain public confidence in government, citizens must believe that
government has the capacity to examine itself when necessary and to take
appropriate action in response. Therefore, I look forward in the report of these
subcommittees to a resounding affirmation of the Treasury Report.

*
7

The Treasury Report contains five sections of factual account and eight
sections of analysis. The Treasury Review focused on the same issues raised in
these hearings: (1) Was the investigation properly initiated and conducted?
(2) Was there probable cause to seek arrest and search warrants? (3) How was
the raid planned and were other alternatives adequately considered? (4) Was
the use of the military appropriate? (5) Did Treasury provide adequate and
appropri~te

oversight? (6) Was the raid properly executed, especially after

ATF learned

~hat

Koresh knew that ATF was coming? (7) Did ATF officials

lie or attempt to cover up the truth?
- Today I will focus on the central conclusions of the Report and on the
policy areas that have been the focus of questioning during these hearings.
The Propriety of Investigating Koresh and
Seeking to Enforce Federal Firearms Laws
The Treasury Report concluded that ATF, at the request of the local
Sheriff, properly initiated an investigation into David Koresh and his followers
based on information provided by the Sheriff. This investigation was
predicated on evidence that federal criminal explosives laws were being
violated. It was not based on Koresh's religious beliefs.
ATF began its investigation of Koresh after receiving complaints from the
McLennan County Sheriffs Department in May 1992. The Sheriffs Office
was contacted by a United Parcel Service driver concerned about suspicious
parcels, including inert grenade casings and a substantial quantity of black
powder, that had been received by certain persons at the Branch Davidian
compound. As the Report stated, "Because the residents of the Compound
8

were constructing what appeared to be a barracks-type cinder-block structure,
had buried a school bus to serve as both a firing range and a bunker, and
apparently were stockpiling arms and other weapons, Deputy Weyenberg asked
ATF to investigate." Report at 17.
Before opening a formal investigative file, the ATF case agent debriefed
the local officials, interviewed gun dealers, and searched national firearms
registries~

Based on this information he made a preliminary determination that

violations of federal law might be occurring. This was not only proper; ATF
would have been irresponsible had it not initiated an investigation.
- ATF makes between 500-600 criminal gun cases a year. The average
number of guns in each case is 21. Investigations that result in seizures of
similar numbers of machine guns as were seized from the Davidian compound
are extremely rare. Not more than one similar sized seizure has been made in
several years. In 1993, ATF seized 520 guns converted to machine guns.
The 48 machine guns that Koresh had amassed is almost 10% of an entire
year's seizures. The rarity of such a seizure is compounded when hand
grenades, explosives materials, and vast quantities of ammunition are also
present. Thus, when the ATF case agent learned of the delivery of grenade
casings, black powder, and large shipments of firearms, he had more than
sufficient reason to begin a thorough and professional investigation.

Enforcement of the Law of the Land and
Illegally Armed Religious and Other Groups
The Review examined, considered and rejected suggestions made by
some that the religious beliefs of Koresh and his followers, or Koresh' sexual
9

conduct with minors, triggered ATF's investigation of Koresh. The Report
stated, "While some have suggested that ATF targeted Koresh because of his
religious beliefs and life-style, the Review has found no evidence of any such
motivation. "

Report at 121. The Review also challenged those who believe

that the government should be deterred from investigating potential unlawful
activity because that activity is entangled with religious belief and practice.
The Rep<?rt stated:
A review of the investigation makes it clear that the ATF inquiry into
the activities of Koresh and his followers was consistent with the agency's
congressional mandate to enforce federal laws regulating the possession
- and manufacture of automatic weapons and explosive devices. Indeed,
ATF would have been remiss if it had permitted considerations of
religious freedom to insulate the Branch Davidians from such an
investigation.
Report at 120. It is worth reviewing the basic principles that apply when
law enforcement and religion meet. That a practice has the sanction of a
religious group does not mean it is lawful. Many religious practices and rituals
have been found to be unlawful and without constitutional protection in
particular situations. Polygamy is unlawful. The use of drugs associated with
religious practice is not permissible where State law prohibits it. While some
may quarrel with these decisions, they must be followed.
ATF generally encounters religious groups only where there are firearms
violations to be investigated. Religious groups cannot receive an exemption
from firearms laws based on their beliefs or practices. The government must
investigate and enforce firearms laws impartially without regard to religion or
ideology. There is no exemption for groups that attempt to violate firearms
laws in the name of religion. There is also no such exemption for groups with
survivalist, violent tax protester, "county supremacy," or for so-called
10

survivalist, violent tax protester, "county supremacy," or for so-called
organized or unorganized militia or paramilitary groups with extreme Second
Amendment ideologies that may stockpile unlawful weapons against a fantasized
or feared federal or United Nations invasion.
On the contrary, it is essential to the American public that public safety
be ensured and that all violations of firearms and explosives laws be
investigated impartially, whether the investigation leads to the inner cities or
mountain strongholds or religious communities.

The Probable Cause Investigation

The Treasury Report concluded that there was probable cause to believe
that people inside the Branch Davidian compound were manufacturing illegal
machine guns and explosive devices -- as did the Magistrate-Judge who
reviewed the affidavit and approved the warrant. No facts have emerged that
undermine that conclusion.
Various commentators have opined probable cause was lacking. Attacks
have been based on technical legal quarrels with specifics of the firearms
information in the warrant. Other attacks have been based on the suggestion
that ATF improperly ignored information that David Koresh was a licensed
firearms dealer, or that he may have intended to be, even though he technically
was not. Attacks have also impugned the warrant as insufficient on the grounds
that it contained extraneous material concerning Koresh' s religious beliefs and
his plural marriages with young girls and women at Mt. Carmel. Underlying
these attacks is the common theme that law enforcement is hostile to lawful
firearms owners, and incomprehending of and hostile toward religious interests.
11

These assertions and opinions are in error. I refer the Committees to
pages 17 through 35 and 119 though 135 of the Treasury Report, which set
forth the facts developed by ATF's case agent that established probable cause.
In addition, the Treasury Report includes the analysis of two non-Treasury

weapons experts who confirmed that ATF's case agent, the U.S. Attorney's
office, and Judge Green had ample evidence to support searching the compound
for

evid~nce

of the manufacture of illegal machine guns. Two non-Treasury

explosives experts concluded that the evidence gathered by ATF established
probable cause to believe that illegal explosives were being manufactured.
- Indeed, after the April 19 fire, the Texas Rangers recovered 48 illegal
machine guns, illegal explosive devices, and illegal silencers and hundreds of
thousands of rounds of ammunition from the compound. Not only was there
probable cause to search for illegal weapons, illegal weapons were actually
found and used against federal agents possessing lawful search and arrest
warrants.
I would like to emphasize that any suggestion that the probable cause
determination by ATF, the U.S. Attorney's office, and the

Magistrate~Judge

evidence that our legal system is hostile to religion is wholly unfounded. ATF
had reason to fear Koresh's willingness to use violence. He had established his
control over the Branch Davidian community in a gunfight ended by armed
deputies. His rhetoric was threatening and his preaching concerned the
approach of the apocalypse. In addition, he had extraordinary control over his
followers who acquiesced to his sexual activities with numerous minor girls and
married women at the compound. Based on these facts it was reasonable for
ATF to believe that Koresh represented a greater threat than a gun collector
who might decide to manufacture and sell unlawful weapons.
12

What these facts demonstrate is not hostility to religion, but rather that
law enforcement cannot afford to assume that unlawful activities are benign
merely because they are associated with a religious belief or unconventional
lifestyle. Rather, as ATF did here, law enforcement must examine the totality
of the circumstances.
Since the Treasury Report was issued, eleven Branch Davidians were
brought to trial. At that trial, none of the defense lawyers challenged the
validity of the search warrant. Several of the defendants were found guilty of
the offenses referenced in the warrant. Indeed, I understand that one of those
defense lawyers testified last Friday that the warrant was legally sufficient.

The Decisionmaking Process Leading to Forceful Execution of Warrants
and Analysis of the Tactical Planning Effort
The Treasury Review team and the six tactical operations experts all
concluded that ATF's raid planning was seriously flawed. Specifically the
Report concluded that:
First, intelligence-system flaws, including an improperly conducted
undercover operation, seriously compromised the planning for warrant service.
Second, because of the flawed intelligence gathering and processing
system, the planners did not give sufficient attention to other options, such as
trying to arrest Koresh away from the compound.
Third, ATF should have consulted with psychologists and other experts in
order to better understand Koresh's likely response to different law enforcement
options. The Report recommended improved access by law enforcement to
experts in such fields as psychology, sociology, and theology when dealing with
13

barricade or hostage situations or with suspects with non-traditional belief
systems or thought processes unlike those of a standard criminal target.
Fourth, the planners did not develop a meaningful contingency plan.
Despite the flaws in the planning process, a majority of the Review's tactical
experts concluded that the plan had a reasonable chance of success if all of the
planners' major factual assumptions had been correct. The experts disagreed
over

wh~ther

the plan was a good one.

The Report did not take a position on what plan should have been
followed, namely, a siege, a raid or dynamic entry, apprehension of David .
Koresh off the compound, or some other approach or combination of
approaches. The Report concluded that the plan was based on inadequate
intelligence. Without adequate intelligence it was impossible to determine the
best approach in hindsight. Two years after the Report was completed, it
remains impossible to retroactively determine the outcome of an alternative
plan.
From a policy perspective, the chief conclusion to be drawn from this
section of the Review is that there are special considerations in selectmg a law
enforcement strategy when dealing with firearms violations or any other crimes
by religious or ideologically identified groups that are co-located with
significant weapons and who may be willing to use violence against law
enforcement and/or themselves. The loss of four ATF agents at the Branch
Davidian compound was unacceptable. Law enforcement must therefore take a
hard look at approaches to enforcing the law -- firearms laws, tax laws, or any
other laws - against groups that may have the potential to take up arms or that
are potentially suicidal. Other approaches, including negotiations and
settlement, isolating the leader, or siege must be considered in each case,
14

before resorting to a dynamic entry.
Treasury Department bureaus have undertaken enforcement actions
against members of religious or ideologically identified groups twice since
Waco.
On July 27, 1994, the Roanoke, Virginia ATF office arrested two
members and associates of a proclaimed militia organization known as the Blue
Ridge Hunt Club. Three other persons were eventually arrested. All were
charged with conspiracy, possession of unregistered silencers, obliterating serial
numbers, and straw purchases of firearms. The group was involved with a plan
to burglarize the National Guard Armory in Pulaski, Virginia, in order to
obtain machine guns and other small arms for the group. The plan included the
possible killing of police officers, the bombing of power plants, and the
creation of diversions in order to slow police response. Because the
organization was not co-located in an armed compound, the danger to law
enforcement was less. ATF successfully arrested one member at his home and
another during a traffic stop away from his home.
On June 3, 1994, the IRS restored the tax-exempt status of the Church
Universal and Triumphant, in return for which the Church, headquartered on a
28,OOO-acre ranch near Corwin, Montana, agreed to stop stockpiling military
style weapons, and divest itself of firearms, including two armored personnel
carriers and thousands of rounds of ammunition. Under the agreement, the
rights of individuals other than those convicted of a felony to own firearms are
unrestricted.
These cases demonstrate that, when confronted with religious or
ideologically identified groups involved with illegal weapons, Treasury bureaus
are seeking solutions that enforce the law, minimize the risk to law
15

enforcement, and respect Constitutional requirements.
Responsible, restrained, and innovative law enforcement is not the full
answer to the problems posed by armed groups such as the Branch Davidians.
Congress, religious scholars, political scientists, and others must also give
consideration to the causes and prevention of the amassing of illegal arsenals
and the turning of those weapons on law enforcement, other government
represen~tives,

or one another. The Law Enforcement Steering Committee,

composed of the Federal Law Enforcement Officer's Association, Fraternal
Order of Police, National Association of Police Organizations, International
Brotherhood of Police Officers' Organizations, Police Executive Research
Forum, Police Foundation, National Organization of Black Law Enforcement
Executives, National Troopers' Coalition, and the Major City Chiefs, in its July
14, 1995, letter to Rep. McCollum and Rep. Zeliff, identified some of the
relevant areas of inquiry:

*
*
*
*

the ease with which potentially violent groups amass weapons;
the amassing of weapons and the threat they generate;
weapons are being stockpiled for a purpose, what is it?
the danger of internal terrorism caused by the activities of arsenal
gathering groups.

The Posse Comitatus Statute and
The Policy of Military Support for Civilian Law Enforcement
The Treasury Report concluded that the ATF did not mislead the U.S.
Military or the Texas National Guard in obtaining their assistance.
Nevertheless, the Review found that the standards for non-reimbursable military
support

~ere

unclear, and that more precisely defined criteria needed to be

developed. Although I have not watched all the testimony, it is my
understanding that the military witnesses testified that the assistance to ATF was
legal- and appropriate and none testified that ATF had lied to the military.
Because there has been a great deal of confusion about this subject, I will
set forth some additional detail about the statutes that authorize military support
for civilian law enforcement. I will then address the policy issue.

Law and Procedure

The Posse Comitatus Act, 18 U.S.C. § 1385, bars military forces from
direct enforcement of civilian law. It does not prohibit all assistance to civilian
law enforcement by the military. The support that ATF received did not
constitute direct enforcement of civilian law.
The operations of the National Guard units that provided support to the
ATF in Waco are not covered by the Posse Comitatus Act. The extent to
which a State National Guard may assist civilian law enforcement is a function
of that State's law. Federal law affects funding and whether such stateprovided support needs to be reimbursed by the law enforcement entity. ~

32 U .S.C. § 112.
17

The extent of the assistance that federal military forces may provide to
civilian law enforcement is governed by Chapter 18, Title 10 U .S.C. Congress
has authorized the Department of Defense (DOD) to provide military
equipment, including spare parts and supplies, and base facilities, to civilian
law enforcement entities, for all (not just drug-related) law enforcement
purposes. 10 U.S.C. § 372. The restrictions of the Posse Comitatus Act are
incorpor~ted

by a prohibition on "direct participation in a search, seizure,

arrest, or other similar activity." 10 U.S.C. § 375. All of the military support
provided to ATF complied with this section.
- DOD may provide training to civilian law enforcement in the operation
and maintenance of § 372 equipment, and expert advice by DOD personnel, for
all (not just drug-related) law enforcement purposes. DOD personnel may also
actually operate § 372 equipment, to the extent such operation does not
constitute direct participation in civilian law enforcement. 10 U.S.C. §§ 373,
374. The requirement for reimbursement for such equipment and services is
waived if it is provided in the normal course of military operations or training,
or if it results in a benefit to the military unit equivalent to what the unit would
otherwise obtain from training or operations. 10 U.S.C. § 377(b).
Texas law provides a broad grant of authority to the Governor to use the
Guard to support civilian law enforcement. The Governor may employ national
guard assets lito assist civil authorities in executing law as the public interest or
safety requires . . . " Texas Government Code, § 431.111(b). Congress has
authorized federal funding for state National Guard operations done to further
drug interdiction and other counter-drug enforcement activities, which results in
provision of such support without a reimbursement requirement. 32 U .S.C. §
112. Provision of National Guard support to civilian law enforcement is
18

possible without a drug nexus, where the State is willing and able to provide
the service, and the Department of Defense has vetted the request's legality,
and provisions for reimbursement.
ATF initially approached the Texas National Guard, seeking aerial
reconnaissance of the Davidian compound. The ATF representative was told
that such support required a drug nexus. Shortly thereafter, ATF obtained
information indicating that there had been a metamphetamine lab at the
Davidian compound several years earlier, and that there had been a recent
shipment of unspecified chemicals, instruments, and glassware to the
compound, suggestive of a current operation. ATF later acquired additional
information suggesting the possible presence of a methamphetamine lab at the
compund, including a statement by Koresh to an undercover agent.
This information was provided to the Texas National Guard, and later to
officials of the entities which regulated and provided Federal military support,
Operation Alliance and Joint Task Force Six. The information was not
fabricated and was accurately reported. All of the military entities concerned
indicated that they were satisfied with the drug nexus identified by ATF . Thus,
ATF uncovered and disclosed, in good faith, information indicative of potential
narcotics violations at the Davidian compound. This information was accepted
by the state and federal military entities.
Let me repeat what the Treasury Report concluded, what Wade Ishimoto,
a former Special Forces intelligence officer who served as an independent
expert to the Treasury Review, stated in his testimony here, and what the
generals who also testified at this hearing stated: ATF did not lie to or mislead
the military. ATF never asserted that the central purpose of their planned
operation was to eliminate a meth lab. To the contrary, the National Guard and
19

the military were fully informed that the mission was principally focused on
unlawful firearms, that ATF was only asserting the possibility of an active meth
lab, and that ATF focused on that possibility in response to the Texas National
Guard's inquiry.
This conclusion is supported by documentation from the military. ATF's
written request for military assistance referred only to a "possible meth lab."
DOD's o.wn internal review sent to Commander, Forces Command, JTF 6,
shows that DOD knew from ATF that 1989 was the last year for which
evidence of a meth lab at the compound existed. And a "hot spot" discovered
by military overflights confirmed the possibility of a meth lab.
That ATF did not lie or mislead the military is also confirmed by DEA
documentation. DEA's coordinator for Operation Alliance attended the
February 2, 1993, meeting of Operation Alliance that evaluated the information
provided to ATF on a drug nexus, and that approved a request for military
assistance based on that information. The DEA coordinator does not believe
ATF lied to or mislead the military. Three DBA agents were present at the
Command Center to assist ATF on the day of the raid.
From JTF-6, ATF obtained the following support, conducted at Ft.
Hood, in Kileen, Texas, by a Special Forces unit which is maintained at JTF-6
to provide such assistance to civilian law enforcement: medical training;
communications training; weapon calibration and practice on firing ranges;
as well as some critiquing of ATF's rehearsal of the raid, and construction of a
door and window frame. The type of support that was provided to ATF by the
military, including training, could have been obtained with or without a drug
nexus. From the Texas National Guard, ATF obtained the following:
overflights that detected "hot spots" consistent with methamphetamine
20

production; tents, office equipment and other administrative support; and three
helicopters that were to operate as a diversion at the start of the raid, two of
which were specially configured for counterdrug work and funded by
counterdrug funds.
The Treasury Report correctly concluded that ATF did not mislead U. S.
military or Texas National Guard officials in obtaining their assistance.
Howeve~1

the Treasury Report also suggested that, neither the laws, nor the

regulations and manuals of the military entities, provide a definition of the
quantum of evidence necessary to establish a drug nexus, and that more
precisely defined criteria should be developed.
Five independent experts analyzed ATF's use of military support for the
Treasury Review. Several opined that ATF should have used helicopters
provided by the U.S. Customs Service, which, because they have broader rules
of engagement, could have assisted, for instance, in picking up wounded. At
least two experts stated that the training ATF received at Fort Hood was
excellent and well thought out.

Military Assistance to Treasury Law Enforcement

I would like to emphasize that Treasury's experience with the military
has been a positive one. The military has provided vital assistance to the
Customs Service in the nation's struggle against illegal drug trafficking. The
DOD supports law enforcement along our country's borders by providing
vehicles and shooting ranges, personnel and equipment to build border fences,
air and marine detection and monitoring support, and research and development
assistance. The National Guard has provided personnel to the Customs Service
21

at ports of entry, and has been directly responsible for many drug seizures and
related arrests. Without these dedicated National Guard members and
commitment and support of the military, Customs and our nation's counter-drug
efforts would suffer greatly.
The military's role in selected law enforcement actions other than border
interdiction of illegal drugs is also critical. The challenge posed by armed
groups willing to use violence against the government or to commit suicide is
relatively recent and very uncommon. By way of comparison, the two recent
ATF investigations of comparable magnitude were a case in 1992 involving a
buy-bust operation in Oregon that resulted in the seizure of 54 Mac-type
machine guns. These machine guns were being manufactured for the purpose
of selling them for profit, and were not in the custody of a large group
occupying a compound whose beliefs included an inevitable violent
confrontation with the government. ATF's largest comparable seizure in 1993
involved the execution of a search warrant at two storage lockers in Round
Lake, Illinois, in which 15 machine guns, 11 silencers, 3 hand grenades, and
approximately 31,000 rounds of ammunition were seized. An outlaw
motorcycle organization was allegedly amassing these weapons for the
protection of narcotics operations and protection against rival motorcycle gangs.
Obviously, a seizure from a storage locker did not pose the extraordinary risks
that ATF agents confronted at the Branch Davidian compound.
Where domestic law enforcement confronts groups using military style
weapons, in military style settings, appropriate training and support equipment
from the military can be very useful. By appropriate, I mean that civilian law
enforcement must always defme the goals of the operation, and the support it
receives must comply with the law.
22

The Treasury Role On February 26
The Treasury Report concluded that the Treasury Department in
Washington, D.C., did not require sufficient advance notice of significant
enforcement operations to meaningfully exercise its oversight of these
operations. Nevertheless, when informed of the plan in this case, the Office of
Enforcement placed a hold on the operation which was removed only after ATF
Director Higgins gave additional assurances about the raid plan. In that regard,
ATF's maintaining surprise was critical to the raid's proceeding as planned.
And, -in conducting this analysis, the Treasury Report touches upon issues such
as the danger of micro-managing bureaus by the Office of Enforcement and of
the role of consultant, the position which I occupied at the time, in the review
of such operations and in the decision-making process concerning such
operations.
Secretary Bentsen was out of the country at an important international
meeting. The Office of Enforcement notified the Deputy Secretary and the
Secretary's Chief of Staff of the February 26 notice received from ATF.
Nothing I have heard in these hearings suggests that conclusions reached
by the Treasury Report are flawed in this area. And, the suggestion from one
session of these hearings that something was amiss because Secretary Bentsen
had not been notified of the raid plan by Treasury officials or by ATF is plainly
wrong. On the contrary, it would have been abnormal for the Secretary to have
been involved at this stage of the operation. Indeed, in the prior 11 years,
Main Treasury had not been asked to approve one raid, nor was ATF ever
required to notify main Treasury under previous Administrations.
As a backdrop to the Committee's understanding of the role of Main
23

Treasury in the review of the raid plan, it must be understood that on February
26, 1993, the day on which the ATF liaison presented a one page notification
of the proposed operation in the vicinity of Waco, the brutal bombing of the
World Trade Center occurred. Understandably and appropriately, the Office of
Enforcement, along with ATF, was responding to the emergency of that event
and focusing on the investigation to determine the nature and placement of the
explosiv~s

used in that tragedy and to assist, however possible, in apprehending

the persons responsible for the bombing. Two other Treasury Enforcement
bureaus, Customs and Secret Service, have offices in the World Trade Center
building. I bring up these facts not to justify why more was not done when the
one page notice was presented -- as I do not feel that more should have been
done -- but to explain that the Office on that day was already operating under a
crisis mode.
The facts uncovered by the Treasury Report demonstrate that Treasury
officials, acting on their own judgment and discretion, and on the advice that I
and a former director of the U.S. Marshall's Service, Stanley Morris, gave,
raised serious concerns about the need for the dynamic entry plan and the risk it
would pose to the safety of innocent women and children, the federal agents
participating in the raid and others in the compound. Specifically, given the
flrepower believed to be possessed by the Davidians and their inclination,
following the teachings of Koresh, to use force and violence to repel the ATF,
it was feared by Treasury officials and myself that lives of innocent people
would be in danger.
These concerns were communicated to Mr. Higgins, the Director of
ATF, and the Acting Assistant Secretary for Enforcement directed that the raid
not go forward. Later that evening, Mr. Higgins provided the factual basis for
24

the perceived need to proceed with the dynamic entry raid plan as soon as
possible, the reasons why ATF believed that the raid should commence at 10:00
a.m. rather than at dawn, and the reasons why ATF believed that the raid could
be executed without jeopardizing the safety of the women and children inside
the Compound. Three factors were critical: the men being in the pit; the arms
locked in the arms room; the women and children being in the dormitory. For
these factors to be present, surprise was necessary. In addition, Mr. Higgins
assured that the undercover agent would visit the Compound on Saturday and
again on the morning of the raid to see if there was a change of routine, and he
guaranteed that the raid would not go forward if things did not look right. On
this basis and with the assurance that the raid would be aborted if the routine of
the Davidians changed, because surprise was lost or because of fear of a raid,
the Acting Assistant Secretary for Enforcement removed the barrier to the raid
that he had placed previously. I agreed with that decision.
While the Office of Enforcement did not, by any practice, rule,
regulation or guideline, need to approve the plan, once notified of the plan and
the intention of ATF to execute it within days, it appropriately voiced its
concern and in, exercising its oversight responsibilities of ATF, appropriately
directed that the raid not go forward. Indeed, for the Office of Enforcement to
have done otherwise would have been a gross neglect of its duty and
responsibility. Do not misunderstand this comment. I do not believe, and I am
not promoting as a matter of policy, that the Office of Enforcement micromanage the Treasury law enforcement bureaus. To the contrary, the Office of
Enforcement did not then and does not now possess the resources to address the
complex, confusing, and potentially ever changing set of circumstances
characterizing the raid plans and other enforcement operations of over 10,000
25

Treasury agents. That is not the role of the Office of Enforcement nor should
it be.
The Assault on the Compound,
The Flawed Decision to Go Forward With the Raid,
and Other Issues
An overlooked finding in the Treasury report is one of its most

imporLant. "Rank and file agents of ATF who were sent to enforce federal
firearms and explosives laws at the Branch Davidian Compound did their best
to perform their assigned tasks and showed dedication and often spectacular
courage in the face of murderous gunfire." Report at p. 7. Bill Buford, as
we learned last week, lay helpless and exposed to Davidian gunfire when a
member of his team dove on top of Buford's body to provide cover. The
report describes another incident in which medic Tim Gabourie had his medical
bag shot out of his hand by .50 caliber gunfire as he tried to assist Special
Agent Willis. There were many more examples of bravery and heroism.
The Report also concluded that the raid should not have gone forward
once ATF learned that Koresh knew that ATF was coming. The Report found
that the raid commanders failed to appreciate the significance of the information
provided by the undercover agent on the morning of the raid and the dangers of
proceeding if the conditions were not as planned.
The Report also stated that the flawed decision to go forward was not
solely a question of individual responsibility on the part of the raid planners. It
was also the result of serious deficiencies in the intelligence gathering and
processing structure, poor planning and personnel decisions, and a general
26

failure of ATF management to check the momentum of the operation as the
circumstances demanded.
In connection with the loss of surprise, the Treasury Report explained
that a cameraman for a local television station told a letter carrier that a raid
was imminent. This individual was a member of Koresh's group, and gave the
information to Koresh, who then prepared his ambush rather than submitting to
ATF' s legal authority. And this lead to the ensuing tragedy.
This event underscores the need for a high level of cooperation between
law enforcement and the media, so that the interests of law enforcement
effectiveness and safety, public safety, and the public's access to adequate
information may be balanced. This is a complex area, but one I think is very
important. The courts are beginning to look at it. Since the Report was
published, a federal court of appeals held that a federal law enforcement agent
is not immune from suit by individuals if the agent permitted the media to enter
the individual's home without their permission.

Post-raid Events
The Treasury Report fully sets forth the facts of post-raid events. It
describes the circumstances under which ATF agents withdrew from their
positions around the compound, the retrieval of the dead and wounded agents,
ATF's inability and deficiencies in maintaining the perimeter it had established
so as to prevent the escape of Davidians who had participated in the ambush
and murder of federal agents, and the chaos that resulted at the ATF command
post and its resultant adverse effect on communications between commanders
and line agents. I will not comment further on these issues other than to refer
27

these Committees to the pertinent sections of the Treasury Report and to say
that nothing revealed during these hearings suggests in any way that the
fmdings of the Report are in error.
Two post-raid matters, the decision to seek FBI assistance and the
decision to cede control to the FBI, and the misstatements made by ATF
management to the public, do require some comment. I will first address the
decision to cede control to the FBI.
As noted in the Treasury Report, on March 1, 1993, the FBI, with the
full cooperation and encouragement of ATF, took charge of the siege at the
Compound. The request that the FBI take control of the siege came from four
sources and demonstrates that federal law enforcement agencies can cooperate
under the most difficult circumstances in an effort to achieve the goal of the
operation.
Shortly after the cease-fire, as ATF assessed the situation and the news of
the tragedy and deaths of the four ATF agents spread throughout the law
enforcement community, at least one ATF supervisor suggested to his
supervisor that the bureau seek assistance from the FBI's Hostage Rescue
Team, known as the FBI HRT. This suggestion was based on the belief that a
hostage situation had developed, that ATF did not have the expertise in dealing
with hostage situations of this magnitude, and that the FBI did. At about the
same time, Assistant United States Attorney Phinizy, one of the prosecutors
who had worked on the affidavit supporting the search and arrest warrants,
contacted the local office of the FBI and requested assistance. Still later, FBI
Director Sessions contacted ATF Director Higgins, expressed his condolences
for the casualties suffered by ATF and offered the FBI's assistance. And, on
yet on another front, I contacted certain high-level FBI officials and, knowing
28

of the FBI HRT, requested that the FBI take control of the developing situation
at the Compound. I was advised that the request for HRT's involvement had
already been made and that the HRT was on its way to Waco.
The transfer of control from ATF to the FBI proceeded swiftly,
efficiently, and almost without incident. While there was some dispute and
discussion of which agency would actually control the site, ATF Director
Higgins, following discussions with me, agreed to cede control to the FBI.
And, given the tragedy that had occurred involving the murder of four ATF
agents, some surviving ATF agents, acting out of pride for their agency and
loyalty to their fallen comrades, to some degree resisted the FBI's insertion into
the situation. These issues were resolved quickly and control was maintained
over the site with the joint participation of FBI, ATF and the Texas Rangers.
Federal, state and local law enforcement can work together towards a
common goal as was demonstrated in the days following the failed execution of
the raid. ATF, though no longer in control of the crime scene or of the hostage
situation, provided essential support to the FBI and the Texas Rangers under the
most difficult of circumstances. Amidst the growing public criticism of the raid
and mourning the deaths of four comrades gunned down in the ambush, ATF
agents stood tall in the continued performance of their duty. In the most trying
of times , ATF demonstrated that it is a first-class law enforcement agency.
.

Finally, the Treasury Review uncovered disturbing evidence of
misleading statements and of deliberate attempts by the raid commanders to
shift blame to the undercover agent. These ATF supervisors, who were
involved in the flawed decision to proceed with the raid plan, notwithstanding
their knowledge that the element of surprise had been lost, lied to the Treasury
Review team, unfairly tried to place blame on a line agent, and altered
29

documentary evidence in an effort to mislead the Review. Others deceived the
public and disregarded directives and requests from Treasury officials, the
Justice Department and the Texas Rangers to refrain from further public
comment concerning the raid until the full facts had been established by the
Treasury Review.
This conduct, discussed fully in the Treasury Report, was inexcusable,
reprehen~ible

and served no purpose other than to undermine the credibility of

ATF. Such conduct was not in the interest of ATF or of the many courageous
line agents who risked their lives during the operation. Any desire on the part
of these officials to somehow shield ATF from further criticism by making
misleading statements or by lying demonstrated gross misjudgment that required
action by the Treasury Department. Each of these officials was detrimentally
affected or resigned. None of them carries a badge or gun today nor will they
ever. The revelation in the Treasury Report of this conduct and the
consequences that followed was painful but necessary to restore public, as well
as line agent confidence in the bureau.
Treasury officials, when they learned that misstatements or

half~truths

had been spoken by ATF officials, directed that no further public comment be
made by ATF management unless based on first hand knowledge. This
directive initially was disregarded but eventually was followed. Treasury
officials did not publicly correct the record until September, 1993, when the
Treasury Report was released. While there can be debate over whether
Treasury officials should have corrected the record more promptly, the fact of
the matter is that to do so prior to conducting a full investigation could have led
to inadvertent misstatements, thereby undermining the credibility of the ATF
and the Treasury Department and further eroding public confidence. In
30

addition, Treasury officials were concerned that premature public statements
might jeopardize the ongoing murder investigations being conducted by the
Texas Rangers.
Under these circumstances, responsible conduct required that Treasury
officials refrain from further public comment until a full investigation was
completed. That investigation concluded in September, 1993.

Reactions to the Treasury Report
- The public statement finally issued took the form of an over 500 page
Report which candidly divulged the numerous errors, as well as acts of
heroism, by ATF.
Here's what the independent reviewers said about the Treasury
Department's investigation and report in letters submitted to Secretary Bentsen

in 1993.
Pulitzer Prize winning journalist Edwin O. Guthman stated, "In
appointing the panel of independent reviewers you said you expected

a through,

comprehensive and uncompromising critique and that, Sir, is what has been
given to you. ... It was a privilege to participate in the review and in so
doing, I must say I gained enormous respect for the professionalism and
dedication with which the investigative team leaders and their agents conducted
themselves at all times."
Henry Ruth, a former Chief Watergate Prosecutor, stated: "The report
insightfully fulfills the purpose of this self-evaluation. The impartiality,
integrity, thoroughness and knowledge of the internal review team members
have been evident throughout the five month, intensive investigative
31

process. Mr. Ruth concludes "It if my heartfelt hope that you, Secretary
Bentsen as a national leader, can lead the change of orientation, thought and
action so that no more men, women, and children need die in these most
difficult of circumstances. "
Chief Willie Williams of the Los Angeles City Police Department stated:
"I have found that the investigative team which you assembled is of the highest
quality and integrity. These men and women have worked tirelessly to uncover
the facts surrounding the events which led up to and included the raid of David
Koresh's Residence near Waco, Texas on the 28th of February 1993."
- The view of the reviewers has been heard and echoed by the independent
Inspector General's Office, members of Congress from Treasury's Oversight
Committees and major news publications throughout the country. I would ask
the committee to include in the record the letters from the three reviewers to
Secretary Bentsen.
Treasury's Office of the Inspector General determined that the report
"provides an accurate account of the events."
Then Arizona Senator Dennis Deconcini found it "thorough, impartial,
and self-effacing."
The Treasury Report drew extensive praise when released in September
1993. Treasury's office of the Inspector General determined that the report
"provides an accurate account of the events."
Members of Congress gave it high praise. Former Arizona Senator
Dennis DeConcini found it "thorough, impartial, and self-effacing." Iowa
Republican Jim Lightfoot described the report as "thorough in its fmdings."
Major newspapers praised Treasury's honesty and candor. The Wall
Street Journal characterized it as "extensively detailed." The Washington Post
32

said it was a "thorough and candid account." The Los Angeles Times wrote,
"[d]espite all that went wrong with the raid by the [ATF] on the Branch
Davidian compound last February, the thorough and complete report
released. . . by the Treasury Department shows that much in its aftermath is
going right." The New York Times called it "brutally detailed." And just last
week, Time Magazine stated:
Perhaps the harshest critic of the ATF's Waco raid was the bureau's own
master, the Treasury Department. In the raid's aftermath, the
Department launched an investigation by veteran agents from its other
_law enforcement agencies, backed up by independent outside reviewers,
including Willie Williams, the Los Angeles Chief of Police. The result
was a 500-page indictment that pulled no punches, yet whose details,
surprisingly, went largely unreported.
Yet, at these hearings, the very people who are most criticized in the
report have badly asserted that the report is only 70% accurate. Certain
members of this committee have accepted that figure as gospel without any
consideration of the source or evidence to support that number. Indee.d, none
of those criticized articulated what, if any facts in the report are inaccurate, nor
what analysis is flawed. As Secretary Bentsen observed, it is not surprising
that Mr. Sarabyn, Mr. Chojnacki, and Mr. Hartnett disagree with some of the
conclusions of the report, because they are among those who were criticized
and were detrimentally affected as a result of the review's findings. At today's
hearing I have with me almost all of those who worked on the report; they are
the finest group of agents and colleagues with whom I ever have been
associated. Their dedication, competence and integrity combined to generate
what many consider the finest examination of a law enforcement action ever
produced. We stand by the report's facts, analysis and conclusions, as do our
33

independent, outside reviewers. If the report is only 70% accurate as those
criticized have asserted, show us the 30% inaccuracies. In reality, it is accurate
and there has been no cover-up.
For the record, none of the members of the team that generated the
Treasury Department's report on Waco were interviewed prior to this hearing
to determine what they thought about the report. So let me now ask the agents,
lawyers, and individuals who gathered the facts and performed the analysis for
the Department of the Treasury's report on ATF's investigation of David
Koresh to stand.
- Thank You.
The American public has a right to know that one of its major
departments, the Treasury Department, already has examined issues confronted
by this hearing and that Treasury's examination was comprehensive, candid,
and accurate. By recognizing this fact, these hearings can help to restore
confidence in this country's public servants. To ignore or deny the quality of
the Treasury Department's self-examination could feed the paranoia and
suspicion of a small segment of the American public.

Post-Waco Changes: Personnel Changes and Policy Oversight
What has changed since the report was released? First, ATF has new
leadership. Director Higgins announced his intention to retire shortly before
publication of the Treasury Report. Secretary Bentsen selected John Magaw,
then Director of the Secret Service to become the new ATF Director. After
issuing the Report, Secretary Bentsen placed five ATF officials on
administrative leave, including Mr. Hartnett, Mr. Chojnacki, and Mr. Sarabyn.
34

The five ATF officials were: the Associate Director for Law
Enforcement (Dan Hartnett), the Deputy Associate Director for Law
Enforcement (Dan Conroy), the Chief of the Intelligence Division ( David
Troy), Phillip Chojnacki, Special Agent in Charge of ATF's Houston Division,
and incident commander at Waco, and Chuck Sarabyn, Assistant Special Agent
in Charge in Houston, and the tactical commander on the ground at Waco. The

Review

~ound

that these officials provided deliberately misleading statements in

the aftermath of the raid. As the Treasury Review stated: "Any individual
whose judgment or integrity cannot be trusted by those who must rely on those
qualities must be removed from a position of discretionary authority." Report
at 182-183.
Mr. Hartnett chose to retire. Mr. Sarabyn and Mr. Chojnacki were
fired. They appealed the decision to the Merit Systems Protection Board. To
avoid the possibility that they would be reinstated in their former jobs, to avoid
re-opening the wounds of agents at ATF, and to permit the agency to move
forward, ATF settled with Mr. Sarabyn and Mr. Chonajcki on terms that
allowed them to be employed, but removed their law enforcement powers.
Both were demoted and removed from their positions as special agents. They
no longer carry guns or badges. The intelligence chief was removed from the
Senior Executive Service ranks.
As a consequence, the entire top management of ATF dealing with law
enforcement matters was replaced. Daniel Black of ATF Compliance Office
was elevated to the newly created Deputy Director position. Charles
Thompson, formerly Special Agent in Charge of ATF New York office, the
largest and among the most successful ATF offices in the country, was chosen
to head ATF Office of Criminal Enforcement.
35

I believe that the decision to terminate these agents was correct. While I
would have preferred to see this decision hold, I believe that ATF Director
John Magaw acted appropriately in deciding that the cases should be settled.
The most important factor to me was that the agents would no longer hold law
enforcement positions. As the Treasury Report stated, "Any individual whose
judgement or integrity cannot be trusted by those who must rely on those
qualities must be removed from a position of discretionary authority." Report
at 182-183.

Treasury Reforms
The tragedy at Waco also demonstrated a serious deficiency in the way
the Office of Enforcement supervised its bureaus and showed the need for the
earliest possible notification of significant law enforcement actions such as the
raid plan executed here. Earlier notification is necessary for the Office of
Enforcement to exercise meaningful oversight of its bureaus.
After the personnel changes, the second change is that I issued a directive
in August 1993, requiring that the Office of Enforcement be informed of any
significant operational matters that affect any of the bureaus' missions,
including major, high-risk law enforcement operations.
Third, I instituted new guidelines for sensitive undercover operations.
Customs, and Secret Service now have all sensitive undercover operations
reviewed by a multi-agency committee to ensure maximum planning and
oversight. The multi-agency committee includes not only representatives from
all Treasury enforcement bureaus, but also representatives from the Department
of Justice's Criminal Division. This procedural safeguard shows the increased
36

oversight by Treasury Officials over the most sensitive and dangerous law
enforcement operations of the bureaus. Indeed, had the undercover guidelines
been in place in 1992 and early 1993, the investigation of Koresh would have
come under close scrutiny by a sizable group of agents and lawyers from a
broad spectrum of enforcement agencies.
Fourth, we took steps to improve oversight, including formal and
informal ,communication between Treasury's law enforcement bureaus and
Treasury. To that end, I established a weekly meeting between the Under
Secretary's office and the heads of each of the Treasury Enforcement Bureaus
and key offices. I also have periodic one on one meetings with each of these
bureau heads where policy matters are discussed in greater detail. Of course, I
also speak regularly and informally with the bureau heads on both significant
and more routine matters.
Finally, I reactivated the Treasury Enforcement Council (TEC). The
TEC consists of all the bureau heads. There also are TEC working groups that
focus on more specific subject matters.
Based on these reforms, an operation contemplated by any Treasury
bureau of the scope and complexity of the Waco raid will come to the attention
of a variety of law enforcement authorities as well as my office well in advance
of the planned action. Ordinarily, ,operational matters are the domain of law
enforcement bureau heads. The job of Treasury is to ensure that the bureaus
have strong leadership and high standards for personnel, institute proper
training, are supported with adequate resources, and enforce the laws
impartially.
For the reasons stated in the Treasury Report, tragedies such as the one
at Waco never should happen and never should be permitted to happen again.
37

Under my direction, the Office of Enforcement, though it has improved its
oversight, will continue to make strides to assure the American public that
Treasury law enforcement agencies act responsibly and at the same time, carry
out their critical mission in ensuring the safety of our communities.

The Importance of the Treasury Report

I don't believe a day has passed since February 28, 1993 that I haven't
thought about the deaths of Conway LeBleu, Todd McKeehan, Rob Williams
and Steve Willis. I was in a position to influence the Acting Assistant
Secretary for Enforcement not to permit the raid to proceed -- no matter what
assurances ATF's then Director, Steve Higgins, gave him. I gave the same
advice -- first, to stop the raid, then to permit it to go forward -- that I would
have followed, had I been the Assistant Secretary for Enforcement. I have
never shied away from taking responsibility for my advice, nor do I now.
In early March I attended funerals of three of the four murdered agents.

Two were held the same day in different states, so I could only attend" three. I
do not have the vocabulary to describe the impact of attending the funeral of a
law enforcement officer slain in the line of duty. Police officers from
throughout the country -- state, local and federal -- attend or send flowers in
recognition of the unity of law enforcement. Moreover, I felt that the surviving
family members gave me more comfort than I gave them.
I remember holding Conway LeBleu's son Cameron's hand while I knelt
before him. He was eighteen months old. I remember Rob Williams' mother
holding me in her arms for a long time and telling me that everything would be
O.K. I remember Steve Willis' father's strength. He said that he was proud of
38

his son because he died doing what made him happy. While I wasn't able to
attend Todd McKeehan's funeral, I later spoke with his father who said:
"Please send me a copy of your report of what happened at Waco before it's
made public; I want to know the truth."
Three funerals in three states in three days. I am reminded every day of
the dangerous world in which law enforcement operates. Since joining
Treasury. I have attended 14 funerals of Treasury agents and employees killed in
the line of duty and 8 funerals and memorial services of non-Treasury agents.
I do not forget that four ATF agents were murdered; three wives are widowed;
children are without a father; and parents, brothers and sisters are without a
loved one. During the Waco funerals I saw and met ATF agents for whom I
would one day be responsible. I saw the bond among them. Men and women
cried openly and proudly as they laid their brethren to rest. Black and white
agents held each other. Female and male agents held each other.
I don't believe that the Conway LeBleu had been buried before press
reports surfaced that ATF went forward with the raid after learning that Koresh
had been tipped to the planned raid on raid day. ATF management did not
confirm this fact; it denied it publicly and frequently.
I committed myself to find the truth using the most comprehensive and
authoritative review process possible. And, since I don't do the work of the
brave and good ATF agents who risk their lives each and every day enforcing
the law against the country's most dangerous criminals, I committed myself to
ensuring that they have the leadership, training, resources, and support
necessary for the work they do.

ATF's Law Enforcement Mission
39

The Treasury Department did a thorough, comprehensive, and
unsparingly honest investigation of the tragic events at Waco insofar as they
involved ATF and Treasury. Two years after the Treasury Report and the
installation of new leadership at ATF, the ATF continues to perform essential
and often dangerous work for the American people. At this time, the agency
should be permitted to move on.
Let. me review for you a few facts about the work ATF does every day
for the American people:

* In FY

1994, ATF special agents forwarded 5,592 cases for prosecution

involving alleged violations of the federal firearms, arson, and explosives laws.
Of the nearly 9,500 suspects referred for prosecution in those cases, 47
percent were convicted felons, 49 percent were involved in narcotics
trafficking, and 25 percent had violent criminal histories.

* ATF

operates 21 Achilles task forces in 20 major cities with high violent

crime rates. The task forces, comprised of ATF special agents and state and
local law enforcement officers, target gang violence, drug trafficking, murder,
rape and other violent crimes. From 1988 through 1994, ATF's Achilles
program took 6,251 violent criminal offenders off the streets.

* ATF National Response Team has mobilized 310 times in response to
explosives and arson-related crises, including the terrorist bombings in
Oklahoma City and the World Trade Center. These incidents involved the loss
of 431 lives, 2,324 injuries and over $3.5 billion in property damage. ATF
also has been called to respond to 10 international crises involving explosives
40

and arson.

* From 1989 to

1993, ATF arson investigations helped keep Americans'

insurance costs down by saving the insurance industry $187 million in

fraudulent claims.

* The Violent Crime Control Act of 1994 made firearms thefts from a federally
licensed gun dealer a federal criminal offense. Since the law went into effect in
September 1994, ATF has received 1,688 theft reports involving 13,173

firearms.
By setting out the truth, the Treasury Report honored the memories of
the ATF agents killed at Waco. By instituting reforms, Treasury and ATF have
worked to ensure that a tragedy of this kind never again

occur~.

There has

been a lot of discussion at these hearings about the need to restore faith in
federal law enforcement. I do not believe the American people need their faith
restored, they have faith in federal law enforcement. Last week as these
hearings continued, everyday work continued for ATF line agents. That work
often places them in the most dangerous neighborhoods pursuing the country's
most violent criminals.
On the Monday before the hearings began, an undercover agent for ATF
shot and killed a suspected member of a murderous crack distribution ring in a
crime ridden New Orleans neighborhood who, while pointing a Beretta 9mm
semi-automatic pistol, threatened to "blow the heads off" of both the agent and
another person near him. The agent, a Waco veteran, was working on a Drug
Enforcement Administration task force along with officers from the New
41

Orleans police and the Jefferson Parish Sheriff s Office. The task force targets
violent narcotics offenders. We thus must remember the violent world in which
ATF agents operate.
When the New Orleans Times-Picayune reported on the episode on the
front page, it did not mention Waco. The people of New Orleans, know that
whatever mistakes ATF made two years ago, it carries out a critical, difficult
and dangerous law enforcement mission, fighting violent narcotics offenders,
and armed career criminals, gangs, illegal gun traffickers, arsonists, and bombmakers. ATF agents daily place their lives on the line to help make our
citizens safer. If the American people are reminded of that during these
hearings, I believe the mission of law enforcement and ATF will be
strengthened as a result.

omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
July 24, 1994

Contact: Hamilton Dix
(202) 622-2960

RUBIN ANNOUNCES BUREAU OF ENGRAVING AND PRINTING DIRECTOR
Treasury Secretary Robert E. Rubin today appointed Larry E. Rolufs as director of the
Bureau of Engraving and Printing (BEP).
Rolufs, 55, has served at the General Accounting Office since 1986, most recently as
director of information management services in the Office of Information Management and
Communication, a position he assumed in October 1992. From October 1990 to October
1992 he was director of policy and planning in the same office, and from April 1986 to
October 1990 he served as director of the Office of Publishing and Communications.
"Larry's extensive background in management and the printing field make him an
outstanding and highly qualified person for this important position," Secretary Rubin said.
"His leadership will be important to the bureau in the coming years as we implement our
program to redesign the U.S. paper currency."
Rolufs worked at the Treasury Department from December 1983 to April 1986 as
director of special projects under the U.S. Treasurer. He was deputy director of the U.S. Mint
from October 1982 until December 1983 and served as assistant director for operations at the
BEP from November 1979 to October 1982.
Rolufs holds a B.S. in Printing Management from California State Polytechnic
University and a M.S. in Printing Management/Telecommunications from South Dakota State
University. He was born in Springfield, Mo., and is married to Lawanda Dawes.
The BEP, a bureau within the Treasury Department, has facilities in Washington, D.C.
and Fort Worth, Texas. The BEP produces all U.S. paper currency, the majority of U.S.
postage stamps and other security documents issued by the federal government.
Mr. Rolufs succeeds Peter H. Daly, who has served as BEP director since August 26,
1988. Mr. Daly will move to the Treasury Department to work on strategic issues involving
cash systems.
RR-472
- 30 Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

(J)
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July 25, 1995

FEDERAL FINANCING BANK
Charles D. Haworth, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of June 1995.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $90.6 billion on June 30, 1995,
posting a decrease of $2,101.2·million from the level on
May 31, 1995. This net change was the result of a decrease in
holdings of agency debt of $1,244.6 million, in holdings of
agency assets of $755.0 million, and in holdings of agencyguaranteed loans of $101.5 million. FFB made 17 disbursements
during the month of June, and executed four repricings of RUSguaranteed loans, and 94 maturity extensions of RUS-guaranteed
loans. FFB also received 128 prepayments in June.
Attached to this release are tables presenting FFB June loan
activity and FFB holdings as of June 30, 1995.

RR-473

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Page 2 of 6
FEDERAL FINANCING BANK
JUNE 1995 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL

MATURITY

INTEREST
RATE

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF TRANSPORTATION
New York S & W Railroad

6/27

$4,204,575.00

5/22/15

6.400% Qtr.

9/1/95
6/30/95
6/30/95
12/11/95
12/11/95
12/11/95
6/30/95
6/30/95·
1/2/96
7/1/25
6/30/25

5.932%
5.931%
5.806%
5.830%
5.779%
5.733%
5.667%
5.667%
5.732%
6.730%
6.730%

11/2/26
11/2/26

6.624% S/A
6.635% S/A

12/31/25
12/31/14
1/2/24
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95

6.560%
6.310%
6.459%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%

GENERAL SERVICES ADMINISTRATION
Atlanta CDC Office Bldg.
HCFA Head9Uarters
HCFA Serv~ces
Foley Services Contract
Foley Services Contract
Foley Square Courthouse
HCFA Services
HCFA Headquarters
Memphis IRS Service Cent.
HCFA Services
HCFA Headquarters

6/1
6/1
6/6
6/19
6/22
6/26
6/26
6/26
6/26
6/30
6/30

$1,281,892.07
$704.68
.$92,761.00
$177,160.18
$122,314.50
$806,822.00
$93,223.00
$757.38
$1,923,398.06
$1,635,827.65
$114,295,859.53

6/8
6/14

$2,500,000.00
$9,641,158.58

6/8
6/23
6/23
6/30
6/30
6/30
6/30
6/30
6/30
6/30

$2,000,000.00
$5,168,000.00
$53,304,000.00
$3,571,691.99
$2,732,817.18
$2,227,488.98
$1,621,346.82
$2,145,859.94
$275,425.00
$2,464,480.04

S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

GSA/PADC
ICTC Building
ICTC Building
RURAL UTILITIES SERVICE
Carteret Electric #360
Central Iowa Power #385
Oglethorpe Power #335
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
S/A is a Semi-annual rate:

Qtr. is a Quarterly rate.

* maturity extension or interest rate reset

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 3 of 6
FEDERAL FINANCING BANK
JUNE 1995 ACTIVITY

DATE

BORROWER

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE

GOVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos

Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric

#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917

6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30

$2,304,578.41
$576,770.22
$1,174,637.59
$18,528.53
$489,923.43
$459,565.21
$4,258,733.61
$3,979,226.99
$1,019,372.90
$1,118,855.91
$1,436,394.35
$1,767,404.81
$432,680.62
$998,004.27
$1,303,084.40
$2,416,589.53
$2,735,098.77
$61,443.65
$761,972.17
$940,326.70
$2,556,748.24
$511,074.61
$5,203,367.01
$1,195,764.51
$2,396,336.44
$24,061,313.44
$708,809.22
$484,926.15
$2,225,630.45
$1,301,062.41
$1,690,506.84
$2,779,216.89
$2,974,846.95
$585,643.94

Qtr. is a Quarterly rate.
* maturity extension or interest rate reset

10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95

5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 4 of 6
FEDERAL FINANCING BANK
JUNE 1995 ACTIVITY

BORROWER

DATE

FINAL

AMOUNT
OF ADVANCE

MATURITY

$18,949.55
$1,939,608.86
$999,125.56
$2,689,879.88
$854,577.19
$3,273,272.26
$2,356,273.61
$3,823,593.60
$1,214,814.94
$4,909,091.05
$1,497,321.54
$469,606.95
$486,304.90
$5,734,239.35
$8,535,296.23
$39,220,058.04
$15,961,609.95
$9,805,014.50
$1,526,204.16
$200,666.78
$7,756,053.55
$40,032,761.57
$6,153,626.74
$9,495,638.26
$10,232,202.59
$7,379,417.90
$7,508,175.41
$3,492,259.81
$13,447,033.04
$5,968,805.29
$3,092,824.57
$926,249.04
$1,653,514.21
$586,040.46

10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
6/30/05
6/30/05
6/30/97
6/30/97
6/30/97
1/3/17
1/3/17
1/3/17
1/3/17
7/2/02
7/1/02
7/1/02
12/31/15
1/3/17
10/2/95
7/1/96
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95

INTEREST
RATE

GOVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Citizens utilities #387
*Citizens Utilities #387
*coop. Power Assoc. #070
*Coop. Power Assoc. #130
*Coop. Power Assoc. #156
@East Kentucky Power #140
@East Kentucky-Power #140
@East Kentucky Power #188
@East Kentucky Power #188
*Hoosier Energy Elec. #901
*Hoosier Energy Elec. #901
*Hoosier Energy Elec. #901
*Kamo Electric #209
*N. Dakota Central #278
*Northwest Iowa Power #907
*Oglethorpe Power #916
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918
*Plains Elec. #918

6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30

Qtr. is a Quarterly rate.
@ interest rate buydown
* maturity extension or interest rate reset

5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
6.342%
6.342%
5.969%
5.969%
5.969%
6.591%
6.591%
6.591%
6.591%
5.932%
5.932%
5.932%
6.502%
6.591%
5.566%
5.545%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 5 of 6
FEDERAL FINANCING BANK
JUNE 1995 ACTIVITY

BORROWER

DATE

AMOUNT

OF ADVANCE

FINAL

MATURITY

INTEREST
RATE

GOVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
*Saluda River Elec. #903
*Saluda River Elec. #903
*Saluda River Elec. #903
*Saluda River Elec. #903
*Saluda River Elec. #903
*Saluda River Elec. #903
*Saluda River Elec. #903
*Saluda River Elec. #903
*Seminole Electric #905
*Seminole Electric #905
*Seminole Electric #905
*Seminole Electric #905
*Seminole Electric #905
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*Washington Electric #269

6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30

$2,341,111.32
$884,798.45
$1,403,619.27
$9,878,655.98
$3,260,843.72
$2,648,404.94
$11,045,413.98
$1,044,942.40
$12,091,521.43
$12,269,060.33
$23,710,936.95
$39,965,689.66
$39,981,563.14
$935,836.49
$11,230,036.69
$3,630,971.25
$3,059,527.22
$3,632,085.10
$3,866,727.23
$4,285,830.31
$1,201,820.48
$914,658.82
$301,512.45

Qtr. is a Quarterly rate.
* maturity extension or interest rate reset

7/1/02
7/1/02
7/1/02
7/1/02
7/1/02
7/1/02
7/1/02
7/1/02
1/3/17
1/3/17
1/3/17
1/2/18
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
10/2/95
6/30/97

5.935%
5.935%
5.935%
5.935%
5.935%
5.935%
5.935%
5.935%
6.303%
6.303%
6.303%
6.322%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.566%
5.969%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
.Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 6 of 6
FEDERAL FINANCING BANK
(in millions)
Program
Agency Debt:
Department of Transportation
Export-Import Bank
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sUb-total*
Agency Assets:
FmHA-ACIF
FmHA-RDIF
FmHA-RHIF
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural utilities Service-CBO
Small Business Administration
sub-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration +
DOl-Virgin Islands
DON-Ship Lease Financing
Rural utilities Service
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
DOT-Section 511
sUb-total*
grand-total*
*figures may not total due to rounding
+does not include capitalized interest

June 30. 1995
$

0.0
2,646.1
15,777.2
3,200.0
7.614.7
29,237.9

Mav 31. 1995
$

0.0
3,149.8
16,518.0
3,200.0
7.614.7
30,482.5

Net Change

FY '95 Net Change

6/1/95-6/30/95

1011/94-6/30/95

0.0
-503.8
-740.8
0.0
2..:..Q
-1,244.6

-664.7
-1,280.4
-10,742.0
-200.0

-l.;!58.~

-14,245.4

2,698.0
3,675.0
23,631.0
10.5
28.5
4,598.9
0·1
34,642.6

3,453.0
3,675.0
23,631.0
10.5
28.5
4,598.9
0.7
35,397.6

-755.0
0.0
0.0
0.0
0.0
0.0
0.0
-755.0

-3,365.0
0.0
-760.0
-14.8
-7.2
0.0
-0.3
-4,147.4

3,580.8
95.7
1,688.5
2,222.4
21.2

3,612.0
95.7
1,688.5
2,220.8
21.2'
1,432.1
17,313.1
16.8
447.7
l1.Q
26,858.9

-31.2
0.0
0.0
1.6
0.0
0.0
-56.3
0.0
-19.8

-204.6
-14.2
-58.0
192.9
-0.7
-47.4
-59.8
-39.9
-95.1

1~432.1

17,256.8
16.8
428.0
15.0
26,757.4

LJ.

-101.5

=========

--------

$ 90,637.9

$ 92,739.1

$-2,101. 2

Ol~

-326.4
=========
$-18,719.2

FOR IMMEDIATE RELEASE
July 25, 1995

j..

Y ; ,."

1";

;.~:',',':'

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $17,754 million of 2-year notes, Series AG-1997,
to be issued July 31, 1995 and to mature July 31, 1997
were accepted today (CUSIP: 912827U59).
The interest rate on the notes will be 5 7/8%. All
competitive tenders at yields lower than 5.955% were accepted in
full. Tenders at 5.955% were allotted 43%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 5.955%, with an equivalent price of 99.851. The median yield
was 5.938%; that is, 50% of the'amount of accepted competitive bids
were tendered at or below that yield. The low yield was 5.882%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$41,095,131

Accepted
$17,753,551

The $17,754 million of accepted tenders includes $857
million of noncompetitive tenders and $16,897 million of
competitive tenders from the public.
In addition, $868 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $287 million
of tenders was also accepted at the high yield.from Federal
Reserve Banks for their own account in exchange for maturing
securities.

RR-474

DEPARTMENT

O}"

THE

TREASURY

NEWS

'IREASURY

................................~2Z,78q~..............................111
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 25, 1995

Waco Update

Attached is an update based on recent testimony in the House
Waco hearings.
Subjects covered include:

(1)
(2)
(3)
(4)
(5)
(6)
(7)

The Davidians Fired First
Shooting at the Dogs
Videotape of the Raid
Helicopters did not Fire
The Front Door of the Compound
ATF did not use Excessive Force
ATF did not strafe the compound with automatic weapons
fire.
-30-

RR-475
2:00pm

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Dick DeGuerin
Assertion: The evidence suggests that ATF fired first on the
compound.
•

Three impartial reporters on the premises -- Mark Masferrar,
Jim Mullony, Tommy Witherspoon -- testified at trial that
persons inside the compound fired first.

•

Agents participating in the raid testified under oath at
trial and before Congress that the first shots came from
within the compound.

•

Koresh was alerted forty-five minutes before the raid was to
take place that ATF was coming. Kathy Schroeder testified
at trial that preparations were made within the compound to
ambush the agents. Graeme Craddock gave corrobating
testimony on Turning Point on Thursday night. Koresh's
followers gathered firearms, ammunition, and grenades in
anticipation of their arrival. Davidians were stationed in
the windows and on the water tower when the agents arrived.

Dick DeGuerin
Assertion: The first sbots may bave been fired at the doqs.
ATF's p1aD oal1ed for them to sboot the 4oqs.
Fact:
•

ATF agents testified under oath, and three members of the
media confirmed that the first shots were fired at ATF
agents from within the compound. This testimony when
unchallenged during yesterday's hearings.

•

ATF

•

ATF's plan called for agents to discharge fire extinguishers
at the dogs in order to hold them at bay. Shots were to be
fired at the dogs only if the fire extinguishers failed.
One agent managed to discharge his fire extinguisher before
taking fire from within the compound.

~gents protected themselves by shooting the dogs after
the gunfight started.

Dick Deouerin
Assertion: The videotape of the raid which was to be taken from
the undercover house is missing.
Fact:
•

ATF originally planned to make a videotape of the warrant
execution from the undercover house. A camera was set up in
the window and connected to a VCR recorder. However, in the
period before arrival of the cattle trailers the agents
found that, whenever they keyed their radio microphone, the
tape ejected from the VCR. For this reason, the VCR was
never turned on.

•

If a videotape operation of the had been made, it would have
confirmed evidence presented at trial by the ATF agents and
the media -- that the Davidians fired first.

neCuerin and Zimmerman
Assertion: The perfortioDS OD the riqht 8i48 of the door were
from iDcomiDq rounds. This evidence 8uqqeats that ATF fired
~irst.

Fact:

•

The defense attorneys' claims are not verifiable because the
door they refer to was destroyed in the fire. The forensic
evidence of the remaininq part of the door shows clearly
that most of the holes were made by outgoing rounds.

•

Forensic evidence from the door is incapable of determining
who fired first, only that both sides fired at each other.

•

The incoming holes in the door were caused by ATF agents
firing in self-defense after the Davidians opened fire.

DaGuerin
Assertionl The Davidians may have had tbe right to derend
themselves against exceaaive deadly rorce.

Fact:
•

The Davidians had no right to fire upon federal agents
serving legally valid, properly issued warrants. No citizen
has this right. The proper means to challenge the validity
of a warrant is in court, not by taking up arms 'against law
enforcement officers.

•

If the fact that the agents were armed when they approached
the compound constitutes "excessive force," then criminals
present during any law enforcement raids will have the right
to resist with deadly force.

•

The Davidians knew that ATF was coming to the compound that
morning before the agents even arrived, and were waiting in
ambush.
On Turning Point, Graeme Craddock, a Branch
Davidian, admitted that members of the compound were lying
in wait for Koresh's signal to shoot these officers.
Howell/Koresh even told an FBI negotiator during the
subsequent siege: "Ya'll guys didn't have a chance. We knew
you were coming."

•

The ATF agents were running toward the compound wearing
uniforms and carrying equipment clearly marked as "POLICE
ATF" and identified themselves as police with a warrant to
serve.

•

The Davidians were doing more than firing in self-defense;
they were trying to kill the agents. Kenny King and Bill
Buford were fired upon numerous times after they received
their initial wounds.

DeGuerin
Assertion: AT7 aqenta sprayed the compound with automatic
weapons fire.
Fact
•

No ATF agents carried fully automatic weapons.

•

On the day of the raid ATF agents carried a total of 7 AR-15
(which are different from M-16s) and 15 MP-5 rifles. All of
these weapons were semi-automatic. Five ATF agents carried
an MP-5 that was capable of firing a two shot burst from a
single pull of the trigger. In contrast, dozens of fully
automatic machine guns were recovered from the Davidians'
compound. Also recovered were hundreds of thousands of
rounds of ammunition.

DEPARTMENT

THE

TREASURY

~/78g~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111

................................

OFFICE OF PUBUC AFFAIRS • 1500 pE'NNsnVANIA AVEiNlJJEl.N;W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR RELEASE AT 2:30 P.M.
July 25, 1995

:'CONTACT:

Off.ice of Financing
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $25,200 million, to be issued August 3,
1995. This offering will result in a paydown for the Treasury of
about $800 million, as the maturing weekly bills are outstanding
in the amount of $26,003 million.
Federal Reserve Banks hold $6,805 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $2,548 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional
amounts may be issued for ·such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000

Attachment

Rll-476

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED AUGUST 3, 1995

July 25, 1995
Offering Amount .

. .

$12,600 million

91-day bill
912794 V5 0
July 31, 1995
August 3, 1995
November 2, 1995
May 4, 1995
$12,299 million
$10,000
$ 1,000

182-day bill
912794 W8 3
July 31, 1995
August 3, 1995
February 1, 1996
August 3, 1995

Description of Offering:

Term and type of security .
CUSIP number
. . .
Auction date
. . . . .
Issue date . . .
Maturity date .
Original issue date .
Currently outstanding
Minimum bid amount
Multiples . . . . . .

$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Maximum Recognized Bid
at a Single yield
Maximum Award . . . . . .
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms . . .

Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
35% of public offering
35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date

DEPARTMENT

THE

TREASURY

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OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. "·WASHIHGToN, D. . • 2\1);20. (202) 622-2960

FOR IMMEDIATE RELEASE
July 25, 1995

Contact: Hamilton Dix
(202) 622-2960
MEDIA ADVISORY

Treasury Deputy Secretary Frank Newman, U.S. Treasurer Mary Ellen Withrow, and
Bureau of Engraving Director Larry E. Rolufs will accompany representatives of the National
Council on Disabilities on a tour of the Bureau of Engraving and Printing (BEP) in
Washington, D.C. on Wednesday, July 26.
The tour celebrates the fifth anniversary of the Americans with Disabilities Act. It will
take place at 2:30 p.m. at BEP's production facility, 14th and C Streets, S.W., Washington,
D.C.
The Bureau of Engraving and Printing has installed a number of features that make the
tour easily accessible to those with disabilities, including open-caption screens, audio tapes
and wheelchair access. In 1994, nearly 700,000 people took the currency production facility's
guided tour.
All press who plan to attend the tour must call Dawn Haley, BEP Public Affairs, hl
p.m. Wednesday at (202) 874-3913. Press should arrive by 2: 15 p.m. and enter through the
visitor's center on the 15th Street side of the building.
-30-

RR-477

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

THE

TREASURY

~~178~9~. . . . . . . . . . . . . . . . . .. .

....................

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANlAAVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 26, 1995

STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN
"We welcome the consensus that is emerging in favor of an interim agreement on financial
services in the World Trade Organization's Committee on Trade in Financial Services. We
expect this to be confirmed on Friday. This agreement protects the capacity of the United
States to respond to excessive foreign restrictions on access for U.S. firms."
The results will provide a basis for continued work to open financial services markets on a
multilateral basis. We will participate in the negotiations that will take place before the
expiration of this interim agreement in December 1997."
-30-

RR-478
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT
•

•

THE
•

T~EASURY
I

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.· WAS~~IN?T9N~ R·~·· ,20f20. 1202) 622-2960
IIJu I u ~ ,) -J j

•

A LETTER BY LESLIE B. SAMUELS
ASSISTANT SECRETARY OF THE TREASURY
(TAX POLICY)
REGARDING THE S CORPORATION REFORM ACT
OF 1995
.JUL Y 26, 1995

RR-479

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT OF THE TREASURY
WASHINGTON

ASSISTANT SECRETARY

July 25, 1995

The Honorable Orrin G. Hatch
United states Senate
Washington, D.C. 20510
Dear Senator Hatch:
Recently, the Administration testified before the Subcommittee on
Taxation and Internal Revenue Service Oversight on the provisions
of S. 758, the ItS Corporation Reform Act of 1995" (the "Reform
Act").
As stated in this testimony, we support the goal of the
Reform Act to provide small businesses with needed S corporation
reform and simplification. The Administration supports many of
the technical and administrative provisions of the Reform Act,
such as increasing the number of shareholders from 35 to 50, and
applauds you and the Subcommittee for undertaking such needed
reform and simplification. We believe, ho~ 'Jer, that appropriate
revenue offsets must be provided for these ~egislative proposals
to the extent they lose revenue.
We are also concerned that certain provisions of the Reform Act
may unintentionally create undue complexity and provide increased
opportunities for large taxable C corporations to escape
corporate taxation by electing S corporation status. This seems
to be an inappropriate consequence of a bill intended to benefit
small businesses.
In response to your request at the hearing, we
have been considering several proposals that would address these
concerns.
In addition, as we stated in our testimony, we would
be pleased to work with the Senate Finance Committee to produce a
revenue neutral reform package for small business that could be
enacted on a bipartisan basis.
During the hearing, we stated that there have been two recent
developments that should strongly influence the shape of any S
corporation reform.
First, limited liability companies ("LLCs")
have emerged as a tremendously popular alternative to S
corporations.
LLCs combine the flexibility of a partnership for
tax purposes with the liability protection of an S corporation.
LLCs, like S corporations and other forms of partnerships, are
generally not subject to tax; the results of their operations
flow through to the owners. virtually all states have enacted
some form of LLC legislation and, for most new enterprises
seeking extended flow-through treatment, an LLC will likely
become the preferred entity. Thus, as we consider S corporation
reform, we should keep in mind that it can be expected generally
to benefit only certain existing businesses.

- 2 -

Second, Treasury and the IRS have recently proposed a "check-thebox" system that would allow LLCs and other unincorporated
entities to elect to be treated as partnerships for tax purposes
simply by checking a box. This check-the-box system has been
generally praised by taxpayers and tax practitioners. However, it
would not apply to enterprises formed as corporations.
We do not
have the authority to extend the check-the-box system to nonpublicly traded corporations--large or small--including S
corporations.
In light of these developments, we believe that, as an
alternative to some of the provisions of S. 758, we should
consider allowing, at least for a limited period of time, certain
S corporations to convert to a partnership on a tax-free basis
under prescribed circumstances. As you know, there are currently
several practical limitations on an S corporation's ability to
convert to a partnership.
In particular, such a conversion
generally results in a tax liability that may be too steep a
price for many S corporations to pay, as well as various
transaction costs (lawyer and accountant fees, state transfer
taxes, etc.).
If adopted, this proposal would eliminate or
reruce the tax cost of the conversion and enable certain S
co~porations to el~ct the more flexible partnership treatment.
As part of this proposal, we should also cor~ider whether it
would be appropriate ~o grant Treasury authority to extend the
check-the-box proposal to converting S corporations.
If Congress
were to do so, we would be authorized to issue regulations that
would allow S corporations to continue their existing corporate
status while converting to partnership treatment for federal tax
purposes.
As a result, S corporations that wanted to be treated
as a partnership for federal tax purposes would simply file an
election to be treated as a flow-through partnership, rather than
actually having to transfer assets to a new partnership entity.
This proposal would enable S corporations to achieve partnership
tax treatment without incurring the transaction costs involved in
actually converting to a partnership (including an LLC.)
Finally, the dual concerns of providing appropriate revenue
offsets to this legislation and targeting it to small business
suggest that we explore another possible S corporation reform.
Specifically, we should consider whether it is advisable to
conform the tax treatment of the conversion of large existing C
corporations to S corporations with the treatment of their
conversion to a partnership (including an LLC.)
This proposal
(as applied to all converting C corporations, not just large C
corporations) was suggested by the Joint Committee on Taxation in

3 -

1990 as a simplification measure. 1 Currently, electing S status
rather than converting to a partnership generally enables large C
corporations -- corporations that would not meet anyone's
definition of small business -- to escape most corporate taxes.
In light of the recent developments discussed above, now may be
an appropriate time to review the Joint Committee's proposal.
I am also sending a similar letter to Mr. Pryor and the chairs
and ranking members of the Senate Finance Committee and the House
Ways and Means Committee. We look forward to working with the
two committees to develop a reform package that provides the
needed flexibility for small businesses.
Sincerely,

za~~~

Leslie B. Samuels
Assistant Secretary
(Tax Policy)
cc:

Senator Robert Packwood
Senator Daniel P. Moynihan
Representativ~ Bill Archer
Representative Sam M. Gibbons

In a letter to Rep. Rostenkowski, the Joint Committee
on Taxation recommended, as part of a simplification package,
that "a shift from C corporation status to passthrough entity
status where the passthrough entity is an S corporation [be]
conformed to the present-law treatment where the passthrough
entity is a partnership." See letter to Chairman Dan Rostenkowski
from P-onald A. Pearlman, Chief of Staff of the Joint Committee on
Taxation, reprinted in Committee on Ways and Means, Written
proposals on Tax Simplification, WMCP 101-27, May 25, 1990, p.20.

UBLIC DEBT NEWS
Department of the Treasury • Bureau of ~~e ,Public Debt • Washington, DC 20239

t! L .'.

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FOR IMMEDIATE RELEASE
July 26, 1995

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Office of Financing
202-219-3350

RESULTS OF TREASUR¥' S" AUCTION OF 5-YEAR NOTES
i,

C, I/,~,,'

", ,

Tenders for $11,501 million of 5-year"riotes, Series N-2000,
to be issued July 31, 1995 and to mature July 31, 2000
were accepted today (CUSIP: 912827U67).
The interest rate on the notes will be 6 1/8%. All
competitive tenders at yields lower than 6.219% were accepted in
full.
Tenders at 6.219% were allotted 96%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.219%, with an equivalent price of 99.601. The median yield
was 6.198%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 6.180%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$30,195,617

Accepted
$11,500,577

The $11,501 million of accepted tenders includes $287
million of noncompetitive tenders and $11,214 million of
competitive tenders from the public.
In addition, $550 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $275 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.

RR-480

D EPA R T l\1 E N T

0 F

THE

T R- E A SUR Y

lREASURY r,:~ iN E

OmCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

WRITTEN STATEMENT OF LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Committee:
I am pleased to submit this statement presenting the views
of the Administration on miscellaneous revenue issues as
described in the July 10, 1995, pamphlet prepared by the Joint
Committee on Taxation 1 ("JCT Pamphlet").
The Committee has before it over 250 proposals representing
SUbstantive changes to a wide range of tax provisions. Many of
these proposals deal with complex provisions of the law.
In many
cases, the proposals raise questions whether existing law should
be thoroughly reviewed and subject to hearings, considering,
among other things simplification and rationalization.
For
instance, Treasury is studying the treatment of financial
instruments and entities engaged in financial ~ervices
transactions and ways to modernize their regulatory and tax
treatment.
Some proposals that are the subject of these hearings
might more appropriately be considered in the context of such a
modernization effort.
In developing our positions on the proposals before the
Committee, we have relied on a number of tax policy principles.
One such principle is tax simplification. Given the widespread
interest that has been expressed in simplifying the tax code, we
believe that in evaluating these proposals, great weight should
be given to the extent that they may either simplify or
complicate the tax laws. Many taxpayt~s have complained that one
of the greatest sources of complexity in the tax laws is frequent
change in the law. We urge the Committee in considering these
miscellaneous proposals to bear in mind the additional complexity
that may result from large numbers of even meritorious changes in
the tax laws.

RR-481
Joint committee on Taxation, Description of Miscellaneous
Tax Proposals (JCS-19-95), July 10, 1995.
For press releases, speeches, public schedules and official biographies, caU our 24-hour fax line at (202) 622-2040

The Administration strongly supports many of the
simplification provisions contained in H.R. 3419, as it passed
the House in the 103rd Congress and as proposed to be modified in
the JCT Pamphlet. The Administration has recently announced
additional tax simplification proposals.
For instance, last month the President announced a pension
simplification package. A number of the miscellaneous tax
proposals included in these hearings are the same as or similar
to items in the Administration's pension simplification proposal.
We believe that the complexity of the private pension system has
raised the compliance and administrative costs of maintaining a
plan to a level that discourages certain employers, particularly
small employers, from providing any retirement plan for their
employees. Accordingly, one of the principal elements of the
Administration's proposed pension simplification package is a
new, simple retirement plan for employers with 100 or fewer
employees, known as the NEST (or National Employee Savings
Trust). The NEST would combine the most attractive features of
IRAs and 40l(k) plans, and would not be subject to the top-heavy
rules or to any other complex nondiscrimination rules. We look
forward to working with Congress on a bipartisan basis to achieve
this and other pension simplification this year.
In June, President Clinton also announced proposals, as part
of the Administration's Reinvention of Government II (REGO II)
initiative, to simplify the tax and wage reporting system, and to
expand the Internal Revenue Service's partnership program with
state tax authorities. We note that one of the simplification
proposals in H.R. 3419 would permit IRS to enter into cooperative
agreements with State tax authorities. The Administration
supports this provision and is eager to work with the Committee
to improve it.
In addition to tax simplification, the Administration has
relied on several other tax principles in evaluating the
miscellaneous proposals that are before the Committee. We oppose
"rifleshot" measures that provide special tax relief to a
targeted group of taxpayers. We generally oppose purely
retroactive provis~Qns that seek to supplant the judicial
process. We favor equity among similarly situated taxpayers. We
insist upon the administrability of each provision. Finally, to
the extent that miscellaneous tax proposals represent tax
expenditures, the relevant cost to taxpayers, and whether there
are proposed revenue-raising offsets, are important factors to be
considered.
The Administration's view with respect to many of the
proposals under consideration today assumes that appropriate
revenue measures will be proposed. Consequently, Poven for tax
proposals that are meritorious, they must be offset by revenueraising provisions that are compatible with the principles of
2

deficit reduction. Moreover, even if appropriate revenue-raising
offsets can be identified, the Administration will want to work
with the committee and the Congress as a whole to set priorities
for the use of those revenues.
The remainder of this statement is a detailed discussion of
the Administration's positions on the miscellaneous tax proposals
that are the subject of the hearing. The discussion follows the
order of the proposals described in the JeT pamphlet.

ADMINISTRATION POSITION ON
MISCELLANEOUS TAX PROPOSALS
I.

MISCELLANEOUS PROPOSALS

TAX ACCOUNTING PROVISIONS

Expensing of certain Costs Associated with Natural Disasters

Administration position. Do not support. The Administration is
aware of concerns relating to lost or damaged crops.
'£his
propvsal, however, goes well beyond allowing deductions to
restore acreage to its pre-disaster condition by allowing
deductions for capital investments.
2.

Allow Installment Method of Reporting Income from Sale of
certain Residential Real Property

Administration position. Oppose.
Current law appropriately
denies the installment method with respect to sales of real
property by dealers. This provision would add significant
complexity to the Internal Revenue Code and would be difficult
for the Internal Revenue Service ("IRS") to monitor. Also, it is
inconsistent with the narrow exceptions of current law, as it
would not impose an interest charge on the deferred tax.
3.

Eliminate "Look-Back Method" for Nonresidential Construction
Contracts

Administration position. Oppose. The look-back provisions serve
to compensate either the government or the taxpayer for the
under- or over-estimation that is inherent in the use of
estimates. The narrow exceptions to the use of this method
currently available serve to exclude those taxpayers for whom the
calculations are overly burdensome.
4.

Treatment of Contributions in Aid of Construction for Water
utilities

Administration position. Do not oppose. Congress enacted the
current statute in 1986 to prevent utilities from permanently
excluding the income associated with these contributions.
Congress believed that regulated utilities had the flexibility to
recoup these expenditures (if they were incurred directly)
through the ratemaking mechanism.
It is not clear, however, that
utilities have this flexibility.
For example, many utilities are
restricted to fixed-rate structures that do not permit them to
earn a return on property of the type under consideration.
Therefore, in these cases, there is no permanent exclusion of
income as contemplated by Congress in the Tax Reform Act of 1986
4

("1986 Act").
It is unclear, however, from a tax policy
perspective why this proposal should be limited to water
utilities.

Allow Trading Partnerships and Corporations to Use a Markto-Market Method of Accounting for securities

Administration Position.
Do not support. The Treasury is
studying the treatment of financial instruments and entities
engaged in financial services transactions and ways to modernize
their regulatory and tax treatment.
This proposal is more
appropriately considered in the context of the larger issues.
Furthermore, there are a number of technical issues that will
hav~ to be addressed with this type of treatment, such ~s the
character of gain or loss on a mark of a capital asset generating
ordinary income flows.
6.

Allow Partnerships and S Corporations to Elect Taxable Years
Other than Required Taxable Years by Paying Estimated Taxes
on Behalf of Their Owners

Administration position.
Oppose. This provision is extremely
complex and will impose greater administrative and compliance
burdens on the IRS.
Furthermore, there are a number of technical
problems.
For example, the entity makes payments at the
corporate rate, unless owners have income from the entity above a
certain amount, or, if the entity is a partnership, it has income
above a certain amount without regard to the number of partners.
This may result in significant deferral of estimated payments by
the owners, depending upon their tax bracket3. As another
example, the owners may find it difficult to de~ermine the actual
amount of credit against their own tax liabilities that is
flowing from the entity if ownership is changing throughout the
year.
7.

Allow Deduction for Intrastate Operating Rights of Motor
Carriers

Administration position.
oppose. Allowing a current deduction
for the adjusted basis of operating authorities would contravene
long-standing cost recovery principles and is even more generous
than the Economic Recovery Tax Act 0f J981 provision affecting
interstate operating rights.
8.

Allow Taxoavers to Estimate Shrinkage for Inventory
Accounting

Administration position. oppose. The Administration believes
that the use of estimates based on historical data in this
context does not result in a clear reflection of income.

Provide Exclusion for certain Amounts Received by a Utility
with Respect to Nuclear Decommissioning Costs

Administration position. Do not support. The effect of this
proposal is to allow the utility to exclude from income customer
contributions to future decommissioning costs without reducing
the amount the utility is permitted to deduct for contributions
to a nuclear decommissioning fund.
10.

Repeal Treasury Ruling Reguirement for Nuclear
Decommissioning Costs

Administration position. Do not support. Taxpayers are required
to obtain a ruling establishing the schedule of contributions to
a nuclear decommissioning fund in order to prevent excess
accumulations in the fund and to assure that contributions are
not deducted more rapidly than level funding.
We believe that centralized administration, through a ruling
procedure, is the most efficient method of achieving these
purposes. The Internal Revenue Service's experience with the
ruling requirement is that the schedules submitted by taxpayers
in their ruling requests frequently require adjustments in order
to prevent excessive or accelerated deductions. We are concerned
that, if the ruling requirement is eliminated and enforcement of
limitations on contributions is left to the audit process, errors
in the schedule of contributions are more likely to escape
detection. We also believe the Internal Revenue Service should
not be deprived of its discretionary authority to disqualify a
nuclear decommissioning fund if the fund's assets are not used
for decommissioning or there is self-dealing between the -fund and
the utility.
We recognize that, under current rules, it is possible that
taxpayers may be required to request a new ruling to reflect
minor changes in the assumptions on which the taxpayer's original
ruling was based. The Internal Revenue Service and Treasury are
aware that in such cases, it is appropriate to streamline the
procedures to ease administrative burdens on both taxpayers and
the Internal Revenue Service.
11.

Treatment of certain compensation Payable by certain
Personal Service Corporations Using an Accrual Method of
Accounting

Administration position. Do not oppose, with possible
modifications. Provided the amount of compensation which may be
deducted under this provision is limited in a manner similar to
that proposed in H.R. 11 in the 102nd Congress, the mismatch that
would result from this provision would not undermine the purposes
of section 267.
6

12.

Treatment of Livestock Sold on Account of Weather-Related
Conditions

Administration Position.
Support. This provision promotes the
policy of allowing farmers to avoid unpredictable tax results due
to events not within their control, and allows these taxpayers to
associate expenses with income directly attributable to those
expenses in the same manner as the natural business cycle.
13.

Treatment of Certain Crop Insurance Proceeds and Disaster
Assistance Payments

Administration position.
Support. This provision promotes the
policy of allowing farmers to avoid unpredictable tax results due
to events not within their control, and allows these taxpayers to
associate expenses with income directly attributable to those
expenses in the same manner as the natural business cycle.
14. -Allow Certain Contractors to Use the Cash Method of
Accounting
Administration position. Oppose.
The Administration does not
believe that a statutory change is necessary.

ALTERNATIVE MINIMUM TAX

Allow certain Investment Expenses to be Deducted for
Alternative Minimum Tax Purposes

Administration position.
Do not oppose, with modifications.
From a tax policy perspective, the AMT treatment of theseexpenses is inconsistent with one of the purposes of the AMT (to
assure that economic income is subject to tax) and results in a
mismeasurement of economic income.
This relief should not be
limited to individuals receiving distributive shares of section
212 expenses from partnerships. The economic distortion at issue
applies no matter what form the taxpayer's investment takes.
2.

Allow Energy Tax Credits Against Alternative Minimum Tax

Administration position. oppose. There is no reason that energy
credits should be subject to substantially more f~vorable
treatment than other tax credits, which generally are not allowed
against the AMT.
In addition, the purpose of the AMT, to assure
that taxpayers with economic income are subject to tax, will be
weakened if credits may be fully utilized against it.

C.
1.

BUSINESS EXPENSES
Any Period During Which a Federal Employee Is certified By
the Attorney General To Be Participating in a Federal
Criminal Investigation Not Included in Computation of OneYear Limitation with Respect to Deductibility of Travel
Expenses While Temporarily Away from Horne

Administration position. Do not support.
It has not been
established that the impact of the amendment of section 162(a) by
the Energy Policy Act of 1992 upon federal investigators is
unique or more burdensome than the impact upon state and local
iRvestigators or other governmental or business activities.
Deduction of expenses for travel away from horne may result in the
deduction of personal expenses as business expenses. A
universally applicable fixed time limit is appropriate and should
minimize administrative disputes.
2.

Deduction for Regularly Scheduled Air Transportation Limited
to Normal Tourist Class Fare

Administration position. Oppose.
Imposing a new limitation on
the deductibility of airline fares would create significant
administrative burdens.
In addition, it would be inappropriate
to single out the airline industry in contras~ to other forms of
transportation by limiting deductions for airfare to a particular
fare.
3.

Increase Deductibility of Business Meal Expenses for
Individuals Subject to Federal Hours of Service Limitations

Administration position. Oppose. We are not persuaded that the
circumstances of those individuals who would be affected by this
proposal are sufficiently unique to warrant special treatment.

BUSINESS TAX CREDITS

Credit for the Rehabilitation of Certain Historic Homes

Administration position. Oppose. The subsidy represented by the
proposed credit is not warranted. Moreover, the transferability
of the credit pursuant to rehabilitation mortgage credit
certificates raises significant administrative concerns.
2.

Increase Tax Credit and Modify Other Provisions with Respect
to Electric Vehicles

Administration position. Do not support. The current 10 percent
credit (subject to a $4000 cap) for electric vehicles was enacted
8

in 1992, effective for vehicles placed in service after June 30,
1993. We are concerned that certain of the proposed
modifications would create greater disparity in the tax
incentives for electric vehicles and the special expensing
allowed for other clean-fuel vehicles.
3.

Tax Credit and Tax-Exempt Financing for Environmental
Remediation Expenses

Administration Position. Do not support. Although the
Administration fully supports the goal of environmental cleanup,
the proposal would be complex and difficult to administer.
In
addition, the proposal would have significant revenue cost, and
would not be the most efficient means of providing subsidies to
finance cleanup costs.

CAPITAL GAINS

Ten Percent Alternative Tax on Gains Held Five Years

Administration position. Oppose. This type of proposal is
inconsistent with the principles of an income tax since taxpayers
with the same amount of capital gain would pay greatly different
amounts of tax in many cases. The proposal would be very complex
due to its potential interaction with other provisions such as
loss carryovers, the 28 percent maximum tax on capital gains,
limits on the deduction of investment interest expense, and the
alternative minimum tax.
In addition, this proposal would lose
significant revenue.
2.
(a).

One-Time Exclusion of Gain on the Sale of a principal
Residence by an Individual Who Has Attained Age 55
Allow Multiple Exclusions Where Two Otherwise Eligible
Taxpayers Marry

Administration position. Do not oppose. There are a number of
anomalies in existing law, particularly with respect to
individuals who remarry.
It is clear that improvements to the
current rules can be made for otherwise eligible taxpayers who
marry. We are happy to work with Congress to develop proposals
to simplify current law.
(b).

Allow Multiple Exclusions in certain Cases

Administration position. Do not support. This proposal has the
potential to allow two exclusions within a marriage for a total
of up to $250,000 in excluded gains. There are a number of
anomalies in existing law, particularly with respect to
individuals who remarry. We are happy to work with Congress to
develop proposals to simplify current law, but we are concerned
9

about the possibility in this proposal of allowing two exclusions
within a marriage.
(c).

Allow Multiple Exclusions in the Case of certain Unemployed
Persons

Administration position. oppose. This proposal raises
significant administrative concerns.
(d).

Treat certain Disabled Persons as satisfying the Age 55
Reguirement

Administration position. Do not support.
It is unclear that
this is a~l appropriate, targeted way to assist the disabled.
In
addition, we have concerns about the definitions used in the
proposal.
3.

Revise Targeted Capital Gains Exclusion for Small Business

Administration Position. Do not support. section 1202 as
currently drafted provides an appropriate incentive for
investment in small business corporations. The Administration,
however, recognizes the potential problems that can be created by
the current provisions regarding shareholder redemptions and the
amount of working capital that is treated as used in the active
conduct of a trade or business. We would be happy to work with
Congress to devise appropriate corrections to address these
specific problems.
4.

Exempt Tax-Exempt Bonds from Treatment ?s Market Discount
Bonds

Administration position. Oppose. Market discount on a taxexempt bond is attributable to the time value of money and is
appropriately treated as discount.
F.
1.

CHARITABLE DEDUCTION
Deduction for Commemorative Coins Purchased from U.S. Mint

Administration position. Oppose. This proposal runs contrary to
the fundamental tax policy principle which holds that a taxpayer
makes a charitable contribution only to the extent the taxpayer's
payment exceeds the value of anything provided in return. The
U.s. mint sells commemorative coins for a set price per coin. A
taxpayer who pays the set price for a commemorative coin has
gotten back something of equivalent value, and therefore has not
made any charitable contribution that would merit a deduction.

Charitable Deduction for Non-Itemizers

Administration position. Oppose. A charitable contribution
factor is already built into the standard deduction. Therefore,
allowing taxpayers who do not itemize to claim a deduction for
charitable contributions would effectively provide many taxpayers
with a double deduction, and would pose significant budgetary and
administrative problems.
3.

Remove Charitable Deductions from Overall Limitation on
Itemized Deductions

Administration position. Oppose. There is no tax policy rea Jon
for distinguishing the charitable contribution deduction from any
other itemized deduction that is subject to the reduction imposed
by section 68.
4.

-Repeal Charitable SUbstantiation Rule for contributions of
$250 or More

Administratlon position. Oppose. The sUbstantiation requirement
of section 170(f) (8) is intended to stop known abuse of the
charitable contribution deduction by taxpayers seeking to deduct
payments to charity that are actually payments for goods or
services rather than contributions. Requiring written
sUbstantiation provides the IRS with an effective mechanism for
verifying that a taxpayer's payment genuinely represents a
charitable contribution.
5.

Allocation of Basis to Sale Portion of Bargain Sales of Real
Estate Interests to Charities or Governments

Administration position. Oppose. By allowing a taxpayer to
offset the gain from a bargain sale of real property to charity
with the full basis in the property, this proposal removes an
important check on the taxpayer's interest in inflating the value
of the charitable contribution.
It also increases the preference
for using appreciated real property rather than cash to make
charitable contributions. Furthermore, by preventing the IRS
from considering negotiations and the actual sales prices when
determining the fair market value of a restriction on use of real
property that has been sold to a charity, the proposal creates an
unwarranted exception to the general principles of fair market
value. Arm's-length bargaining and sales prices are essential
elements in any principled analysis of fair market value.
Prohibiting their consideration would encourage taxpayers to
claim unjustifiably that they have made bargain sales.

Enhanced Deduction for corporate contributions of Scientific
Equipment for Design Research

Administration Position. oppose. The special rule for
contributions of scientific property for research was enacted in
response to studies that showed that universities were unable to
meet the rising costs of scientific equipment in such equipmentintensive research areas as physics, chemistry, and electrical
engineering. This rationale does not apply to contributions of
equipment for use in design research. Moreover, there is no
evidence that the costs of the equipment used in design research
are rising.
In fact, the cost of computer equipment, one of the
principal tools of design research, is generally falling.

CHILD CARE CREDIT

Extend Dependent Care Credit and Dependent Assistance
Programs to Certain Overnight Camp Expenses

Administration Position. oppose. Taxpayers may claim this
credit for certain child-care costs incurred in order to enable
the taxpayer to work, but generally may not deduct expenses which
are predominately for the entertainment or education of their
child.
In addition, this provision appears to limit the amount
of allowable expenses on a weekly basis, adding significant
complexity to the calculation of the credit and exclusion
amounts.

H.
1.

COMPLIANCE
Allow Offset of state Tax Liability with Overpayments of
Federal Tax Law (H.R. 757)

Administration Position. Do not oppose. The Administration
supports the goals of H.R. 757, but believes modifications are
necessary to ensure that the IRS can continue to administer its
refund offset program in an efficient manner. We would be
pleased to work with the Committee in crafting the needed
modifications.
2.

Repeal of Information Reporting on Real Estate Transactions

Administration position. oppose. This information reporting
requirement is important in enabling the IRS to monitor
compliance. The Congressional concern underlying the enactment
of this provision in 1986 remains valid.

Extend IRS Offset Authority for Undercover Operations

Administration position. Support. When it was available, offset
authority was used by the IRS to conduct effective undercover
investigations of crimes such as money laundering and motor fuel
excise tax fraud. The offset authority also was used to conduct
undercover investigations that led to the indictment of major
drug traffickers and organized crime figures, and the seizure of
millions of dollars in illicitly derived assets. The authority
should be extended.
I.

CORP0RATE

certain Distributions by Alaska Native Corporations and
Treatment of Certain Settlement Trusts

Administration position. Do not support. Any changes to the
taxation of Alaska Native corporations ("ANCs") should be
structured to minimize administrative burdens on the IRS. The
proposal would increase the situations in which the determination
of basis in shares of ANC stock becomes relevant, and thus would
increase administrative complexity.
2.

Lengthen Corporate Capital Loss Carryover From 5 to 15 Years

Administration position. This proposal would permit capital
losses to be carried forward 15 years instead of five.
The
current five-year carry-forward may be unduly short.
We are
concerned, however, about revenue effects and whether the
proposed modification is appropriate for existing losses.- We
believe this proposal should be considered in light of the
treatment of carryovers generally.
3.

Repeal Rule that Accumulated Earnings Tax Applies Without
Regard to the Number of Shareholders

Administration position. Do not support. Changes to the
accumulated earnings tax rules must be carefully considered,
particularly with respect to their coordination with other antiavoidance provisions in the Code, incluning the personal holding
company and foreign personal holding company rules. Although
changes in these rules may be justified, they should await a
thorough review of these anti-avoidance provisions.
4.

Modify Rules for Interest on Large Corporate Underpayments

Administration position. Do not support. This proposal is
inconsistent with the original design and intent of the 1990
legislation that imposes the higher rate of interest on large
corporate underpayments.
13 '

DEPRECIATION AND AMORTIZATION
Normalization of Consolidated Tax Adjustments with Respect
to Non-Regulated Subsidiary of a Regulated Public utility

Administration position.
Do not support. The Administration is
not convinced that regulatory commissions should be prohibited
from allocating any of the consolidated tax benefits resulting
from the accelerated use of losses incurred by unregulated
affiliates to the customers of the utility against whose income
the losses were applied. Moreover, if Congress wishes to
restrict a regulatory commission's discretion, sanctions other
than the loss of accele:ated depreciation may be more
appropriate.
2.

Establish lS-Year Recovery Period for Small Retail Motor
Fuel outlet Stores

Administration position. Oppose. The proposal is likely to lead
to significant abuses and controversies.
3.

Establish 3-Year Recovery Period for Semiconductor
Manufacturing Equipment

Administration position.
Do not support. Changes in depreciable
lives should be made only after detailed analysis of relevant
economic and other evidence supporting a change.
4.

Establish 3-Year Recovery Period for Property subject to
certain Rental Purchase Agreements

Administration Position. Oppose. The Administration is unaware
of any economic analysis that supports a shorter life for
property subject to rent-to-own contracts.
5.

Establish 10-Year Recovery Period for Commercial Improvement
Property

Administration position. Oppose. The Treasury is unaware of any
economic analysis that supports this modification to the
prohibition on component depreciation or the 10-year recovery
period of this proposal.
6.

Establish lO-Year Recovery Period for Certain Leasehold
Improvements

Administration position. Oppose. The Treasury is unaware of any
economic analysis that supports this modification to the
prohibition on component depreciation or the lO-year recovery
period of this proposal.
14

Treatment of Intermodal Cargo Containers

Administration position.
Oppose. The investment tax credit and
accelerated depreciation provisions were intended to stimulate
investment in the united states. This proposal is inconsistent
with that objective, and due to its retroactive nature, will not
directly result in new investment. Moreover, the amendment of
tax returns for many prior years presents significant
administrative burdens for the IRS.
8.

Exempt Acquisition of Software and Software Services
Businesses from IS-Year Intangibles Amortization

Admi~istration

position.
Do not support. We are concerned that
this proposal will lead to disputes over whether an acquisition
qualifies for exemption from IS-year amortization and thus will
undermine the goals of the 1993 intangibles legislation.

EITC

Advance Payment of the Earned Income Tax Credit through State
Agencies

Administration position.
support, with modifications. This
proposal is very similar to a demonstration program proposed by
the Administration in 1994 (section 741 of H.R. 4605, 103rd
Congress). We would support this proposal if it were modified to
conform to our proposal, primarily by addressing the critical
issue of the States' responsibility for excessive payments and
limiting the provision to a demonstration project involving a
specified number of States for a limited duration with an·
agreement to share data for purposes of evaluating the program.

EDUCATION

Exclusion For Income Earned on State Prepaid Tuition Plans

Administration position.
support Administration's budget
proposal. The Adminis~ration strongly supports incentives for
investing in and saving for education, but believes that the
President's IRA and educational expense deduction proposals are a
more flexible way to encourage savings and a more cost-effective
means of helping middle- and lower-income individuals afford
education. Moreover, the exemption under current law of interest
on Series EE savings Bonds used for education largely satisfies
the needs addressed by this proposal for middle- and lower-income
individuals saving for their children's education.
In addition,
we believe that the proposal has technical problems, and may have
large revenue costs.
15

We understand, however, that the prepaid tuition plans currently
in place ln a number of states are appealing to individuals
trying to save for their children's education. We also
understand that uncertainty about the tax treatment of the plans
under current law may discourage some from using the plans to
save for college. We would be happy to work with Congress to
create a less expensive, more targeted approach to dealing with
this problem.
2.

Adopt Education Savings Accounts

Administration position. support Administration's budget
proposaL.
The Administration supports efforts to encourage
savings and to p~omote investment in higher education. We
believe, however, that our proposals to allow deductions for
educational expenses and to expand IRAs is a preferable approach.
The Administration's proposals are targeted on middle-income
families and thus are a more cost-effective way to increase the
savings rate in this country.
since there is no income
limitation under this proposal, it may provide a tax windfall for
higher-income individuals without increasing their overall rate
of savings. The Administration's proposals are targeted to
provide incentives for lower- and middle-income people who need
help saving and paying for college.
Finally, we prefer the
Administration's IRA proposal because it is a more flexible
approach to enhancing the savings rate.
3.

Expand Section 108ef) To Provide That Cancellation of Private
College Student Loans Is Not Taxable Income

Administration Position. Do not oppose. If Congress decides
that the exclusion of cancellation of indebtedness income· under
section 108(f) should be extended to student loans from
educational institutions under a program of an institution
designed to encourage its students to serve in occupations or
geographic areas with·unmet needs, we would not oppose such a
change on a revenue-neutral basis in the context of otherwise
acceptable legislation. However, the Administration remains
strongly committed to its prior proposal to clarify that debt
forgiveness on Federal direct student loans with incomecontingent repayment is excluded from income. The Administration
sees its proposal as a priority.

EMPLOYMENT TAXES

Employment Tax Status of Certain Fishermen

Administration position. Do not oppose. The proposal would take
the traditional operation of fishing fleets into account in
determining the employment tax status of crew members while
ensuring that income paid to crew members is reported. We note
16

that a determination of crew size based on the preceding calendar
year (rather than the preceding four quarters) would simplify
compliance and administration burdens related to the provision.
2.

FICA Exemption for certain Seasonal Children Camp Employees

Administration Position. Oppose. The proposal would create
disparities between full-time students employed by children's
camps and other students or young adults employed in a trade or
business.
3.

Extend FICA Tip Credit

(a). Extend FICA Tip Credit to All Employees Who Receive Tips
Administration position. Oppose. The FICA tip credit was
intended to apply only to the employer FICA tax paid on tips
received from customers in connection with the provision of food
or beverages for consumption on the premises of a food or
beverage establishment. The Administration does not believe it
is appropriate to expand this special tax treatment to tips
received by employees for other services.
(b). Effective Date of FICA Tip Credit
Administration position. Oppose. We oppose the application of
the FICA tip credit to taxes paid on tips that are not timely
reported by employees. Under current law, employers are eligible
for the credit only for taxes paid on tips that are timely
reported tv them by employees. The extension of the credit to
taxes paid on unreported tips would provide a disincentive for
employers to encourage employees to report tips.
We also oppose the retroactive application of the FICA tip credit
to taxes paid after December 31, 1993 with respect to tips
received for services performed before January 1, 1994. This
proposal, in combination with the proposed extension of the
credit to unreported tips, would provide a significant windfall
to employers whose employees did not report all or a portion of
their tips received before January 1, 1994 and to employers that
did not pay FICA taxes on the tips that their employees did
report before January 1, 1994. These ~mployers would be eligible
for a 100 percent credit, even for their delinquent FICA taxes.
In contrast, employers that timely paid their FICA taxes on
timely reported tips and employers-that encouraged their
employees to accurately report their tips would have only
received a deduction for their share of FICA taxes attributable
to pre-1994 tips.
In addition, extending the availability of the
credit in the manner proposed could result in an unanticipated
drain on general revenues.

Repeal Presumption That Bakery Distributors are Employees
for Employment Tax Purposes

Administration Position. Do not support. Bakery drivers have
been treated as statutory employees for employment tax purposes
since 1951. We do not believe that there is sufficient reason to
change this longstanding provision and disrupt existing
arrangements.
5.

FUTA Exemption for certain Religious Schools

Administration position. Do not support. We do not believe that
there is sufficient reason to reduce unemployment compensation
coverage for this group of workers and their employers.
In
addition, an exception that is based on whether the employer has
a "primary religious purpose" would increase administrative
complexity in the statute.
6.

-Application of Common Paymaster Rules to certain Agency
Accounts at State Universities

Administration position. Do not support. The current provision
is a narrow exception that is specifically limited to faculty
practice plans where at least 30 percent of the plan employees
are also employed by a State university medical school. We
understand that technical State law issues prevent certain
medical schools from utilizing this provision, and we would not
oppose a change more narrowly tailored to address that problem.
However, we have concerns about the elements of this proposal
that would expand the types of institutions qualifying for common
paymaster treatment and that would eliminate the concurrent
employment requirement.
7.

Repeal section 1706 of 1986 Tax Reform Act

Administration position. Worker classification issues should not
be addressed on a piecemeal basis.
It would be preferable to
develop a more comprehensive approach that appropriately deals
with worker classification issues. We would be happy to work
with Congress to develop such an approach.
N.

EMPOWERMENT ZONES

Expand Number of Community Development Corporations (from 20
to 40) Eligible for Tax Credit and Increase Aggregate Amount
of contributions Eligible for Tax Credit

Administration position. Oppose. The Administration believes
that it is premature to modify these provisions until there is
better evidence on how the 1993 provisions are working.
18

Tax Incentives for Economic Recovery in Designated Areas with
Employment Loss in Financial and Real Estate Businesses

Administration Position.
Oppose. This proposal, in contrast to
the Empowerment Zone and Enterprise Community program authorized
in 1993, is focused too narrowly on reductions in employment and
includes a number of tax incentives that in and of themselves
would be unlikely to improve economic conditions in distressed
areas.
3.

Allow 20-percent Tax Credit for Commercial Revitalization in
Empowerment Zunes and Other Specially Designated Areas

Administration Position.
Oppose. This proposed credit is
unlikely to be effective in overcoming the primary barriers to
non-residential development in these distressed areas, is likely
to adversely affect businesses already located in these areas,
and would be extremely complex to administer.

ENERGY

Modifications to Tax Credit for Producing Fuels from
Nonconventional Source

(a).

Allow the Credit to Be Claimed Against the Alternative
Minimum Tax

Administration position.
Oppose. There is no reason that energy
credits should be subject to substantially more favorable
treatment than other tax credits, which generally are not allowed
against the alternative minimum tax ("AMT"). The purpose- of the
AMT, to assure that taxpayers with economic income are subject to
tax, will be weakened if credits may be fully utilized against
it.
(b).

Unrelated Party Sale Requirement

Administration position.
oppose. Under either proposal, a
taxpayer would have the incentive to erect an electric plant,
sell electricity produced from self-generated gas on the national
grid, receive the credit, and buy back the electricity from the
national grid rather than using its own self-generated
electricity. Use of self-generated electricity is already a
common practice for many industries without the credit;
therefore, this proposal would expand use of the section 29
credit beyond what was originally intended. Moreover, absent an
arm's-length transaction, the amount of section 29 gas
"constructively" or "deemed" sold would not be
verifiable.
Finally, the number of potential taxpayers who could
claim the section 29 credit under the proposal (and hence the
amount of the associated revenue loss) is far greater than
19

originally estimated by Treasury in 1993, when the proposal was
previously considered.
(c).

Underground Coal Gasification

Administration position. oppose. The proposal would allow
certain modules newly drilled within a coal production area to
qualify for the section 29 credit if there is an existing aboveground gas transportation system to bring the gas generated from
in-situ processing to an existing above-ground facility for
further processing. This could expand the use of the credit
virtually indefinitely for a given coal seam and would,
therefore, disadvantage other facilities that would have to
comply with the placed-in-service expiration date.
(d).

Definition of Tar Sands

Administration position. Oppose. The placed-in-service date for
wells from tar sands to qualify for the section 29 credit expired
at the end of 1992. The source of the definition of tar sand
presently in use by the IRS is a ruling by the Federal Energy
Administration. The Tax Court has determined that this
definition is the proper definition for purposes of section 29
the Code.
In addition, there is no tax policy justification for
creating a windfall by recharacterizing a significant number of
deposits as eligible for the credit, when the oil or gas has
already been economically produced. Moreover, the Administration
would anticipate sUbstantial difficulty implementing any standard
that requires measurement of a gas-free viscosity at original
reservoir temperature.
2.
(a).

Determination of Independent Oil and Gas Producer status
Increase Permitted Retail Sales

Administration position.
Oppose. Producers that are
sufficiently integrated to sell at retail are most likely large
companies of the type intended to be excluded from percentage
depletion.
Regulated public utilities, which tend to be
relatively large companies, should not be given a favorable rule
for purposes of determining whether they qualify as independent
producers.
(b).

Increase Permitted Refining Activity

Administration position. Oppose. The current 50,000 barrels of
production threshold was carefully considered. There is no tax
policy reason for adjusting the threshold.

Tax Credit for Lubricating oil Produced from Re-refined oil

Administration Position. Oppose. Motor oil, like other
materials, is recycled when dictated by environmental regulations
or when economically profitable. Today, lubricating oil is being
recycled without the credit. Moreover, this credit would be
difficult to administer. Because used oil is frequently blended
with other hydrocarbons as part of the re-refining process,
determination of the amount of lubricating oil that is actually
derived from used oil would be complex.
Implementation would
also require a precise definition of "lubricating oil."
4.

Allow Ge~logical and Geophysical Costs Incurred in
Connection with oil and Gas Development to be Expensed in
the Year Incurred

Administration Position. The Administration believes that the
objectives of any proposal to change the tax treatment of
geological and geophysical (G&G) expenditures should be
simplification and neutrality. This proposal, however, does not
achieve these goals.
Instead, under this proposal, G&G costs
would be treated more favorably than intangible drilling costs.
The proposal would not reduce complexity. The Administration
would welcome the opportunity to work with Congress on a proposal
for G&G that would reduce compliance burdens for the industry and
provide more equal treatment for both types of expenditures.
5.

Extend the Renewable Electricitv Production Credit to
Electricity from Certain Fuel-Cell Powe~ Plants

Administration position. Oppose. There is no tax policyjustification to single out fuel-cell power plants for a tax
credit, since fuel-cell power plants have been competing in the
international marketplace for several years.
P.

ESTATE AND GIFT TAX PROVISIONS

Exemption From Estate Tax For Qualified Historic Property
Subject To Permanent Conservation Easement

Administration position. Oppose. The Administration believes
that the deduction allowed under current law for the grant of a
charitable easement on historic properties is sufficient. The
proposal would permit a complete exclusion for qualified historic
property of unlimited value from the gross estate, rather than
the value of the charitable easement alone. The proposal would
be subject to abuse and would erode the tax base.

Exempt certain Land Subject To Permanent Conservation
Easement From Estate Tax

Administration position.
oppose.
The Administration believes
that the deduction allowed under current law for the grant of a
charitable easement is sufficient.
The proposal would permit an
exclusion for surrounding land of unlimited value from the gross
estate, rather than the value of the charitable easement alone.
The proposal would be subject to abuse and would erode the tax
base.
3.

Estate Tax Marital Credit For Certain Employees of
International Organizations

Administration Position. support, with technical modifications.
The Administration believes that the proposal is consistent with
the United States' special role as host to international
organizations.
4.

Relief From Retroactive Gift Tax Regulation On Disclaimers

Administration position.
Oppose. The proposal would open up the
statute of limitations for certain disclaimers for a one-year
period.
The United States Supreme Court decided this issue in
the cases of Jewett v. Commissioner and Irvine v. U.S. We
believe that this issue was properly resolved by the courts.
5.

Extend the "Predeceased Parent Exception" To Collateral
Heirs and To Taxable Terminations and Distributions

Administration position.
Do not oppose. The policies that
underlie the special rule for transfers to a grandchild whose
parent is deceased (Code section 2612(c) (2»
generally would
support the proposed expansion to cover collateral heirs and to
apply the rule to
taxable
terminations and taxable distributions ,
.
"
as well as to d1rect Sk1pS. The blll (H.R. 1099), however,
requires technical modifications.
6.

Increase special Use Valuation Limit to $1.5 Million

Administration position. Do not oppose.
that the maximum of $750,000 by which the
may be reduced under section 2032A is not
not oppose an appropriate increase in the
acceptable legislation.
7.

If Congress decides
value of real property
sufficient, we would
context of otherwise

Estate Tax Credit For Conservation Property Donated to
Federal Government.

Administration position. Oppose. The Administration believes
that the deduction allowed under current law for transfers of
22

interests in property to the Federal Government for conservation
purposes is sufficient. To the extent that this proposal is
designed to assist taxpayers with liquidity problems, that issue
is more appropriately addressed through the section 6166
installment payment provisions.
8.

Proposals To simplify and Improve Estate and Gift Tax

This proposal includes 33 specific proposed changes to "simplify
and improve" the estate and gift tax. The proposals are
discussed individually below.
In some instances, the proposals
are not sufficiently well developed at this time to permit the
Administration to take a position.
(a). Equal Treatment For Individuals Who utilize Revocable Trusts
Administration Position
- (i)
support, with respect to the sixty-five day rule in
proposal (2); and the equal treatment of individuals and
revocable trusts with regard to amortization of reforestation
proposal (10) (provided that in the case of proposal (10) the
revocable trust and the grantor together are entitled to amortize
a total of up to $10,000 of reforestation expenses). Proposal
(2) would be beneficial to estates, would eliminate a distinction
between wills and revocable trusts and would have no tax cost.
Proposal (10) furthers the policy of treating the assets of a
grantor trust as if they were owned directly by the grantor
during the grantor's lifetime.
(ii)
Do not oppose, with respect to the passive loss rule
of proposal (4); the treatment as qualified shareholder for
Subchapter S purposes in proposal (6); and the gifts from
revocable intervivos trusts in proposal (8). Proposals (4) and
(6) would eliminate differences between wills and revocable
trusts and therefore are consistent with the goal of
simplification. Proposal (8) furthers the policy of treating the
assets of a grantor trust as if they were owned directly by the
grantor during the grantor's lifetime.

(iii)
Do not support, with respect to the set-aside
deduction of proposal (1); the sales to related persons in
proposal (5); and the taxable year of proposal (7). These
proposals either create potential for abuse or create new
complications not outweighed by their improvements.
(iv) While we share the goals of the separate share rule of
proposal (3) and the equal generation skipping tax treatment of
estates and revocable trusts following death of settlor in
proposal (9), we need to study them further in order to make
certain that they do not create opportunities for abuse.
23

(b). Eligibility for ordinary Loss Deduction On Loss On Small
Business stock
Administration Position. Do not oppose, provided that the
revocable trust and the grantor together are entitled to only one
ordinary loss deduction.
This proposal furthers the policy of
treating the assets of a grantor trust as if they were owned
directly by the grantor during the grantor's lifetime.
(c). Repeal of Income-Shifting Provisions (i.e.
Throwback Rules
(Code Secs. 665-668) Capital Gains (Code Sec. 644)
I

Administration position. support, but only for domestic trusts
that have never been foreign trusts and only for accumulations
after 1986. Limiting the application of these provisions would
greatly simplify the income taxation of trusts and eliminate a
confusing and burdensome requirement for taxpayers.
(d) . Restore Unified Credit In Case of Split Gifts
Administration position. support. This proposal corrects a
problem that leads to double taxation of lifetime gifts by
allowing restoration of the surviving spouse's unified credit
where the property is subsequently included in the deceased
spouse's estate.
(e). Provide For Portability of Unified Credit and GST Exemption
Administration position. This proposal has merit and may
simplify estate planning by individuals. Particularly, this
proposal would decrease the use of certain trusts that are now
employed solely for their tax benefits. The Administration is
concerned, however, that the proposal has some potential for
abuse and believes that a more specific proposal must be
developed before a position can be taken.
(f). Making Use of Unified Credit Optional
Administration position. Do not support. This proposal creates
new complications not outweighed by its benefits.
(g). Modification of Rules Relating To Marital Deduction
Administration position. Do not support. Any proposal to allow
reformations of QTIP trusts must include, at a minimum,
limitations in terms of time and scope. The proposal to allow a
surviving spouse to hold a limited power of appointment over the
assets of a QTIP trust is contrary to the limited purpose for
which QTIP trusts were established. QTIP trusts should remain
devoted to the benefit of the surviving spouse for such spouse's
lifetime.
24

(h). Provide For Federal Disclaimer Rules
Administration Position. support. These technical changes to
section 2S18(c) (3), as well as the clarification that disclaimers
are effective for income tax purposes, clarify and simplify
federal disclaimer law.
These proposals would conform provisions
on transfer-type disclaimers to those that govern all other
disclaimers.

(i). Provide That Disclaimer of Interests in Qualified Plans Do
Not Violate the Spendthrift Restriction Applicable To Such
Plans
Administration Position. support. This proposal serves to
increase taxpayers' flexibility in post-mortem planning without
undermining the policy of prohibiting the assignment or
alienation of qualified plan assets.
(j).- Modify Rules For Qualified Domestic Trusts

(1)

(QDOTs)

Modification of Rules Relating To Trustee of a
QDOT

Administration Position. Do not support. This proposal would
allow taxpayers to comply with the QDOT trustee provisions of the
Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), the
Omnibus Budget Reconciliation Act of 1990 ("1990 Act"), or OBRA
93. We favor the proposal contained in H.R. 3419, 103rd
Congress, which extends relief only to QDOTs executed before the
1990 Act that conform with the TAMRA requirem::-_nts.
(2)

Modify Non-Estate Tax Consequences of Transfers By
Surviving Spouse to QDOT

Administration position. oppose. This proposal would make the
decedent the transferor of a trust the terms of which are written
by the surviving spouse after the decedent's death, with
potential tax implications not envisioned by the decedent.
(3)

Transfers In Civil Law Countries to QDOT

Administration Position. This propo~al is not sufficiently
developed for the Administration to take a position. The
Government's interest in collecting estate tax on the surviving
spouse's death must be adequately protected in any proposed
alternative to a QDOT arrangement.

(4)

Delete Requirement That U.S. Trustee Have Power To
Approve Distributions From a QDOT

Administration position. Oppose. The requirement that a QDOT
have a U.S. trustee is critical to the Government's ability to
collect the estate tax due on the death of the surviving spouse.
(5)

Clarification of Who Is the Transferor For GST
Purposes in Case of QDOT

Administration position. Support. The Administration supports
giving the surviving spouse the right to elect to be treated as
the transferor of the QDOT for GST purposes. This would give an
alien spouse an election equivalent to that available to estates
and surviving spouses under section 2652(a) (3).
(k). Modification of Generation-Skipping Transfer Tax Rules
Administration Position. Do not support. Most of these proposed
changes address issues arising from the proposed regulations.
These regulations are on the Priorities Guidance List to be
issued in final form this year. We believe that it is premature
to address these issues legislatively when the regulations have
not been finalized.

(1). Modification of Period of Limitations For Assessment and
Collection Against Transferees
Administration position. Oppose. The Admini3tration believes
that the additional one-year period for collection of tax from a
transferee is necessary due to the transfer of the property.
(m). Extension of Tax-Free Transfers Between Former Spouses to
All Types of Property and To Transfers At a Spouse's Death
Administration position. Oppose. The Administration believes
that this proposal is overly broad and would create opportunities
for tax avoidance.
9.

Required Notices To Charitable Beneficiaries of Charitable
Remainder Trusts

Administration position. Do not support. While in principle the
Administration favors requiring notification to a charitable
remainderman that a trust exists for its ultimate benefit the
proposal is too complicated and burdensome. The Administ~ation
is willing to work with the Committee to develop a less
complicated and burdensome proposal.

EXCISE TAXES

Modifications to Diesel Fuel Excise Tax Provisions

(a).

Retail Collection of Tax on Recreational Boat Fuel

Administration Position.
Oppose. The tax on diesel fuel used in
pleasure boats would be unenforceable if collected at the retail
level. Allowing the use of dyed fuel in pleasure boats would
eliminate the utility of visual inspections, depriving the
Internal Revenue Service of its primary enforcement mechanism
under current law.
It appears that while many marinas carry both dyed and clear
fuel, some marinas are carrying only dyed fuel for their
commercial customers due to limited tankage.
As a result, there
have been complaints that pleasure boats are unable to buy clear
fuel'at all marinas.
Many marinas, however, have already
incurred the expense of adding a separate tank for clear, taxed
diesel fuel in order to comply with current law.
We are
monitoring marinas in various areas and have found that clear
diesel fuel is readily available in areas where recreational
boating is popular. Moreover, availability has improved
significantly since the summer of 1994, even in areas such as the
Gulf Coast of Louisiana, where commercial boating predominates
and retailers are least likely to accommodate recreational users.
We believe that the availability of clear diesel fuel should
continue to improve as the market adjusts to the new rules.
We are cognizant of safety concerns and want to receive more
information about any area where the tax may have caused safety
problems.
We are also concerned, however, that uncertainty over
the permanence of the new rules is retarding the adjustment
process and may have discouraged some marina operators from
installing the facilities needed to serve their pleasure boat
customers.
(b).

Penalty-Free Dilution of Dye Concentrations in Certain
Cases

Administration position. oppose. The IRS currently permits the
blending of kerosene with dyed diesel fuel after the fuel is
removed from the terminal so long as the resulting blend
continues to satisfy the generally applicable dye color and
concentration requirements. Notice 94-21, 94-1 C.B. 339. The
dye concentration requirements were adopted after extensive
conSUltations with refiners, pipeline and terminal operators, and
diesel fuel distributors.
The Treasury Department made every
effort to accommodate their concerns and set the concentration
requirement at the lowest level consistent with effective
enforcement of the tax. Thus, we are concerned that this
27

proposal would either impair enforcement of the tax or require an
increase in generally applicable dye concentration requirements
to offset post-terminal dilution.
The Committee should also note that the Administration supports
proposal Q.2. below to treat kerosene as diesel fuel.
If this
proposal is adopted, untaxed kerosene will be dyed when it is
removed from the terminal and there will be no need to blend
clear kerosene with dyed diesel fuel.
(c).

Refunds for Bad Debt and casualty Losses

Administration position. Oppose. Many products other than
diesel fuel are subject to Federal excise taxes.
In general,
these taxes are not refunded when a casualty loss or bad debt
loss is experienced with respect to a tax-paid article. We are
aware of no reason for treating a loss with respect to tax-paid
diesel fuel any differently than, for example, the total loss of
a tax-paid luxury automobile in a traffic accident.
Property owners generally can protect themselves against casualty
losses through insurance that compensates for losses attributable
to excise taxes embedded in the cost of the property in the same
manner as it compensates for other components of the property's
cost. Although bad debt losses typically are not covered by
insurance, creditors generally compensate for these losses by
including a risk premium in the interest rates or prices they
charge.
(d).

Interest-Bearing Refunds for certain Diesel Fuel Users

Administration position. Oppose. Congress decided in 1993 that
taxing fuels at the terminal rack and dyeing nontaxable diesel
fuel are the best methods for ensuring compliance and preventing
fraud.
Current law reflects this decision. All nontaxable and
partially exempt users of diesel fuel may purchase dyed diesel
fuel on which no tax was imposed. Refunds are permitted when
clear fuel is used for a nontaxable or partially exempt purpose,
but these refunds are generally subject to strict limitations.
The proposed changes, by making the refund procedure easier and
more attractive than under current law, would reduce the
incentive to use only dyed fuel for nontaxable and partially
exempt uses, and increase the extent to which the taxability of
diesel fuel is determined after the terminal rack. We are
concerned that the proposed changes would result in an increased
volume of refund claims, thereby adding substantial
administrative burdens and increasing opportunities for refund
fraud.

(e).

Exempt Alaska from Diesel Dyeing Requirement

Administration position. Support. Alaska is the only state that
is currently exempt from the Clean Air Act's dyeing requirements.
The Administration believes the Clean Air Act and Internal
Revenue Code dyeing requirements should be as harmonious as
feasible, respecting the differences between the two statutes.
Accordingly, we support a corresponding exemption from the
Code's diesel dyeing requirements for diesel fuel sold in Alaska,
subject to procedures established by the Treasury Department.
2.

Treat Kerosene as a Diesel Fuel for Excise Tax Purposes

Administration position. Support, with modifications. The
Administration believes that the continuation of the present
nontaxable treatment of kerosene would perpetuate the problems
that Congress sought to correct in the Omnibus Budget
Reconciliation Act of 1993 (OBRA 93), and that a change is
essential if the new diesel fuel tax system is to function as
Congress intended.
We also believe, however, after consulting
with the Consumer Product Safety Commission, that it is
imperative to consider the consumer safety issues of adding dye
to kerosene used in space heaters. Therefore, we would like to
work with Congress, mindful of the differing needs of the
consumer and the distributor, to devise a limited ultimate vendor
refund rule in this specific case. We urge the Congress to
address this issue as soon as possible.
3.
(a).

Modify Rail Diesel Motor Fuel Tax Rate
Equalize Diesel Fuel Taxes

Administration position. oppose. In OBRA 93, Congress decided
to raise revenue for general fund purposes, and thus reduce the
deficit, by increasing taxes on fuel used for transportation
purposes. We are satisfied that Congress carefully considered
the rates of tax that should apply to fuel used in various
transportation modes, and we do not believe Congress should
reconsider its deci6ion at this time.
It would be appropriate,
however, to re-examine this issue in 1999 when the tax rate on
railroad diesel fuel is scheduled to drop to 4.3 cents per
gallon.
(b).

Exempt AMTRAK

Administration position. Oppose. We believe that any additional
subsidies to AMTRAK should be provided through the appropriations
process, where they will be subject to regular review, rather
than through the tax code.

Expand Off-Highway Business Use Exemption from Motor Fuels
Excise Taxes

Administration Position. Oppose. Allowing a refund for
used by a truck's engine while operating, for example, a
take-off on dump trucks, is unenforceable and would lead
widespread tax evasion. The courts have recently upheld
regulatory interpretation of the statute governing this
provision, and we continue to support the position taken
regulations.
5.

Modify Gasoline Tax Refund Procedure
States and Local Governments

f~r

fuel
power
to
the
in the

Gasoline Sold to

Administration Position. Oppose. The IRS generally processes
gasoline tax refunds within 45 days.
Paying these claims within
20 days would require special manual processing and substantially
increase processing costs.
The IRS is committed to providing quality customer service,
including prompt payment of valid refund claims, and is moving
toward this goal through its modernization effort.
customer
service goals must be balanced, however, against the need to
ensure the integrity of the tax administration system and improve
overall compliance. Thus, the IRS carefully scrutinizes
questionable claims to prevent the payment of fraudulent refunds.
We believe Congress should take no action that might discourage
such careful scrutiny.
Although gasoline wholesale distributors no longer have the
opportunity to credit gasoline tax refunds against their diesel
fuel tax liability, they are still treated more favorably than
other claimants. In most cases, a person entitled to a payment
with respect to a nontaxable use of gasoline is required to claim
an income tax credit unless the payment to which the person is
entitled exceeds a specified amount.
In contrast, a wholesale
distributor can file a claim for refund as soon as the gasoline
is sold to a State or local government at a tax-excluded price.
6.
(a).

Adjust certain Fuels Tax Rates for BTU Equivalency to
Gasoline
Exempt LNG From Some Motor Fuels Taxes; Adjust the LNG Rate
on Other Taxes

Administration Position. Oppose. There is no justification for
exempting liquified natural gas (LNG) from the Highway Trust Fund
component of th7 special motor , fuels excise tax. The Highway
Trust Fund port1on of the spec1al motor fuels excise tax applies
to liquid fuels, and LNG is a liquid fuel. Under the OBRA 93
provisions, Congress maintained imposition of the Highway Trust
30

Fund portion of the tax and imposed the deficit reduction portion
of the tax on LNG, and made compressed natural gas (CNG) subject
only to the deficit reduction portion of the tax. We believe
that this issue should not be reopened at this time.
We also
believe that this issue should be re-examined in 1999 when the
Highway Trust Fund component of the tax expires.
(b).

Reduce the Tax Rates on Certain Fuels Based on BTU
Equivalence

Administration position. Do not support. In 1993, Congress
carefully considered and agreed to an allocation of the motor
fuels taxes on a broad base of transportation fuels. We believe
that piecemeal unravelling of the agreement would be a mistake,
although we believe that this issue should re-examined when the
Highway Trust Fund component of the tax expires in 1999.
(c).

Adjust Tax Rate for Propane Based on BTU Equivalence

Administration position. Oppose. There is no justification for
adjusting only the propane tax rate to a rate based on propane's
BTU equivalence to gasoline.
If adjustments are to be made, they
should be made to all fuels.
We also believe that this issue
should re-examined in 1999, when the Highway Trust Fund component
of the tax expires.
7.
(a).

Modifications to the Retail Truck Excise Tax
Impose Tax on Manufacturer

Administration position. Do not oppose, if conforming changes
included.
Imposing the heavy truck tax on sales by the
manufacturer, rather than the first retail sale, is likely to
improve the administration of the tax. Until its modification by
the Surface Transportation Act of 1982, the heavy truck tax was
imposed on manufacturer sales, with generally good results. At
that time, although as many as 1500 small trailer manufacturers
were required to file returns, approximately 10 to 15 major
manufacturers accounted for most of the sales revenue subject to
the tax. Under t~is system, the IRS was able to target its
enforcement efforts efficiently and taxpayers were generally well
aware of their obligations. The 1982 change resulted in
thousands of additional, generally smaller and less well-informed
taxpayers, and less-focused enforcement efforts by the IRS.
In 1982, Congress changed the heavy truck tax because it was
concerned that a manufacturers tax was likely to create a
financial hardship for retail dealers who carry inventories of
tax-paid trucks for long periods before the trucks are sold at
retail. This concern may be less significant now because
interest rates are much lower than at that time. The Committee
should also note that a manufacturers tax on heavy trucks is not
31

entirely free of administrative difficulties.
In particular, the
tax on subsequent additions of parts and accessories would apply
much more frequently than under current law, offsetting to some
extent the advantages of shifting the tax to the manufacturer.
If the proposal is adopted, certain conforming changes will be
necessary.
Under current law, the amount of tax is based on the
retail sales price.
If the tax is imposed on the manufacturer,
the amount of tax should be based on the manufacturer's selling
price and the tax rate should be increased to the extent
necessary to avoid a revenue loss.
(b).

Certain Activities Not Treated as Remanufacture

Administration position. The meaning of "manufacture" is
generally the same for purposes of the heavy truck excise tax as
for all other manufacturers and retailers excise taxes.
See
Treas. Reg. §48.0-2(a) (4).
In addition, however, the Code
specifically provides that certain activities are not treated as
manufacture for purposes of the heavy truck tax.
We are willing
to work with this Committee to develop appropriate bright-line
tests in addition to those currently provided.
8.

Consolidate Collection of Aviation Gasoline Excise Tax

Administration position.
Support. We believe that consolidation
of the collection of the aviation gasoline excise tax at the
terminal removal level, with the full 19.4 cents-per-gallon tax
collected at that point, would improve efficiency a~d enforcement
of the tax.
9.

Expand Aviation Excise Tax Exemptions for Air Ambulances

Administration position. oppose. Aviation excise taxes support
the Airport and Airway Trust Fund, which in turn provides funding
for the maintenance and improvement of airports and airways. All
users of airports and aviation services supported by the Airport
and Airway Trust Fund should pay their appropriate share of the
Fund's expenditures.
10.

Reduce Harbor Maintenance Excise Tax

Administration position. Oppose. The Administration is
concerned that the proposed annual reductions in the ad valorem
excise tax on cargos and passengers entering and leaving u.S.
ports, followed by a rule that would trigger increases or
decreases in the tax depending on the balance in the Harbor
Maintenance Trust Fund, would be disruptive. The Administration
has proposed that certain expenditures of the National Oceanic
and Atmospheric Administration (NOAA) that aid commercial
navigation be funded out of the Trust Fund. The Congress may
32

want to consider funding construction projects out of the Trust
Fund rather than the General Fund.
11.

Reduce Ethanol Fuel Tax Subsidy if Carbon Dioxide Produced
as a Byproduct is Marketed by the Producer

Administration Position. Do not support. Adjusting excise tax
rates on gasohol to reflect the circumstances under which the
ethanol contained in the mixture was produced would impose
sUbstantial complexities and administrative costs.
The excise
tax on gasohol cannot, as a practical matter, be set at a rate
that varies according to the quantity of carbon dioxide produced
and marketed as a byproduct of ethanol production.
The tax is
paid downstream from the ethanol producer; therefore, the
taxpayer will have no way of knowing how much carbon dioxide may
have been produced as a byproduct of any particular batch of
ethanol and whether the producer of that ethanol directly
marketed the carbon dioxide.
12. Provide a Lower Rate of Tax on certain Hard Ciders
Administration position. Oppose. The excise taxes imposed on a
particular alcoholic beverage should be revised only in the
context of a general review of alcoholic beverage excise tax
rates.
The Committee should also be aware that some hard cider
producers may object to the proposed change because they will
lose part of the benefit of the credit for small domestic wine
producers.
For producers that currently receive the full credit,
the tax would increase from 17 cents per gallon to 22.6 cents per
gallon.
13. Wine Spirits -- Permit the Use of other Agricultural Products
Administration Position. Do not oppose, with modifications.
Under the proposal, the definition of wine spirits would be
expanded to include spirits derived from agricultural wine (i.e.,
wine made from agricultural products other than fruit).
Thus,
agricultural products that currently are wasted could be used to
make wine spirits to fortify nonstandard wines such as wine
coolers.
To preserve the integrity of natura __ wine, the proposal should be
clarified to provide that wine spirits made from agricultural
products may not be used to fortify natural wine.
In addition,
to avoid inconsistency with the National Performance Review,
which recommended repeal of the wine and flavor credit, the
proposal should also be modified to provide that alcohol derived
from agricultural products does not qualify for the credit.

14. Phased Repeal and Modifications of the Luxury Excise Tax on
Automobiles
(a).

Phase out or Phase Down of Tax

Administration position. oppose. This proposal will have
significant revenue costs.
Congress decided in the Omnibus
Budget Reconciliation Act of 1990 that it was appropriate to
impose a tax on luxury automobiles for deficit reduction
purposes.
This decision was reaffirmed in OBRA 93, which
repealed the taxes on other luxury goods and made minor changes
to the luxury tax on automobiles. We believe it would be a
mistake to revisit this issue.
(b).

Exemption for Electric Cars

Administration Position. Oppose. Although the Administration
supports limited tax incentives to encourage the use of electric
automobiles, this proposal would provide an unlimited exemption
from the luxury tax, unrelated to the additional cost
attributable to the use of an electric propulsion system. This
unlimited exemption is broader than necessary to encourage the
use of electric automobiles and is inconsistent with the decision
to raise revenues for deficit reduction purposes by imposing a
tax on luxury automobiles.
15.
(a).

Modifications to the Excise Tax on Ozone-Depleting Chemicals
Exemption for Imported Recycled Chemicals

Administration position. Support, with modifications. The
Environmental Protection Agency is concerned that the tax imposed
on imported recycled Halons, a group of ozone-depleting chemicals
that the Montreal Protocol phased out of production at the end of
1993, is impeding the free flow of foreign stocks of recyclable
Halons to essential uses in the United states. This may have
adverse environmental consequences because foreign owners who are
deprived of a market for recycled Halons will be more likely to
vent unwanted Halons into the atmosphere.
The exemption for imported recycled ozone-depleting chemicals
should be limited so as not to disadvantage domestic producers
that are required to pay tax on the chemicals. Thus we do not
support an exemption for imports of chemicals other than Halons
so long as domestic production of those chemicals is permitted
under the Montreal Protocol.
(b).

Exemption for Metered-Dose Inhalers

Administration position. Oppose. The use of ozone-depleting
chemicals in metered-dose inhalers already enjoys a substantial
34

tax advantage over all other uses of ozone-depleting chemicals.
The base tax amount applicable to all other ozone-depleting
chemicals is $5.35 per pound in 1995 and increases by 45 cents
per pound in each year after 1995. The tax on chemicals used in
metered-dose inhalers is permanently frozen at $1.67 per pound.
16. Exemption from Gas Guzzler Excise Tax for Limousines
Administration position. Oppose.
The Omnibus Budget
Reconciliation Act of 1990 modified the treatment of limousines,
including stretch limousines, to encourage a reduction in
domestic consumption of petroleum products.
In view of
continuing concerns regarding the effects of inefficient fuel use
on the environment and energy security, we do not think it is
appropriate to modify the treatment of limousines at this time.
17. Allow In-Bond Transfers of Bottled Distilled Spirits Among
Commonly Owned Distilled Spirits Plants
Administration position. oppose.
The proposed change would
adversely affect enforcement of the distilled spirits tax.
The
principal effect of the change would be to move the point at
which tax is imposed downstream from the facility where the
distilled spirits are produced.
Currently there are
approximately 117 tax collection points, but that number is
likely to increase substantially if the collection point is moved
downstream.
This would greatly increase the administrative
burden required for effective enforcement of the tax.
In
addition, permitting tax-free removals of bottled spirits, which
can be more easily diverted than bulk spirits during a transfer,
would provide increased opportunities for tax evasion.
The proposed change would result in revenue losses over the
budget period because, in addition to increasing the potential
for tax avoidance, it permits distillers to defer payment of
taxes beyond the time at which payment would be required under
current law.
18. Drawback of Distilled spirits Tax on Spirits Used in
Nonbeverage Froducts
Administration position. oppose. The current system for
collecting the tax is simple and effective.
It allows drawback
of the tax only after distilled spirits have been used in a
nonbeverage use, encourages accurate records, and avoids the need
for controls to assure that distilled spirits withdrawn for a
nonbeverage use are not subsequently diverted. The proposed
change would reduce or negate these benefits and increase the
potential for abuse and nonpayment of the tax.
The proposed change would result in revenue losses over the
budget period because, in addition to increasing the potential
35

for tax avoidance, it permits nonbeverage users to obtain the
benefit of the drawback before the time at which the drawback
would be allowed under current law.
R.

Exempt organizations

Treatment of certain Costs of Private Foundation in Removing
Hazardous Substances.

Administration position. oppose. This proposal would present an
opportunity for inurement or private benefit.
Taxpayers owning
property that requires environmental clean-up would donate the
property to a private foundation.
The proposal would allow the
foundation to use money it receives in the form of deductible
contributions to pay for clean-up costs that the donor would
otherwise have been forced to incur.
These payments would not
serve charitable purposes, and, therefore, should not be treated
as qualifying distributions.
2.

Prevent Reclassification as UBTI of Certain Dues Paid to
Agricultural or Horticultural Organizations.

Administration position.
Do not support. This proposal would
allow dues paid to a special category of tax-exempt organizations
to avoid taxation as unrelated trade or business income
regardless of whether the dues payments were related to the
organization's tax-exempt purpose. There is no clear tax policy
basis for treating section 501(c) (5) agricultural and
horticultural organizations more favorably than section 50l(c) (5)
labor organizations, let alone organizations exempt under other
parts of section 501(c). Moreover, this proposal would allow
agricultural and horticultural organizations to run businesses
that compete directly with for-profit entities but do not pay
income tax simply because they label the business's income as
membership dues.
3.

Private Foundations

(a). Modify Rules for Private Foundation Grants to Foreign
Organizations
Administration position. Do not oppose. This proposal would
simplify international grant-making by U.S. private foundations
to certain foreign charities. Requiring private foundations to
accept expenditure responsibility for such grants would provide
adequate safeguards to ensure that the grant is properly
classified as a qualifying distribution.

(b). Extend Due Date for First-Quarter Estimated Tax by Private
Foundations
Administration Position. Support. Changing this due date will
reduce the number of filing deadlines a private foundation must
remember.
It will also improve the foundation's ability to
calculate its estimated tax liability accurately so as to avoid
additions to tax.
4.

Common Investment Fund for Private Foundations

Administration Position. Do not oppose. Such a fund would
enable small private foundations to expano their investment
capabilities by banding together and accepting grants of seed
money from large private foundations.
Presumably, such a fund
would eventually increase the amount of resources available to
serve charitable purposes. Allowing such a fund to be a taxexempt charitable organization would be consistent with the
exemption that the Code already provides for similar college and
university common funds (section SOl(f».
5.

Exclusion from UBIT for Corporate sponsorship Payments
Received by Tax-Exempt organizations in Connection with
Public Events

Administration position. Oppose. This proposal would give taxexempt organizations a competitive advantage over taxable
enterprises in offering advertising to busines~~s.
It would also
favor large organizations that obtain sponsors for a single
sizeable event once a year over smaller organizations that
solicit corporate sponsors for several small fundraisers each
year.
6.

Repeal 1986 Extension of UBIT to Games of Chance

Administration position. oppose. Tax-exempt organizations are
not necessarily furthering charitable purposes by regularly
carrying on gambling activities. Thus, there is no tax policy
justification for exempting income from such activities from the
unrelated business income tax, especi~lly where the exemption is
available only in states that had laws permitting nonprofits to
conduct gambling as of October 5, 1983. The decision made by a
number of states to subsidize nonprofit organizations by granting
them exclusive rights to conduct gambling activities does not
affect the determination as to the proper federal income tax
treatment of the proceeds from those activities.
7.

Clarify UBIT Treatment of Licensing of Olympic Trademarks

Administration position. Do not oppose, if revised. There is a
need for additional guidance on the scope of the UBIT exception
37

for royalties. However, it should apply to royalties received
not only by qualified amateur sports organizations, but by all
tax-exempt organizations. The proposed definition of "royalty"
would include payments for which the right to use a trademark or
similar item was a substantial part -- but not all -- of the
consideration. This expansion of the definition would allow
royalties to include income earned from unrelated trade or
business activities conducted in direct competition with forprofit entities.
We favor a proposal clarifying that the
provision of certain types of services closely related to the use
of a trademark or similar item will not cause a payment to cease
to be a royalty.
8.

Exception to Debt-Financed Rules (Sec. 514(c) (9)) For
Private Foundation Debt to Improve Real Property

Administration position. Oppose.
The section 514(c) (9)
exception to the debt-financed income rules was reviewed in 1993.
There is no tax policy justification for creating an additional
narrowly tailored category of organizations eligible to benefit
from this exception.
9.

Permit Tax-Free Liguidation of Certain Closely Held
Corporations Whose Stock Is Given to Charity and Exempt
certain Assets from section 514(c) (2) Debt Financed Rules

Administration Position. Oppose.
In the wake of the repeal of
General Utilities, the Treasury Department is studying the issues
raised by conversions from taxable to tax-exempt status in a
broader context than that presented by this proposal. We believe
that these issues should be addressed on a comprehensive basis
and not in response to discrete types of transactions.
The other aspect of the proposal concerns the debt-financed
income rules. There is no tax policy basis for exempting a
charity from UBIT on its income from debt-financed assets under
these circumstances. Allowing charities to assume mortgages on
property they receive not only as a bequest but also as a
lifetime gift presents a significant opportunity for private
benefit, since it may be a means of improving a donor's personal
credit position.
10. Allow Conversion of Scholarship Funding Corporation to
Taxable Corporation
Administration position. Do not support. The proposal would
enable taxable, for-profit corporations to obtain the benefit of
tax-exempt financing. The benefit is equal to the built-in
arbitrage of the difference between the tax-exempt interest rates
on the debt issued by the qualified scholarship funding
cor~o7ations and comparabl 7 taxable interest rates.
For-profit
entltles should not be entltled to such benefit. The proposal
38

also creates an unwarranted exception to the excess business
holdings rule. The excess business holdings rule was
specifically created to prevent private foundations from
controlling for-profit entities because there is the possibility
that disqualified persons will use the foundation to run the
business for their personal benefit rather than as a means of
support for charitable purposes.
11. Treatment of certain Amounts Received by Telephone
Cooperatives
Administration Position. Do not support. This provision is
inconsistent with the general tax treatment of cooperatives.
It
allows an organization to be treated as a tax-exempt cooperative
even though it does not derive substantially all of its revenues
from its members.
12. Clarify That Parent Holding Companies for Hospitals May
Qualify as Public Charities Rather than Private Foundations
Administration Position.
Support. The Administration supported
this change as part of its proposal for health care reform. As
health-care provider systems become increasingly sophisticated,
it is common for them to form a nonprofit parent organization
that coordinates and oversees the activities of the system as a
whole.
For the same reasons that a supporting organization is
treated as a public charity rather than a private foundation, a
health system parent organization that meets the criteria for tax
exemption under section 50l(c) (3) also should be treated as a
public charity. This proposed addition to section 509(a) will
eliminate technical questions that currently arise because the
supporting organizations described in section 509(a} (3) have
traditionally been expected to be subsidiaries of public
charities rather than parents.
13. Treatment of Rural Electric Cooperatives
Administration position. Oppose. The proposal is inconsistent
with the general tax treatment of cooperatives and raises
administrative co~cerns.
It allows an organization to be treated
as a tax-exempt cooperative even though it does not derive
substantially all of its revenues from its members.
14. Codify IRS Directive Governing Calculation of UBIT Liability
from Charitable Gambling
Administration position. Oppose. Tax-exempt organizations are
not necessarily furthering exempt purposes by regularly carrying
on gambling activities. Therefore, they should be subject to
unrelated business income tax on the profits from such
activities. This fundamental principle is not affected by the
legal rationale that enables certain non-charitable tax-exempt
39

organizations to take a deduction for the mandatory contribution
of their gambling profits to charity. Nor is it affected by the
decision of a number of States to subsidize nonprofit
organizations by granting them exclusive rights to conduct
gambling activities.
Finally, appropriate policy on this legal
question should not be tied to an IRS enforcement directive
designed to allow for efficient administration of an IRS audit
program.
15. Extend Private Inurement Rule to section 501(c) (4)
Organizations
Administration Position. support.
Current restructuring in the
health care market is providing greater oppurtunities for
insiders of nonprofit health care organizations to divert the
resources of these organizations to their personal benefit.
Under current law, health care organizations that want to avoid
the inurement prohibition that applies to organizations exempt
from- tax under section 501(c) (3) may seek tax exemption under
section 501(e) (4).
Extending the prohibition against inurement
to section 501(c) (4) organizations would deter insiders from
seeking to take advantage of the restructuring of nonprofit
health care organizations for their personal gain.
16. Permit Certain Corporate Conversions to Tax-Exempt Title
Holding Company Without Asset Appreciation Tax Where
Corporation is Wholly Owned by Tax-Exempt Entity that
Received Stock as a Gift or Bequest
Administration position. Oppose.
In the wake of the repeal of
General utilities, the Treasury Department is studying the issues
raised by conversions from taxable to tax-exempt status in a
broader context than that presented by this particular proposal.
We believe that these issues should be addressed on a
comprehensive basis and not in response to discrete types of
transactions as contemplated by this proposal.
S.

FINANCIAL INSTITUTIONS

Delete OBRA 1993 Denial of Losses Reimbursed by FSLIC
Assistance for Failed Thrifts

Administration Position. Oppose. There is no tax policy
justification for repealing this provision, which the Treasury
concluded in a 1991 study was a clarification of existing law.
Repeal would likely result in additional IRS and taxpayer
resources being devoted to resolution of the issue.

Treat Small Commercial Finance Companies as Small Banks for
Bad Debt Reserve Deductions

Administration position. Oppose. The reserve method of
accounting may allow taxpayers to claim deductions before a loss
is realized. Treasury is studying the various tax and regulatory
treatments of financial intermediaries and financial products.
Any disparities in treatment of financial intermediaries
operating similar businesses are more appropriately considered in
the context of these larger issues.
T.
1.

Foreign

Increase in Section 911 Exclusion from $70,000 to $100,000
With Indexing

Administration position.
Oppose. The current exemption of
$70,000 provides substantial simplification in tax filing for
workers earning modest salaries abroad.
Increasing the exclusion
from $70,000 to $100,000 would not be appropriate in the context
of our efforts to reduce the budget deficit.
2.

Repeal of Limitation on Foreign Sales Corporation Exemption
for Military Property

Administration position. Do not support. At present, exports of
military property through a foreign sales corporation (FSC) are
entitled to only 50 percent of the FSC benefits that are
available for other exports. Military property is defined as an
arm, ammunition, or instrument of war designated in the Munitions
List, established pursuant to 22 U.S.C. 2778.
If Congress finds
that u.S. exports of military property, either generally or
specific items of military property, are facing increased
competition, then it may be appropriate to repeal or partially
repeal this limitation.
3.

Inclusion of Computer Software as Foreign Sales Corporation
Export Property

Administration position. Do not o~pose. Under current law,
films, tapes, and records licensed for reproduction abroad
qualify as export property for purposes of the foreign sales
corporation provisions. However, technological developments are
making the distinction between films, records, tapes and computer
software less clear. Therefore, we would not oppose an extension
of foreign sales corporation benefits to computer software
licensed for reproduction abroad.

Recharacterization of Overall Domestic Loss for Foreign Tax
Credit Limitation Purposes

Administration position.
Do not support.
Allowing taxpayers to
recharacterize overall domestic losses is expensive and complex
and is not theoretically justified.
Taxpayers can choose to
defer certain foreign earnings while realizing foreign losses.
Therefore, it is appropriate to require taxpayers who offset U.S.
source income with foreign losses to recapture those losses out
of future foreign earnings.
The current overall foreign loss
rules are necessary to prevent abuses, and should not necessarily
be mirrored for domestic losses.
5.

Election to Use Earnings and Profits Basis for Allocation of
Interest Expense for Foreign Tax Credit Limitation Purposes

Administration position.
Do not support.
This provision is
intended to eliminate the disparity in the interest allocation
regulations between the basis of foreign assets, computed under
special u.s. rules that apply to foreign assets, and the basis of
U.S. assets, computed under general U.S. rules.
In particular,
the accelerated depreciation allowed for U.S. assets tends to
diminish their basis for purposes of interest allocation, while
foreign assets are generally depreciated using straight-line
depreciation.
Using E&P basis would synchronize the computation
of basis for U.S. and foreign assets.
There are two significant
problems, however.
First, accelerated depreciation already
provides taxpayers with substantial tax benefits; allowing
taxpayers to use straight-line depreciation for interest
allocation may be seen as providing an unwarranted additional
benefit.
Second, the proposal introduces additional complexity
into an already complex area, as taxpayers would have to compute
an E&P basis for each asset, along with the tax basis.
6.

Extension and Modification of Special Allocation of Research
and Experimental Expenditures to U.S. Source Income for
Foreign Tax Credit Limitation Purposes

Administration Position.
support permanent extension at 50
percent.
This proposal is similar to ~=ction 864(f) of the
Internal Revenue Code, which generally expired on December 31
1994.
It differs from current section 864(f) in that it would
increase the 50 percent exclusive apportionment percentage of
section 864(f) to 64 percent.
This proposal would also allow a
taxpayer to elect not to utilize the place of performance rule
under the sales method.
As stated in the President's fiscal year
1996 budget, the Administration supports the permanent revenueneutral extension of current section 864(f), which provides a 50
percent exclusive apportionment percentage.
The Administration
does not oppose the election to waive the place of performance
rule under the sales method. However, the Administration does not
42

support increasing the exclusive apportionment percentage to 64
percent.
7.

Repeal Foreign Tax Credit Basket for "10/50" Noncontrolled
Corporations

Administration Position. Oppose. The proposal offers taxpayers
an inappropriate opportunity to average foreign tax rates on
different types of income earned through different 10/50
companies and also effectively applies an election (on a companyby-company basis) to apply a "look-through" approach. The
proposal opens even more opportunities for abuse than would pure
look-through. Although the Administration opposes this proposal,
it is generally sympathetic to the burdens presented by the 10/50
basket and therefore does not oppose the alternative 10/50
proposal at item T.14., below.
8.

Extension of Period to Which Excess Foreign Tax Credit May
-Be Carried

Administration Position: Do not support. The reason the Code
permits the carryover of foreign taxes is that foreign and
domestic tax accounting rules may differ, resulting in income
being taxed in the United states and a foreign country in
different years.
The current carryover periods generally are
appropriate to account for these differences. Moreover, the
availability of deferral effectively allows taxpayers to choose
when to begin the carryover periods.
Extension of the
carryfor-.lard period to 15 years would permit inappropriate
averaging of high- and low-taxed foreign source income, which the
foreign tax credit rules generally seek to limit.
It also would
have significant revenue losses outside the revenue-estimating
window.
9.

Expansion of De Minimis Exception to Subpart F Income
Treatment

Administration position. Do not support. The proposal would
raise the ceiling of the subpart F de minimis exception from 5 to
10 percent and eliminate the $1 million limit of current law.
The Administration would be pleased to work with the Committee to
consider alternative methods of revising the de minimis exception
in order to simplify the operation of sUbpart F. However, we
believe that any exception should contain a dollar limit, as well
as a percentage limit, to avoid excessive deferral of U.S. tax on
income not subject to sUbstantial foreign taxation.
10.

Treatment of Foreign Base Company Sales and Services Income
of Controlled Foreign Corporations in the European Union

Administration position. oppose. Although the European Union is
moving towards economic integration, the lack of direct tax
43

harmonization creates inappropriate tax-planning opportunities.
For example, the proposal would exempt income from taxa~ion under
subpart F even where it is subject to little or no forelgn.tax.
Therefore, the European Union should not be treated as a slngle
country for subpart F purposes at this point.
11.

Exclusion of Foreign Base Company Shipping Income From
Subpart F Income for certain Controlled Foreign Corporations

Administration position. Oppose. The proposal would reinstate
prior law provisions granting deferral for certain shipping
income. The Administration believes that the concerns regarding
the absence of tax on such income, which motivated the Congress
to curtail deferral in 1986, remain valid.
12.

Limit Application of UNICAP Rules to Foreign Persons

Administration position. Do not oppose. As we understand the
proposal, it would exempt foreign persons from the uniform
capitalization requirements of current law, except with respect
to their U.S. effectively connected income and their subpart F
income. Although this proposal would yield results that are
somewhat less accurate from a theoretical perspective, we believe
that it could achieve significant simplification for affected
taxpayers.
13.

Reporting of Foreign Corporation Earnings and Profits on a
u.S. GAAP Basis

Administration position. Do not support. Generally accepted
accounting principles ("GAAp") are determined by the Financial
Accounting Standards Board.
In the interest of protecting
shareholders and other stakeholders from aggressive accounting
practices, GAAP earnings tend to accelerate losses and defer
income. We believe, therefore, that it would be inappropriate to
delegate the function of determining the amount of income to be
picked up by controlled foreign corporations to an administrative
body the interests of which may run counter to the tax system.
However, we would be willing to work to with the Committee in an
effort to identify limited opportunities where GAAP could be used
to achieve simplification without adverse revenue consequences.
14.

Permit Shareholder of a "10/50" Corporation to Elect to
Treat It as a CFC for Foreign Tax Credit and Subpart F
Purposes

Administration position:
Do not oppose. This proposal is a
reasonable way to simplify the 10/50 basket rules. The
proposal's coupling of foreign tax credit and subpart F
consequences is consistent with Congressional intent as evidenced
by the legislative history of the 10/50 rule (enacted in 1986).
44

That legislative history indicates a Congressional belief that a
multiple separate-basket approach for 10/50 corporation dividends
was appropriate, because 10/50 corporations, unlike CFCs, could
not be considered part of the same economic unit as the u.s.
shareholder.
It would be consistent with this legislative
history, however, to permit single-economic-unit (i.e., CFC)
treatment for foreign tax credit purposes, if the taxpayers are
required to apply CFC treatment for subpart F purposes as well.
The bill's consistency rule may preclude certain taxpayers from
making the CFC election if they cannot obtain sufficient data
from one or two 10/50 companies to apply the look-through or
subpartF rules (~, due to sUbstantial majority foreign
ownership).
The consistency rule properly prevents taxpayers
from electing CFC treatment only with respect to 10/50
corporations that have, for example, no subpart F income.
Treasury would be pleased to work with the Committee to consider
other alternative reforms of the 10/50 basket rules if it appears
that-a consistency rule would limit too severely the utility of a
CFC election.
15.

Increase in Reporting Threshold for Stock Ownership of a
Foreign Corporation

Administration position. Do not oppose. Although the basic
corporate information collected under section 6046 is valuable,
the Administration believes tnat raising the reporting threshold
to 10 percent would not significantly jeopardize that interest
and would ease the filing burden of u.S. shareholders holding
minority interests.
16.

Modification of Excess Passive Assets Provision for·
corporations with Active Financing Income

Administration position. oppose.
The Administration believes
that this proposal creates significant administrative
difficulties because it differentiates between "active" financing
income and "passive" income outside the context of regulated
entities that qualify for the existing banking, insurance and
securities exemptions. We believe that this line is very
difficult to draw. Moreover, this form of relief is
inappropriate because it treats corporations differently
depending on the manner in which they finance their businesses,
not on the basis of how active those businesses are.
17.

Exception from Foreign Personal Holding Company Income and
Foreign Base company Services Income for Active Financing
Income

Administration position. oppose. The proposal would reinstate,
with modifications, pre-1987 law provisions granting deferral for
certain income derived in the active conduct of a banking,
45

financing, or similar business or from certain investments made
by insurance companies. The Administration believes that the
concerns regarding the mobility of this income, which motivated
the Congress to eliminate or curtail deferral for such income in
1986, remain valid.
18.

Repeal of Excess Passive Assets Provision and Modification
of Passive Foreign Investment Company Provisions

Administration position. oppose.
The proposal would eliminate
the excess passive assets provision and modifications to the
passive foreign investment company assets test that were enacted
in 1993 to prevent controlled foreign corporations from deferring
tax indefinitely, as they were able to do before 19S3 by managing
their passive income and assets so as to avoid the passive
foreign investment company thresholds.
The third alternative
proposal regarding passive foreign investment companies would
make it even easier for a corporation to avoid treatment as a
passive foreign investment company.
In addition, the proposal to
exempt controlled foreign corporations from the passive foreign
investment company rules would allow less than lO-percent
shareholders to achieve unlimited deferral of taxation on passive
income.
The Administration believes that the concerns regarding
the ability of investors in foreign corporations to achieve
unlimited deferral through the accumulation of passive assets
abroad, which led to the passage of the passive foreign
investment company rules in 1986 and the excess passive assets
provision in 1993, remain valid.
19.

Exemptlon of united States Shareholders of Controlled
Foreign Corporations from Passive Foreign Investment Company
Provisions

Administration position. Do not oppose. The Administration
believes that it may be possible to exempt the 10-percent United
States shareholders of controlled foreign corporations from the
passive foreign investment company provisions of the Code. We
believe that this proposal could simplify the anti-deferral
provisions of current law without significant detriment to the
policy concerns underlying those provisions, because the
provisions added to subpart F in 1993 now inhibit the
accumulation by controlled foreign corporations of excessive
passive assets abroad, as the asset test does in the case of
passive foreign investment companies.
20.

Valuation of Assets of a Controlled Foreign Corporation
under the Passive Foreign Investment Company and Excess
Passive Assets Provisions

Administration position. Oppose. We understand that the
proposal is intended to benefit certain service companies that
have substantial amounts of self-generated intangibles. Because
46

it applies only to the extremely small number of controlled
foreign corporations whose stock is publicly traded, it would
not, however, benefit the vast majority of foreign service
corporations.
In addition, the proposal raises sUbstantial
problems, as well as associated administrative burdens, in
determining valuations on an on-going basis.
21.

Exempt certain Income Derived by Insurance Brokers or Agents
from PFIC Rules

Administration position. Oppose.
It is unclear that the
situation of insurance brokers and agents is more similar to that
of banks, insurance companies, and securities dealers, to whom
the Congress has granted limited exceptions from the passive
foreign investment company rules, than to that of service
companies, to whom the Congress has not granted any exception.
Moreover, the Administration believes that the proposed exemption
is broader than necessary to achieve the stated purpose of
treating insurance brokers and agents in a manner comparable to
banks, insurance companies, and securities dealers.
As drafted
in H.R. 4626 (103rd Congress), the proposal would treat insurance
brokers and agents more favorably.
22.

Prizes and Awards Received from a Foreiqn Pavor by a
Nonresident Alien Relating to Competitions Held in the
United states and Not Treated as Foreign Source Income

Administration Position. The staff of the Ways & Means Committee
has advised Treasury that the explanation of this provision in
the JCT pamphlet is incorrect. Treasury understands that this
provision relates to compensation received by nonresident aliens
in connection with Olympic competitions held in the united
states. Treasury is concerned about creating a tax exemption for
commercial activities related to the Olympics. However, Treasury
is prepared to work with the Committee to ensure that the tax
laws do not create an impediment to holding the Olympics in the
United states.
23.

Exempt Service Income of a Nonresident Alien Earned on
International Ships or Aircraft from U.S. Tax

Administration position. Do not support. Income earned within
the United states should be subject to U.S. tax. Treasury would
be willing to work with the Committee in order to evaluate
whether the method of withholding tax applicable to international
crew members is appropriate to the circumstances of international
shipping.
The proposal also would exclude certain days spent within U.S.
territory for purposes of determining residency under the
SUbstantial presence test of section 7701; this proposal is not
acceptable as described.
Treasury would be willing to work with
47

the Committee in order to identify the proper residence status
for tax purposes of alien individuals who do not enter the united
states for purposes of immigration law.
24.

Repeal Portfolio Interest Exemption

Administration Position.
oppose. Repealing the portfolio
interest exemption would substantially increase the cost of
government and corporate borrowing in international markets.
25.

Exempt Certain Short-Term 010 Obligations Held by a NonResident Alien from u.s. Estate Tax

Administration Position.
Support. As we understand it, the
proposal would extend the estate tax exemption for 010
obligations held by nonresidents who are not u.s. citizens to
include certain short-term 010 obligations described in Code
section 871(g) (1) (B) (i).
This would conform the estate and
income tax treatment of such obligations and remove a
disincentive to purchase them.
26.

Carryover of Excess Possession Tax Credit

Administration Position. Do not support. We do not support the
proposal because the carryback of the excess possession credit
would provide a windfall for taxpayers. The economic activity
limitation is intended to increase possession employment and
investment. A carryforward of excess possession credit might
have that effect, but a carryback would not.
27.

Pass-Through Treatment for Certain Dividends Paid bv a
Regulated Investment Company ("RIC") to Foreign Persons

Administration Position. Do not oppose in part. We do not
oppose the provisions of the proposal that would treat RIC
dividends as "interest-related dividends" to the extent
attributable to interest income that would be exempt from u.s.
tax if earned directly by a foreign person or as "short-term
capital gain dividends" to the extent attributable to the excess
of short-term capital gains over long-term capital losses. We
~lso do not oppose the proposed treatment of RIC shares for
estate tax purposes with respect to the estates of decedents
dying after the date of enactment, except to the extent described
below relating to "taxable interest dividends." We believe that
these provisions will enhance the ability of U.S. mutual funds to
attract foreign investors and eliminate needless complications
now associated with the structuring of vehicles for foreign
investment in u.S. securities.
However, we oppose the provision that would treat RIC dividends
as "taxable interest dividends" to the extent attributable to
interest income that would be taxable if earned directly by a
48

foreign person. This provision would unilaterally extend to
foreign investors in RICs the benefits of the reduced withholding
rates for interest and estate tax treatment provided in our
income and estate tax treaties, with no guarantee that comparable
benefits will be provided for u.s. investors by our treaty
partners.
28.

Consolidate Income and Loss of Same Country Foreign
corporations That Elect To Be Taxed as Domestic Insurance
Companies

Administration Position. Oppose. Current law provides specific
"chain deficit" rules permitting u.S. shareholders of controlled
foreign corporations in a chain to consolidate their income and
loss from qualified activities, including insurance, in
appropriate circumstances. Additional relief for certain
insurance companies does not appear necessary or appropriate.
U.

HOUSING COOPERATIVES

Tax Relief for Housing Coops on Interest on Reasonable
Reserves and Income from Laundries and Parking; for Limited
Equity Coops, Tax Relief for Commercial Rentals

Administration Position. Do not support. Although it may be
appropriate to treat income from parking and laundry facilities
(attributable to use by tenant-stockholders and their guests) as
patronage-sourc~d, interest on reserves and rental income should
not be treated as patronage-sourced.
2.

Treatment of Coops Owning only Land

Administration Position. Do not oppose, if prospective. The
Administration is not aware of any reason why land cooperatives
should not be entitled to the same treatment as housing
cooperatives. However, the retroactive effective date (to
Deceu~er 31, 1987) is not appropriate.
V.

INSURANCE

Treatment of salvage and subrogation of Property and
Casualty Insurance Companies

Administration position. Do not oppose. The Administration does
not oppose a proposal that alters the statutory language
contained in the 1990 Act to clarify Congressional intent.

Health Organizations Eligible for Benefits of section 833

Administration position.
Do not support.
Blue Cross/Blue Shield
organizations receive special tax treatment that was granted in
their transition to taxable status.
These tax benefits include,
among others, a special deduction, and the elimination of the 20
percent reduction in unearned premium reserves that applies
generally to all property and casualty insurance companies.
The
scope of these special tax benefits should not be expanded on a
retroactive basis.
3.

Treatment of Certain Gains and Losses of Life Insurance
Companies Under Section 8l8(b)

Administration position.
Do not support. Although life
insurance companies do not get the benefit of section 1231 for
depreciable property used in connection with a non-insurance
business, this is one of the many features of the taxation of
life insurance companies that do not conform to the taxation of
non-insurance businesses.
Any change in the taxation of life
insurance companies should be considered in connection with the
overall scheme of life insurance company taxation.
In addition,
the proposal would add complexity to the law by segregating the
loss into capital and ordinary components on a percentage basis
and allowing the ordinary portion to be deductible over five
years.

Treatment of Certain Charitable Risk Pools

Administration position.
The laws of at least one State provide
for the organization of charitable risk pools that provide
insurance coverage to charitable organizations that are members
of the pool. The courts have held that these charitable risk
pools do not qualify for tax exemption under sections 501(c) (3)
or 50l(m).
The Administration would not oppose a provision under which a
charitable risk pool could qualify as a section 50l(c) (3)
organization, notwithstanding section 50l(m), provided that the
charitable risk pool receives a sufficient amount of
contributions from non-members that it uses to subsidize the
coverage provided to members.
The Administration believes that
in the absence of such subsidized coverage, the operations of a'
charitable risk pool would be virtually identical to a mutual
insurance company, and as such should be subject to tax in
accordance with the policies underlying section 50l(m).

Deduction for Small Property and Casualty Insurance
Companies

Administration Position. Oppose. The proposal would provide an
additional tax-induced distortion favoring the sale of insurance
through small firms, lose significant revenues, and create
sUbstantial additional complexity in the Code.
Under present
law, property and casualty insurance companies with net written
premiums (or, if greater, direct written premiums) that do not
exceed $350,000 are exempt from federal income tax.
In addition,
a property and casualty insurance company may elect to be taxed
solely on taxable investment income for any taxable year its net
written premlums (or, if greater, direct written prAmiums) exceed
$350,000 but do not exceed $1.2 million.
A special deduction for
small property and casualty insurance companies in addition to
the tax benefits available to these insurers under existing law
is not necessary.
6.

Treatment of Deposits Under Certain Perpetual Insurance
Policies

Administration Position. Oppose. Under a perpetual insurance
contract, a policyholder deposits a one-time payment with the
insurer in return for casualty insurance that is provided until
the policy is canceled and the deposit is refunded to the
policyholder. The policyholder generally may cancel the
insurance at any time. The investment earnings on the deposit
are retained by the insurer to fund insurance costs.
If a
purchase of a perpetual insurance contract is not treated as a
below-market loan, the policyholder avoids tax on the interest
earned on the deposit, allowing casualty insurance to be .
purchased with pre-tax dollars.
7.

Extend section 130 Exclusion to Structured Settlements for
Workmen's Compensation Payments

Administration position. Do not oppose. There appears to be no
policy justification, apart from revenue considerations, for
allowing less favora0le tax treatment for work-related physical
injury claims than other physical injury claims.
8.

Treatment of certain Small Property Casualty Insurance
Companies Under the Alternative Minimum Tax

Administration position. Oppose. Applying the small company
election to be taxed solely on taxable investment income in
calculating alternative minimum tax liability would subvert the
goal of the alternative minimum tax to measure the economic
income of companies and impose some tax on that income. In
addition, piecemeal amendments to the alternative minimum tax is
51

not desirable. Any revisions should be evaluated in the context
of overall simplification of the alternative minimum tax.
9.

Tax Treatment of Consolidations of Life Insurance
Departments of Mutual savings Banks

Administration Position.
Do not oppose. The Administration does
not oppose this proposal as long as it is limited to
consolidation of life insurance departments of mutual savings
banks under section 594 under requirement of State law, the
provision applies only if policyholders have no rights to surplus
and no voting rights prior to the consolidation, and their
approval was not required in order for the consolidation to
occur.
10.

Extend section 832(e) to Financial Guarantee Insurance

Administration Position. This proposal does not raise a
significant federal income tax issue, but instead relates
primarily to regulatory matters. Because a company that claims a
deduction under section 832(e) must purchase "tax and loss",
noninterest-bearing federal government bonds equal to the amount
of the tax savings attributable to the deduction, the amount that
the company pays the government in a given year is the same
regardless of whether it claims the deduction. The principal
effect of the provision is to allow the company to report an
asset for regulatory purposes as a result of the payment.
11.

Increased Dollar Limits for Burial Insurance

Administration position. Do not oppose. Apart from revenue
considerations, it may be appropriate to increase the dollar
limits applicable in the case of an insurance contract to cover
payments of burial expenses or in connection with prearranged
funeral expenses to reflect inflation.
12.

Foreign Companies Carrying on Insurance Business

Administration Position.
Do not oppose, subject to provision of
a prospective effective date. Although we do not believe that
the provisions of current law violate our treaty obligations, we
believe the propos7d amendments, effective prospectively, could
improve the operat10n of the statute.

LOW-INCOME HOUSING

Provide lS-year Depreciation and Other Tax Incentives to
Encourage the Preservation of LOW-Income Housing

Administration position. Oppose. Ge~erous tax advantages,
including substantial credits and rel1ef from the passive loss
52

rules, .alread~ exist for low-income housing.
Shortening the
depreclable llfe to 15 years, doubling the exception to the
passive loss rules (from $25,000 to $50,000), and reducing the
depreciable life for AMT purposes (from 40 years to 15 years) are
not justified at this time.
2.

Low-Income Housing Credit Provisions

(a). Allow HOME Funds To Be Used with 91% Credit
Administration Position. Oppose.
Given the ceiling on tax
credits, current law restrictions on combining federal subsidies
are reasonable.
(b). Expand Community Service Area Costs Eligible for Credit
Administration Position. Do not oppose, with modifications. The
low-income housing tax credit is a credit for housing and
functionally related facilities.
While there may be some
justification for extending the credit to certain community
service buildings, this proposal might allow financing of
commercial-type facilities that allow as much as 49% of the use
to be for persons other than residents. Any extension of the
credit should provide a more targeted definition of community
service buildings and use by residents.
(c). Change State Credit Authority Limitation Stacking Rule
Administration position. Do not support. This ~hange would
effectively allow States to carryover unused authority for an
unlimited period. Although this change should have little
revenue impact, it could significantly reduce the flow of- credits
to the national pool. This could result in an inefficient use of
the credit by benefiting states that could not use all of their
credit authority at the expense of the states that did use all of
their credit authority.
(d). Expand Credit to Lead Paint Removal
Administration position. Do not support. The low-income housing
tax credit is a credit for housing ta~g~ted to serve low income
persons.
It is an inappropriate vehicle to provide incentives
for removal of lead paint in older buildings.
(e). Expand Credit to certain Cooperative Housing
Administration
tax credit was
for low income
owner-occupied
property.

position. Do not support. The low-income housing
enacted to increase the stock of rental housing
families and individuals. Extending the credit to
housing would dilute the goal of increasing rental

PARTNERSHIPS

Permanent Extension of Publicly Traded Partnership
Grandfather Rule

Administration position. oppose. The effective date provisions
of section 7704 provided existing partnerships with a generous
10-year period for preparing to comply with section 7704. The
debate regarding the effective date provisions of section 7704
should not be reopened.
Y.

PASSIVE LOSSES

Modify the Application of Passive Loss Rules to Timber
Activities

Administration Position.
Do not support. The current regulatory
limitations on the facts-and-circumstances test for material
participation are rules of administrative convenience designed to
prevent disputes when there is little chance the taxpayer will
prevail. Although the elimination of these limitations may
increase the number of disputes between the Internal Revenue
Service and taxpayers, taxpayers who are precluded from using the
facts-and-circumstances test under current law (for example,
because they do not participate in an activity for more than 100
hours) will still find it very difficult to establish, based on
all the facts and circumstances, that their participation is
regular, continuous, and substantial.
2.

Modify the Application of Passive Loss Rules to Farming
Activities

Administration position. Do not support. The Administration
position on this proposal is the same as its position on the
similar proposal to modify the application of the passive loss
rules to timber activities.

z.
1.

PASS-THROUGH ENTITIES

Subchapter S Reform Proposals to Expand Availability of
Subchapter S and Improve Its Operation

Adminis~r~tion positio~.

Th7 Administration supports the goal
of provldlng small bUSlness wlth needed S corporation reform and
simplification. The Administration also supports many of the
technical and administrative provisions of the proposals such as
increasing the number of shareholders from 35 to 50. We'are
co~cerne~, however, that certain pro~isions of the proposals may
unlntentl0nally create undue complexlty and provide increased
opportunities for large taxable C corporations to escape
54

corporate taxation by electing S corporation status. This seems
to be an inappropriate consequence of proposals intended to
benefit small businesses. We would be pleased to work with the
committee to produce a revenue-neutral reform package that is
more precisely targeted to small business and does not introduce
additional complexity into the Code.
There have been two recent developments that should strongly
influence the shape of any S corporation reform.
First, limited
liability companies (ILLCs") have emerged as a tremendously
popular alternative to S corporations.
LLCs combine the
flexibility of a partnership for tax purposes with the liability
protection of an S corporation. LLCs, like S corporations and
other forms of partnerships, are generally not subject to taxi
the results of their operations flow through to the owners.
Virtually all states have enacted some form of LLC legislation
and, for most new enterprises seeking extended flow-through
treatment, an LLC will likely become the preferred entity. Thus,
as we consider S corporation reform, we should keep in mind that
it can be expected generally to benefit only certain existing
businesses.
Second, Treasury and the IRS have recently proposed a "check-thebox" system that would allow LLCs and other unincorporated
entities to elect to be treated as partnerships for tax purposes
simply by checking a box. This check-the-box system has been
generally praised by taxpayers and tax practitioners. However, it
would not apply to enterprises formed as corporations. We do not
have the authority to extend the check-the-box system to nonpublicly traded corporations -- large or small -- including S
corporations.
In light of these developments, we believe that, as an
alternative to some of the proposals, we should consider
allowing, at least for a limited period of time, certain S
corporations to convert to a partnership on a tax-free basis
under prescribed circumstances. There are currently several
practical limitations on an S corporation's ability to convert to
a· partnership.
In particular, such a conversion generally
results in a tax liability that may be too steep a price for many
S corporations to pay, as well as various transaction costs
(lawyer and accountant fees, State transfer taxes, etc.).
If
adopted, this proposal would eliminate or reduce the tax cost of
the conversion and enable certain S corporations to elect the
more flexible partnership treatment.
As part of this proposal, consideration should be given to
whether it would be appropriate to grant Treasury authority to
extend the check-the-box proposal to converting S corporations.
If Congress were to do so, we would be authorized to issue
regulations that would allow S corporations to continue their
existing corporate status while converting to partnership
55

treatment for federal tax purposes. As a result, S corporations
that wanted to be treated as a partnership for federal tax
purposes would simply file an election to be treated as a flowthrough partnership, rather than actually having to transfer
assets to a new partnership entity. This proposal would enable S
corporations to achieve partnership tax treatment without
ipcurring the transaction costs involved in actually converting
to a partnership (including an LLC) .
Finally, the dual concerns of providing appropriate revenue
offsets to this proposal and targeting it to small business
suggest that we explore another possible S corporation reform.
Specifically, we should consider whether it is advisable to
conform the tax treatment of the conversion of large existing C
corporations to S corporations with the treatment of their
conversion to a partnership (including an LLC).
This proposal
(as applied to all converting C corporations, not just large C
corporations) was suggested by the Joint committee on Taxation in
1990- as part of an earlier simplification package.
The Joint
committee recommended that "a shift from C corporation status to
passthrough entity status where the passthrough entity is an S
corporation [be] conformed to the present-law treatment where the
passthrough entity is a partnership." See letter to Chairman Dan
Rostenkowski from Ronald A. Pearlman, Chief of Staff of the Joint
committee on Taxation, reprinted in Committee on Ways and Means,
written Proposals on Tax Simplification, WMCP 101-27, May 25,
1990, p.20.
Currently, electing S status rather than converting
to a partnership generally enables large C corporations -corporations that would not meet anyone's definition of small
business -- to escape most corporate taxes.
In light of the
recent developments discussed above, now may be an appropriate
time to review the Joint Committee's proposal.
2.

Subchapter S corporations Eligible for Rules Applicable to
Real Property Subdivided for Sale by Noncorporate Taxpayers

Administration position. Oppose. The proposal would extend
section 1237 treatment to S corporations and thereby equalize the
treatment of S corporations and partnerships with regard to the
sale of certain subdivided real property. The proposal, however,
is to be effective for sales after January 1, 1992 and to sales
before January 1, 1992 for purposes of characterizing post-1991
sales as falling under section 1237. While the Administration is
generally sympathetic to equalizing the treatment of S
corporations and partnerships, we oppose the proposal on the
basis of this effective-date provision.
3.

Treatment of Financial Asset Securitization Investment Trusts
(FASITS)

Administration Position. Do not oppose, with modifications. The
Administration did not support a similar proposal introduced in
56

1993. Since 1993, the proposal has been improved significantly.
We still have concerns, however, about the complexity of the
proposal and whether the safe harbor treatment of debt securities
allows equity-like interests to be treated as debt.
In addition,
we have concerns about creating another special purpose tax
entity rather than improving or expanding existing law.
Finally,
we are concerned about potential revenue losses outside the
budget window. We believe that this proposal should be
considered in the context of Treasury's study of the treatment of
financial instruments and entities engaged in financial services
transactions.
4.

Treatment of Tax-Exempt Municipal Investment Conduits
(TEMICS)

Administration Position. Do not support. We are not aware of
the need for this proposal, which would introduce significant
complexity into the tax law.
5.

Modification of Rules For Real Estate Investment Trusts
CREITS)

Administration Position. Do not support. The Administration is
sympathetic to arguments that there are technical problems with
the current REIT rules in the tax law. We are concerned,
however, with the way this proposal addresses those problems. We
look forward to working with the committee to resolve these
issues in an appropriate and revenue-neutral manner. We believe
that the proposal should be considered in the context of
Treasury's study of the treatment of financial instruments and
entities engaged in financial services transactions.
6.

Allow Bank Common Trust Funds To Be Transferred to More than
One Mutual Fund without Taxing Trust Beneficiaries

Administration position. Do not oppose, with modifications.
This proposal would allow smaller banks that lack sufficient
funds to create proprietary mutual funds to transfer their common
trust funds to one or more larger mutual funds.
We support this
goal. We have, however, significant concerns about the
complexity and effectiveness of the basis-pooling rules, and
believe that this part of the proposal should be substantially
revised.

AA.

PEACE TAX FUND

Establish u.s. Peace Fund to Receive Conscientious
Objectors' Income, Estate, or Gift Tax Payments To Be Used
Only for WIC, Head start, U.s. Institute of Peace, and Peace
Corps

Administration position. oppose. The proposal would provide one
category of individuals with more direct say over the way the
government spends tax dollars, as opposed to the influence all
taxpayers exert through the normal political processes and the
ballot box.
In this regard, it is simllar to the provision in
H.R. 1215 which we oppose regarding a Public Debt Reduction Trust
Fund.
The proposal also presents significant administrative
problems.
BB.

PENSIONS AND EMPLOYEE BENEFITS

PENSIONS

Nondiscrimination Rules

(a). Repeal Special Nondiscrimination Tests for Qualified Cash or
Deferred Arrangements
Administration Position. oppose. We oppose the repeal of the
special nondiscrimination tests for qualified crish or deferred
arrangements (Known as the ADP test) and for employer matching
contributions and employee after-tax contributions (known as the
ACP test).
These tests protect nonhighly compensated employees
under a 401(k) or 401(m) arrangement by ensuring that they
receive reasonable contributions (as a percentage of
compensation) compared to highly compensated employees. However,
the ADP and ACP tests, including the related correction
procedures, can be complicated and costly to administer. The
Administration's pension simplification package has proposed a
simple "safe harbor" alternative that allows employers to avoid
all ADP and ACP testing but that also protects nonhighly
compensated employees. These design-be sed safe harbors -- which
would apply both for 401(k) plans and for the Administration's
proposed simple plan for small employers, the NEST (for National
Employee Savings Trust) -- consist mainly of employer matching
and nonmatching contributions designed to increase the likelihood
that nonhighly compensated employees will have meaningful
contributions.

(b). Modify Definition of Highly Compensated Employee to
Eliminate 1-0fficer Rule
Administration position.
Support. H.R. 3419 defines a highly
compensated employee CRCE) as any employee who is a more-than-5
percent owner ~f the employer or who earns more than $50,000
($66,000 as adJusted in 1995 for cost of living). The proposal
would eli~inate the additional rule in H.R. 3419 that, if no
employee 1S an HCE under this definition, then the highest-paid
officer is treated as an HCE.
In its pension simplification
package, the. Administration has proposed to define an HCE simply
as any employee who is a more-than-5 percent owner or who earns
more than $80,000 (effective for 1996 and indexed for future
years), without a highest-paid officer rule.
Consistent with our
simplification proposal, we support the proposed deletion of the
highest-paid officer rule. We also believe that raising the
dollar threshold to $80,000, as under the Administration's
proposal, would prevent many middle-income taxpayers from being
classified as HCEs who are prohibited from receiving better
benefits than others.
(c). Repeal Top-Heavy Rules
Administration position. oppose. The top-heavy rules provide
rank-and-file employees with important protection not currently
provided by any other Code provision. However, the top-heavy
rules may require complex calculations that deter small employers
from adopting qualified plans. To address this problem, as well
as many other concerns unique to small business, the
Administration has proposed a new, simple plan for small
employers -- the NEST. The NEST would be exempt from the topheavy requirements (and other nondiscrimination testing rules) ;
instead, the structure of the NEST itself is designed to promote
meaningful contributions for all eligible employees.
(d). Modify Leased Employee Rules
Administration position. Oppose. The proposal does not simplify
or clarify the leased employee rules; it adds new layers that
increase complexity. The proposed five-year graded vesting
schedule is likely to result in reduced benefits for rank-andfile employees who remain with leasing organizations for a
relatively short time. The safe harbor alternative would permit
service recipients and qualified leasing organizations to
circumvent the existing safe harbor limit on the percentage of
leased employees.
In addition, the safe harbor would require a
qualified leasing organization to register with the IRS. It is
not clear what the IRS's responsibilities would be under this
requirement.
If, for example, registration required the IRS to
evaluate each leasing organization that applied for registration
59

and conduct a periodic review of the registrants, the provision
could impose significant administrative burdens.
(e). Exempt State Judicial Plans From Nondiscrimination
Requirements
Administration Position. Do not support. Tax-qualified plans of
governmental employers generally are deemed to satisfy minimum
participation, nondiscrimination and coverage requirements until
plan years beginning on or after January 1, 1999. The delayed
effective dates allow time for the development of appropriate
nondiscrimination provisions for governmental plans. We do not
believe that there is a sufficient tax policy justification for
providing a total exemption from the nondiscrimination rules for
anyone class of employees.
(f). Repeal OBRA 1993 Provision Limiting compensation Taken into
Account to $150,000
Administration Position. Oppose. The OBRA 1993 reduction in the
amount of compensation that may be taken into account under a
qualified plan serves to reduce the extent to which employers can
provide tax-qualified retirement benefits that favor the highly
compensated employees. Reversal of that reduction would permit a
larger share of the employer's tax-favored contributions to be
allocated to employees who can better afford to save for their
own retirement.
In addition, the proposal would have significant
revenue cost.
(g). Repeal for Pilots OBRA 1993 Provision Limiting Compensation
Taken into Account to $150,000
Administration Position. Oppose. For the reasons noted above,
we oppose the repeal of the OBRA 1993 reduction in the amount of
compensation that may be taken into account under a qualified
plan. Furthermore, we do not believe there is a legitimate tax
policy reason to repeal the reduction (and thus have a different
compensation definition) for one class of employees.
(h). Repeal Minimum participation Rule
Administration position. support, as applied to defined
contribution plans. As applied to defined benefit plans the
minimum participation rule prevents significant abuse.
it
prevents an employer from establishing individual defined benefit
plans for highly compensated employees in order to provide those
employees with more favorable benefits than those provided to
lower paid employees under a separate plan. The rule also
prevents an employer from favoring one small group of
participants over another in other ways (for example by covering
them under two separate defined benefit plans and fU~ding one
plan better than the other). Accordingly, we oppose the repeal
60

of the minimum participation rule for defined benefit plans.
However, as applied to defined contribution plans, the minimum
participation rule adds complexity for employers without
delivering commensurate benefits to the system. Thus, consistent
with the Administration's pension simplification proposal, we
support the repeal of the minimum participation requirement for
defined contribution plans.
2.

Distribution Rules

(a). Repeal IS-percent Excise Tax on Excess Distributions
Administration Position. Do not support. Both the IS percent
excess distribution penalty and the section 41S(e) combined plan
limit (which applies to any employee who participates in a
qualified defined benefit plan and a qualified defined
contribution plan of the same employer) were designed to
safeguard against an individual accruing excessive tax-favored
retirement benefits under multiple plans. There is considerable
duplication in the application of the two provisions.
Because
the 41S(e) combined limit is the far more complicated provision - and because it, unlike the IS percent excise tax, applies only
to the plans of a single employer -- we believe, consistent with
the Administration's simplification proposal, that the cause of
simplification would be best served by repealing the combined
limit rather than by repealing the IS percent penalty.
(b). Provide that Pension Distributions are Taxed as Capital
Gains
Administration position. Oppose. Under existing law, qualified
plans receive very favorable tax treatment.
Employees are not
taxed on contributions to these plans; the trusts do not pay
taxes on their earnings; and employees are eligible for special
tax treatment for certain types of distributions. We believe
that the proposed additional tax incentive to provide
compensation in the form of retirement benefits is not needed.
In addition, the proposal would lose significant revenue.
(c). Reinstate Ten-year Forward Averaging
Administration position. oppose. Reinstating ten-year averaging
for lump sum distributions, which was generally repealed by the
Tax Reform Act of 1986, would do nothing to simplify the taxation
of lump sum distributions, and would lose SUbstantial revenue.
The application of ten-year averaging often involves difficult
definitional determinations and complicated calculations.
(d). Permit Penalty-Free withdrawals for Unemployed Individuals
Administration position.
support Administration's version of
this leqislation. The Administration supports the objective of
61

allowing unemployed individuals to make penalty-free withdrawals
from IRAs, as included in the Middle Class Bill of Rights, H.R.
980.
The Administration believes that this change should be part
of a comprehensive expansion of IRAs for middle-income taxpayers,
as provided in H.R. 980.
In addition, this change should be
limited to individuals facing long-term unemployment.
3.

Limits on contributions and Benefits

(a). Modification of Interest and Mortality Rate Provisions of
the Retirement Protection Act
Administration Position. Oppose. The change in the interest
rates and the specification of the mortality table that may be
used for purposes of applying the section 415 limitations
contained in the Uruguay Round legislation reestablished the
principle that a plan may not provide a benefit in the form of a
lump sum that is worth more than the equivalent of the maximum
single life annuity that would be permitted at the same age under
section 415. The effective date of the changes need not be
deferred, because the Uruguay Round legislation also provided
that a plan may protect the benefit accrued prior to the
effective date of the new provision.
(b). Eliminate Combined Plan Limit for Participants in Both a
Defined Contribution Plan and a Defined Benefit Plan
Administration position. support. The repeal of this limit has
also been proposed by the Administration. The combined limit is
cumbersome, requiring information concerning a plan participant's
entire work history, and is commonly determined incorrectly. The
goal of the combined limit -- to safeguard against an individual
accruing excessive retirement benefits on a tax-favored basis -is also addressed by the 15 percent excise tax on excess
distributions, which the Administration's proposal would retain.
4.

Employee stock Ownership Plans

(a). Modify Rules Relating to Deferral of Gain on certain Sales
of Stock to an ESOP (section 1042 exchanges)
Administration position. Oppose. We do not believe that there
is sufficient tax policy justification for this expansion of
section 1042.
(b). Permit ESOP to be Beneficiary of Charitable Remainder Trust
Administration position. Oppose. We do not believe that the
current charitable estate tax deduction for charitable remainder
trusts should be expanded to cover ESOPs.

(c). Treatment of Certain Securities Transferred to an ESOP From
Terminated Defined Benefit Pension Plan
Administration Position. Oppose. The Treasury historically has
not favored this type of retroactive provision that provides tax
benefits to a narrow class of taxpayers.
(d). Permit Payment of Estate Tax Liability by an ESOP
Administration Position. Oppose. We do not believe that there
is sufficient tax policy justification for reinstating this
benefit, which Congress repealed in 1989.
5.

Permit Permanently Disabled Persons to Contribute to section
401(k) Plans

Administration position. Do not oppose. To encourage
contributions for disabled workers, plans should be allowed to
permit disabled former employees, highly compensated as well as
nonhighly compensated, to make elective contributions to 401(k)
plans. We would support legislation that achieves this goal if
technical issues relating to the implementation of the proposal
are appropriately resolved. We would be happy to work with the
Committee to that end.
6.

Modify Sanctions for Failure to Comply with Qualification
Requirements

Administration Position. Oppose. By effectively eliminating
sanctions in all but the most egregious cases, the proposal
reduces employers' incentives to adopt systems and procedures
that assure operational compliance with plan qualification rules.
Unlike the current IRS administrative programs, the proposal is
not targeted to providing incentives for voluntary compliance,
such as implementation of plan procedures that minimize future
errors. As a consequence, adoption of the proposal might well
have an adverse effect on participants' benefits and rights and
could significantly increase the need for IRS examination and
enforcement efforts. As current administrative programs evolve,
Treasury and the IRS will continue to work to structure systems
that reduce plan burdens while encouraging voluntary compliance.
7.

Allow Prenuptial Waiver of Spousal Annuity Benefits

Administration position. Oppose. The proposal could undermine
the important Federal retirement policy of protecting a spouse's
rights by permitting waivers to be made many years before
retire~ent and long before meaningful information might be
available concerning the value of benefits being waived.

Deny Federal Tax Information to states Imposing a Pension
Source Tax

Administration Position. Oppose.
The exchange of tax
information between State and Federal tax authorities for tax
administration is essential to the orderly collection of both
state and Federal tax revenues.
Prohibiting the exchange of tax
information would interfere with the administration and
enforcement of Federal tax laws. The access of States to Federal
tax information should not be conditioned on compliance with
requirements unrelated to the needs of Federal tax
administration.
9.

Unfunded Deferred Compensation Plans of Tax-Exempt and
Governmental Organizations

(a). Exempt Deferred Compensation Plans for Volunteer Fire
Fighters
Administration Position. Oppose. The proposal would effectively
allow volunteer fire and rescue personnel to defer up to 100
percent of their compensation. Other employees of tax-exempt
organizations or of State and local governments are generally
limited to deferring one third of their compensation (or $7,500
if less). There is no tax policy reason to distinguish employees
who perform these services from any other employees of tax-exempt
or governmental employers.
(b). Increase Deferred Compensation Limit for Group Medical
Practices
Administration Position. Support a broader proposal that would
apply to all tax-exempt organizations and State and local
governments. There is no tax policy reason to confer special
benefits exclusively on such a narrow class of taxpayers.
However, because excess benefit plans provide certain employees
with benefits that are already provided to other employees under
a qualified plan, we believe that excess benefit plans maintained
by all tax-exempt organizations and State and local governments
should be exempt -- without limit -- from the restrictions of
section 457. The Administration's pension simplification
proposal provides for this exemption.
(c). Require Individual Ownership of Plan Assets
Administrat~on
terms, requ~re

Position. Oppose. This proposal would, by its
amounts deferred under a nonqualified deferred
compensation plan of a tax-exempt organization or a State or
local government to be funded for the exclusive benefit of plan
participants. However, income tax on these amounts would be
deferred as if they were not funded.
This favorable tax
64

treatment of participants would confer on a category of
nonqualified deferred compensation plans significant benefits
that are specifically reserved under the current statutory scheme
for retirement plans that meet numerous nondiscrimination and
other qualification requirements. section 457 plans not only are
allow 7d to discriminate in favor of highly compensated employees,
but, ln the case of tax-exempt organizations, they also are
generally permitted to cover only a select group of management or
highly compensated employees because of the interaction of the
Code and ERISA requirements.
We oppose extending significant
benefits of qualified retirement plans to this very broad
category of nonqualified deferred compensation plans.
10.

Provisions Relating to Individual Retirement Arrangements
("IRAs")

(a). Permit Tax-Free Rollover of certain Severance Payments
Admihistration Position. Do not support. We do not believe that
it is generally appropriate to expand the individual retirement
account rollover provisions to otherwise taxable severance
payments that have not been dedicated to retirement savings under
a tax-qualified plan.
(b). H.R. 682 (the "Savings and Investment Incentive Act of
1995")
Administration position. support Administration's version of
this proposal. The Administration supports the expansion of
IRAs, but believes the President's IRA proposal ln H.R. 980
provides a more cost-effective way to increase net national
savings. The President's proposal expands savings incentives to
individuals with more moderate incomes, who are now doing little
saving. We also believe that penalty-free withdrawals should be
made available to pay for long-term care expenses for an
incapacitated parent, as proposed by the President.
11.

Treatment of Indian Tribal Governments under Section 403(b)

Administration position. Do not support. The Administration
believes it would be more appropriate t, address the retirement
saving needs of tribal government employees through comprehensive
pension simplification that would include consideration of all
tax-exempt organizations. Accordingly, as part of its pension
simplification proposal, the Administration has proposed allowing
tax-exempt organizations and Indian tribal governments to sponsor
section 401(k) plans in the future. Also, as a general matter of
tax policy, the Administration does not favor this type of
retroactive tax relief.

12.

Special Rules for Church Pension Plans

Administration Position. oppose, except for certain technical
changes. As a general matter, the Administration opposes the
proposal for the following reasons:
~

We believe that the proposed exemption from the trust and
nondiscrimination requirements for most qualified church
retirement plans and section 403(b) annuities is not
justified by differences in church organizational structures
or polity, or other unique attributes of churches or church
plans. Church employees are entitled to the same safeguards
as employees of other organizations, regardless of their
employer's internal administration. We have similar
reservations about most of the other new special rules for
church plans in the proposal.
The proposed amnesty included
in the proposal for all past violations of sections 401(a)
and 403(b) and the retroactive effective dates of many of
the proposals are contrary to our general policy against
retroactive relief from prior compliance obligations.
We believe that the current statutory approach of exempting
church plans from certain provisions that are difficult to
apply or inappropriate in the church plan context is the
right approach because it applies, to the extent possible,
the same retirement policy for all employers and employees.
We oppose the extension of the special rules currently
applicable only to qualified church-controlled organizations
(QCCOs) to all church-controlled or affiliated organizations
(other than certain hospitals and universities) because it
is inappropriate to provide special treatment reserved
generally for churches to organizations that function more
as secular charities or commercial enterprises. We are,
however, sensitive to problems that exist in applying the
QCCO definition. We are also concerned about the problems
that exist in applying the generally applicable employer
aggregation rules to churches. We would be pleased to work
with the Committee to develop simplified rules to address
these issues.

We do not oppose certain technical changes included in the
proposal.
For example, the clarification of the ability of selfemployed ministers to participate in a church plan may facilitate
the application of certain provisions to church plans and we
would like to work with the Committee to develop this'proposal
more fully.
In.additio~, ~e note that t~e proposal to modify the
age 70 1/2 requlred beglnnlng date for dlstributions is
consistent with the Administration's proposal to generally
eliminate the requirement that distributions from a qualified
66

plan must begin at age 70 1/2 even for an employee who continues
to work for the employer maintaining the plan.

EMPLOYEE BENEFITS

Tax Treatment of certain Disability Benefits for Police and
Fire Fighters

Administration position. Do not support. The Treasury
Department generally has not favored this type of targeted
retroactive tax relief.
2.

Exclude from Income Retirement Benefits that an Employee
Elects to Use to Purchase Employer-Provided Accident or
Health Care

Administration position. oppose. Enactment of the proposed
exclusion from income would create an entirely new mechanism for
prefunding retiree accident and health benefits, and it is not
clear whether any nondiscrimination or vesting rules would apply.
The proposal may result in significant revenue loss.
3.

Modify Restrictions on Golden Parachute Payments

Administration position. Do not support. We do not support
eliminating the 75 percent shareholder approval requirement in
cases where one person owns more than 50 percent of the voting
power of a corporation. The super-majority rule serves to
promote serious shareholder consideration of compensation paid
upon changes of control.
4.

Employee Housing For certain Medical Research Institutions

Administration position. Do not oppose. The proposal would
eliminate disparities in the tax treatment of employer-provided
faculty housing for schools and institutions providing similar
medical instruction for students.

cc.
1.

TAX-EXEMPT BONDS
Expansion of Arbitrage Rebate Exception for Carta in Bonds

Administration position. Do not support. It may be appropriate
to review the arbitrage rebate exceptions as part of the
Administration's effort to simplify the tax law. The arbitrage
rebate rules were enacted to discourage unnecessary and early
issuance of tax-exempt bonds by requiring that arbitrage profits
be turned over to the federal government. However, this type of
proposal should be considered in the context of a general review
of these rules which would exempt more issues rather than more
67

dollar volume from the rebate requirements while still preventing
arbitrage abuse.
2.

Bonds for certain output Facilities

Administration Position. Do not oppose. Although this change
would have a revenue cost, it would simplify the tax laws. There
does not appear to be any reason to treat municipal output
facilities more harshly than other municipal facilities.
3.

Bonds for Emergency Response Vehicles of certain Volunteer
Fire Departments

Administration Position. Do not oppose. Although this proposal
will result in a slight revenue loss, it is a reasonable
expansion of the limited authority to issue tax-exempt bonds
under current law.
4.

- Spaceport Exempt-Facility Bonds

Administration Position. Oppose. This proposal would
principally benefit a single municipality in Florida.
Further,
there could be a significant revenue loss because these bonds
would not be subject to the volume cap.
5.

Bonds for Solar Energy Facility

Administration Position. Do not support. Use of tax-exempt
financing, particularly in combination with other federal
subsidies exempt from the federal guarantee rule, would not be an
efficient vehicle for encouraging solar energy facilities.
other
federal tax incentives are available to support solar energy
development.
6.

Bonds for the Sale of the Alaska Power Administration
Facility

Administration position. Oppose. This proposal would
principally benefit a single State in the purchase of a federal
power facility which has already received other federal benefits.
7.

Bonds for the United Nations

Administration position. Support. The Administration believes
that the proposal to use tax-exempt financing to provide office
space for the united Nations is a matter of great importance and
benefit to the united states. There would be an insignificant
revenue impact because these bonds would be subject to the volume
cap.

Bonds for certain Pre-1990 Issues in the state of
Connecticut

Administration Position. Oppose. This proposal would benefit a
single state and have retroactive effect.
9.

Bonds Related to the Transfer of Port Everglades, Florida

Administration Position. Oppose. This proposal would
principally benefit a single municipality.
10.

Qualified Mortgage Bonds - Home Improvement Loans

Administration Position. Do not oppose.
It may be appropriate
to review the dollar limitation on home improvement loans to
persons meeting specified income limits. However, this type of
change should be considered in the context of a general purpose
of the mortgage revenue bond program, which is to provide housing
to certain f~rst-time homebuyers meeting income and purchaseprice limits.
11.

Qualified Veterans' Mortgage Bonds

Administration position. Do not support. The qualified
veterans' mortgage bond program continues to apply to only five
states and to a limited class of veterans as a grandfather rule
and it is not appropriate to further expand the program in this
manner. Veterans' programs should apply uniformly across the
nation. Veterans may be able to qualify for mor~gages supported
by tax-exempt mortgage revenue bonds or mortgage credit
certificates.
12.

Modification of Exception to Bank Interest Deduction
Disallowance for Qualified 501Cc) (3) Bonds

Administration position. oppose. This proposal would have
significant revenue cost. This change effectively increases the
$~O million small issuer limit by removing a significant category
of bonds from its coverage. In addition, by providing every
501(C) (3) organization with its own a.1nl'.al $5 million limit, the
applicability and complexity of the small issuer rule would be
increased substantially.
13.

Qualified Small-Issue Bonds

Administration position. Do not support. The small-issue bond
provisions were extended permanently to provide a benefit
targeted to small manufacturing businesses. This change is a
significant increase in the ability of larger business to benefit
from tax-exempt bonds.
69

14.

Repeal Student Loan Marketing Association's Exception to the
Rule Disallowing Interest Deductions on Debt Used to Acquire
or Carry Investments in Tax-Exempt Bonds

Administration position. support. The Administration believes
that it is appropriate to provide a transition rule for interest
deductions during the period of time that the Student Loan
Marketing Association moves toward either privatization or
dissolution.
DO.

TAX RETURN CHECKOFF

Permit Individual Tax Return Checkoff for U.S. Olympic Trust
Fund

Administration position.
oppose. Regardless of how meritorious
the beneficiary of any voluntary checkoff on a tax return, such
propbsals add complexity to the return, result in confusion, and
impose significant administrative burdens.
2.

Permit Individual Tax Return Checkoff for Deficit Reduction

Administration Position. oppose. This Administration has a
strong commitment to deficit reduction.
Nevertheless, this
particular proposal would add complexity to the return, result in
confusion, and impose significant administrative burdens.
EE.

TRUSTS AND ESTATES

Income Tax Rates Applicable To Trusts and Estates

Administration position. Oppose. These proposals reduce the
income tax rates applicable to all (H.R. 329) or certain (H.R.
960) trusts.
The tax rate brackets applicable to trusts were
compressed in 1986. We believe that the present tax-rate
schedule for trusts is appropriate, and we would consider a
change to this schedule only in the context of a complete
overhaul of the income taxation of trusts and estates.
FF.
1.

OTHER
Allow Nonprofit Educational Foundations to Sell U.S. Savings
Bonds

Administration position. Oppose. Although the Administration
strongly supports efforts to make it easier for individuals to
save and invest, the proposal to allow nonprofit educational
foundations to be agents for the sale of U.S. savings bonds would
increase risks and expenses to investors and to the Treasury, and
70

likely would not result in additional investments in savings
bonds.
In addition, changing the prohibition against the use by
private parties of the words "United states Savings Bonds" in
advertising or solicitations would inhibit Treasury's efforts to
stop deceptive advertising and solicitation practices. The
Treasury is developing guidelines for appropriate and acceptable
uses of the words "United States Savings Bonds" by private
parties.
II.
1.

POSSIBLE MODIFICATIONS TO SIMPLIFICATION PROVISIONS
CONTAINED IN H.R. 3419 (103RD CONGRESS)

Provisions Relating to Individuals

(a). Permit Payment of Taxes by Credit Card
Administration position. Support. Clarifying that the fees that
may be imposed for using a credit card to pay federal taxes could
not be borne by the federal government would improve this
provision.
(b).

Election by Parent to Claim Unearned Income of Certain
Children on Parent's Return

Administration position. Do not oppose deletion.
Because this
provision of H.R. 3419 was included in H.R. 1215, as passed by
the House of Representatives, the Administration does not oppose
deleting the provision from this tax simplification package.
(c).

Expanded Access to Simplified Income Tax Returns

Administration position. support deletion. Section 116 of H.R.
3419 required the Commissioner to study ways to expand access to
simplified individual income tax returns, including permitting
itemizers to use Form 1040A and removing or raising the taxable
income limitations on use of Form 1040A, and to submit a report
discussing such actions. Since the Service is already working on
such a study, this provision is unnecessary, and Treasury
supports deleting thi~ proposal from the simplification package.
2.

Pension Simplification

(a). Tax Exempt Organizations Eligible under section 401(k)
Administration position. Oppose. This proposal would impose a
restriction on tax-exempt organizations that is not imposed on
for-profit employers. For-profit employers are allowed to
provide a nonqualified deferred compensation plan in addition to
a broad-based section 401(k) plan. Restricting the ability of
tax-exempt organizations to do the same would be contrary to the
spirit of the basic provision (i.e., allowing tax-exempt
71

orga~izations to maintain 401(k) plans), which is to put forprofits and tax-exempt organizations on an equal footing.
In
addition, the section 457 dollar limit (generally $7,500) for any
individual is offset dollar for dollar by elective deferrals made
by the individual to a 401(k) plan. Therefore, the benefits that
are provided under a 457 plan to an employee who also
participates in a 401(k) plan are already restricted.

(b). Nondiscrimination Rules for Qualified Cash or Deferred
Arrangements and Matching Contributions
Administration position. We support the Administration's proposal
to provide a new simpler plan for small employers instead of
modifying the SARSEP rules. We believe that one of the reasons
SARSEPs have not been more widely used is that they do not allow
employers to match employee deferrals. The extension of the
401(k) safe harbors to SARSEPs would presumably allow matching
contributions to be used under a SARSEP as an incentive to induce
employees to make elective contributions.
We believe that
nondiscrimination safe harbors (and the ability to have matching
contributions) would be a significant improvement to SARSEPs.
However, under the proposal, the matching contribution safe
harbor would not appear to be a meaningful option for the many
SARSEPs that are top-heavy and therefore required to provide a 3
percent minimum nonelective employer contribution for all nonkey
employees.
At the same time, if no employer contribution is
required for employees who do not elect to make salary reduction
contributions, the matching contribution safe harbor currently
proposed will not do enough to promote meaningful contributions
for nonhighly compensated employees.
Instead of simply modifying the SARSEP provisions, the
Administration has proposed a new, simple plan for small
employers, known as the National Employee Savings Trust, or NEST.
The NEST provides for design-based safe harbors that are almost
identical to the safe harbors proposed in H.R. 3419, except that
the NEST safe harbors exempt the employer from the top-heavy
rules while also providing for a 1 percent nonelective employer
contribution as part of the matching contribution safe harbor.
(c). Full-Funding Limitation of Multiemployer Plans
Administration position. Oppose deletion. H.R. 3419 proposed to
repeal the 150 percent limitation on deductible contributions for
multiemployer plans and to allow triennial actuarial valuations
(rather than annual valuations) for these plans. Consistent with
the Administration's pension simplification proposal, we oppose
the current proposal to delete these provisions from H.R. 3419.
The 150 percent limit is intended to limit the extent to which an
employer can deduct contributions to a defined benefit plan for
liabilities that have not yet accrued. However, an employer has
little, if any, incentive to make "excess" contributions to a
72

multiemployer plan. The amount an employer contributes to a
multiemployer plan is fixed by the collective bargaining
agreement, and a particular employer's contributions are not set
aside to pay benefits solely to the employees of that employer.
without the 150 percent limit, annual actuarial valuations are
unnecessary and overly burdensome. Therefore, we believe that
triennial valuations should be allowed for multiemployer plans if
the 150 percent limit is repealed.
(d). Alternative Full-Funding Limitation
Administration Position.
Support deletion. While we recognize
that the OBRA 1987 full funding limitation has the effect of
limiting pension plan funding for plans with liability that is
heavily weighted towards younger employees, we believe that a
narrow rule eliminating the effect of the OBRA 1987 change for a
few employers is inappropriate.
Furthermore, this proposal
requires an offsetting adjustment to the 150 percent full funding
limit to maintain revenue neutrality.
This adjustment will be
difficult to determine on an annual basis and will subject the
employers affer,ted by the adjustment to uncertainty.
(e). Special Rules for Plans Covering Pilots
Administration Position.
Support deletion. We do not believe
that an extension of the current exception for pilots to
nonunionized pilots is warranted.
(f). Treatment of Employer Reversions Required by Contract to be
Paid to the united states
Administration Position. Oppose deletion. The excise tax is
intended to apply to reversions received by employers.
Accordingly, it is inappropriate to impose the excise tax on the
portion of a reversion that must be paid by a government
contractor to the United States. The President's pension
simplification proposal includes a provision excluding these
reversions from excise tax.
(g) • continuation Health Coverage for Employees of Failed

Financial Institutions
Administration Position. Do not oppose deletion. The primary
motivation for including this provision in H.R. 3419 is now moot.
(h) • Clarify Relationship Between community Property Rights and

Retirement Benefits
Administration position. While the scope of the provision as
described is unclear, the Administration generally supports
clarification of the relationship between community property
rights and retirement benefits. The Administration generally
73

supports, with technical modifications, the proposal (described
in the June 16, 1993 Joint committee on Taxation Description of
Miscellaneous Tax ~roposals (JCS-S-93) at 71-72) to clarify the
availability of the marital deduction where the non-participant
spouse in a community property state predeceases the participant
spouse.
3.
(a).

Treatment of Large partnerships
Simplified Flow Through for Large Partnerships

Administration position. Oppose deletion. The Administration
opposes the suggestion of deleting the provisions that would
modify the tax treatment of large partnerships and reduce the
number of items that must be separately reported to the partners.
The Administration would be happy to work with the Committee to
devise any revisions that may be needed to provide more
simplified flow through treatment for large partnerships.
(b).

Simplified Audit Procedures for Large Partnerships

Administration position. Oppose deletion. The Administration
opposes the suggestion of deleting the provisions providing
simplified audit procedure for large partnerships.
The new audit
system created by these provisions would improve the IRS'S
ability to audit large partnerships in a timely and efficient
manner. The Administration would be happy to work with the
Committee to devise any revisions that may be needed to provide
more efficient audit procedures for large par:nerships.
(c).

Partnership Returns on Magnetic Media

Administration position. Support. The Administration supports
requiring magnetic media reporting for large partnerships and
other partnerships with more than 250 partners.
The
Administration also supports the provision of H.R. 3419 that
would provide the IRS with authority to require magnetic media
reporting for large partnerships. Magnetic media reporting would
assist the IRS in auditing large partnerships in a timely and
efficient manner.
4.
(a).

Foreign Provisions
Deferral of Tax on Income Earned through Foreign
Corporations and Exceptions to Deferral

Administration position. Support foreign simplification efforts.
The Administration supports meaningful simplification of the
foreign provisions of the Code to the extent permitted by
budgetary constraints. We would be pleased to work with the
Committee to further develop simplification proposals.
74

5.
(a).

Provisions Relating to Regulated Investment Companies
Require Brokers and Mutual Funds to Report Basis to
customers

Administration Position.
support deletion. Because we
und 7rstand that much of the industry is now voluntarily reporting
baS1S to shareholders, we support deleting the mandatory
reporting requirement in H.R. 3419.
6.
(a).

Tax-Exempt Bond Provisions
C.+,arification of Definition of "Investment-Type Property"

Administration Position.
Support deletion.
clarified in Treasury regulations.
7.
(a).

This issue was

Administrative Provisions
Administrative Practice and Procedural Simplification

Administration position.
Do not oppose deletion. H.R. 3419
included nine provisions modifying administrative practice and
procedure. Because these provisions are presently being
considered separately in connection with the Taxpayer Bill of
Rights proposals, Treasury does not oppose deleting these
provisions from this simplification package.
8.
(a).

E~tate

and Gift Tax Provisions

statute of Limitations Applicable To Valuation of Gifts

Administration position. Do not support. The proposal as
described appears too broad. It requires additional study to
ascertain its administrative costs as well as its estimated
revenue loss.
9.
(a).

Other Provisions
Treatment of Pre-Need Funeral Trusts

Administration position. Oppose. When trust income is
distributed to the provider, it is taxable as a payment for
services or merchandise, regardless of its original character to
the trust.
If the provider were treated as the owner of the
trust, then trust income distributed as a payment for services or
merchandise could escape tax, depending on the nature of the
trust corpus.
In addition, the proposed amendment would
inappropriately allow purchasers and providers of a pre-need
funer31 to choose which party will bear the tax burden with
respect to the income earned by the trust.
75

DEPARTMENT

_ _ _ _ _ _ _ _ _IIIIII. .

THE

TREASURY

. . . . ._ _ _ _ _ _ _ _•

~/7Kq:::.;.

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMJ\lEDIATE RELEASE
July 2~, ll)t)5

\IEDI:\ ,,\OVISUR Y

\Vritten te~till]()nv h\ TrC~I~Ur\ .·\.\si\tant Sl'LTl't~lr\ Le"lil' /). \,[1111Il'l\ ~i\in~ the
administration's \ie\\\ O~l ";)Il11.' ~5() l-lli\ccILllleOU\ rl'\ell-lIl' hill\ \11: 1 1: 1 ,lkd t()~the I-louse
Ways and \le~lns C()llllllitke i" il()\\ ~1\:liLthll'. Till' rl'\l'11Ul' hill\ ", c'; " lihlw,sed during
Ways and \leans ill':lrillg\ July II-I~.
The 75-p:lge tl'~tilllllll\ Ill~ly he ()hl:lllleLi ~lt till' Trl':l~ury I )l'; 1,[11111l'11I courier
window at the 15th St. l'ntr:lllce. hy ctllillg the Uffil'l' ()f Puhlic .\ILlli\ ~11 (.202) h.22-2l){)(),
or on the Internet :It the Trea~ury Dl'P:lrtllll'llt Illlllll'P:lgl' at http: \\ \\ \\ .lIstreas.gov

It ma v also he 0 h t:l ine d t h ro II gh Fnl \V 0 rid :1 t 7(),:. -3.2 1-,:',:' _:, l) ( 1'+ ..+ Illod e rn speed),
in the Treasurv
Electronic
Lihr~lrv ~l~ file T2SPCHh l.t\t. The lihr:lI\- 1\ 1-l':IChed bv first
.
.
selecting "e" from the main illenu fur the Busine~s, Trade and Llhm ~lrl':l, and then
selecting "E" for the Treasury Electronic Lihrary. The file is at k:!.\l I:'+,()()() hits and
will take about 20 minutes tu download.
'"

-30-

RR-4~2

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

THE

TREASURY

OFFICE OF PUBUC AFFAIRS • l500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact:

FOR IMMEDIATE RELEASE
July 27, 1995

S~:()tt

Dykema

(2()2) h22-2960

U.S. FIRMS, IRS TO BENEFIT FROM OECD TAX RULES, TREASURY SAYS
New international guidelines for taxing multinational corporations will help
American businesses compete in the global economy and facilit~lll' l'(Jlkction of a fair
share of tax by the Internal Revenue Service, the Treasury Dep~lItllh:nt said Thursday.
The guidelines, in a report to he released Friday, July 2:-1, Iw the Organization for
Economic Cooperation and Development provide a common klllll'\\'()fk for determining
how to tax a company's income so that it isn't taxed by more thall (Jile country. So-called
double taxation is considered a barrier to free trade.
''These new OECD guidelines are fully consistent with curr\..'lll U.S. t~LX rules and
will help prevent double taxation and facilitate the U nited State~ ill collecting its fair
share of t~Lx," said Leslie B. Samueh, Treasury assistant secretary 1m 1~IX policy.
"Keeping American c(}mpanies competitive in global markets by r\..'lll()ving such trade
barriers as doubk taxatioll is a top priority of this administratioll." Samuels said.
The report, ''Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations," replaces earlier guidelines issued in 1979 and updates the consensus
interpretation of the so-called "arm's length principle." The arm's length principle is the
agreed international standard for evaluating the prices charged in cross-border
transactions between related companies.
Samuels said these guidelines will help Treasury achieve two critical goals. First,
they improve transfer pricing compliance by endorsing the use of the most reliable
evidence of an arm's length price. Second, they reduce taxpayer compliance burdens by
providing OECD tax authorities with a common framework for analyzing a transaction,
thus avoiding inconsistent analyses that can result in double taxation.
Along with new transfer pricing regulations issued by the Internal Revenue
Service in July 1994 and penalty regulations issued in February 1994, the OECD

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RR-483
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2 -

guidelines represent a major component of Treasury's efforts to ensure that the arm's
length principle i~ a~ ~ill1pll' as pos~ihle for both t~L\payers and the IRS.
The ~.s-ll1emher OECD represents most of the world's industrialized nations. The
United States is :tl1 :tl'ti,e p:trticip:trlt in the work of the OECD :tnd \\as a lllaJor
contrihutor [0 [he C(lIltell[ ()t [Ill' nl'\\ [:t\ report.
-30-

TRANSFER PRICING BACKGROUND

Transfer pricing involves the prices that affiliated companies charge one another
for cross-border transfers of goods and services. A multinational group can manipulate
these prices to shift taxable income frolll one country to another.
The United States and other countries have adopted the "arm's length princ;ple"
as the international transfer pricing norm. Under this principle. the price in a controlled
transaction should be the same that it would have been had the parties been unrelated.
Various methods are used to determine whether the terms of a controlled transaction
were arm's length.
The guidelines serve tV.ill principal functions. First. they prmide a framework for
resolving cases of d(}uhle taxation that arise when two countrie'. inconsistently allocate
the income from cross-horder tral1'.actiol1s het\veen rebted COlllp:lllie" (controlled
transactions), suhjectil1g the incollle to taxation in both countril'~. Second. they provide
guidance for countries when they develop their internal transfer Inil'ing rules. Similarity
among the rules in differel1t coul1trie'. helps to minimize the nlllllhL'r of cases of double
taxation.
The principal issue addressed in the guidelines is the roll' (l! "profit methods" that
have been increasingly used in many countries. The U.S. include'll \ariants of these
methods in transfer pricin~ cgubtions issue(! in 1994. The _Iilklilw\ expres"i a
preference for other. Illore traditional methods. but recognize that when it is not possible
to apply these methods reliahly. profit methods are useful.
I

A draft of the guidelines was issued for public COlllment in July 1994 and changes
were made in response to the comments received. In particular. the discussion of profit
methods was clarified to indicate, like the U.S. regulations, that such methods should be
applied to specific transactions, rather than to a multinational's entire operations. This
change increased the already considerable degree of similarity bet\\'een the guidelines
and the U.S. regUlations.
The guidelines discuss two categories of transfer pricing methods: "traditional
transaction methods" and "transactional profit methods." The traditional transaction
methods examine prices or gross margins in comparable transactions between unrelated
parties to determine an appropriate price for a controlled transaction. A transactional
profit method starts with a net, or operating margin, and works hack to an appropriate
pnce.
U.S. regulations issued last year included two types of transactional profit
methods: the Comparable Profits Method (CPM) and the Profit Split Method. The role
of the CPM has heen the most controversial issue in transfer pricing for several years. A
version of the CPM was first proposed in U.S. proposed regul~,~i()ns issued in 1YY2.
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Two principal COI1l't:rns \\nt: raisl'd with respect to this mdhod: first, the CPM might be
hasl'd on an industry a\'cragl' ratl' of return that would not renect non-transfer pricing
factors that could l'xplain difkrencl's bl'twl'en thl' t~L\payer's rcsult and the results
ohtaint:ll by tht: indu~tr) gl'nl'r~t1I): sl'cond, the CP\l might be applil'd to dl'termine an
O\l'rall rate of rdurn fur an l'mire cntity rathl'r than to dl'tcrminl' an appropriate return
from a spl'cific tr~ln~~lction or produl't linl'.
Thl' 199-1- reguLltion~ ~uh~t~lntially rl'visl'd thl' CP\l tll ~lddrl'ss thl'se concerns. To
the fir~t Cllnl'l.'rn, thl' rl.'guLltion~ pr()\idl' that "un~ldlll~tl'd industry aVl'rage
rdurns them~l.'hl.'~ C~lnIl()t l.'~t~lhlhh arm's kngth re~ults." \() ~lddres~ the second concern,
thl' rl'gubti()n~ pr()\idt: th~lt tht: CP\l i~ to hl' applied to "thl' 11]()~t n~lrr()\vly identifiahle
husine~s acti\it) fur \\hich d~lta inl'mporating thl' c()ntrolled tI~IIhal'tion i~ availahll'."

addres~

SiIllil~lrl),

ill !l)l)-J. ,ll~() (~lllti()ned against using
iIlllu~try ~l\n~lgl'~:'liln 11() l.'\t:Il! (~111 UI1~ld.iu~tt:l1 111du:-.tr) ~l\ l'I.Igl' rl.'turn~ themselvcs
e~t~lhli~h ~lrIll's length l'()llditi()lh' Lnlike the L·,S. rl.'gul~lll(111~, I]()\\l'\t:r, tht: draft
guidelint::-. did not ~trlll1gl\ dirt:l't t~l\ ~ldlllini~tratm~ t() ~ltll'lllt)t t(1 ~lpply the CPM on as
narrow ~l h~l~i,,, ~l." 1)(1~~ihk,
tht:

dr~dt ()LCl) gllidl.'lil1e~ i~~Ul'd

The fin~t1 guidt:lint:" reflect t\\(1 Illajor ch~lngt:~ in till' di~(u~"i(ln (If the CPM.
Fir s 1, to t: IiIII ina t t: t ht: III i,~ iIII Prl' ~ ~ iII 11 iIl ~ (1Il1l' q U ~ Ir tc r" t h: It till' (' P\ 1 d t: s cr ihl' din the
guidelines \\a" tht: "~lllle ~l~ tht: \ l'r~illn ()f tht: (T\\ that thl' lS prupml'd ill I l )l)2, the
naIlle of the Illl.'tlllld \\~l~ Ch~lllgl'd tll 'trall~~lcti()11~t1 111.'t lll~lrgill 11h..:tlwd." Second, like the
U.S. regulation,,,, the guidelilll.'~ \\l'rl' re\i,~ed t(1 di~c(lllragl' ~ljljllll':lti()n (If the CPM
without reg~lrd t(1 ~pl.'cifil' tr~llh~lL'tilllh.
Thl' UECD guideline" are llf lTitical IIllport~lI1Ce to the.' efficient administration of
the international tran~fl'r pricing "),,tell1. The earlier guilkline~ \vere widely regarded as
obsolete. With()ut the di"cipline IIllfHhed by creditahle ULCl) guidelines, country
practice" \\l.'re hl'ginning to di\erge alld the ri"k of d()uhle -- alld under -- taxation was
increasing. ,·\Itlwugh it i" not arHil'q)~lted that all 2~ UECD \\eIllher States will adopt
rules that preci:-.el) track the guidelines in all rl'Specl',. the nt'\\ guidelines will help to
bring country pr~lctices Into hruad conformity, thereby reducing the incidence of double
t~L\ation. They alsu \\ill pr()\ide a COIllmon framework for resolution of those cases of
double LL\ation that do ~lri"e.

Department of the Treasury
I ..' ,
Financial Crimes Enforcement ~twOFk lJ U
L.

I I 3 LI

[MlQlJ ~~news"
2070 Chain Bridge Road, Suite 200, Vienna, VA 22182-2536
1500 Pennsytvania Avenue, NW, Suite 3210, Treasury Annex, Washington DC 20220

Anti-Money Laundering Controls for Indian Tribal Casinos
Contact:

FOR IMMEDIATE RELEASE
July 31. 1995

Joyce McDonald
(703) 905-3770

The Treasury's Financial Crimes Enforcement Network (FinCEN) announced
today a proposed regulation that would bring Indian tribal casinos under Treasury's
anti-money laundering controls.
The proposed regulations are issued under the Bank Secrecy Act (BSA) , which
is the core of the Treasury's program to combat flnancial crimes, including money
laundering and tax evasion. The BSA is administered by FinCEN.
"Money launderers and tax evaders continue to look for new ways to hide their
money," said Stanley E. Morris, FinCEN's Director. "Casinos are cash-intensive and
many offer a wide variety of flnancial services, similar to banks. Without effective
regulations, they may be vulnerable to money laundering."
Since 1985, Treasury, through its BSA regulations, has required recordkeeping
and reporting of large cash transactions occurring at state licensed casinos with gross
annual gaming revenue in excess of $1 million. This infonnation preserves a
flnancial trail for investigators to follow as they track criminals and their assets. It can
be an invaluable tool in criminal, tax, or regulatory investigations or proceedings.
Congress speciflcally extended Treasury's authority to regulate Indian tribal gaming
when it enacted the Money Laundering Suppression Act last fall.
Over the past 10 years, U.S. casino gaming has grown rapidly:
Industry sources report that last year over 600 commercial casinos were
licensed in 10 states and accounted for approximately $167.3 billion in
wagering activity. Of the 600 casinos, about 370 have gross revenues in
excess of $1 million.

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Tribal casino \:!rowth has been just as dramatic. with approximately 120 tribal
casinos located in 16 states. with new operations expected to open in an
additional eight states within the coming year.
The most recent statistics available from the industry indicate that patrons of
Indian casino gaming establishments wager over $27 billion each year.
"With the tremendous growth of Indian gaming. the time is right for the
industry to adopt money laundering controls." said Morris. He pointed out that the
method of operation of casinos on Indian lands is no different than the method of
operation of state licensed casinos. Therefore. regulatory requirements should be
applied consistently.
Prior to issuing the proposed rule. FinCEN consulted with tribal governments.
Congress. and the National Indian Gaming Commission. Last month. Richard G.
Hill, Chainnan of the National Indian Gaming Association (NIGA). a national group
representing more than half of all tribal government casino operations. testified in
support of FinCEN's proposed regulations. "In order to ensure that integrity and
security of their gaming operators. many tribes have already. voluntarily adopted
Bank Secrecy Act measures," said Hill. "We have met with Treasury about BSA on
several occasions. We understand what Treasury is doing, and we are willing to
work cooperatively to see that the Indian gaming industry is protected against abuse
by money launderers."
Morris said that Treasury does not want to jeopardize the growth of Tribal
gaming, which has such positive social and employment ramifications for the tribes
involved. At the same time, he stressed that the industry must adopt reasonable
controls to prevent and identify illegal financial transactions.
The notice of proposed rule making, delivered to the Federal Register today
and published in accordance with the Register's schedule, seeks specific comments on
how compliance with the BSA by tribal casinos can best be examined and enforced.
They make it clear that Treasury is hoping to hear from tribal officials, casino
operators. and state officials, said Morris.
###

Ol~

DEPARTMENT

THE

TREASURY

~~/78q~·~. . . . . . . . . . . . . . . . . . . . . . . . . .. .

............................

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
July 28, 1995

STATEMENT OF THE HONORABLE JOHN D. HA "·KE, JR.
UNDER SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE

RR-485

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202)

622-2040

FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
July 28, 1995
TESTIMONY OF THE HONORABLE
JOHN D. HAWKE, JR.
UNDER SECRETARY FOR DOMESTIC FINANCE
U.S.DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE FINANCE COMMITTEE

I appreciate the opportunity to appear before you today to
discuss issues relating to the debt limit.

I commend you, Mr.

Chairman, for bringing this matter up for hearing sufficiently in
advance of the time the current ceiling will be reached so that
this Committee will have an opportunity to deliberate in a
thoughtful and orderly manner.

My testimony will address in

sequence each of the questions posed in the Chairman's letter to
me of July 24, 1995.

THE NEED TO INCREASE THE DEBT LIMIT
On July 17, Secretary Rubin wrote to the Congressional
leadership pointing out that the Treasury's current estimates
show that the permanent ceiling of $4.9 trillion will be
sufficient to provide cash for Government operations and payment
obligations until sometime in October.

The exact date when the

Treasury will run up against the limit is difficult to pinpoint,
since it will depend upon a number of factors,

including the

timing of receipts and expenditures, which can deviate from our
estimates over short time periods.

Since this process deals with

numbers of very large magnitude, even small deviations from

estimates In percentage terms can translate into large changes in
actual dollars.

Also, the Office of Management and Budget is

releasing additional details for the Midsession Review of the
Budget for FY 1996 on Monday.

As the cash flows estimated in the

Midsession Review actually occur, our estimates of cash and debt
may need to be refined.

We will provide more information to

Congress later this summer, as the need for a debt limit increase
becomes more pressing.

With regard to the size of a debt limit increase, the
Conference Report on the Concurrent Resolution on the Budget for
FY 1996 -- recently passed by Congress -- called for a permanent
increase in the debt ceiling to not more than $5.5 trillion.

estimate that a ceiling increased to this level would not be
reached until sometime in 1997.

This would allow ample time to

revisit the debt limit in a well-considered, orderly fashion.

IMPACTS OF DELAY -- BORROWING DISRUPTIONS
The Committee has asked that I address the impact on the
U.S. Treasury and the financial markets of a delay in raising the
debt limit.

Even modest delay threatens market dislocations ,

which could generally hamper Treasury borrowing operations and
increase the Government's cost of financing.

More extensive

delay could precipitate a debt limit crisis that could
significantly interrupt Government operations, delay millions of

Federal payments, and spread fear and uncertainty about the
Government's ability to pay its obligations.

Borrowing from the public.

When there has been a delay in

Congressional action to increase the debt limit in the past,

has generated market uncertainty about Treasury financing
schedules.

This uncertainty has tended to cause Treasury

borrowing costs to be higher than they otherwise would have been.
The

~reasury

will conduct its regular midquarter refunding

operation in November, when the Treasury is scheduled to sell 3and 10-year notes.

If uncertainty related to enactment of an

increase in the debt limit caused an increase of just 5 basis
points

(five one-hundredths of one percentage point)

In the

interest rate on the 10-year notes, the interest cost to the
taxpayer would increase by $62.5 million.l

Disruptions in Treasury borrowing operations were acute
during the debt limit impasse in 1990, when six temporary
increases in the debt limit were enacted before it was increased
permanently on November 5, 1990.

The Treasury announced

regularly scheduled auctions, but was forced to postpone them. 2
Based on $12.5 billion, the amount of 10-year notes
offered in the May 1995 refunding, over the life of the notes.
1

2 The Treasury cannot auction a marketable security unless
it has assurance that there will be sufficient room under the
debt ceiling to issue the security on the settlement date.
Secondary market trading, which usually begins when a Treasury
security is announced, cannot begin until enactment of debt limit
legislation is assured.

Large backlogs of borrowing operations resulted from the delays
and, when debt limit increases were enacted, auction schedules
were compressed.

This meant that investors did not have time to

plan acquisitions of Treasury securities, nor did the dealer
community have time to distribute securities to their customers
during the pre-auction period.

For example (shown in the table attached to my testimony) ,
the 'Treasury announced an emergency issue of cash management
bills on October 18, 1990, when we were assured of enactment of
one of the six temporary increases in the limit.
auctioned and issued on October 19.

The bills were

There usually is a week of

pre-auction trading and another several days between the auction
and issue dates.

In addition to disruptions of auctions of marketable
Treasury securities, sales of savings bonds were suspended, which
meant notifying 45,000 issuing agents to stop accepting
applications and notifying them again to begin applications when
there was room under the debt limit.

Moreover, the Treasury was

not able to follow normal procedures in issuing nonmarketable
state and local government series securities, which may have
caused would-be buyers to purchase government securities in the
open market instead, with a resulting decline in Treasury sales
of the lower yield nonmarketable securities.

Borrowing from Government accounts.

About 165 Government

accounts, including the social security trust funds, have
statutory authority to invest with the Treasury.

Under normal

investment procedures, the Treasury invests net receipts in
nonmarketable Treasury securities and reinvests proceeds of
maturing securities to the extent that a

pa~ticular

fund does not

need the proceeds for program purposes.

Investments may be

redeemed by the investing agencies to meet program needs, such as
payment of social security benefits.

Net investment increases

the public debt.

When the debt limit is reached, the Treasury may be unable
to invest or reinvest these funds, which may cause them to lose
interest earni ngs 3 unless Congress ultimately acts to restore
lost interest earnings of the Government accounts as part of its
action increasing the permanent debt limit.
The most profound impact of protracted delay, of course,
would be to cause apprehension in the markets about a potential
default on Treasury obligations.

The United States has never

defaulted on its public debt, and while we are confident that
Congress would not purposefully put Treasury in jeopardy of a
default, a failure to address the debt limit in a timely manner

Exceptions are the Civil Service Retirement Fund and the
Thrift Savings Fund of the Federal Employee Retirement System,
which have automatic earnings restoration language in their
statute.
3

would in itself generate uncertainty In the markets that would be
harmful to the national interest.

ROLE OF DEBT LIMIT IN DEFICIT REDUCTION
Finally, the Committee has asked that I address the role of
the debt limit in deficit reduction.

As a practical matter, the

debt limit itself does not have an impact on deficit reduction.
The critical revenue-raising and spending decisions are made
durir.g the Congressional budget process, and budget resolutions
propose levels of debt limit that are consistent with the budget
deficit,

investments of the Government accounts in Treasury

securities, and borrowing to fund Federal lending programs.

Balancing the Federal budget can only be accomplished by
changing revenue and spending policies.

The Administration,

the strongest possible terms, urges you to de-couple the issues
of raising the debt ceiling and reaching our mutual goal of a
balanced budget.

Balancing the budget must be done in an orderly, careful,
and thoughtful manner allowing for a full and open policy debate.
It should r.ot be subject to a last-minute effort to complete
reconciliation just before hitting the debt ceiling.

Such a

rush, which threatens the shutdown of vital services to our
citizens and the financial integrity of the market for Treasury
securities, is in no one's interest.

CONCLUSION
We look to Congress to act in a timely manner to avert a
debt limit crisis that could prevent the Government from meeting
its obligations.

The United States has never in its over 200-

year history defaulted on any of its debt obligations, nor has it
ever had its checks returned for insufficient funds.

The

consequences of either type of default would be enormously
expensive and far-reaching.

The public has a right to expect

that this important issue will be addressed ln a timely, orderly,
and thoughtful manner, and we are pleased that this Committee has
opened up the consideration of the matter in this spirit.

1990 Debt Limit:

Market Disruptions

On August 1, Treasury announced the quarterly refunding (3-,
10-, and 30-year securities) with a caveat that the auctions
would occur only if there was assurance of debt limit
authority to issue them on August 15.

On August 6, Treasury announced that it would proceed with
the refunding auctions. A temporary debt limit was signed
on August 9.
There was little pre-auction when-issued
trading of the new issues between August 1 and August 6,
which truncated the normal refunding distribution period.

On October 9, the temporary debt limit was extended through
October 19.

On October 12, Treasury announced 52-week bill auction for
October 18 with settlement on October 25, only if there was
assurance of debt limit authority to issue them.

On October 16, Treasury announced regular weekly bills for
auction on October 22, and settlement on October 25, with
the debt limit caveat.

On October 17, Treasury announced the 2-year note for
auction October 24 with the debt limit caveat.

On October 18, Treasury postponed auction for 52-week bills.

On October 18, Treasury, with assurance the temporary debt
limit would be extended on October 19, announced $12.5
billion of 69-day cash management bills for auction·and
settlement on October 19.

On October 19, the temporary debt limit was extended through
October 24.

10.

On October 22, Treasury postponed auction of weekly bills.

11.

On October 23, Treasury announced regular weekly bills for
auction on October 29, with the debt limit caveat.

12.

On October 24, Treasury postponed the 2-year auction
because there was no assurance that the Treasury could
settle on October 31.

13.

On October 25, the temporary debt limit was extended through
October 27.
The Treasury rescheduled the 13-, 26-, and 52week bill auctions f~r.settlement prior to the expiration of
the temporary debt llmlt. The 13- and 26-week bills were
auctioned at 10:00 a.m. and settled the same day.

14.

On October 26, the 52-week bills were auctioned at 10:00
a.m. and settled before close of business.

15.

On October 26, Treasury rescheduled the 2-year auction for
October 30, with the same debt limit caveat.

16.

On October 28, the temporary debt limit was extended through
November 5.

17.

On October 29, the Treasury released two separate press
releases: (1) reaffirming the October 30 date for the 2-year
auction, which was just one day before the settlement date
and (2) reaffirming the October 29 date for the weekly bill
auction, in accordance with its announcement of October 23.

18.

On November 5, a permanent debt ceiling was enacted.

DEPARTMENT

THE

TREASURY {~!

TREASURY

NEW S

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
July 28, 1995

TESTIMONY OF THE HONORABLE JOHN D. HAWKE, JR.
UNDER SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
ON THE
SAVINGS ASSOCIATION INSURANCE FUND
BEFORE THE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE

RR-486
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

SAVINGS ASSOCIATION INSURANCE FUND
Testimony of the Honorable John D. Hawke, Jr.
Under Secretary of the Treasury
for Domestic Finance
Before the Committee on
Banking, Housing, and Urban Affairs
United States Senate
July 28, 1995

SUMMARY
SAIF's Problems
The Savings Association Insurance Fund (SAIF) has four major weaknesses. First,
SAIF has slender reserves. As of March 31, 1995, SAIF held only 31 cents in reserves for
each $100 in insured deposits. The failure of one or two large thrift institutions could
exhaust these reserves and leave the Fund insolvent.
Second, SAIF has only meager income with which to protect depositors and build
reserves. Forty-five percent of SAIF premiums go to pay interest on bonds issued to prop up
a prior deposit insurance fund (the so-called FICO bonds).
Third, SAIF has excessive concentrations of risk because it insures a specialized
industry and because of the industry's concentration in large West Coast-based institutions.
Fourth, and most importantly, SAIF has an assessment base (i.e., base of deposits on
which to charge premiums) in long-term decline. From the end of 1989 through March of
this year, SAIF's assessment base -- instead of growing over 40 percent (as projected in
1989, when SAIF was established) -- has shrunk 23 percent.
Need for Action
SAIF-insured deposits will almost certainly continue to shrink, because depository
institutions have both the motive and the means to reduce their use of such deposits. Under
the FDIC's proposed premium schedule, SAIF premiums for the healthiest institu~ons will be
nearly six times as high as Bank Insurance Fund (BIF) premiums. Institutions with SAIFinsured deposits can avoid high premiums in various ways. They can sell off loans, instead
of holding them in portfolio, and thus reduce their need for deposits. They can replace
deposits with nondeposit funding sources, such as Federal Home Loan Bank borrowings. Or
they can seek to switch deposits from SAIF to BIF, using approaches such as that proposed
by Great Western earlier this year (forming an affiliated BIF-insured bank with branches in
itS thrift lobbies). Accordingly, we believe it would be unwise to base policy on projections
that SAIF's assessment base will grow, stabilize, or shrink only very slowly.
SAIF's greatest vulnerability arises from the interaction between the payments on the
FICO bonds, which claim the first $793 million in annual SAIF premiums, and a SAIF
assessment base in long-term decline. The combination of fixed FICO payments and a
shrinking assessment base tends to create a vicious circle in which (1) shrinkage of the
assessment base makes FICO payments consume an increasing share of SAIF premiums,
which (2) reduces SAIF's capacity to bear losses and build reserves and renders increasingly
remote the prospect of SAIF ever accumulating sufficient reserves so that it could cut
premiums, which (3) makes SAIF-insured deposits less attractive as a funding source, which

in turn (4) promotes further shrinkage of the assessment base and leaves SAIF with even less
income remaining after FICO payments.

If not corrected, SAIF's weaknesses could leave the Fund insolvent and the FICO
interest payments in default. They could also make it more difficult for savings institutions
to attract and retain capital, thus hanning what remains of the thrift industry and diminishing
the industry's capacity to help solve its problems.

Guiding Principles
The. Administration believes that six principles should guide any solution to SAIF's
problems: .
First, minimize the costs and risks to the taxpayers.
_ Second, assure prompt capitalization of SAIF.
Third, avoid default on the FICO bonds.
Fourth, require a fair and substantial contribution from institutions with SAIF-insured
deposits.
Fifth, allocate burdens fairly, and avoid market distortions and perverse incentives.
And sixth, maintain public confidence in federal deposit insurance by acting promptly,
before SAIF's problems become more serious.
Resolving SAIF's Problems
Over the past several months, the Treasury has worked with the FDIC and OTS to
develop a solution to SAIF's problems. The joint proposal has three critical elements:
First, capitalizing SAlF through a special assessment on SAIF-insured deposits.
Institutions with SAIF-insured deposits would pay a special assessment at a rate sufficient to
increase SAIF's reserves to $1.25 per $100 of deposits at the beginning of 1996. The special
assessment would be based on institutions' SAIF-assessable deposits on a specific past date,
such as March 31, 1995, which would make the assessment difficult to evade and would give
institutions no new incentives to shrink their SAIF-insured deposits.
To help ensure that the special assessment does not inadvertently contribute to the
failure of institutions that might otherwise have survived, the FDIC's Board of Directors
could exempt weak institutions from the special assessment if the exemptions would actually
reduce risk to the Fund. But any exempted institution would pay premiums for 1996 through
1999 under the current SAIF risk-based premium schedule (with rates ranging from 23 to 31
basis points). Thus weak institutions would still, over time, generally pay more than healthy
institutions.

Second, spreading FICO payments pro rata over all FDIC-insured institutions.
Spreading FICO payments over a large deposit base ($3.2 trillion as of March 1995) would
avoid the vicious circle of shrinkage, perverse incentives, and record-high premium rates
described above. And it would leave BIF premiums only 2.5 cents higher per $100 of
deposits than they otherwise would have been -- still allowing BIF premiums to decline
dramatically from the 23-cent rates prevailing over the past four years.

Third, merging the deposit insurance funds as soon as practicable -- preferably no
later than the beginning of 1998. Merging the funds would cure the longer-tenn weaknesses
of SAIF that arise from the Fund's concentrations of risk. Merger would provide the
requisite asset and geographic diversification, and would protect taxpayers from the
another deposit insurance crisis by ensuring that SAIF's problems would not
possibility
need to be revisited.

The joint proposal also includes some additional provisions that would improve the
overalJ solution. In view of BIF members' contribution to a SAIF solution, we support
restoring the FDIC's authority to rebate premiums paid on BIF-insured deposits to the extent
that BIF has reserves exceeding its designated reserve ratio. In order to give the FDIC
flexibility to reduce the frequency of premium rate changes, we would also support allowing
the insurance funds' actual reserves to fluctuate temporarily within a range of not more than
0.1 percentage point above or below the designated reserve ratio. The FDIC would still
strive to maintain the funds at that ratio (and that ratio itself would not change), but the
flexibility would help smooth out premium rate fluctuations.
Conclusion
We urge immediate action on SAIF's problems -- before they develop into a crisis.

TABLE OF CONTENTS
I.

II.

SAIF'S PROBLEMS

SLENDER REsERVES

MEAGER INCOME

EXCESSIVE CONCENTRATIONS OF RIsK

DECLINING ASSESSMENT BASE

NEED FOR ACTION

INCENTIVES TO REDUCE RELIANCE ON SAIF-INSURED DEPOSITS

WAYS TO REDUCE RELIANCE ON SAIF-INSURED DEPOSITS
1.
Operating More Like Mortgage Banks
2.
Shifting to Nondeposit Funding Sources
3.
Other Approaches
4.
Conclusion: Moratorium Doomed to Fail

CONTINUING DECLlNE LIKELY IN SAIF ASSESSMENT BASE

CONSEQUENCES OF INACTION
SAIF
1.
2.
FICO Bonds
SAIF Members
3.

14
14
15
16

9
9

ill.

GUIDING PRINCIPLES

IV.

RESOLVING SAIF'S PROBLEMS

CAPITALIZING SAIF THROUGH A SPECIAL ASSESSMENT ON
SAIF-INSURED DEPOSITS
Basic Approach
1.
Weak Institutions
2.

18
18
20

SPREADING FICO PAYMENTS OVER ALL FDIC-INSURED INSTITUTIONS

MERGING THE DEPOSIT INSURANCE FUNDS

SUPPLEMENT ARY ELEMENTS
Authorizing Rebates of Excess BIF Premiums
1.
Adjusting Rules to Promote Premium-Rate Stability
2.

26
26
26

CONCLUSION

SAVINGS ASSOCIATION INSURANCE FUND
Testimony of John D. Hawke, Jr.
Under Secretary of the Treasury
Before the Committee on Banking, Housing, and Urban Affairs
United States Senate
July 28, 1995
Mr. Chairman, Senator Sarbanes, Members of the Committee.
I appreciate this opportunity to present the Administration's views on the problems
and prospects of the Savings Association Insurance Fund (SAIF) and on possible solutions to
SAIF's problems. I want to commend you, Mr. Chairman, and Senator Sarbanes for your
very constructive leadership on these issues.
Over one-fifth of all FDIC-insured institutions held SAIF-insured deposits as of
March 1995. These institutions, located in every state, included 1,773 savings institutions
and 771 commercial banks. SAIF's deposit base of $733 billion constituted 23 percent of all
domestic deposits at FDIC-insured institutions.
While savings institutions are healthy, SAIF is not. SAIF's problems have been a
source of increasing concern to us at the Treasury. We warned of those problems as early as
1993:
"A wide disparity between BIF and SAIF premiums will encourage SAIF-insured
institutions to reduce their reliance on insured deposits (e.g., by operating more like
mortgage banks), regardless of any moratorium on conversions. If SAIF-insured
deposits continue to shrink -- as we believe will occur if BIF and SAIF premiums
diverge so significantly -- SAIF's assessment base will eventually decline to the point
that premium income will not even cover FICO payments." [See footnote 5.]
We continue to believe that these problems merit attention and action.
In my testimony, I will (1) describe the problems SAIF faces; (2) explain the need for
action to resolve those problems; (3) set forth criteria for a solution; and (4) set forth our
recommendations for resolving SAIF's problems -- recommendations we make jointly with
the FDIC and the Office of Thrift Supervision.

I. SAIF'S PROBLEMS
SAIF has four major weaknesses: slender reserves; meager income; excessive
concentrations of risk; and, most significantly, an assessment base in long-term decline.
Together, these weaknesses raise doubts about SAIF's long-term viability. I will discuss
each of the weaknesses in turn.

2
A.

SLENDER REsERVES

First, SAIF has slender reserves. As of March 31, 1995, SAIF held $2.2 billion in
reserves to cover $703.7 billion in insured deposits. These reserves amounted to only 31
cents per $100 of insured deposits -- 75 percent below the statutory standard of $1.25 in
reserves per $100 of insured deposits. SAIF's reserves amounted to only 7 percent of the
$32 billion in assets of SAIF-insured problem institutions as of March 1995. The failure of
one or two large thrift institutions could exhaust these reserves and leave the Fund insolvent.
By contrast, the Bank Insurance Fund (BIF) had reserves of $23.2 billion as of March
1995 to cover $1.9 trillion in insured deposits - about $1.22 in reserves per $100 of insured
deposits and 70 percent of the assets of problem BIF-insured institutions. The FDIC believes
that BIF's reserves reached the statutorily required level of $1.25 per $100 of insured
deposits during the second quarter of this year (which the FDIC will verify once deposit data
becoIl!e available in September).
SAIF's reserves would have exceeded the statutorily required level last year (even
before BIF) if SAIF had been permitted to retain the premiums paid on its deposits since the
Fund's inception in August 1989, for SAIF has charged high premiums throughout its
history. But $7.4 billion -- or approximately 75 percent -- of SAIF premiums have been
diverted through March 1995 to uses other than building up the Fund: 11 percent to the
Resolution Funding Corporation ($1.1 billion); 20 percent to the FSLIC Resolution Fund
($2.0 billion); and 42 percent to pay interest on Financing Corporation (FICO) bonds ($4.3
billion). If these premiums had gone into SAIF's reserves, rather than being diverted to pay
costs associated with failures in the thrift industry before SAIF's creation, SAIF's reserves
would have stood at $9.6 billion as of March 31, 1995 -- 1.36 percent of insured deposits -plus interest on the foregone premiums.

MEAGER INCOME

Second, SAIF has only meager income with which to protect depositors and build
reserves. Although the Resolution Funding Corporation and FSLIC Resolution Fund no
longer receive SAIF premiums, FICO bonds continue to claim a large proportion of those
premiums. By law, the first $793 million in premiums paid annually by SAIF-member
savings associations goes to pay the interest on FICO bonds, which were issued from 1987
through 1989 to cover losses of the old Federal Savings and Loan Insurance Corporation. 1
FICO payments currently consume almost 45 percent of all SAIF premiums. Continued
shrinkage of SAIF's assessment base (i.e., the deposits on which SAIF can levy premiums)
will only increase the percentage taken by FICO payments, leaving SAIF even less income
with which to protect depositors and build reserves.

IThe actual payments from SAIF members to FICO have been slightly less because FICO

has had a small amount of investment income, which was used to pay interest costs. Future
payments will equal, or closely approach, the full $793 million annual interest cost.

3
C.

EXCESSIVE CONCENTRATIONS OF RIsK

Third, SAIF has greater-than-optimal concentrations of risk. These concentrations
arise because SAIF insures a specialized industry and because of the industry's concentration
in large West Coast institutions. SAIF members' similarities to each other are greater than
those of BIF members: SAIF members invest mainly in residential-mortgage-related assets.
Although SAIF members individually tend to be at least as safe as commercial banks with
similar capital ratios and management quality, SAIF itself faces increased risks from insuring
institutions whose asset portfolios correlate with one another to a greater degree than those of
BIF meml>crs. Thus, for example, adverse changes in interest rates or housing markets
could put many SAIF members under stress at the same time. Furthermore, eight of the ten
largest savings institutions (ranked by domestic deposits) have headquarters on the West
Coast. These eight institutions held 18 percent of SAIF-insured deposits2 as of March 1995.
This geographic concentration increases the risk of problems in the Fund that could affect all
SAIF-.insured institutions, nationwide.
D.

DECLINING ASSESSMENT BASE

Fourth, and most importantly by far, SAIF's assessment base has declined
dramatically. In 1989, when proposing the creation of SAIF, the Bush Administration
projected that SAIF's assessment base would grow 7 percent annually. Similarly, the
Congressional Budget Office (CBO) assumed 6 percent annual growth. In fact, SAIF's
assessment base has shrunk 23 percent, from $950 billion at the end of 1989 to $733 billion
as of March 1995 -- an annual shrinkage rate of almost 5 percent.
Although SAIF's deposit base actually grew slightly during the last quarter of 1994
and the first quarter of 1995, this reversal is likely to be short-lived. The FDIC has
attributed the deposit growth to the relatively higher costs of savings institutions' other
funding sources (including Federal Home Loan Bank advances), and to the effect of higher
interest rates last year, which made deposits a relatively attractive option for savers. The
FDIC also believes that SAIF members, anticipating a possible legislative solution to SAIF's
problems, might have deferred steps to reduce their reliance on SAIF-insured deposits.
Without such a solution, we believe SAIF-insured deposits will resume their decline because,
as I will explain, depository institutions have both the motive and the means to reduce their
reliance on SAIF-insured deposits.

ll. NEED FOR ACTION
We believe it would be unwise to base policy on projections that SAIF's assessment
base will grow, stabilize, or shrink only very slowly. Institutions with SAIF-insured deposits

2For brevity, I use the term SAIF-insured deposits to refer to any deposits at SAIFmember depository institutions and any Oakar deposits at BIF-member institutions (see
footnote 3), whether or not these deposits exceed the $100,000 limit on insurance coverage.
(SAIF members have only minimal amounts of uninsured deposits.)

have strong economic incentives to reduce their use of such deposits, and to a significant
extent they also have the ability to do so. Indeed, the very uncertainty surrounding future
trends in SAIF's assessment base will tend to encourage accelerated shrinkage. As we
discuss below, a rapid shrinkage of SAIF's assessment base -- indeed, a rate of shrinkage
equivalent to what actually occurred since 1989 in the part of the assessment base from
which FICO payments are made -- could result in a default on FICO bonds within a couple
of years. To the extent that such a decline results from the migration from SAIF of the
deposits of the Fund's strongest members, or represents a shift toward secured nondeposit
liabilities, SAIF could be deprived of the income necessary to fund its losses and build
reserves. We believe this prospect of shrinkage makes a compelling case for resolving
SAIF's problems now.

1NCENl1VES TO REDuCE RELIANCE ON SAIF-INSURED DEPOSITS

Depository institutions have strong incentives to reduce their reliance on SAIF-insured
deposits. The most acute incentives arise from the prospect of a large and protracted
differential between BIF and SAIF premiums. The healthiest members of BIF and SAIF all
currently pay 23 cents in premiums per $100 of domestic deposits. Because BIF is very
close to recapitalizing as of the latest available data, the FDIC has proposed reducing the BIF
premium rate for healthy institutions to 4 cents per $100, while maintaining the
corresponding SAIF rate at 23 cents per $100. The healthiest SAIF members would thus pay
575 percent as much as BIF members for the same insurance coverage. Since savings
institutions must meet the same capital and other regulatory standards as banks, such a wide
differential in a low-margin business would put thrifts at a significant competitive
disadvantage.
A significant BIF-SAIF differential could persist for years, especially in view of the
large and increasing proportion of SAIF's income consumed by payments on FICO bonds.
Even if SAIF were to reach the 1.25 percent target early in the next century, the FICO
obligation would perpetuate a large differential until 2019, when the FICO bonds will be paid
off.
Apart from any shrinkage of the total SAIF assessment base, the General Accounting
Office (GAO) has noted that SAIF members also face the possibility that the FDIC might
need to increase premiums on all SAIF-insured deposits solely to offset the shrinkage in the
proportion of SAIF-insured deposits from which premiums can be used for FICO payments. 3

~e deposits in question are known as "Dakar" and "Sasser" deposits. As relevant here,
Dakar deposits result when a SAIF member merges into a BIF member. SAIF remains
responsible for insuring the portion of the BIF member's deposits attributable to the former
SAIF member, and the BIF member pays premiums on those deposits at the SAIF rate.
Sasser deposits result when a SAIF member becomes a bank but remains SAIF-insured. As
of March 1995, Dakar deposits accounted for almost 27 percent of SAIF's deposit base;
Sasser deposits accounted for 7 percent.

5
B.

WAYS TO REDuCE RELIANCE ON

SAIF-INSURED DEPOSITS

Current law generally prohibits SAIF members from converting to BIF membership. 4
But depository institutions have ample means available to reduce their reliance on SAIFinsured deposits -- and thus avoid high premiums. They can operate more like mortgage
banks. They can shift from SAIF-insured deposits to nondeposit funding sources. Or they
can pursue more aggressive and unconventional approaches to avoid the prohibition against
switching from SAIF to BIF.
'

Operating More Like Mortgage Banks

Savings institutions have traditionally held in their portfolios the residential mortgage
loans they originated, and have funded those loans with federally insured deposits. Mortgage
banks, by contrast, promptly sell off in the secondary market the loans they originate; they
hold (ew loans -- only those they are waiting to sell off. Many savings institutions now
operate to some degree like mortgage banks: they sell off some of the loans they originate.
SAIF-member institutions can reduce their reliance on SAIF-insured deposits by
operating more like mortgage banks. When the institutions originate residential mortgage
loans, they can promptly sell them in the secondary market, instead of holding them in their
portfolios. In this way, the institutions can do without deposits they have traditionally used
to fund their loan portfolios -- and avoid the SAIF premiums they would otherwise pay on
those deposits. Unfortunately, several types of mortgages that do not meet secondary market
standards might not be available with a shift toward mortgage banking.

Shifting to Nondeposit Funding Sources

SAIF member institutions can also reduce their reliance on SAIF-insured deposits by
shifting from deposits to other funding sources. In fact, deposits as a percentage of OTS-

The FDIC has ruled that payments on FICO bonds can be made only from premiums
paid on SAIF-member savings association deposits, and not from premiums paid on Dakar
and Sasser deposits. Thus, as the percentage of SAIF's assessment base in Dakar and Sasser
deposits increases, the proportion of SAIF's income available for FICO payments decreases.
(FICO payments consume two-thirds of the premiums from non-Dakar, non-Sasser deposits.)
The GAO has noted that the growth of Dakar and Sasser deposits might, in itself,
conceivably lead the FDIC to increase SAIF premiums -- so that income from SAIF-member
savings associations alone would suffice to make FICO payments. Making SAIF's entire
deposit base available for FICO still would not resolve SAIF's problems.
4Until SAIF's reserves reach 1.25 percent of insured deposits, current law generally
prohibits SAIF members from becoming BIF members and vice versa, and generally
prohibits other "conversion" transactions between BIF and SAIF members, including:
mergers; assumptions of deposit liabilities; transfers of assets in exchange for assumptions of
deposit liabilities; and certain deposit transfers involving receiverships.

6
supervised thrifts' total assets have declined from 80 percent at the end of 1991 to 71 percent
as of March 1995. Examples of how institutions can shift away from SAIF-insured deposits
include the following:
•

A SAIF member can increase its borrowings from the Federal Home Loan Bank
(FHLBank) System -- a government-sponsored enterprise that makes long-term
"advances" to depository institutions, generally for less than 50 basis points over the
Treasury's own cost of funds. FHLBank advances carry no SAIF premiums.
Because FHLBank advances are available in a wide range of maturities and terms,
they can help institutions manage their interest-rate risk more effectively than full
funding with deposits. For OTS-supervised thrifts, FHLBank advances financed 10.6
percent of total assets as of March 1995, up from 7.4 percent in 1991.

•

A SAIF member can increase its use of other secured borrowing -- such as by
obtaining funds through reverse repurchase agreements, using securities as collateral.
Funds obtained through these agreements fmanced 5.5 percent of the total assets of
OTS-supervised institutions as of March 1995, up from 2.4 percent in 1991.

•

A SAIF member whose holding company forms a BIF-member bank may seek to

accept deposits as agent of the bank, perhaps in return for a commission from the
bank. The bank might go on to loan the funds in question to the SAIF member.
In each case, SAIF comes out the loser. It collects no premiums on the nondeposit
liabilities that its members use in place of insured deposits. Indeed, using FHLBank
advances and other secured borrowings in place of deposits actually puts SAIF at greater risk
of loss by requiring the institution to use bigh-quality assets as collateral, thereby making
them unavailable to satisfy depositors' claims if the institution fails.

Other Approaches

According to the FDIC, 12 institutions, including the parent companies of some of the
largest West Coast thrifts, have applied to establish banks with branches in their thrift
lobbies. These institutions have $115 billion in SAIF-insured deposits, almost 16 percent of
SAIF's assessment base. These banks, benefitting from soon-to-be-Iower premiums than
their sister thrifts, should be able to offer deposits and loans more competitively with those
of other financial institutions. More attractive deposit rates will induce thrift customers to
switch their accounts to the affiliated banks. Over time, this could allow a substantial
proportion of such thrifts' deposits to escape from SAIF despite the moratorium.
Another way to reduce reliance on SAIF-insured deposits might be for SAIF member
institutions to acquire BIF-insured deposits through mergers -- also an Oakar transaction but
the reverse of the more common form in which BIF members buy SAIF deposit franchi~s.
Because the acquired deposits remain BIF-insured, institutions expanding in this way would
reduce the percentage of their total assets financed with SAIF-insured deposits.

Conclusion: Moratorium Doomed to Fail

The possible actions outlined above illustrate the flexibility SAIF members have to
restructure their operations so as to soften the burden of high SAIF premium rates. The
Government cannot realistically regulate this managerial flexibility out of existence -- for
example, by broadening the current moratorium on conversions between BIF and SAIF.
Given the BIF-SAIF differential and other incentives for reduced reliance on SAIF-insured
deposits, the ingenuity of financial markets would thwart attempts to prop up SAIF by such
regulatory means. Such attempts would afford SAIF no meaningful protection from
shrinkage of its deposit base. On the contrary, they would be as futile as price controls
aimed at· charging some motorists $6 a gallon for gasoline that other motorists can readily
obtain for $1 a gallon.

CONI'INUING DECLINE

LIKELy IN SAIF ASSESSMENT BASE

The combination of an assessment base in long-term decline and a fIxed FICO

obligation lies at the heart of SAIF's predicament. With little foreseeable prospect of relief
from high premiums, SAIF members will tend to reduce their reliance on SAIF-insured
deposits, thus deepening the decline of SAIF's assessment base. Shrinkage of the assessment
base will reduce SAIF's income, and with it SAIF's ability to absorb losses and build
reserves. But no matter how much SAIF's income shrinks, annual FICO payments will
remain fixed at $793 million, arid will thus consume an ever greater proportion of SAIF's
remaining income. This burden of FICO payments will render SAIF's capitalization (Le.,
building its reserves to 1.25 percent) increasingly distant and unlikely. Carried to its logical
conclusion, this vicious circle could very well leave SAIF insolvent and the FICO interest

8
payments in default. S At a minimum, it underscores the shakiness of assuming little or no
shrinkage in the deposit base. We need to break this cycle now.
We cannot rely on the continual growth of Dakar deposits to somehow resolve SAIF's
problems. SAIF-insured Dakar deposits must by law be assumed to grow at the same rate as
the total deposits of each BIF-member bank that purchased them. With a BIF-SAIF premium
differential, banks with Dakar deposits will effectively pay higher rates for deposit insurance
than banks of comparable size without Dakar deposits - even beyond SAIF's capitalization
date, because of the FICO burden. The differential may discourage banks from purchasing

snte Administration warned of these risks while the Resolution Trust Corporation
Completion Act of 1993 was pending. For example, a Treasury position paper distributed to
the conference committee described the very problems now coming to pass:
"This projected decline in BIF premiums poses potentially serious problems for
SAIF and the taxpayers who stand behind it. ... At the time of FIRREA, [FICO]
payments were not expected to burden SAIF significantly. Thrift institutions had
$948 billion in deposits, and thrift deposits had been growing rapidly. The framers
of FIRREA assumed that [SAIF-insured] deposits ... would generally grow at an
annual rate of 7.2 percent. FIRREA specifically contemplated that Congress would
help build up SAIF with appropriated funds, thus offsetting the drain of FICO
payments. In fact, SAIF-insured deposits have shrunk 23 percent since FIRREA, to
$734 billion -- declining at an average rate of some 6 percent per year (even as
deposits at BIF-insured institutions remained stable). '"
"These large and persistent declines in SAIF-insured deposits have increased the
relative burden of FICO payments. If such deposits had grown as anticipated at the time
of FIRREA, FICO payments would now consume 27 percent of SAIF's premium
income. In fact, they now consume over 40 percent.
"Thus, although SAIF charges the same premium rates as BIF, SAIF will have
difficulty building reserves. ...
"If SAIF premiums averaged 25 basis points, premiums for healthy SAIF-insured
institutions might be 15-20 basis points higher than premiums for comparable BIFinsured institutions. We are concerned that such a disparity could cause further
shrinkage of SAIF-insured deposits and, over time, actually reduce SAIF's total premium
income. Banks and thrifts operate on narrow margins in increasingly competitive
financial services markets. A wide disparity between BIF and SAIF premiums will
encourage SAIF-insured institutions to reduce their reliance on insured deposits (e.g., by
operating more like mortgage banks), regardless of any moratorium on conversions. If
SAIF-insured deposits continue to shrink -- as we believe will occur if BIF and SAIF
premiums diverge so significantly -- SAIF's assessment base will eventually decline to
the point that premium income will not even cover FICO payments. "

additional Oakar deposits and should discourage banks from bidding aggressively for such
deposits. Therefore, not only would SAIF's deposit base shrink, but costs for resolving
future thrift failures could be expected to rise. Moreover, existing holders of Oakar deposits
would also have significant incentives to find ways to avoid paying premiums on those
deposits at the higher SAIF rate.

CONSEQUENCES OF INACTION

SAIF

FDIC staff baseline projections rel~ earlier this year assumed a relatively low
level of insurance losses over the long term -- i.e., that thrifts with 0.22 percent of all SAIF
assets would fail per year -- enabling SAIF to capitalize in 2002 under the current premium
schedule. However, these projections also showed that SAIF's ability to recapitalize is
highly sensitive to the assumed level of future insurance losses. For example, tripling the
annwll failure rate to 0.66 percent of SAIF assets would render SAIF incapable of
capitalizing before 2019. Even this higher rate is substantially less than the 0.94 percent
thrift asset failure rate observed during the past 15 years, after excluding the high loss years
of 1988-1992. Historical experience therefore suggests a real possibility that SAIF could
linger for a long time in great weakness, or even become insolvent.
If SAIF were to become severely troubled or even insolvent, the FDIC might wish to
protect depositors by drawing on its $30 billion line of credit with the Treasury. But there is
some uncertainty about whether the line of credit could be used under these circumstances.
Section 14(c)(1) of the Federal Deposit Insurance Act allows the Secretary of the Treasury to
disburse funds under the line of credit only pursuant to an agreement with the FDIC that
provides a repayment schedule and demonstrates that available premium income will be
sufficient to meet the repayment schedule, including interest accruing on the balance. If
SAIF's condition were to deteriorate to the point that the FDIC needed to draw on the line of
credit, the burden of the FICO obligation might make it difficult to show that borrowings
could be repaid from SAIF's premium income.

FICO Bonds

The continuing decline of SAIF's assessment base, coupled with the growth of Oakar
and Sasser deposits, raises the possibility that the SAIF premiums available to make
payments on FICO bonds (i.e., the premiums paid by SAIF-member savings associations)
could fall below the requisite $793 million. A 10 percent annual deposit shrinkage rate
(excluding Oakar and Sasser deposits) would result in insufficient premium income to cover
FICO bonds within a few years. Such a decline is not unrealistic in light of the historical
trends in SAIF-insured deposits and the steps recently taken by several of the largest thrifts
to shift deposits from SAIF to BIF.

SAIF Members

Whether or not SAIF members succeed in extricating themselves from SAIF
premiums and other perceived disadvantages of being associated with SAIF, failure to resolve
SAIF's problems will make it more difficult for savings institutions to attract and retain
capital, thus harming what remains of the thrift industry and diminishing the industry's
capacity to help solve its problems. Delay could reduce the industry's ability to serve
housing finance while raising the ultimate cost of resolving SAIF's problems. Delay could
also harm SAIF by discouraging the formation of new SAIF-insured institutions, encouraging
weak institlltions to take excessive risks in an attempt to remain competitive with BIF-insured
institutions, and hindering efforts by the FDIC and OTS to find private-sector solutions for
troubled institutions.
ID. GUIDING PRINCIPLES

The Administration believes that six principles should guide any solution to the
problems of SAIF:
•

First, minimize the costs and risks to the taxpayers.

•

Second, assure prompt capitalization of SAIF.

•

Third, avoid default on the FICO bonds.

•

Fourth, require a fair and substantial contribution from institutions with SAIFinsured deposits.

•

Fifth, allocate burdens fairly, and avoid market distortions and perVerse
incentives.

•

And sixth, maintain public confidence in federal deposit insurance by acting
promptly, before SAIF's problems become more serious.

IV. RESOLVING SAIF'S PROBLEMS
Over the past several months, the Treasury has worked with the FDIC and OTS to
develop a solution to SAIF's problems. We have arrived at a joint proposal with three
critical elements: first, a special assessment on SAIF-insured deposits to fully capitalize
S~r; ~d, spread.ing FICO payments over all FDIC-insured depository institutions; and
third, mergmg SAIF mto BIF. We have also agreed on some additional provisions that we
think would improve the overall solution. We will discuss in tum below each element of a
SAIF solution.

CAPlTAUZING SAIF THROUGH A SPECIAL ASSESSMENT ON SAIF-INSURED
DEPOSITS

Basic Approach

The first critical element would require institutions with SAIF-insured deposits to pay
a special assessment at a rate sufficient to fully capitalize SAIF (Le., increase the Fund's
reserves to $1.25 per $100 of deposits) at the beginning of 1996, when the special
assessment would be due. Unlike regular SAIF premiums, the special assessment would use
a retrospective assessment base -- namely, an institution's SAIF-assessable deposits on a
specific paSt date, such as March 31, 1995.
Under such an approach, we estimate that a special assessment on the order of 83 to
90 basis points would suffice to capitalize SAIF. The exact rate would depend on (1) the
extent_ to which SAIF's reserves fall short of the 1.25 percent level at the end of this year;
and (2) the total deposits subject to the special assessment. 6 In any event, we would expect
the special assessment to augment the Fund by some $6 billion.
Capitalizing SAIF immediately through a special assessment on a retrospective base
has several major advantages. The special assessment would avoid the distorting effects of
maintaining high regular SAIF premiums (with a large BIF-SAIF differential) over a
protracted period. Using a retrospective base would give institutions no new incentives to
reduce their SAIF-insured deposits, since reducing such deposits would not affect their
premium liability. For that same reason, a retrospective base would also prevent evasion. A
special assessment using such a base represents the best available means of obtaining a
substantial contribution from institutions with SAIF-insured deposits without significantly
distorting those institutions' behavior.
With SAIF capitalized, the FDIC could base SAIF premiums on the risks posed by
SAIF members (as well as on SAIF members' pro rata share of FICO payments -- see Part
IV-B). We anticipate that SAIF premium rates for institutions that had paid the special
assessment would fall to levels approximating BIF premium rates. So long as the FICO
bonds remained outstanding, however, SAIF rates could not fall below BIF rates for
institutions posing comparable risk.
I would note that a special assessment, standing alone, would not solve all of SAIF's
problems. It would not correct SAIF's most serious problem: the adverse effects of
applying the fixed FICO obligation to a shrinking SAIF assessment base. Thus, the other
two elements of our proposal discussed below are critical for achieving a long-term solution.

6I.e., the total SAIF deposit base, including Oakar deposits, minus deposits at weak
institutions that the FDIC exempts from the special assessment (as discussed below).

Weak Institutions

A special assessment would put weak institutions under some stress insofar as it
diminished their reported capital. 7 To help ensure that the special assessment does not
inadvertently contribute to the failure of institutions that might otherwise have survived, the
FDIC's Board of Directors should be authorized to exempt weak institutions from the special
assessment if it determines that the exemptions would actually reduce risk to the Fund.
It is important to understand, however, that any institution exempted from the special

assessment would instead pay. regular premiums under the current SAIF risk-based premium
schedule, with rates ranging from 23 to 31 basis points, for 1996 through 1999. Thus, weak
institutions would still, over time, generally pay more than healthy institutions -- a result
consistent with the underlying principles of risk-related premiums. Assuming FICO
payments are reallocated as explained in Part IV-B, a healthy institution would pay
appro~mately 101 basis points from 1996 through 1999 (assuming an 85 basis point special
assessment, plus a risk-based premium of 4 basis points for each of four years). A weak
institution exempted from the special assessment and paying annual premiums of 29 basis
points (under the applicable schedule weak institutions pay premiums between 29 and 31
basis points) would pay a total of 116 basis points (29 basis points for each of four years).
Institutions exempted from the special assessment would have the option (during the 19971999) of paying a pro-rated portion of the special assessment and thenceforth paying
premiums under the new risk-based schedule. 8 This option would encourage weak
institutions to resolve capital and other deficiencies.

SPREADING

FICO PAYMENTS OVER ALL FDIC-INSURED INsnnmONS

SAIF's greatest vulnerability arises from the interaction between the fixed FICO
obligation and SAIF's declining assessment base. Specifically, SAIF confronts the possibility
of a vicious circle in which (1) FICO payments consume an increasing share of SAIF

7Such stress would result in part from institutions paying higher risk-based premiums
because they had fallen into lower capital categories (e.g., from well-capitalized to
adequately capitalized, or from adequately capitalized to undercapitalized). The FDIC could
mitigate that sort of stress by using its existing statutory authority to adjust risk-based
premiums: specifically -- and solely for the purpose of setting risk-based premiums for
coverage during the calendar year 1996 -- the FDIC could calculate a SAIF-insured
institution's capital before payment of the special assessment but taking into account other
capital fluctuations.
~us, if the special assessment were 85 basis points and an exempted institution raised

additional capital during 1996, it could pay a pro-rated special assessment of 63.75 basis
points at the beginning of 1997, and thereafter pay regular premiums under the new SAIF
risk-based schedule. The 63.75 basis points (three-fourths of 85 basis points) reflects the fact
that the institution paid the special assessment one-fourth of the way through the 1996-1999
period.

13
premiums, which (2) reduces SAIF's capacity to bear losses and build reserves and renders
increasingly remote the prospect of SAIF reaching the 1.25 percent reserve level, which (3)
makes SAIF-insured deposits less attractive as a funding source, which in tum (4) promotes
further shrinkage of the assessment base and leaves SAIF with even less income remaining
after FICO payments.
Such a Vicious circle is possible because FICO payments bulk large in relation to
SAIF's income. Consequently, the second critical element in resolving SAIF's problems
would be to spread the FICO obligation pro rata over all FDIC-insured institutions, both
banks and thrifts. This would not involve withdrawing money from the deposit insurance
funds. Instead, as is currently the case with SAIF, money sufficient to make FICO payments
would be deducted from the premiums insured depository institutions remitted to the FDIC,
before those premiums were deposited in the insurance funds.
_ This approach would spread FICO costs over a large deposit base, $3.2 trillion as of
March 1995, instead of leaving them concentrated in a much smaller and shrinking deposit
base of $485 billion (or $733 billion counting Oakar and Sasser deposits). Spreading FICO
payments would remove the damaging uncertainty the current arrangement creates for SAIF
and its members, as well as the perverse incentives it gives SAIF members to shrink their
deposits. Spreading FICO payments would also help SAIF bear losses and maintain reserves
and, combined with the special assessment on SAIF-insured deposits, would eliminate the
BIF-SAIF premium differential. A stronger SAIF would reduce the risk to taxpayers of
another deposit insurance crisis.
We welcome the indications from banks and bank trade associations that they
appreciate the urgency of SAIF's problems and are open to participating in a solution that
would involve a sharing FICO costs.
Some in the banking industry have argued that BIF members should not contribute to
a solution because bankS are not to blame for SAIF's problems. But blame is not the issue;
the issue is how to restore SAIF to health and avoid another deposit-insurance debacle.
Let there be no mistake: banks did not cause SAIF's problems. But neither did the
surviving savings institutions or the taxpayers. The surviving institutions suffered (as did
banks) from unfair competition by deeply insolvent thrifts that remained open and ran up
huge losses. The surviving institutions have paid record-high deposit insurance premiums far
longer than banks. As already noted, most of their SAIF premiums have been diverted to
pay for losses incurred before the creation of SAIF.
Nor were taxpayers to blame for past losses. Yet they have already contributed huge
sums to the thrift cleanup. The taxpayers have borne almost all of the estimated $87-95
billion in losses covered by the RTC, and over two-thirds of the estimated $62 billion cost of
FSLIC ·assistance agreements.
Participation by banks in sharing the FICO costs would underscore the importance to
banks and the public of a stable deposit insurance system backed by the full faith and credit

of the United States. Banks have benefitted substantially from Government actions -- and
taxpayer backing -- to shore up the deposit insurance funds. The aid taxpayers provided to
the depleted thrift insurance fund helped prevent spillover effects on public confidence for
FDIC-insured banks that would have been disastrous, particularly at a time when mounting
bank failures were putting tremendous pressure on BIF's predecessor fund. The Government
stood ready to provide resources to protect the insured depositors of troubled banks only a
few years ago when BIF's reserves were depleted. Banks benefitted directly from the
Government's removal and resolution of insolvent thrifts, whose bidding for deposits to
finance mounting losses raised the cost of funds for all insured institutions.
Sharing the FICO obligation would also highlight the common interests of banks and
savings institutions in solving SAIF's problems and maintaining a sound deposit insurance
system. Consumers do not distinguish between BIF and SAIF: they view the two together
as "federal deposit insurance." Thus any uncertainties about the health of one Fund would
adver~ly affect public perception of the entire system.
Spread across all FDIC-insured institutions, FICO payments would amount to only
about 2.5 cents per $100 of deposits. Using recent FDIC projections, this would still allow
premiums to fall to 4 cents for the healthiest institutions during the next couple of years, a
dramatic decline from the 23-cent premiums prevailing over the past four years -- and well
below the approximately 7-cent effective premium rate (Le., net of rebates) charged on
average over the FDIC's entire history.

MERGING THE DEPOSIT INSURANCE FuNDs

The first two critical elements of a SAIF solution -- capitalizing SAIF through a
special assessment and spreading FICO payments over all FDIC-insured institutions -- would
resolve SAIF's most pressing problems in a reasonable and equitable manner that·protects the
taxpayers and maintains the stability of the deposit insurance system. But these elements
would not cure the longer-term weaknesses of SAIF that arise from the Fund's excessive
concentrations of risk (discussed in Part IT-C): the fact that SAIF insures a specialized
industry, whose members are more like each other than BIF members, and that the industry
is concentrated in large West Coast institutions.
These longer-term weaknesses necessitate the third critical element of our joint
proposal: merging SAIF into BIF, and thereby providing the requisite asset and geographic
diversification. Such a merger would protect taxpayers from the possibility of another
deposit insurance crisis. It would assure the public - and Congress - that SAIF's problems
would not need to be revisited. And with SAIF fully recapitalized by the special assessment
the merger would not dilute BIF. Congress should act now to provide for a merger of the '
Funds. We recommend that the merger occur as soon as practicable -- preferably no later
than the beginning of 1998.
We recognize that any discussion of merging the deposit insurance funds raises many
ancillary issues, which center on the future of the thrift charter and other rules and
institutional arrangements specific to savings institutions. The Treasury staff has been

15
working hard to develop a comprehensive approach for dealing with all the complex and
difficult issues involved here. We are preparing to report back to both Banking Committees
within a relatively short period of time with our suggestions on the ancillary issues. In the
meantime, we urge the Committee to act promptly on the joint proposal, which would
provide an urgently needed -- and comprehensive -- solution to SAIF's problems.

SUPPLEMENTARY

ELEMENTs

Authorizing Rebates of Excess BIF Premiums

In view of the contribution BIF members would be asked to make to secure a sound
solution to SAIF's problems, we support restoring the FDIC's authority to rebate premiums
paid on BIF-insured deposits to the extent that BIF has reserves exceeding its designated
.
reserve ratio. 9

Adjusting Rules to Promote Premium-Rate Stability

A final issue which received consideration in our discussions with the FDIC and the
OTS was the desirability of providing stability to premium rates, important for depository
institutions to make reliable projections of their costs. 10 In order to give the FDIC flexibility
to reduce the frequency of premium rate changes, the Board's rate-setting authority would be
modified to allow actual reserves to fluctuate temporarily within a range of not more than 0.1
percentage point above or below the designated reserve ratio. This would provide flexibility
to smooth out premium rate fluctuations but does not change the designated reserve ratio. ll
We also support lowering, from 23 basis points to 8 basis points, the minimum
average premium required when a deposit insurance fund is undercapitalized or when the
FDIC has borrowings outstanding from the Treasury or the Federal Financing Batik. This
change would further reduce the potential for sharp swings in insurance premium rates.

~ebate authority would not extend to BIF's investment income, which has never been
rebated in the FDIC's history.

l°Once the deposit insurance funds are fully capitalized, premiums charged to their
members might vary from period to period depending on factors such as the level of actual
or expected insurance losses, and changes in interest rates, combined with the need to
maintain a deposit insurance fund's reserve ratio so that it approximates the designated
reserve ratio.
llThis flexibility would not override (1) the FDIC's duty to base premiums on risk; or
(2) the requirement that SAIF premiums be no lower than BIF premiums. Nor would it
authorize rebating BIF's investment income.

V. CONCLUSION
In this testimony, I have described serious weaknesses in SAIF -- weaknesses that cast

doubt on the Fund's long-term viability. The large impending disparity between BIF and
SAIF premiums heightens the prospects for further weakening of SAIF, especially by
accelerating the long-term erosion of SAIF's deposit base. SAIF members will have the
incentives and the ability to reduce their reliance on SAIF-insured deposits, regardless of any
moratorium on switching Funds. Inaction would increase the risks of another thrift deposit
insurance fund insolvency crisis and a potential default on FICO debt.
For these reasons we urge Congress to act now to resolve SAIF's problems. Another
thrift crisis would hurt all FDIC-insured institutions, including BIF members. Any solution
should minimize costs to the taxpayers, provide for prompt capitalization of SAIF and
payments on the FICO bonds, require a significant contribution from SAIF-insured
institutions, avoid market distortions, and maintain public confidence in the deposit insurance
system.
After the deposit insurance debacles of the 1980s and early 1990s, we have an
opportunity here. We have identified the problems before the crisis. This gives us an
opportunity to work together to secure the enactment of a lasting solution. Some would have
us squander this opportunity by denying that problems exist and waiting until they hit us over
the head. As we know, that is how policymakers dealt with the thrift debacle during the
1980s. The question here is not whether there will be problems; there are problems today.
The question is when these problems will ripen into a current crisis -- and that may occur
sooner than many believe possible.
We stand ready to continue to work with this Committee and other Members of
Congress to resolve SAIF's problems.

RESOLVING THE PROBLEMS OF THE
SAVINGS ASSOCIATION INSURANCE FUND
July 27, 1995
BACKGROUND: THE NEED FOR ACTION
SAIF Is in Poor Condition, and Its Prospects Are Bleak.
•

SA,F is significantly undercapitalized.
As of March 31, 1995, SAIF held reserves of $2.2 billion to cover
$ 704 billion in insured deposits -- only 31 cents in reserves per
$100 of insured deposits.

•

SAIF assessments have been -- and continue to be -- diverted to other
uses.
From SAIF's inception in 1989 through March 1995, $ 7.4 billion in
SAIF assessments were diverted to cover past thrift losses. If
those funds had gone into SAIF, the fund would have been fully
capitalized last year.
Payments on bonds issued to prop up a prior deposit insurance
fund (FICO bonds) currently consume 45 percent of SAIF
assessments -- and that percentage will increase if SAIF deposits
continue to shrink.

•

SAIF's assessment base has declined sharply.
SAIF deposits shrank by 23 percent from year-end 1989 through
March 1995, or an average of 5 percent annually, rather than
growing over 40 percent (as projected at the time of SA IF's
creation in 1989).

•

SAIF is now responsible for resolving failed thrifts.
On July 1, 1995, SA IF became responsible for handling thrift
failures. Given SAIF's meager reserves, the failure of one or two
large thrifts could render SAIF insolvent and put the taxpayer at
risk.

Consequences of Inaction: Prospects for SAIF, the FICO Bonds, and the Thrift
Industry Will Worsen.
•

Erosion of the SAIF assessment base would accelerate.
The healthiest SAIF members will have strong economic incentives
to avoid paying almost 6 times as much as the healthiest BIF
members for the same insurance coverage. Because of SAIF's
obligation to make payments on the FICO bonds, a large differential
between BIF and SA IF premiums would persist until the year 2019
even if SAIF were fully capitalized. Thus institutions would
continue to have incentives to shrink their SAIF deposits.
Healthy institutions have a wide variety of ways in which to shrink
their SAIF deposits, despite the current moratorium on converting
from BIF to SAIF. For example, they can sell off loans instead of
holding them in portfolio. They can replace deposits with
nondeposit funding sources. They can also seek to switch deposits
from SAIF to BIF by forming or acquiring affiliated BIF-insured
banks offering higher interest rates than thrifts.

•

SAIF's weaknesses could lead to a default on FICO interest payments.
If the portion of SAIF's assessment base available for FICO
payments declines 10 percent annually, FICO will default on its
interest payments in a few years.

•

Failure to resolve SAIF's problems could weaken the thrift industry, and
thus further weaken SAIF.
Uncertainties about SAIF -- and high SA IF premiums -- could make
it more difficult for SA IF members to attract and retain capital, thus
reducing the thrift industry's ability to help solve its problems and
respond to any adverse economic changes.

•

Structural issues make SAIF more vulnerable to economic downturns and
financial market instability.
SAIF faces increased risks because it insures institutions with
similar asset portfolios, and because SA IF-insured deposits are
concentrated in large West Coast thrifts.

3
PROPOSAL
1.

Capitalize SAIF Through Assessments on SAIF Deposits
•

Require institutions with SAIF-assessable deposits to pay a special
assessment in an amount sufficient to capitalize SAIF (Le., increase
the Fund's reserve ratio to 1.25 percent). Base the special
assessment on SAIF-assessable deposits held as of March 31,
1995. Make the special assessment due on January 1, 1996.
The special assessment would probably amount to 85 to 90
basis points. The rate would depend on (1) the extent to
which SAIF is undercapitalized at the end of this year; and
(2) the total deposits subject to the special assessment (i.e.,
total SA IF-assessable deposits, minus deposits at weak
institutions exempted by the FDIC from the special
assessment, as discussed below).
The risk-based assessment schedule for the newly capitalized
SAIF would be similar to the schedule for BIF (the current
FDIC Board proposal has rates ranging from 4 to 31 basis
points).
For purposes only of setting risk-based assessments for
coverage during the calendar year 1996, the FDIC would
calculate a SAIF-insured institution's capital before payment
of the special assessment but taking into account other
capital fluctuations.

•

Permit the FDIC's Board of Directors (acting pursuant to published
guidelines) to exempt weak institutions from the special
assessment if the Board determines that the exemption would
reduce risk to the Fund.
•

Require institutions exempted from the special assessment to
continue to pay regular assessments under the current SAIF
risk-based assessment schedule, with rates ranging from 23
to 31 basis points, for the next four calendar years (19961999).

Thus weak institutions would stl'll, over time, generally
pay more than healthy institutions. A healthy
institution would pay approximately 101 basis points
from 1996 through 1999 (an 85 basis point special
assessment, plus a risk based assessment of 4 basis
points for each of four years as proposed by the FDIC
Board). A weak institution would pay annual
assessments of 29-31 basis points (under the current
schedule weak institutions pay assessments of 29-31
basis points) for a total of 116-124 basis points (29-31
basis points for each of four years).
•

•

To encourage weak institutions to resolve capital and other
deficiencies, give institutions exempted from the special
assessment the option -- during the 1996-1999 period -- of
paying a pro-rated portion of the special assessment and then
paying assessments under the new risk-based schedule for
the remainder of the period.

Require that rates under the risk-based assessment schedule for
SAIF be no lower than the rates for comparable institutions under
the risk-based assessment schedule for BIF until the Funds are
merged.

Spread FICO Payments Over All FDIC-Insured Institutions

•

Effective January 1, 1996, expand the assessment base for
payments on FICO bonds to include the entire assessment base of
all FDIC-insured institutions -- both BIF members and SAIF members
(thus spreading the FICO obligation pro rata over all FDIC-insured
institutions) .

As under current law, the cash to pay FICO bond interest
would come from assessment payments remitted by insured
depository institutions, rather than by withdrawing money
from the deposit insurance funds.
Spreading FICO payments would still allow healthy
institutions' BIF premiums to decline dramatically from
current rates.

Merge the Deposit Insurance Funds
•

Effective as soon as practicable -- preferably no later than the
beginning of 1998 -- merge the BIF and SAIF.
A merger of the funds would resolve the long-term
weaknesses of SAIF by providing the requisite asset and
geographic diversification, which in turn should protect
taxpayers from the possibility of another deposit insurance
crisis.
We recognize that any discussion of a merger of the funds
raises a host of ancillary issues, such as the future of the
thrift charter - and other distinctions between banks and
thrifts. The Treasury is developing a comprehensive proposal
to deal with these issues.

Authorize Rebates of BIF Excess Premiums
•

Authorize the FDIC to rebate assessments paid by BIF members to
the extent that BIF reserves exceed the deSignated reserve ratio.
Rebate authority would not extend to BIF's investment
income, which has never been rebated in the FDIC's history.

Adjust Rules to Promote Assessment-Rate Stability
•

Direct the FDIC's Board of Directors to maintain a deposit insurance
fund's reserve ratio so that it approximates the designated reserve
ratio. Give the Board flexibility to reduce the size and frequency of
assessment rate changes by permitting the reserve ratio to
fluctuate temporarily within a range of not more than 0.1
percentage point above or below the designated reserve ratio. This
would provide flexibility to smooth out premium rate fluctuations
but would not change the 1.25 percent deSignated reserve ratio.

6
The FDIC would seek to maintain the fund at approximately
the designated reserve ratio, but could permit it to fluctuate
temporarily within a narrow band. This flexibIlity would in no
way impair such other rules as (1) the FDIC's duty to base
assessments on risk; or (2) the requirement that SAIF
assessments be no lower than BIF assessments. Nor would
it authorize rebating BIF's investment income.
•

Lower from 23 basis points to 8 basis points the minimum average
assessment required under section 7(b)(2)(E) of the Federal Deposit
Insurance Act when a deposit insurance fund is undercapitalized or
when the FDIC has borrowings outstanding for the fund from the
Treasury or the Federal Financing Bank.

FDIC and OTS:
Make Unspent RTC Funds Available as a Backstop for
Extraordinary, Unanticipated SAIF Losses Until the BIF and SAIF are
Merged
•

If SAIF losses were to exceed $500 million in any calendar year
during the period beginning on July 1, 1995 (when SAIF takes over
the RTe's responsibility for resolving failed institutions), and ending
when the Funds are merged, make unspent RTe funds available to
cover the amount by which the losses in that year exceed $ 500
million.
Thus SAIF would cover the first $ 500 million in losses during
any such year, and unspent RTC funds would cover any
additional losses.
Neither the CBO nor the FDIC currently projects that SAIF
losses will reach $ 500 ml11ion in any year. (The FDIC
projects losses of $270 million per year; the CBO projects
losses of $450 million per year.) Thus unspent RTC funds
would serve only as a reinsurance policy against losses more
severe than those now anticipated.
The Treasury does not support use of RTC funds.

NEWS

TREASU&Y

OFFICE OFl'UBUC AFFAIRS • 1500PENNSYLYANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
:

FOR IMMEDIATE RELEASE
August 1, 1995

Contact: Rebecca Lowenthal
(202) 622-1997

TREASURY HOSTS 4TH "PARTNERSHIPS" CONFERENCE IN CALIFORNIA
Small, minority and women-owned businesses will be able to bid on over $2 million in
contracts at the U.S. Treasury Department's "PARTNERSHIPS '95" conference in City of
Industry, California, on August 30. The conference will be held at the Industry Hills Sheraton
from 7 a.m. to 5 pm.
PARTNERSHIPS '95 is designed to bring bid opportunities directly to businesses,
establish working relationships with the Treasury staff who make purchasing decisions, and
teach businesses how to access federal contract information through electronic commerce so
they can compete. This is the fourth such conference and the second time PARTNERSHIPS
has come to the West Coast -- with $8 million in contracts available at previous events. It is
part of a larger initiative to increase contracting with small, minority and women-owned
businesses by 30% over Fiscal Year 1992 levels. Treasury Assistant Secretary for Management
and Chief Financial Officer George Munoz is spearheading that effort and will be a keynote
speaker at the August conference.
"Treasury has made great strides in fostering partnerships with small, minority and
women-owned businesses," Treasury Secretary Robert E. Rubin said. "That spirit of partnership
and of economic inclusion allows us to take advantage of a greater array of goods and services.
I am committted to giving more business to historically underutilized comp.anies. This is a top
prio.rity of President Clinton and myself. Treasury will continue to streamline the bidding
process, and make it easier for them to become Treasury partners. Together we'll build strong
and lasting partnerships."
Treasury will provide hands-on training in electronic commerce, the technology that
more and more companies use to access bid information throughout the federal government.
Some Treasury bureaus will identify professional service requirements for local competition.
Thousands of dollars in credit card purchases will be made and announced throughout the
conference. Exhibitors will include value-added networks and Treasury prime contractors ready
to discuss their subcontracting needs. Treasury bureaus, including local California offices, will
be represented. They are the Internal Revenue Service; Bureau of Alcohol, Tobacco &
Firearms; Comptroller of the Currency; Customs Service; Bureau of Engraving & Printing;
Financial Management Service; U.S. Mint; Bureau of Public Debt; and Secret Service.
The registration fee is $60 ($30 for additional company representatives). Requests for
quotations will be available on August 17 through Treasury's Small Business Fax line at (202)
622-1133. For registration information, call Sullivan & Associates at (818) 792-3259.
-30RR=487

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DE PA R T MEN T

O~: 4-,'H £' :r R,f0 S l,JR Y
:5: ()

WASHINGTON, D.C. -

I;U~' / J
UNDER SECRETARY

'1/

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I 4!

July 28, 1995

MEMORANDUM FOR MEMBERS OF' THE PRESS
FROM:

Ronald K. Noble
Under Secretary (Enforcement)

SUBJECT:

Waco Hearings

Special Agent James Cavanaugh's gripping remarks \~odnesday, July
26 of his negotiations with David Koresh wrapped up five days of
testimony by Treasury and Bureau of Alcohol, Tobacco and Firearms
emp=~yees in this me thIs congressional heari~gs on Waco.
During these hearings, Treasury and ATF have taken great care to
set the record straigb~ about what happened a~ Waco and why.
The 1993 Treasury Department report on ATF's actions at Waco
withstood critical scrutiny. The core elements of the tragedy
that led to the murder of four ATF agents are now beyond dispute:
-- ATF initiated an investigation of David Koresh, at the
request of the local sheriff's office, because of legitimate
concerns about the illegal manufacture of machine guns and
explosives at the compound.
-- ATF agents obtained lawful warrants to search the
premises and arrest Koresh.
-- The Davidians were tipped off 40 minutes ahead of time
and chose to ambush federal law enforcement agents.
As Treasury's own review pointed out two years ago, ATF
commanders ordered that the operation proceed although they were
aware that surprise was lost. certain ATF officials made false
or misleading statements in the aftermath. All of these facts,
as detailed in the Treasury report, were confirmed in these
hearings, as they were in previous hearings and at the criminal
trial of the surviving Davidians.

RR-488

The hearings also have addressed and resolved the following
issues -- issues that some skeptics have claimed required further
investigation:
-- David Koresh was investigated because of suspected
violations of federal firearms and explosives laws. not
because of his religious beliefs or because he raped
children who lived on the compound.
FBI firearms examiner
James Cadigan described his count of 48 illegal machine guns
recovered from the compound as "conservative."
-- The search and arrest warrants were legally sufficient.
Federal prosecutor Ray Jahn testified that none of the
defense lawyers challenged the warrants at trial.
Indeed,
Tim Evans, the defense lawyer for one of the Branch
Davidians, conceded during the hearings that he believed
ATF's investigation developed probable cause.
And ~he
president of the National District Attorneys Association
testified that the warrant was legally sound.
-- ATF legally aCquired military training an'] ~elicopters.
Officials from the Department of Defense, the Texas National
Guard, as well as members of Congress on both sides of the
aisle, agreed that ATF did not violate laws dealing with the
use of the military in law enforcement.
The helicopters 'lid not have guns mounted, their doors were
closed, they were 300 yards from the compound Nhen they were
fired upon and turned back, and their pilots testified under
oath at trial that no shots were fired. Davidians shot at
ATF agents on the roof; this firing would have caused bullet
holes in the roof.
-- The Branch Davidians fired the first shot. Testimony by
ATF agents Roland Ballesteros, Bill Buford and John Williams
confirmed that gunfire erupted from within the compound as
they approached. ATF special agent James Cavanaugh, the
supervisor stationed in the undercover house, stated that
agents took "an awful beating" as they unloaded from the
cattle trailers.
"If I thought that an ATF agent would drive up in front of a
structure and shoot, I would throw my badge in the garbage,"
Cavanaugh told the subcommittees on Wednesday, July 26.
"It
didn't happen."
These accounts have been corroborated by the trial testimony
of three members of the press who were on or near the
premises when the firefight began.

A number of facts were sometimes presented as new information
during the hearings.
Actually, they were thoroughly covered in
Treasury's review.
These "new" facts include:
-- ATF planners did not fully consider other options for
executing the warrants, such as arresting Koresh off the
compound. (Pages 134-143 of the Treasury report).
-- Intelligence gathering (including the undercover
operation) was poor and existing intelligence was not
adequately evaluated by planners and decision-makers.
(Pages 51-53, 143-148/ 1.68-170/ 186-188).
-- No completed written raid existed before the operation
went forward.
(Pages 207-210).
-- Tactical experts disagree as to whether ATF's raid plan
was well-conceived.
(Appendix B).
Treasury historically has exercised inadequate oversight
of the Treasury enforcement bureaus.
(Pages 180-183).
secretary Bents~n was not informed of the raid in
advance. (Page 178).
-- Undercover agent Robert Rodriguez, who was in the
compound ~he morning February 28/ infonlled his superiors
that surprise had been lost minutes before the raid was
ordered to go forward.
(Pages 89-91). In testimony Monday,
July 24, he described his call to the raid's tactical
coordinator, Chuck Sarabyn: "'Chuck, they know. They know.
They know we're coming.'
I can remember that as long as I
live.
I remember those words."
-- The supervisors who ordered the raid to go forward on
February 28 falsely state that they did not know the
operation had been compromised.
(Pages 193-207). Texas
Ranger captain David Byrnes testified that, based on the
overwhelming evidenced developed during the Rangers'
investigation, sarabyn and Chojnacki are not credible, that
the Rangers concluded they knew Koresh was aware that ATF
was coming.
Rodriguez put it this way:
"These two men knew what I told
them.
They knew exactly what I meant. They lied to the
public, and in doing so they just about destroyed a great
agency."
__ The internal shooting review conducted by ATF personnel
was halted at the request of the local U.S. Attorney's
office. The Texas Rangers began a full criminal
investigation within two days of the raid.
(Page 197).
3

-- Treasury coordinated with the Department of Justice in
order not to interfere with ongoing investigations and
prosecutions.
(Pages 2 and 7).
"Throughout the planning
and conduct of the review, two issues were paramount: (1) to
produce a thorough, unbiased review of ATF's conduct and (2)
to ensure that the actions of the Treasury review did not
jeopardize the Justice Department's criminal case against
those who murdered four ATF agents," Treasury General
Counsel Edward S. Knight said in statement Thursday, July
20.

In short, no findings, conclusions, or recommendations have been
demonstrated false or incomplete by these hearings.
Of course,
not every fact or opinion contained in the more than 26,000 pages
of documents produced to the committees was included in
Treasury's 500 page report.
But the fact remains that the
Treasury report is the most complete, accurate, and honest
account of what happened at Waco, why it happened, lnd who was
responsible.
Weeks before the hearings commenced, Secretary Rut~~ expressed
his hope that the hearings get at the truth, not undermine law
enforcement or advance the agenda of special interests who oppose
firearms laws and their enforcement.
Disturbing e'/ldence of
cQvert involvement by the National Rifle Association in the
congressional inquiry confirms the Secretary had reason to be
concerned that the hearings would be used for a broad atcack on
ATF, or measures such as the Brady Law and the Assault Weapons
Ban.
Despite such evidence and although no new material facts emerged,
the hearings did serve a useful purpose.
They further clarified
the difference between fact and fiction.
The public heard from ATF agents themselves -- individuals such
as Bill Buford, Roland Ballesteros, James Cavanaugh, John
Williams and Robert Rodriguez -- about what took place at the
Branch Davidian compound on February 28, 1993, confirming what
the Treasury report found two years ago. The public was able to
see that these men are not "jack-booted thugs," but are dedicated
public servants doing difficult and dangerous work.
Kiri Jewell's testimony established that Koresh was a villain,
not a victim.
Koresh was shown to be insensitive to human life.
Cavanaugh recalled negotiating with Koresh and trying to arrange
the rescue of a wounded agent during the firefight:
"I had a
radio mike in one ear, with an agent pleading for his life. And
I had this guy on the phone who thought he was God.
So I put all
my energy into negotiating it because if I didn't, this guy in my
ear, my friend, was going to die."

Members on both sides of the aisle agreed with near unanimity
that no mistakes made by ATF justified the killing of the four
agents -- Conway LeBleu, Todd McKeehan, Robert Williams, and
steven willis -- who perished in the line of duty.
But at least one witness mistakenly contended that the deaths of
these agents could be considered justifiable homicide.
"I wasn't
there," said Jack Zimmerman, attorney for Davidian steve
Schneider. "But if the ATF accidentally or however opened fire on
people in their horne, and all they did was defend themselves in
their home, then under the law that's justifiable homicide.
It's
not murder.
It's not murder." But overwhelming evidence in the
Treasury report, at trial and during these hearings proved that
the Davidians shot first.
ATF Director John Magaw and I had the opportunity to describe the
changes made since Waco at ATF and Treasury, respectively, to
prevent future tragedies.
Looking forward, our goal must be to strengthen :a~ enforcement.
We must ensure that our agencies are equipped and :rained to
confront the increasingly dangerous challenges the}" face.
To
this end, Congressman McCollum has exhibited welcome leadership
in promising to hold hearings on militias this fall.
We will continue to institute reforms at ATF and Treasury.
But
we will also ma~e sure that the men and women of ATF receive the
respect that they have earned.
Never again, should federal
agents, such as Bill Buford, shot four times by the Branch
Davidians, be vilified for doing their sworn duty.
"This is very similar to how I felt when I came horne from
Vietnam," Buford said in USA Today Wednesday, July 26. "I thought
I had done a service for my country, but was portrayed as
something less.
They made us feel that we were the enemy."
Dehumanizing such heroes diminishes us all.

DEPARTMENT

THE

TREASURY

..............................~jI78fq~.............................
OmCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 _ (202) 622-2960

ADV 9 A.M. EDT
Remarks as prepared for delivery
July 31, 1995

REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
FRATERNAL ORDER OF POLICE
VIRGINIA BEACH, VA.

Thank you for the invitation. I'm the first Treasury Secretary to address the
Fraternal Order of Police, and I very much appreciate the honor.
I also want to congratulate Dewey on his stewardship of the FOP. Treasury's law
enforcement people have greatly valued the opportunity to work with you, Dewey, and
we're looking forward to working closely with your successor and with this organization.
You and the FOP have been very supportive, and in particular I and all of us at
Treasury very much appreciate the support the FOP has provided to our Bureau of
Alcohol, Tobacco and Fireanris.
When I came to this job, my focus was on economic policy, taxes, the dollar, the
federal budget, and similar matters. I was heavily involved in those issues when I was at
the White House, and they are an important part of my agenda now that I'm at the
Treasury Department. However, the more I learned about the law enforcement side of
my job and about the functions of the 34,000 people at Treasury who work in our various
law enforcement operations, the deeper my appreciation became of the importance of
Treasury's law enforcement role and more generally of the critical importance of all law
enforcement -- state, local and federal -- to our social order and social fabric.
As my time at Treasury has grown, I've come to have a good deal of first-hand
experience in the issues of law enforcement. That experience has enhanced my
understanding and that understanding has led to commitment.

RR-489

(more)

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That commitment deepened as I looked into the ATF actions at Waco while
Treasury was preparing for the current hearings. Clearly, mistakes were made in the
initial ATF raid. Hearings were held after the raid, and Treasury conducted an
exhaustive and widely-praised investigation resulting in many changes at ATF. However,
no mistake that was made justified the ambush and killing of four law enforcement
officers. David Koresh knew in advance tbat the ATF was coming to serve arrest and
search warrants-. Instead of accepting the warrants and then resorting to legal process,
he stationed armed people in the windows of his compound and on a water tower, and
then shot, killed and wounded ATF officers as they approached the compound. That is
the core fact of the ATF raid on Waco.
When Congress decided to hold these hearings, I said in public appearances that
the hearings could prove useful if they served to once again get the truth out, and that
there many members of Congress on both sides of the aisle who were committed in good
faith to doing that. However, I also said that I was deeply concerned that some might
use the hearings to undermine support for law enforcement through distortion and
misinformation -- and clearly there has been evidence of that -- in order to attempt to
roll back the Brady Law and the assault weapons ban, or to divert attention from
extremist groups and militias, or even to feed paranoia and conspiracy theories. There
can be legitimate differences of opinon on the Brady Law or assault weapons ban -- but
my own view is that they powerfully serve public safety without any interference with the
use of guns for sport or self-defense. While there may be these differences, it is
extremely dangerous to undermine law enforcement as a vehicle towards reversing that
legislation. It must not be allowed to happen.
I think it is also worth noting that nothing new with respect to the ATF was
elicited in the hearings beyond the findings of the Treasury report, and nothing in the
hearings contradicted any of the findings of the Treasury report.
The more I looked into Waco and the more I learned, the more I came out
convinced that the ATF needs and deserves support. And second I was convinced that I
should do everything possible to support law enforcement more generally, because these
are some of the most difficult and dangerous jobs in our society, and absolutely critical
to our social order and social fabric.
I've made this a hands-on experience. Last month I visited in New York with the
Customs Service agents who conducted an undercover operation with respect to some
individuals trying to sell eight tons of nuclear-related materials that came from Russia.
As has since been publicly disclosed, the suspects were fully prepared to proceed when
our undercover agent said he was a broker for Saddam Hussein. I also stayed informed
as that same agency put a serious dent in the Cali cartel a couple of months back.

Our ATF has played an important role in the arrests in the Oklahoma City and
the .World Trade Center bombings, and it works closely every day with local law
enforcement authorities in the dangerous and critically important mission of dealing with
illegal weapons and armed criminals. The Secret Service is not only protecting the
President, but also protecting the integrity of our currency through their jurisdiction over
counterfeiting. FLETC, our training center in Georgia, is producing officers ready for
street duty. FinCen, our Financial Crimes Enforcement Network, is going after moneylaunderers. And the IRS has a criminal investigations operation. Every one of our
enforcement bureaus has had many important successes and makes a daily contribution
to maintaining the rule of law, as do each of you.
Much of our work in federal law enforcement involves working closely with state
and local officers. And that teamwork is invaluable.
For example, the ATF has 21 task forces in conjunction with state and local
officers in 20 major cities with high violent crime rates. They go after gang violence,
drug trafficking, murder, rape and other violent crimes. These task forces have taken
more than 6,200 violent criminals off the streets in seven years. And since we're in the
Tidewater area, let me cite some specifics here. Two months ago a man with 14 prior
felony convictions was sentenced on several firearms charges after an investigation by the
ATF and Chesapeake Police Department. Last month 10 people involved in distributing
several kilos of crack each month in this area were sentenced on firearms and drug
charges -- again, a cooperative effort between the ATF and the Norfolk Police
Department.
Similarly, in the span of five days last month Secret Service field offices in Miami
and Charlotte helped city officers solve two brutal murders.
I am proud, and I feel it more strongly every day as I learn more and more, of
being associated with the men and women of law enforcement. You place your lives on
the line doing very dangerous· and difficult work. Some of you live under cover, and go
after extraordinarily dangerous individuals who smuggle drugs or run gangs or build
bombs. The support of the American people is essential for you to be effective, your
effectiveness is essential for public safety, and all of us must do everything possible to
ensure that you have that support and combat those who would undermine that support.
In addition to your law enforcement accomplishments, the American people need
to know more about the work you do to support our communities in other ways. While
I'm impressed in the broad sense at the accomplishments of our law enforcement
personnel, I am equally impressed at your willingness not just to go out on the line every
day, but to work in our communities in other supportive ways.

I remember about 15 years ago while I was living in New York I was involved
with an organization called the 28th Precinct Council. For those of you who don't know
New York, the 28th Precinct is around the middle of Harlem. What impressed me as I
worked with the council was the commitment of the officers not only to policing, but also
volunteering in their community for programs with children, acting as mentors, helping
out senior citizens.
It can make a difference. We have programs at Treasury, in cooperation with
many other law enforcement agencies around the country, to help teach youngsters why
guns are dangerous and gangs are bad. The Norfolk ATF field office just finished a
video on that subject. We have Secret Service agents and others adopting schools and
giving security advice at housing projects. I suspect every department represented here
today has individuals deeply involved in their communities in activities other than law
enforcement.

I believe police officers have a keen understanding of the problems of our
communities, perhaps more so than the rest of us, because you live with those problems
every day. You do double duty: protecting society and building society.
That's the reality of law enforcement in this country -- people who build
communities, people who protect communities, people who make incredible sacrifices for
all of us. The debt Americans owe those who protect and serve is tremendous.
As I have come to understand the law enforcement area of Treasury more, and
as my commitment has deepened, I have tried to carry that understanding and
commitment to the financial and business forums where Treasury Secretaries are
invariably and often invited to speak. I was in New York at the New York Economic
Club earlier this year. I told a hall of 600 black-tie businessmen that they really need to
understand and support law enforcement.

That wasn't the message they expected to hear from a Treasury Secretary, but
they were highly responsive as I explained to them how central to our daily lives the
profession of law enforcement is and how much the men and women of law enforcement
need the support of all Americans. Crime takes an enormous physical and emotional
toll and feeds anger and anxiety and insecurity that undermines and tears at our social
fabric. It also takes a tremendous financial toll as well, which puts us at a productivity
disadvantage compared to the many nations which do not have problems of the same
magnitude.
I include this message in almost every speech I give to business groups. More
importantly, as Dewey can tell you, the President is totally committed to supporting law
enforcement, and is an ardent and frequent advocate for the men and women of law
enforcement and the dangerous and difficult and critical role they play in our society.

The President worked hard to see the Crime Bill passed so that we can have another
100,000 officers on the street to make you more effective. He worked hard, as you have,
for Brady and the assault weapons ban. He is working hard for anti-terrorist legislation.
The President, the Attorney General and I were honored to share the podium with
Dewey at the annual peace officers' memorial service in Washington in May when the
names of officers from around the country who died in the line of duty were added to
the memorial.
Having said that, I want to comment on some of the headlines related to law
enforcement we've seen lately.
There will always be problems from time to time in any organization composed of
human beings, and that includes law enforcement organizations. When a Waco raid is
mishandled, or allegations are made about a Good 01' Boys Roundup, they must be
dealt with fully, candidly, openly and expeditiously. Public support and perceptions of
the profession of law enforcement are predicated on the absolute necessity that law
enforcement is fair and unbiased. However, problems within law enforcement
organizations must be dealt with in the context of supporting law enforcement, not with
an intent to undermine law enforcement.

In closing, I want to make two points. First, as Secretary of Treasury I am
strongly committed to supporting law enforcement and combatting those who would
undermine law enforcement, those who would drive a wedge between Americans whose .
safety you protect, and you, the protectors.
And second, police officers have a keen insight into our society's problems. You
see the worst of it, and you understand the causes of crime better than most Americans.
You realize that the more support given to prevention, to working with problem children
in our inner cities, to giving young men and women economic opportunity, to eliminating
the causes of insecurity and alienation, the less crime for all of us. All Americans must
vigorously engage on that front -- where so many of you are involved -- while at the same
time giving you our utmost support as you protect all of us.
-30-

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C .• 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
July 28, 1995

BORROWING ADVISORY

Contact

CO~lMITTEE

Jon Murchinson
(202) 622-2960

MEETING, REFUNDING PLANNED

The Treasury Department's Borrowing Advisory Committee will hold an open meeting
at 11 :30 a.m. Tuesday, August I, 1995 in the Treasury Department. room 3327, 1500
Pennsylvania Avenue NW.
Deputy Assistant Secretary (Federal Finance) Darcy Bradbury will announce the
Treasury Department's quarterly refunding at I p.m. on Wednesday, August 2, 1995 in room
3327 of the Treasury Department.
Media without Treasury, White House, State, Defense or Congressional credentials
wishing to attend should contact the Office of Public Affairs at (202) 622-2960, with the
following information: name, Social Security number and date of birth, by 5 p.m. Monday,
July 31 for Tuesday's event and by 5 p.m. Tuesday, August 1 for Wednesday's event. This
information can be faxed to (202) 622-1999.

-30-

RR-490

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

TREASURY

THE

TREASURY

NEWS

~iI789~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

......................................

OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
July 28, 1995

Contact:

Jon Murchinson
(202) 622-2960

RUBIN HOLDS FIRST MEETING OF FINANCIAL SERVICES COMMISSION

Treasury Secretary Robert E. Rubin will convene the first meeting of the Financial
Services Advisory Commission on Monday, July 31 at 1 p.m. The meetIng, which is open to
the public, will be in the Cash Room at the Treasury Department, 1500 Pennsylvania Avenue
NW.
Under the Interstat Banking and Branching Efficiency Act of 1994, the Secretary of
the Treasury is conducting a study of the American financial services system, in consultation
with the advisory commission and federal financial regulators. The Treasury study will
examine the strengths and v. ..:::knesses of the U.S. financial sys' _,n in meeting the needs of
the system's users. A final report and recommendations will be made to Congress. The
report will focus on the issues facing the future of financial services and on the needs of the
users of those services.
Media without Treasury, White House, State, Defense or Congressional credentials
wishing to attend should contact the Office of Public Affairs at (202) 622-2960, with the
following information: name, Social Security number and date of birth, by noon Monday, July
31. This information can be faxed to (202) 622-1999.

-30-

RR-491

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Department of the Treasury
Advisory Commission on Financial SelVices

Stephen J Brobeck, Executive Director, Consumer Federation of America
John G. Heimann, Global Financial Institutions Group Chairman, Merrill Lynch & Co.
Beth Hodges, Executive Vice President, First National Bank of Panhandle, Texas
Mary Agnes Houghton, President, ShoreBank Corporation
Glenn H. Hutchins, General Partner, Blackstone Group
Orin S. Kramer, General Partner, Kramer Spelman, LP.
Donald A. Moore Jr., Managing Director, Morgan Stanley & Co.
Clyde W. Ostler, Vice Chairman, Wells Fargo Bank
Robert C. Pozen, General Counsel and Managing Director, Fidelity Investments
Franklin D. Raines, Vice Chairman, Federal National Mortgage Association
Rachel F. Robbins, Managing Director and Deputy General Counsel,
lP. Morgan & Co.
John F. Sandner, Chairman of the Board, Chicago Mercantile Exchange

July 28, 1995

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