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ILETTERING HORI ZONTAL ONI
ISPINE.
BIND AS COLLATED.I
Lot: . 5-25-05
Item:
54
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O}'FICE OJ<' PUBLIC AFFAIRS e1500 PENNSYLVANIA AVENU 1£, N. W.• WASHINGTON, D.C.e 20220. (202) 622·2960
EMBARGOED UNTIL 11:00 A.M.
November 27, 2002
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $29,000
million to refund an estimated $29,818 million of publicly held 13-week and 26-week
Treasury bills maturing December 5, 2002, and to pay down approximately $818 million.
Also maturing is an estimated $16,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced December 2, 2002.
The Federal Reserve System holds $12,975 million of the Treasury bills maturing
on December 5, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held December 3, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,096 million into the l3-week bill and $815 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
000
Attachment
P )"-.3658
For press releases, speeches, public schedules and official biographies, call our 24-hollr fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED DECEMBER 5, 2002
November 27, 2002
Offering Amo~nt . . . . . . . . . . . . . . . . . . . . . . . • . . . . $14,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . $ 4,900 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 and multiples . . . . . . . . . . .
91-day bill
912795 MB 4
December 2, 2002
December 5, 2002
March 6, 2003
September 5, 2002
$19,474 million
$1,000
$15,000 million
$15,000 million
None
182-day bill
912795 MQ 1
December 2, 2002
December 5, 2002
June 5, 2003
December 5, 2002
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position is $1 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.
Maximum Recognized Bid at a Single Rate ........ 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender.
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
record at their financial institution on issue date.
TREASURY
EMBARGOED UNTIL 11:00 A.M.
December 2, 2002
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $21,000 million to
refund an estimated $16,000 million of publicly held 4-week Treasury bills maturing
December 5, 2002, and to raise new cash of approximately $5,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $12,975 million of the Treasury bills maturing
on December 5, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
000
Attachment
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED DECEMBER 5, 2002
December 2, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $21,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $21,000 million
NLP Exclusion Amount ................ $10,800 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 LS 8
Auction date . . . . . . . . . . . . . . . . . . . . . . . . December 3,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . December 5,2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . January 2,2003
Original issue date ................. July 5,2002
Currently outstanding ............... $42,529 million
Minimum bid amount and multiples .... $l,OOO
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position is $1 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.
Maximum Recognized Bid at a Single Rate ... 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.
PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt· Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
December 02, 2002
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
December 05, 2002
March 06, 2003
912795MB4
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.210%
Investment Rate 1/:
1.231%
Price:
99.694
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 53.47%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
34,604,737
1,417,746
170,000
$
14,000,163 2/
36,192,483
SUBTOTAL
TOTAL
5,041,805
5,041,805
Federal Reserve
$
41,234,288
12,412,417
1,417,746
170,000
$
19,041,968
Median rate
1.200%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.185%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
36,192,483 / 14,000,163
=
2.59
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,185,836,000
http://www.publicdebt.treas.gov
_)' ( U
..Jl-P Y
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
FOR IMMEDIATE RELEASE
December 02, 2002
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
182-Day Bill
December 05, 2002
June 05, 2003
912795MQ1
High Rate:
l. 290%
Investment Rate 1/:
Price:
l.316%
99.348
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 51.31%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
28,366,512
1,018,489
100,000
$
15,000,087 2/
29,485,001
SUBTOTAL
$
TOTAL
5,629,661
5,629,661
Federal Reserve
35,114,662
13,881,598
1,018,489
100,000
$
20,629,748
Median rate
1.275%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.250%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
29,485,001 / 15,000,087
=
1.97
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $852,685,000
http://www.publicdebt.treas.gov
2-11-27-16-29-9-5061: Treasury Establishes Exchange Stabilization Fund Web Page
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
November 27, 2002
2002-11-27 -16-29-9-5061
Treasury Establishes Exchange Stabilization Fund Web Page
Today the Treasury Department announced the establishment of a public web page
for the Exchange Stabilization Fund (ESF). The purpose of the page is to provide
explanatory information on the ESF and links to official reports in which the finances
and operations of the ESF are reflected.
This is the first time that such comprehensive information has been assembled in
one place that is readily usable by the public. Information in public documents on
the ESF's operations and finances has long been considerable in scope, but many
of these documents focus on the broader Treasury or U.S. government financial
context of which the ESF is a part, rather than on the ESF itself. Also, the Treasury
regularly provides the Congress with reports on ESF operations and finances,
including an annual audit report. The new ESF web page makes such information
easier to relate specifically to the ESF.
The view of the Treasury Department is that the public can benefit from a better
understanding of role of the ESF and that the ESF web page will serve this
purpose.
The ESF web page can be accessed at: wwwtreas.gov/offices/internationalaffairs/esf/index.html
-30-
Ilwww.treas.gov/press/releases/20021127162995061.htm
7117/2003
Treasury - Exchange Stabilization Fund
HOME
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I TED
CONTACT TREASURY
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SITE INDEX
FOIA
ESPANOL
ACCESSIBILITY
PRIVACY & LEGAL
S T .\ T E '"
11~1·:\Rl"I'IE'T 4..:
III.; rl"R.~~·\Sl1
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OFFICE OF INTERNATIONAL AFF.tIIRS
Exchange Stabilization Fund
jsearch
jews
Cey Topics
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INTRODUCTION
• InJr.9.d1JcUQn.
Fed.eral Reserve
The Exchange Stabilization Fund (ESF) consists of three types of
assets: U.S. dollars, foreign currencies, and Special Drawing
Rights (SDRs)1. Currently, the ESF has a total of approximately
$38 billion in these three assets.
The ESF can be used to purchase or sell foreign currencies, to
hold U.S. foreign exchange and Special Drawing Rights (SDR)
assets, and to provide financing to foreign governments. All
operations of the ESF require the explicit authorization of the
Secretary of the Treasury ("the Secretary").
L~gisjC!ti\'e
Fin9nces
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BCiSis
Qpen:ltiQnS
History
Reports to Congress
Public Reports
RESOURCES
FAQs
The Secretary is responsible for the formulation and
implementation of U.S. international monetary and financial policy,
including exchange market intervention policy. The ESF helps the
Secretary to carry out these responsibilities. By law, the Secretary
has considerable discretion in the use of ESF resources.
The legal basis of the ESF is the Gold Reserve Act of 1934. As
amended in the late 1970s, the Act provides in part that "the
Department of the Treasury has a stabilization fund ... Consistent
with the obligations of the Government in the International
Monetary Fund (IMF) on orderly exchange arrangements and an
orderly system of exchange rates, the Secretary ... , with the
approval of the President, may deal in gold, foreign exchange, and
other instruments of credit and securities."
1. The Special Drawing Rights, or SDR, is an international reserve asset
that was created by the IMF as a supplement to existing reserve assets.
flwww.treas.g\Jvfoffices/intematiorra}.affairs/esf/index.html
7/17/2003
PO-3662: Treasury Department Announces Interim Guidance on Terrorism Insurance
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
December 2, 2002
PO-3662
Media Advisory
Treasury Department Announces Interim Guidance on Terrorism Insurance
for Insurance Industry at Tuesday News Conference
The Treasury Department tomorrow will announce interim guidance for the
insurance industry in meeting certain requirements under the Terrorism Risk
Insurance Act of 2002, signed into law by President Bush on Nov. 26, 2002.
Treasury Under Secretary Peter Fisher will announce the interim guidance at a
news conference at 3:00 p.m. EST on Tuesday, Dec. 3, 2002, in the Media Room
(Room 4121) at the Treasury Department, 1500 Pennsylvania Ave., N.w.,
Washington, DC. He will be joined by Terri Vaughan, president of the National
Association of Insurance Commissioners and the Commissioner of Insurance for
the state of Iowa.
The news conference will be web cast live at www.treasury.gov.
The room will be available for pre-set at 2:00 p.m. on Tuesday. Media without
Treasury or White House press credentials planning to attend should contact
Frances Anderson at Treasury's Office of Public Affairs at (202) 622-2960 by 1:00
p.m. on Tuesday with the following information: name, media organization, social
security number and date of birth. This information also may be faxed to (202) 6221999.
http://www.tre1l3.go~/prc33/rdcl1ses/po3662.htm
12/23/2002
PO-3663: Treasury Department Announces Interim Guidance On Terrorism Insurance for... Page 1 of2
PH[SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free
A(Jol)e(I~) Ar:ru!Jar'~j Re(jdelj;~,.
December 3,2002
PO-3663
Treasury Department Announces Interim Guidance
On Terrorism Insurance for Insurance Industry
Treasury and State Insurance Commissioners Work Closely Together
The Treasury Department today announced interim guidance for the insurance
industry in meeting certain requirements under the Terrorism Risk Insurance Act of
2002, which was signed into law by President Bush on November 26, 2002.
Treasury Under Secretary for Domestic Finance Peter R. Fisher outlined the interim
guidance at a Treasury news conference. He was joined by National Association of
Insurance Commissioners (NAIC) President Therese M. Vaughan, who also serves
as Commissioner of Insurance for the state of Iowa.
"The Terrorism Risk Insurance Program became effective upon enactment by the
President," said Fisher. "Commercial property and casualty insurance companies
now are required to make terrorism insurance coverage available to their
policyholders and, in many cases, such
coverage is in place today as a result of the legislation. That is good news for our
economy.
"Through the working of the competitive marketplace, the economic benefits
expected as a result of the Program should begin to be realized in the near term."
Fisher emphasized that the Program relies upon the state insurance oversight
mechanism to monitor insurance companies' implementation of, and compliance
with, many of the program's requirements. "Our partnership with the state
insurance regulators has worked' very well, and in the upcoming months Treasury
will continue to work closely with the state insurance regulators on the
implementation process," he said.
"State regulators will continue consulting with the Treasury Department on an array
of implementation issues," said Vaughan.
"We are committed to a smooth implementation and want to help companies and
regulators comply with the new law's requirements as quickly and uniformly as
possible."
The interim guidance covers several mandates of the new law, including
policyholder disclosure requirements and the requirement that insurance
companies make coverage for terrorism risk, as defined by the Act, available to
their policyholders. The interim guidance released today follows the NAIC's release
of model disclosure forms last week. Treasury interim guidance states that use of
the NAIC's model disclosures constitutes compliance with the Act's disclosure
requirements while noting that the model disclosures are not the exclusive means
by which insurers may comply with the Act.
Treasury's interim guidance also provides useful information to commercial entities
that wish to obtain terrorism risk insurance. Insurance companies generally have 90
days to notify their policyholders of the Program and of any changes that may be
http://www.tretts.gov/press/releflses/p03663.htm
12/23/2002
PO-3663:ireasury Department Announces Interim Guidance On Terrorism Insurance for ... Page 2 of2
available in their insurance coverage and insurance premium as a result. In some
cases, policyholders must respond affirmatively within 30 days of the notice in order
to be covered under the Program.
Fisher also pointed to more work ahead for Treasury:
Near Term
Treasury plans to follow-up on the interim guidance by drafting regulations, where
appropriate. It also expects to provide guidance or regulations in the near future on
several other aspects of the program, including how Treasury intends to apply the
law to captive insurers and other self-insurance arrangements.
Treasury today also released a request for public comment on group life insurance
coverage. The Act requires Treasury to prepare, on an expedited basis, a study of
the impact of terrorism risk on group life insurers and on the availability of group life
insurance coverage and then to determine, in consultation with NAIC, whether to
apply the Program to group life insurers. The request for public comments, which
will be published shortly in the Federal Register, solicits information from the public
to assist in the study.
Moreover, Treasury intends to begin right away its work on a separate study and
report on the Program required by Section 108(d). In that provision, Congress
directed Treasury to "assess the effectiveness of the Program and the likely
capacity of the property and casualty insurance industry to offer insurance for
terrorism risk after termination of the Program, and the availability and affordability
of such insurance for various policyholders, including railroads, trucking and public
transit." By initiating the study now, Treasury hopes to establish a baseline from
which to monitor developments in the industry and evaluate the Program on an
ongoing basis over its life.
Intermediate Term
Treasury intends to establish a Terrorism Risk Insurance Program Office, headed
by a Program Administrator, to carry out many of Treasury's responsibilities under
the Act, including claims processing.
As part of that effort, Treasury will carry out the President's instructions for a rule
requiring approval of settlement of causes of action as part of the claims processing
framework.
Treasury expects to send the interim guidance this week to the Federal Register for
publication, and it is also available on Treasury's website, www.treasury.gov/trip.
Related Documents:
•
•
Interim Guidance
Group Life
http://www.trea6.gov/pr~releases/po3663.htm
12/23/2002
Billing Code 4810-25-M
DEPARTMENT OF THE TREASURY
Departmental Offices
Interim Guidance Concerning New Statutory Disclosure and Mandatory
Availability Requirements of the Terrorism Risk Insurance Act of 2002
AGENCY: Department of the Treasury, Departmental Offices
ACTION: Notice.
SUMMARY: This notice provides interim guidance to insurers concerning certain
statutory disclosure and mandatory availability requirements contained in the Terrorism
Risk Insurance Act of2002 (Pub.L.I07-297). In addition, this notice provides interim
guidance to insurers concerning the types of commercial property and casualty insurance
covered by the Act and concerning the term "direct earned premium" as used in the Act.
DATES: This notice is effective immediately and will remain in effect until superceded
by regulations or by subsequent notice.
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,
Office of Financial Institutions and GSE Policy 202-622-2730; Martha Ellett,
Attorney-Advisor, Office of Assistant General Counsel (Banking and Finance) 202622-0480.
SUPPLEMENTARY INFORMATION:
This notice provides interim guidance to assist insurers in meeting certain requirements
of the Terrorism Risk Insurance Act of 2002 pending the issuance of regulations by the
Department of the Treasury. The interim guidance contained in this notice may be relied
upon by insurers in complying with these statutory requirements prior to the issuance of
regulations, but is not the exclusive means of compliance. This interim guidance remains
in effect until superceded by regulations or subsequent notice.
I. Background
On November 26, 2002, the President signed into law the Terrorism Risk Insurance Act
of 2002 (the Act). The Act became effective immediately. It establishes a temporary
federal program of shared public and private compensation for insured commercial
property and casualty losses resulting from an act of terrorism, as defined in the Act. The
Terrorism Risk Insurance Program is administered and implemented by the Department
of the Treasury(Treasury) and will sunset on December 31,2005.
II. Interim Guidance
Treasury will be issuing regulations to administer and implement the Program This
notice is issued to assist insurers in complying with certain statutory requirements prior to
the issuance of regulations. This notice contains interim guidance on disclosures required
by sections 103 and 105 of the Act and concerning compliance with the mandatory
availability requirements in section 103( c) of the Act. In addition, this notice provides
interim guidance concerning commercial lines of property and casualty insurance covered
by section 102( 12) and concerning the statutory term "direct earned premium." Treasury
also may iSSl£ additional interim guidance as necessary prior to the issuance of
regulations.
A. Disclosure s to Policyholders
What Disclosures Are Required by the Act in Section 103 (b )(2)?
The Act requires that disclosures be made to policyholders as part of the conditions for
Federal payments under the Terrorism Risk Insurance Program. Section 103(b)(2)
requires an insurer to provide clear and conspicuous disclosure to the policyholder of the
premium charged for insured losses covered by the Terrorism Risk Insurance Program
and the Federal share of compensation for insured losses under the Program.
•
•
•
For existing (in- force) policies issued before the date of enactment (November 26,
2002), the Act requires that disclosure to the policyholder be made not later than
90 days after November 26,2002;
For policies issued within 90 days of November 26, 2002, the Act requires the
disclosure to the policyholder be made at the time of offer, purchase and renewal
of the policy; and
For policies issued more than 90 days after November 26, 2002, the Act requires
disclosure on a separate line item in the policy at the time of offer, purchase and
renewal of the policy.
What Disclosures (or Statements) Are Required by the Reinstatement Provisions in
Section 105(c) ofthe Act?
Section 105(c) of the Act allows an insurer to reinstate preexisting exclusions of coverage
for an act of terrorism in a contract for property and casualty insurance that is in force on
the date of enactment, notwithstanding the general nullification and general preemption
of terrorism exclusions in force on the date of enactment of the Act in Sectiorn 105(a)
and (b), but only if 1) the insurer has received a written statement from the insured that
affirmatively authorizes such reinstatement or 2) if (A) the insured fails to pay any
increased premium charged by the insurer for providing such terrorism coverage and (B)
the insurer provided notice, at least 30 days before any such reinstatement of (i) the
2
increased premium for such terrorism coverage and (ii) the rights of the insured with
respect to such coverage, including the date upon which the exclusion would be
reinstated if no payment is received.
How Mayan Insurer Comply with the Disclosure Requirements of Section 103(b)
(2)(A) If There is No Change in the Premium?
Prior to the issuance of regulations or further guidance by Treasury, any insurer that uses
the Model Form No.2 attached to the model bulletin on Terrorism Risk Insurance dated
November 26,2002 of the National Association of Insurance Commissioners (NAIC),
and posted on the NAIC website at
as a policyholder disclosure form for in- force policies, if the insurer makes no change in
the existing premium, will be deemed by Treasury to be in compliance with section
103(b )(2)(A).
How Mayan Insurer Comply with the Disclosure Requirements of Section 103(b)
(2)(B) for Policies Issued Within 90 Days of Enactment?
Either NAIC Model Disclosure Form No.1 which is posted on the NAIC website at
or NAIC
Model Disclosure Form No.2 which is posted on the NAIC website at
may be modified as appropriate by insurers for the particular policy and used for policies
issued within 90 days of enactment. Prior to the issuance of regulations or further
guidance by Treasury, any insurer that modifies as appropriate and uses either of these
model disclosure form; as its disclosure for policies issued within 90 days of enactment
of the Act will be deemed by Treasury to be in compliance with the Section 103(b )(2)(8)
disclosure requirements.
Mayan Insurer Use the Same Form to Comply with the Reinstatement
Requirements of Section 105(c) and the Disclosure Requirements of Section 103(b)
(2)(A) if Applicable?
Yes. Prior to the issuance of regulations or further guidance by Treasury, if applicable to
an existing policyholder, e.g. for in- force policies where there is a change of premium,
Treasury will deem disclosure by an insurer to an existing policyholder using NAIC
Model Disclosure Form 1, posted on the NAIC website at
to comply with the disclosure requirements of Section 105( c) of the Act, as well as with
the requirements of section 103(b )(2)( A).
Is This Interim Guidance the Exclusive Means By Which an Insurer May Comply
with Disclosure or Reinstatement Requirements of the Act?
No. This interim guidance concerning certain disclosures as specified above may be
relied upon by insurers as a safe harbor in complying with these requirements of the Act
3
until regulations or further guidance is issued by Treasury, but it is not the exclusive
means by which an insurer may comply with these requirements of the Act.
How Mayan Insurer Comply with the "Separate Line Item" Requirement in
Section 103 (b) (2)( C) for policies issued more than 90 days after the date of
enactment?
Treasury will be issuing additional interim guidance as appropriate, and will be issuing
regulations concerning other disclosure requirements, such as the separate line item
disclosure requirement.
Mayan Insurer Comply With the Disclosure Requirements of the Act Through a
Broker or Other Agent?
Yes. In many situations, commercial property and casualty insurance is procured for
policyholders through an insurance broker or other intermediary acting as agent for the
insurer. Prior to the issuance of regulations or further guidance by Treasury, if the
normal form of communication between an insurer and the policyholder is through an
insurance broker (or other intermediary acting as agent for the insurer), an insurer may
provide the Act's required disclosures through such age nts. While this interim guidance
permits an insurer to provide disclosures to its policyholders through an insurance broker
or other agent, the responsibility for ensuring that such disclosures are provided to
policyholders still rests with the insurer.
B. Mandatory Availability
What Does "Make Available" Mean?
From enactment through the end of Program Year 2 (December 31,2004), Section 103
(c) (1) of the Act requires that an insurer:
(A) shall make available, in all of its property and casualty insurance policies,
coverage for insured losses; and
(B) shall make available property and casualty insurance coverage for insured
losses that does not differ materially from the terms, amounts, and other coverage
limitations applicable to losses arising from events other than acts of terrorism.
Until Treasury issues regulations or provides further guidance on the requirements of
section 103(c), "make available" means an insurer is required to offer coverage to a
policyholder for acts ofterrorism (as defined in the Act) that does not differ materially
from the terms, amounts, and other coverage limitations offered to the policyholder for
losses from events other than acts of terrorism. For example, compliance with "make
available" means that insurers offer coverage for acts of terrorism (as defined in the Act)
at deductibles and limits that do not differ materially from the coverage provided for
other perils.
4
For the purposes of this interim guidance, the "make available" requirement does not
mean that insurers must make available coverage for all types of risks. For example, if an
insurer does not cover all types of risks, either because the insurer is outside of direct
State regulatory oversight or a State permits exclusions for certain types of losses (e.g.,
nuclear, biological, or chemical events) an insurer would not be required to make such
coverage available.
This interim guidance is consistent with the Act's stated purpose of ensuring widespread
availability of terrorism risk insurance while preserving State insurance regulation.
During the course of implementing the Program, Treasury will be monitoring the pricing
and availability of terrorism risk insurance coverage as part of the Act's requirements that
Treasury study the effectiveness of the Program (Section I 08( d)( I)) and compile
information on the premium rates of insurers (Section 104(£).
How May Insurers Comply with the "Make Available" Provision?
For purposes of this interim guidance, an insurer that makes a formal offer of coverage to
a policyholder that does not differ materially from the terms (other than price), amounts
and other coverage limitations offered to the policyholder will be deemed in compliance
with the "make available" requirement.
Mayan Insurer Offer Coverage for Acts of Terrorism (as Defined in the Act) that
Differs Materially from the Terms, Amounts, and Other Coverage Limitations for
Losses Arising From Events Other than Acts of Terrorism?
For the purposes of this interim guidance, an insurer may offer coverage that is on
different terms, amounts, or coverage limitations as long as the insurer satisfies the
"make available" requirements (as described in the previous question and answer) and as
long as such offers do not violate any State laws or regulations. For example, in a State
that requires the provision of full coverage without any exclusion, the Act would not
preempt that State's preexisting requirements. In contrast, if a State permits certain
exclusions or allows for other limitations, or if an insurance policy is not directly
governed by State requirements, then after first satisfying the "make available"
requirement (as described in the previous question and answer), an insurer could offer
limited coverage or coverage with exclusions.
C. Property and Casualty Insurance and Direct Earned Premium
What Types of Property and Casualty Insurance are Covered by the Program?
Section 102(12) of the Act defines property and casualty insurance to mean commercial
lines of property and casualty insurance, including excess insurance, workers'
compensation insurance, and surety insurance.
As interim guidance prior to the issuance of regulations, Treasury deems the following
lines of insurance from the NAIC's Exhibit of Premiums and Losses (commonly know as
5
Statutory Page 14) to be included in the Program: Line 1 - Fire; Line 2.1 - Allied Lines;
Line 3 - Fannowners Multiple Peril; Line 5.1 - Commercial Multiple Peril (non-liability
portion); Line 5.2 - Commercial Multiple Peril (liability portion); Line 8 - Ocean
Marine; Line 9 - Inland Marine; Line 16 - Workers' Compensation; Line 17 - Other
Liability; Line 18 - Products Liability; Line 19.3 - Commercial Auto No-Fault (personal
injury protection); Line 19.4 - Other Commercial Auto Liability; Line 21.2 Commercial Auto Physical Damage; Line 22 - Aircraft (all perils); Line 24 - Surety;
Line 26 - Burglary and Theft; and Line 27 - Boiler and Machinery.
Section 102(12) (B) of the Act lists types of insurance coverage that are excluded from
the Program. These are private mortgage or title insurance; financial guaranty insurance
issued by mono line financial guaranty insurance corporations; insurance for medical
malpractice; health or life insurance, including group life insurance; flood insurance
provided under the National Flood Insurance Act of 1968; and reinsurance or
retrocessional reinsurance.
In addition, the Act excludes, ''Federal crop insurance issued or reinsured under the
Federal Crop Insurance Act, or any other type of crop or livestock insurance that is
privately issued or reinsured." As interim guidance to facilitate implementation,
Treasury deems the phrase "any other type of crop or livestock insurance that is privately
issued or reinsured" to mean Multiple Peril Crop insurance reported on Line 2.2 of the
NAIC's Exhibit of Premiums and Losses (commonly know as Statutory Page 14).
How is Direct Earned Premium Measured?
The Act contains the tenn "direct earned premium." The Act specifies an insurer's direct
earned premiums over a given calendar year as the deductible base for purposes of
calculating an "insurer deductible" as defined in section 102(7) of the Act. Forpurposes
of interim guidance to enable insurers that report to the NAIC to calculate their "insurer
deductible" and to facilitate immediate implementation of the Program, the tenn "direct
earned premium" means the direct premiums earned as reported to the NAIC in the
Annual Statement in column 2 of the Exhibit of Premiums and Losses (commonly known
as Statutory Page 14). Treasury will be issuing additional guidance for entities covered
under the Program that do not report to the NAIC.
Dated: December 3, 2002
Peter R. Fisher
Under Secretary of the Treasury
6
Billing Code 4810-25
DEPARTMENT OF THE TREASURY
Departmental Offices
Study of the Impact of Threat of Terrorism on Availability of Group Life Insurance
AGENCY: Department of the Treasury, Departmental Offices.
ACTION: Notice; Request for Comments.
SUMMARY: Recently enacted terrorism insurance legislation requires the Secretary of
the Treasury (Treasury) to study, on an expedited basis, whether adequate and affordable
catastrophe reinsurance for acts of terrorism is available to life insurers in the United
States that issue group life insurance, and the extent to which the threat of terrorism is
reducing the availability of group life insurance for consumers in the United States. To
assist in this study, the Treasury is soliciting comments on the questions listed below.
DATES: Comments must be in writing and received by [INSERT DATE THAT IS 30
DAYS AFTER THE DATE OF PUBLICATION].
ADDRESSES: Send comments bye-mail to uroupiilcstmlv(u'clo.trcas.gov. Please
include your name, affiliation, address, e- mail address, and telephone number. All
submissions should be captioned "Comments on Group Life Insurance Study".
1
FOR FURTHER INFORMATION CONTACT: Lucy Huffman, Project Manager,
Office of Microeconomic Analysis, 202-622-0198; John Worth, Acting Director, Office
of Microeconomic Analysis, 202-622-2683; U.S. Treasury Department.
SUPPLEMENTARY INFORMATION:
Section 4(h) of the Terrorism Risk Insurance Act of 2002 (Public Law No. 107-297)
(Act) requires the Treasury to study, on an expedited basis, whether adequate and
affordable catastrophe reinsurance for acts of terrorism is available to life insurers in the
United States that offer group life insurance, and the extent to which the threat of
terrorism is reducing the availability of group life insurance coverage for consumers in
the United States. To the extent that the Treasury determines that such coverage is not or
will not be reasonably available to both such insurers and consumers, the Treasury is
directed to apply, in consultation with the National Association of Insurance
Commissioners, the provisions of the Act, as appropriate, to group life insurers; and
provide such restrictions, limitations, or conditions with respect to any financial
assistance provided that Treasury deems appropriate, based on this study.
The purpose of the Act is to establish a temporary Federal program that provides for a
transparent system of shared public and private compensation for insured losses resulting
from acts of terrorism, in order to protect consumers by addressing market disruptions
and ensure the continued widespread availability and affordability of property and
casualty insurance for terrorism risk; and to allow for a transitional period for the private
2
markets to stabilize, resume pricing of such insurance, and build capacity to absorb any
future losses, while preserving state insurance regulation and consumer protections.
Treasury is soliciting comment in response to the following questiorn, including
empirical data in support of such comments where appropriate and available.
I.
The impact of terrorism risk on group life insurers
1.1 Who are the suppliers of the group life insurance in the U.S.; who are the buyers; and
how are sellers and buyer brought together?
1.2 What is the corporate status of group life insurers? Are they generally stand-alone
companies, or affiliates of other corporations? If the latter, what are the major
business interests of the other corporations?
1.3 What characterizes group life insurance offerings? Please describe typical terms of
coverage, offer and renewal procedures, and other relevant information.
1.4 How is group life insurance regulated in the U.S.? Are there are significant
differences in group life regulation among the states and, if so, what are these
differences?
1.5 What are the risk exposures of customers and how are they concentrated-by locality,
by type of employer, other? What is the annual premium structure for these different
exposures?
3
1.6 What amounts of loss exposure are typically reinsured? Please describe the structure
of typical reinsurance contracts, including the period of coverage and typical renewal
process.
1.7 What was the amount of group life insurance losses in the terrorist attack of
September 11, 2001; and ho w was it distributed-losses to insurers versus losses to
reinsurers? How was it distributed within each group?
1.8 What was the availability and price of reinsurance in the period before and following
September 11, 2001, for group life insurance? What is it today? Please be specific by
type and amount of coverage available, deductible, sublimit, renewability, and other
relevant characteristics.
1.9 What is the current capacity of group life insurers in the U.S. to bear terrorism risk,
individually and as affiliates of other companies, taking into consideration their
reinsurance situation? Please provide empirical support for responses as available
and appropriate.
1.10
Are there other sources of protection for terrorism risks in group life insurance,
e.g., through capital markets? To what extent are these sources used currently? What
are the issues associated with expanded use of these sources?
1.11
Please address and provide empirical support for whether group life insurers have
reasonable access to adequate and affordable catastrophe reinsurance, and, if not, why
inclusion in the Act would correct this situation. In so doing, please compare the
magnitude and scope of the situation of group life insurers to the situation previous to
the passage of the Act of those property and casualty insurers that are included in the
Act.
4
II.
The impact of terrorism risk on group life insurance markets
2.1 Please describe in detail, current group life insurance market conditions, including
availability and pricing, by type and location of emplo yers and other purchasers.
2.2 What is the impact of terrorism risk on group life insurance availability for employees
and other consumers? Please describe in as much detail as possible which employees
and other consumers have been significantly affected, including availability and
pricing, by type and location of employer or other purchaser of group life coverage.
2.3 What is the cost and availability of alternative sources of life insurance coverage for
those employees and other consumers affected by the reduced availability and
affordability of group life insurance?
2.4 Please explain and provide empirical support concerning the extent to which the
threat of terrorism is reducing reasonable availability of group life insurance coverage
for employees and other consumers in the U.S., and whether it would continue to be
reduced if group life insurers continue to be excluded from the Program. Please
compare the magnitude and scope of the impact on consumers of not including group
life insurance to the impact on consumers previous to the passage of the Act of those
property and casualty insurance lines covered under the Act. Please explain how
inclusion would correct this situation.
III.
The Potential for Inclusion in the Federal Program
5
3.1 Treasury presumes that, if it would be appropriate to include group life insurance
under the Act, Treasury would apply the current provisions of the Act to group life
insurers. If this is not the case, please discuss and provide a detailed explanation of
the changes that would need to be made to implement the Program for group life
insurers. Please include discussion of any operational difficulties with applying the
current provisions in the Act to group life insurers, any other characteristics of group
life insurance that should be considered with respect to any financial assistance if
group life insurers were included under the Act, and the benefits and costs, including
administrative costs, of any proposed changes to the provisions for group life
Insurers.
Dated:
Mark Warshawsky
Deputy Assistant Secretary for Economic Policy
Microeconomic Analysis
6
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FROM THE OFFICE OF PUBLIC AFFAIRS
December 3, 2002
PO-3664
"A Fresh Perspective on U.S.-EU Economic Relations"
U.S. Deputy Treasury Secretary Kenneth W. Dam
CSIS Transatlantic Conference
Washington, D.C.
December 3, 2002
This morning I'd like to offer a fresh perspective on U.S.-EU economic relations. If
you've been reading the financial press on a regular basis, you might think the U.S.
and the EU were fighting a transatlantic trade war.
Let me read you some recent headlines: "EU allowed to retaliate up to $4 billion
dollars;" "Steel tariffs stir transatlantic trade unrest;" "U.S. farm bill coldly received in
Europe." Fortunately, international economic relations are about more than just
headlines.
The facts tell a different story. Inthe last decade, the U.S.-EU economic
relationship, when measured as trade plus investment, has swelled into the largest
and most complex on earth. U.S. investors are deeply invested in Europe's growth,
and vice-versa. You might not realize it, but more than 800 of Europe's best
companies choose to list their shares, in the form of American Depository Receipts,
on U.S. stock exchanges.
Sure, every so often, the U.S. and the EU experience "trade rows," - as our British
friends call them - but trade disputes are inevitable given the scope of our economic
ties. In any event, the real action today in international trade is not in the WTO
dispute settlement process, but in the new Doha Round of negotiations. There we
have put on the table unprecedented proposals for the reduction of barriers in both
agricultural and industrial products. We propose to eliminate agricultural export
subsidies and greatly reduce agricultural support payments, as well as to eliminate
all tariffs on industrial products by 2015.
The fact is that the overall U.S.-EU relationship is about more than just trade. We
have devoted new resources to fighting the financial war on terrorism, collaborating
with our EU counterparts on new financial and regulatory changes, and working to
find common ground on the issue of data privacy.
Therefore, while I am open to questions regarding U.S.-EU trade relations, I'd like
to spend the next few minutes exploring some of the less sensational aspects of the
U.S.-EU economic relationship. Let's start with the financial war against terrorism.
The Financial War on Terrorism
Since September 11 th, the U.S. and the EU have campaigned jointly to designate
terrorist entities and their financial backers, and then to freeze their assets. For
example, nearly every terrorist individual and entity deSignated by the U.S. also has
been designated by the EU or some of its member states. Moreover, the U.S. and
the EU have established a fluid, informal mechanism for sharing information on
terrorists and their supporters. Action also was taken by the EU against the al-Aqsa
Martyrs Brigade, a group that has taken responsibility for a number of suicide
bombings in Israel.
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Recent terrorist finance developments at the EU member-state level also are
positive. In September, we co-chaired with Spain an important meeting of the
Financial Action Task Force to discuss international standards and measures being
taken in the war against terrorist financing. In August, Italy joined the U.S. in
submitting to the UN 1267 Sanctions Committee the names of 25 individuals and
entities linked to al Qaida for asset freezes. The Dutch Government recently froze
the assets of the "New Peoples Army" and its leader Jose Sison, both known to be
responsible for the killing of American citizens in the Philippines. Both France and
Germany have submitted names in the past few months to the UN 1267 list.
However, differences remain on key issues of process and implementation, and
they need to be resolved.
For instance, the EU's "clearinghouse process" is too cumbersome, and it should
be streamlined. Given the threat we face, it still takes far too long for terrorist
names to submitted and considered for designation by the EU.
Equally troubling is the fact that under current EU treaty interpretation, the EU
cannot direct member states to block the assets of individuals and entities of socalled "internal terrorists." Since not all of the fifteen EU countries have domestic
blocking laws that allow them to block assets of terrorism-linked persons
independent of EU action, the assets of "internal terrorists" are being left unblocked
in a number of European countries. The terrorist threat is too serious to be left
unchallenged because of how the EU chooses to organize itself in the terrorist
finance area.
Separately, there also is a general reluctance throughout Europe to designate the
social and religious arms of Hamas and Hizballah as terrorist entities. The United
States has rejected the notion that "firewalls" exist between the militant, social and
religious arms of Hamas and Hizballah, and I urge our European counterparts to do
the same. Not only is money fungible, but no evidence has been brought forward to
establish the existence of any such "firewall."
Our EU counterparts should understand that Secretary O'Neill and I are committed
to pressing for resolution on these critical issues. In fact, we anticipate doing so
again next week, when EU Commissioner Bolkenstein will be visiting the Treasury.
We welcome the generally good cooperation in the financial war on terrorism to
date, and now is the time to confront the remaining issues.
During the meeting with Commissioner Bolkenstein, we also plan to discuss a host
of financial and regulatory matters of mutual concern.
U.S.-EU Financial and Regulatory Cooperation
As in the financial war on terrorism, we are working together on financial and
regulatory changes that have transatlantic consequences. A good example is
Europe's plans to introduce a single financial market in 2005.
Ever since the idea of took shape, the United States has been very supportive of
the EU's Financial Services Action Plan (FSAP) for a single financial market. If
properly implemented, we believe the Plan will stimulate economic growth in
Europe while facilitating international capital flows and providing advantageous
opportunities to borrowers and savers. Our most general concern is in seeing that
the process of European capital market integration is well-managed and fair to all
market participants.
Specifically, we have made our EU counterparts aware of cases where newly
proposed EU financial directives adversely impact non-EU companies operating in
EU-regulated markets. Recently, we voiced concerns that new EU directives under
consideration governing the issuance of prospectuses, capital adequacy,
investment services and financial conglomerates, for example, could discriminate
against U.S. firms in unintended ways.
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Take, for example, the Financial Conglomerates Directive. Under the directive,
U.S.-based investment banks operating in Europe would be subject to supervision
at the holding company level. In the United States, however, investment banks are
supervised by the SEC at the broker-dealer level - not at the holding company
level. Therefore, absent a finding of "equivalent" oversight by EU authorities, U.S.based investment banks operating in Europe no doubt would face higher
compliance and operating costs. Presently, officials in Brussels have been
supportive of our efforts to resolve this problem, and we are continuing to work with
officials from the UK's Financial Services Authority to try to address specific
concerns they have raised.
In order to manage these and other cases of regulatory "spillover" that crop up on
both sides of the Atlantic, and more generally to have a two-way dialogue on key
financial market issues of import to both sides, Treasury created an informal US-EU
financial markets dialogue early this year. Treasury and the European Commission
chair the dialogue and are accompanied by our financial regulators. A number of
informal dialogue meetings have been held in Brussels and Washington to date.
Next week, Commissioner Bolkestein who overseas the Internal Market Directorate
will visit Washington and he plans to meet with Secretary O'Neill at that time for
further discussions on these financial market issues.
While conflicts are inevitable given our varied experiences and attitudes toward
financial regulation and oversight, the Financial Market Dialogue has been a
successful forum for openly airing concerns on both sides. Both sides share the
same objectives: sound financial market supervision and regulation and efficient
capital markets that generate real benefits to firms and investors on both sides of
the Atlantic. I have been impressed by the depth and professionalism of the talks
thus far.
The Financial Markets Dialogue has also begun dealing with the issue of
accounting. Here, the general level of cooperation is high, and for the moment
convergence between our respective standards of accounting seems a mid-range
possibility.
In June 2002, the EU called upon all 15 member states to move from national
accounting standards to International Accounting Standards (lAS) by 2005. This
means that all 7,000 firms listed in the EU soon will be adopting the same
accounting standards. Only a month later, President Bush signed the SarbanesOaxley Act, which introduces stricter government oversight of the audit process for
public companies, in accordance with Generally Accepted Accounting Principles
(GAAP). Though we share common goals on beUer corporate disclosure, both
actions - as you might imagine - raised eyebrows on the opposite side of the
Atlantic, as corporations feared that the costs of reconciliation and compliance
would increase significantly.
Fortunately, how these more muscular regulatory schemes will be implemented and
enforced is being discussed openly by U.S. and EU regulatory officials, with market
input. This needs to continue. The SEC recently even indicated its willingness to
reconsider accepting lAS for firms listed on U.S. exchanges without reconciliation to
U.S. GAAP, provided there is consistent interpretation and enforcement at the EU
level, across all member countries. Convergence needs to be about not just
reducing differences in treatment, but also about optimizing the respective
advantages of each approach to ensure the best reporting and specific guidance on
particular kinds of transactions.
I also understand that the Financial Accounting Standards Board (FASB), which
mandates accounting standards in the United States, recently added convergence
to its formal work agenda. This is a positive development, as is the FASB's and
lAS' recent "Norwalk Agreement," which acknowledges a commitment to the
development of high-quality compatible accounting standards that could be used for
domestic and cross-border financial reporting. After all, capital markets are rapidly
becoming a worldwide feature and regulations need to keep pace.
Data Privacy
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Finally, my discussion of U.S.-EU economic relations would not be complete
without a brief word or two on data privacy.
Last July, Peter Fisher, Treasury's Under Secretary for Domestic Finance led a
group of financial regulators to Brussels for a set of talks on the issue. Initial
meetings with EU Commission officials and with EU member state data protection
commissioners were highly educational, for both sides.
Even on this complex issue. we hope to continue to work toward understanding the
concerns of our EU counterparts, so that we may explain best how U.S. laws and
regulations provide adequate protection under the EU directive. After all, we have a
common interest in privacy on both sides of the Atlantic, and it is not so important
what we term the resolution of our differences, but that we recognize that both
sides' interests can be accommodated when we make dOing so our primary
objective.
Thank you.
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PRess ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 3, 2002
PO-3665
Statement of
Treasury Under Secretary for Domestic Finance Peter R. Fisher
On Interim Guidance on Terrorism Insurance for Insurance Industry
Thank you all for coming.
I would like to welcome Terri Vaughan, President of the National Association of
Insurance Commissioners and the Iowa Insurance Commissioner.
I would also like to introduce Wayne Abernathy who was sworn in yesterday as our
new Assistant Secretary for Financial Institutions. Wayne has arrived just in time to
lead the implementation of the Terrorism Risk Insurance Program.
Last Tuesday, President Bush signed into law the Terrorism Risk Insurance Act of
2002.
Effective Immediately - Benefits Start now
The Terrorism Risk Insurance Program became effective upon enactment by the
President. Commercial property and casualty insurance companies now are
required to make terrorism insurance coverage available to their policyholders and,
in many cases, such coverage is in place today as a result of the legislation. That is
good news for our economy.
Through the working of the competitive marketplace, the economic benefits
expected as a result of the Program should begin to be realized in the near term.
The new law establishes a temporary Federal program that provides for a system of
shared public and private compensation for insured commercial property and
casualty losses arising from acts of terrorism under the Act. The program will be
administered by the Treasury Department and will sunset on December 31,2005.
Role of State Insurance Regulators
Terri Vaughan's presence here today is very important to Treasury.
The Program relies upon the state insurance oversight mechanism to monitor
insurance companies' implementation of and compliance with, many of the
program's requirements.
Our partnership with the state insurance regulators has worked very well, and in the
upcoming months Treasury will continue to work closely with the state insurance
regulators on the implementation process.
Purpose Today - Issue Interim Guidance
The purpose of today's press conference is to announce that Treasury is releasing
today interim guidance that will assist the insurance industry in meeting certain
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requirements under the Act.
This guidance is available on the web site we set up for the program,
www.treasgov/trip. We expect to send the interim guidance this week to the
Federal Register for publication.
The interim guidance covers several requirements of the new law, including
policyholder disclosure requirements and the requirement that insurance
companies make coverage for terrorism risk, as defined by the Act, available to
their policyholders.
Policyholder Disclosures
Last week, Terri Vaughan and her fellow state insurance commissioners issued a
bulletin to insurers that contained model disclosures that insurance companies
could use in satisfying the Act's policyholder disclosure requirements.
The interim guidance Treasury is releasing today states that use of the NAIC's
model disclosures constitutes compliance with the Act's disclosure requirements.
In other words, if an insurer uses the appropriate NAIC model disclosure form in
disclosing the Program to its policyholders, it will be deemed by Treasury to be in
compliance with the law's disclosure requirements.
We are grateful to the NAIC for their quick action in preparing these model
disclosures. At the same time, insurers should also note that the model disclosures
are not the exclusive means by which they may comply with the Act.
The disclosure guidance also provides useful information to commercial entities that
wish to obtain terrorism risk insurance. Insurance companies generally have 90
days to notify their policyholders of the Program and of any changes that may be
available in their insurance coverage and insurance premium as a result. In some
cases, policyholders must respond affirmatively within 30 days of the notice in order
to be covered under the Program.
Make Available
From enactment through the end of December 2004, the Act requires that an
insurer shall make available, in all of its property and casualty insurance policies,
coverage for insured losses that does not differ materially from the terms, amounts,
and other coverage limitations applicable to losses arising from events other than
acts of terrorism.
Until Treasury issues regulations or provides further guidance on this requirement,
"make available" means an insurer is required to offer coverage to a policyholder for
acts of terrorism (as defined in the Act) that does not differ materially from the
terms, amounts, and other coverage limitations offered to the policyholder for
losses from events other than acts of terrorism.
For example, compliance with "make available" means that insurers offer coverage
for acts of terrorism (as defined in the Act) at deductibles and limits that do not differ
materially from the coverage provided for other perils.
Group Life
Today we are also releasing a request for public comment on group life insurance
coverage.
The Act requires Treasury to prepare, on an expedited basis, a study of the impact
of terrorism risk on group life insurers and on the availability of group life insurance
coverage and then to determine, in consultation with NAIC, whether to apply the
Program to group life insurers.
http://www.treds.gov/pre~ ../reletl6e6/po3665.htm
12/23/2002
PO-3665: Under Secretary for Domestic Finance Peter Fisher On Interim Guidance on Te... Page 3 of3
The request for public comments, which will be published shortly in the Federal
Register, solicits information from the public to assist in the study.
Next Steps - Near Term
Treasury plans to follow-up on the interim guidance by drafting regulations, where
appropriate.
We also expect to provide guidance or regulations in the near future on several
other aspects of the program, including how Treasury intends to apply the law to
captive insurers and other self-insurance arrangements.
We also intend to begin right away our work on a separate study and report on the
Program required by Section 108(d). In that provision, Congress directed Treasury
to "assess the effectiveness of the Program and the likely capacity of the property
and casualty insurance industry to offer insurance for terrorism risk after termination
of the Program, and the availability and affordability of such insurance for various
policyholders, including railroads, trucking and public transit." By initiating the study
now, Treasury hopes to establish a baseline from which to monitor developments in
the industry and evaluate the Program on an ongoing basis over its life.
Next Steps - Intermediate Term
As the Secretary announced last week, Treasury intends to establish a Terrorism
Risk Insurance Program Office, headed by a Program Administrator, to carry out
many of Treasury's responsibilities under the Act, including claims processing.
As part of that effort, Treasury will carry out the President's instructions for a rule
requiring approval of settlement of causes of action as part of the claims processing
framework.
http://www.treas.!ov/pri66/rilia~~~po3665.htm
12/23/2002
PO-3666: Deputy Assistant Secretary for Federal Finance Timothy S. Bitsberger To The .,.
Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
December 4, 2002
PO-3666
Remarks of Treasury Deputy Assistant Secretary for Federal Finance
Timothy S. Bitsberger
To The Fixed Income Summit
Palm Beach, FL
When I was invited to participate in today's panel on interest rates, I was as
surprised as anyone that the word "yes" came out of my mouth. It is not a surprising
invitation, given how important interest rates are to me in meeting my job objective
of providing Secretary O'Neill with advice on how to best finance the Government.
After all, our number one objective is to finance the Government at the lowest cost
over time. What you may not be aware of, is how little a role interest rates play in
the advice I provide.
We issue debt regularly and in predictable quantities, rather than opportunistically.
A consequence of regular and predictable issuance is that we are not in a position
to tailor debt issuance to interest rates. And as I just said, not only does this make
sense for Treasury but we really have no other choice.
If Treasury officials were to alter issuance to take advantage of interest rate
fluctuations, they would not nece!5sarily lower borrowing costs - any price
concessions from exercising market power are likely to be more than offset by the
your superior resources devoted to understanding interest rate movements and
modeling our behavior.
Aside from lacking resources -- the office of market finance has no more than four
people devoted to debt policy -- it is difficult to think of a multi trillion-dollar-a-year
annual issuer of debt as nimble. The shear scale of our operations dictates a high
degree of regularity in issuance. What we have done at Treasury is turn some
degree of necessity into a high degree of commitment. So we don't hold snap
unscheduled auctions for a given maturity when yields appear low, and we don't
even take the yield curve into account when we allocate how much to raise by
different maturities Our issuance calendar is well known to every trader or investor
involved in our market. The auction calendar is published months in advance. I
have no doubt that the trader in all of us believes that he or she could "beat" the
market by opportunistically managing treasury's debt issuance. But once we start
to try and capture interest rate moves on the margin we will have become traders
and not debt managers. The risks associated with our own judgments are
insurmountable. We can't trade our way out of a bad position.
Underlying this regularity of issuance, however, is an entity managing the world's
largest cash flows. Over the past year, Treasury received and spent roughly $2
trillion.
As most of you know expenditures and receipts do not coincide - we make large
entitlement payments at the beginning of months and receive cash sporadically
throughout months, with receipts lumped unevenly around only a few tax dates.
Part of my job is to figure out how to efficiently manage uneven cash flows with
regular debt issuance. Part of the consequence of my advice is huge cash swings
in Treasury accounts held in the banking system.
It is not unusual for our cash accounts to swing by more than $50 billion over the
space of a few days. By contrast, if we were to change issuance by more than a
http://www.tr~ds.gov/pre5~/relea5e5/po3666.htm
12123/2002
PO-3666: Deputy Assistant Secretary for Federal Finance Timothy S. Bitsberger To The...
Page 2 of 3
few billion from one auction to the next, we would surprise market participants. Our
situation is further constrained by Treasury's strict collateral requirements with the
banks that hold our cash balances. Constraints, however, do not alter our
objective: the better we can manage our cash balances, the better we can serve
the taxpayer.
In managing these balances, we face a significant challenge in how we respond to
the uncertainty associated with our cash flows. We know that we will have large
seasonal swings in our cash balances and we know when those swings will occur,
but we don't know how big they will be. Our ability to respond to these fluctuations
is limited by our auction calendar - our most flexible tool, weekly bill issuance,
settles once a week and our longer term securities only settle on a monthly or
quarterly basis.
Uncertainty about the future also constrains debt management planning. We have
to be prepared to finance either sustained surpluses or deficits. The range of
potential fiscal outcomes is pretty remarkable - CBO measures this range over a
five-year horizon in trillions of dollars. My job is to ensure that, no matter which
outcome materializes, Treasury will be able to finance the Government's needs
without forgoing its commitment to regular issuance. Because we are regular,
because we want to prepare the market, our auction calendar must be able to adapt
to a variety of outcomes.
The average miss on the current year of forecasting, and this includes street
economists, CSO and OMB - and I repeat - the average miss on the current year
after four months of actuals is $758. That's pretty amazing. This makes the job of
debt manager tricky because we already saw how limited our options can be.
As a result of this uncertainty, we cannot "time" expectations. That is, debt
management cannot be predicated on daily, weekly or monthly concerns about
what mayor may not be a change in the economy. Changes in debt management
are based on a deliberative process after consultation with market participants. We
have a formalized, transparent process around our quarterly borrowing so that we
can solicit your views before we make issuance changes and you can read about
the factors that influence our decisions. The process deliberately prohibits
decisions based on short-term expectations. This slow and predictable behavior is
frustrating to many of you, but once again, if our decisions are wrong, we can't call
up dealers and get out of positions.
While we do not, and cannot, base our decisions on current interest rates, we think
continuously about how our issuance pattern influences our cost of borrowing. This
thinking is motivated by Secretary O'Neill who has challenged us to improve all
facets of our operations. Faster auction times, increased transparency, better
systems, and improved analytics are helping us achieve this goal, but we seek
further improvements.
On the operations side, I invite you to test our systems by participating directly in
our auctions. Our current distribution system works exceptionally well, but for those
of you who have or considered participating in an auction, Treasury now offers safe
(word) point and click capability.
On the debt policy side, I encourage you to think about our issuance and how we
can reduce our interest costs. In October, we solicited views from our private
sector advisory committee on how to measure debt management performance.
Going forward, we will continue to seek views and formulate methodologies that will
provide better quantification of what we do and how we do it.
I will conclude with a couple of observations about our issuance from a historical
perspective. Debt markets in the U.S. have grown more rapidly over the past two
decades than Treasuries. I view this as good for two reasons. One, it is a sign that
the government is playing a smaller role in financial markets. Two, from the
perspective of a debt issuer, our ?maller portion of supply means that we can issue
more cheaply and that our responses to the inevitable forecasting errors we face
are more easily absorbed by market participants.
http://www.tr~~.govfpreBs/relea6i6/po3666.htm
12/23/2002
PO-3666: Deputy Assistant Secretary for Federal Finance Timothy S. Bitsberger To The...
Page 3 of 3
In spite of this reduced position, I recognize that Treasuries act almost as a
currency for a wide range of transactions and that Treasuries playa special role in
asset allocations. I expect that these roles will grow over time as you, the users of
Treasuries, continue to develop faster and more efficient financing mechanisms.
I would like to thank you for your time and would be happy to take any questions.
http://www.trea6.gov/pre ••/relea~es/po3666.htm
12/2312002
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
December 03, 2002
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
28-Day Bill
December OS, 2002
January 02, 2003
912795LS8
1.210%
High Rate:
Investment Rate 1/:
Price:
1.227%
99.906
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 82.27%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
60,375,000
42,589
$
20,957,677
42,589
o
o
SUBTOTAL
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
$
60,417,589
21,000,266
2,303,232
2,303,232
62,720,821
$
23,303,498
Median rate
1.200%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.180%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 60,417,589 / 21,000,266 = 2.88
1/ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
Po
PO-3668: Deputy U.S. Treasury Secretary Kenneth Dam Announces Trip to South America Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
December 4, 2002
PO-3668
Deputy U.S. Treasury Secretary Kenneth Dam Announces Trip to South
America
Deputy Secretary Dam will travel to Chile, Ecuador, Colombia and Peru, December
7-14.
In high-level meetings with a wide array of senior government officials and private
sector political, financial and economic experts, Dam will discuss issues affecting
the common interest of the United States and the region; particularly development
efforts - such as investing in people through education and water projects, regional
stability, capital market development, and our continued cooperation on law
enforcement and money laundering efforts.
This is Dam's second trip to South America. In November 2002, Dam traveled to
Brazil to attend a World Economic Forum summit on Latin American business in
Rio de Janeiro.
http://www.treas.gov/press/releasesJpo3668.htm
12123/2002
FROM THE OFFICE OF PUBLIC AFFAIRS
December 4, 2002
PO-3669
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $75,749 million as of the end of that week, compared to $75,941 million as of the end of the prior week.
1
I
I. Official U.S. Reserve Assets (in US millions)
-- ----d-r---N~-~~~-b~~-2iiooi---N~v~~~;b~~ 2-9,-2002---~1
TOTAL i
75,941----------- !-----~ ------'5-,749--------- ------1
1. Foreign Curren~y Res~~~;l--------~----TOTAi- , Euro
Yen ---fTOTALi
----------~
--------------------------------
---------------r-----~-I
-
a. Securities
6,426
12,805 i 19,231 i 6,407
12,817 I 19,225 I
'a/which, issuer headq-';;rt;;ed i~-th;-u.i;~--~!-----------I-~---------!------O--------r-----------r-- ------------i-~-O----i
- - ----------------------------------'----- __________ '-____~___--'- _____________ c______________
_~_To_t_a~_de_p_o_sl_·t_sw~h: _______________ ~ __~________ I-----------,----
_______ -_________ 1
___________ I_~ _____~I
_________ ___
b.i. Other central banks and BIS
i 10,609 ! 2,571
:b.ii. Banks headqu~rtered i;th~-U.-S----------r--------r-
2,573
,--------- --- - - ; - - - - - 1
i
!
'
--.-------~-
u.s.
--,,--
-~-
__
._~ •• _ _ _ _
.n
-.---
~
~
,,~,---.-.~"-~-.--
b.iii. Of which, banks located in the U . S . !,
2. IMF Reserve Positi~~2----------------~------T ----- -----------~~-~~-------~--~~---,-----------
3. Special Drawing Rights (SDRs)
.------------- ---4. Gold Stock 3
----~---
----- ._-- -_._"-_._- -
--
I
I
'
0
- ----- - - -- 20,582
li
0
!
0
I
_____________ i ____ ~ ______ --'
-·-·--I-~--
I1 20,482 I1
j--- ~- ------j
-
I
11,907
I
i
0
I
---'-------------~I
., - - --- --':---------1I
r -'--'---'-" -------1- --------
- ----- - - ----------r--- - - - -- - - - ---------[ - - - - - ------ - - ---
2
- --
1
---~-~
13,152 I
-----:--0---:
----~---------
b.iii. Banks headquartered outside the
I
i
._ ...--_ .. ----
11,849 !
-- ---- r--------------- ---I
11,042
----------- -
o___ ____ ____ _ ____ _ _ __ !
5. Other Reserve Assets
i
,--___
11,042 i
- --- - -----------1
I 0 J
_ ____________________
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
--~--------------------r--------------------------------------c-----------
I
November 22, 2002
["·---'----·-~·--·---·r-·--
I
---~-.-~--.------- .. -.---~-.-------.--.--- .. -~--- .. -".-
1. Foreign currency loans and securities
Euro
- _.- ---f·--------- - -----."
I
!
Yen
--
---- _.
-
i TOTAL
----1-- -_. ----- -- -
:
November 29,2002
!
--.-.--.--- --.- r - ----- ---- -~. "------ -
I
-- - ------------------~--~---I
..- ._. _.
;-
Euro
i
-1-
O!
i
[" -... ------ -_. --- -;
Yen
i TOTAL !
-----
I
i
0;
- - - - . - -.-----------.--------.---------.----~------------.--------- ---·--··-~--------··-·-l
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
.
. _ .. __ .___ ._" ___ .. _ _ ... J
o
o
o
2.a. Short positions
2.b. Long positions
3. Other
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
November 22, 2002
Euro
1. Contingent liabilities in foreign currency
Yen
TOTAL
November 29, 2002
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
l.a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign cunency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and otherjinancial institutions
Headquartered in the
u.s.
3.c. With banks and otherfinancial institutions
Headquartered outside the
u.s.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Writtcn puts
Notes:
I Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
leposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3 Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week may be
subject to revision. IMF data for the prior week are final.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
PO-3670: Air Transportation Stabilization Board's Decision on United Air Lines' Propos... Page 1 of 1
PRess ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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Ruaciel~i').
December 4, 2002
PO-3670
Air Transportation Stabilization Board's Decision on United Air Lines'
Proposal for a Federal Loan Guarantee
The Air Transportation Stabilization Board (Board) announced today that it cannot
approve the proposal submitted by United Air Lines, Inc. for a $1.8 billion federal
guarantee of a $2.0 billion loan.
The Board believes that the business plan submitted by the company is not
financially sound. This plan does not support the conclusion that there is a
reasonable assurance of repayment and would pose an unacceptably high risk to
U.S. taxpayers.
The Board believes that United's business plan does not position the company to
meet the challenges of the current airline industry environment and to achieve longterm financial stability. Specifically, the plan is based on unreasonably optimistic
revenue projections. The Board believes that with a more reasonable revenue
forecast, United's revenues and costs still would not be aligned, even with the
benefit of all proposed cost reduction initiatives. Thus, even with the proceeds of
the proposed guaranteed loan, United would face a high probability of another
liquidity crisis within the next few years.
Two members of the Board also believe that the suggested revisions that United
proposed bye-mail and fax the evening of December 3 are highly unlikely to
change their assessment of United's proposal. ConSidering all of the foregoing
factors, Governor Gramlich and Under Secretary Fisher voted not to approve this
proposal. Mr. Van Tine, General Counsel of the Department of Transportation,
voted to defer a decision on the Application until December 9, 2002, to allow United
to submit additional financial information.
The Board conducted its review pursuant to the standards set out by the Air
Transportation Safety and System Stabilization Act and by the implementing
regulations promulgated by the Office of Management and Budget. The Board
considered all relevant information, including information obtained during numerous
meetings between United, Board staff, and agency representatives beginning in
April 2002, throughout the summer and fall.
The Board's letter to United is attached.
Additional information about the ATSB is available on its web site,
http://www . ustreas .gov/offices/domeslic-fi nance/alsb/.
Related Documents:
•
•
•
Letter to United
Gramlich Statement
Fisher Statement
http://www.trea3.goY/prtl56/r~lea~es/po3670.htm
1212312002
AIR TRANSPORTATION STABILIZATION BOARD
December 4, 2002
Mr. Frederick Brace
Executive Vice President
and Chief Financial Officer
United Air Lines, Inc.
P.O. Box 66100
Chicago, IL 60666
Dear Mr. Brace:
This letter refers to the application of United Air Lines, Inc. ("United"), dated June 21,
2002 as supplemented (the "Application") to the Air Transportation Stabilization Board (the
"Board"), for a Federal loan guarantee under the Air Transportation Safety and System
Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (the "Act") and the regulations promulgated
thereunder, 14 CFR Part 1300 (the "Regulations").
The Board staff and the broader working group, consisting of representatives of the
Board's voting members, have reviewed and considered all the materials submitted by United, as
well as the explanatory information presented by United at our meetings beginning in April
2002, throughout the summer, and on October 28, November 5, November 11, November 12,
November 20 and November 26. The Board staff asked United a series of questions (as
referenced in your letter of November 27) and carefully considered the company's answers.
Also, the Board's financial, industry and legal consultants have submitted their reports and
analyses which have been taken into consideration. In addition, the Board staff has prepared for
the Board members a comprehensive analysis of all these materials. The voting Board members
held discussions ofthese materials at meetings on November 4, November 26 and December 4,
2002.
Based on this information and applying the criteria set forth in the Act and the
Regulations, the Board cannot approve the proposal submitted by United. The Board believes
that the business plan proposed by United is not financially sound. In the Board's view, United's
management presented a business plan that does not position the company to meet the challenges
of the current airline industry environment and to achieve long-term financial stability. The
Board believes that, even if the company were to receive the proceeds of a guaranteed loan, there
is a high probability that United would face another liquidity crisis within the next few years.
The Board's financial consultant assigned the proposed loan an extremely low credit rating,
implying that United is more likely than not to default. The Board believes that the company's
proposal poses an unacceptably high risk to U.S. taxpayers and does not support the conclusion
that there is a reasonable assurance of repayment of the proposed loan. The Board would like to
make you aware of the following fundamental deficiencies in United's proposal:
First, the Board has concluded that United's revenue projections are unreasonably
optimistic.
•
United's business plan is predicated upon a significant near-term rebound in revenue. In
particular, United forecasts that its passenger unit revenue (revenue per available seat mile)
will rise sharply in the near-term due to a significant increase in yields. This forecast for unit
revenue growth in the next few years is substantially more optimistic than forecasts of
industry observers and the Board's consultants. The Board does not concur with United's
explanation for this divergence.
•
The more conservative alternative projections submitted by United, which assume a delayed
industry revenue recovery, anticipate near-term unit revenue growth that is still in excess of
the base case expectations of industry observers.
•
The Board also believes that the company's revenue forecast does not make sufficient
allowance for the likely effects of continued expansion by low-cost carriers in United's
markets as well as other potential structural changes affecting industry revenue.
Second, the Board believes that more reasonable revenue forecasts for United would not
support the company's cost structure as presented in the business plan. The Board notes that
even with the benefit of United's proposed cost reduction initiatives, United would remain
among the highest cost carriers in the industry. If competitors are successful in achieving
additional cost savings, United's relative cost position could weaken further.
Third, the Board has substantial concerns about the underfunded status of United's
pension plan. Even if United obtains a waiver to reduce near-term funding requirements,
required cash outflows will likely remain substantial over the term of the proposed loan. The
Board is concerned about United's ability to generate sufficient cash flows to meet its pension
funding obligations concurrent with other obligations, including repayment of the guaranteed
loan.
Fourth, United has proposed that the loan be secured by a significant collection of assets.
The proposed collateral package does not overcome the deficiencies of the business plan and
associated default risk. Analysis by the Board's consultants and staff indicates that the collateral
package is likely to have substantially less value in the event of default than is estimated by
United. The Board believes that there is a significant risk that the recovery value will be less
than the outstanding amount ofthe loan.
Finally, the Board considered United's proposal of November 26,2002 for a staggered
draw on the loan facility. The Board did not view the alternative structure as a material change
to United's proposal. The Board's financial consultant assessed this proposal and affirmed the
credit rating it had previously assigned. Two members of the Board also believe that the
suggested revisions that United proposed bye-mail and fax on the evening of December 3 are
highly unlikely to change their assessment of United's proposal.
Considering all of the foregoing factors, Governor Gramlich and Under Secretary Fisher
voted not to approve this proposal. Mr. Van Tine, General Counsel of the Department of
Transportation, voted to defer a decision on the Application until December 9 to allow United to
submit additional financial information.
Sincerely,
Daniel Montgomery
......
-
....
FEDERAL RESERVE ress release
For immediate release
December 4, 2002
Statement of Edward M. Gramlich
Chairman
Air Transportation Stabilization Board
These are hard decisions, and I certainly feel for the
affected employees.
At the same time, the Loan Board has a
responsibility to taxpayers, and to fostering the long-term
health of the airline industry.
Given our conclusion that the
business plan submitted by the company is financially unsound, I
believe it best not to approve the United proposal.
-0-
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
December 4, 2002
Contact:
Betsy Holahan
202-622-2960
Statement of Treasury Under Secretary Peter R. Fisher
On ATSB Announcement on United Air Lines
I could not approve United's proposal for a federal loan guarantee because their submission
failed to meet the requirements of the statute and the regulations that must guide our decisions.
This is not just about costs, it's about a business plan that is fundamentally flawed.
-30-
fa - 3f.t>lJ
PO-3672: Remarks of Under Secretary John B. Taylor at the EMTA Annual Meeting
Page 1 of 5
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 5,2002
PO-3672
Using Clauses to Reform the Process for Sovereign Debt Workouts: Progress
and Next Steps - Prepared Remarks at the EMTA Annual Meeting John B.
Taylor Under Secretary of Treasury for International Affairs December 5, 2002
Thank you for giving me the opportunity to speak here today. It is a pleasure to
engage with so many knowledgeable and experienced emerging market
participants in one setting. I have found that frequent and candid discussions
between the private and the public sector are essential for good economic policy
whether they take place on trading floors, in government offices, on the phone, by
email, or at formal meetings like this one. And I want to say that I am grateful for the
useful analysis and comments provided by EMTA members and staff-especially by
EMTA Executive Director Michael Chamberlin. I hope that my comments can be as
useful to you today.
I would like to focus on a topic that many of us have been discussing for the past
year-incorporating new clauses into sovereign bonds, clauses that can create a
better process for countries and their creditors to follow in the event of a debt
workout. The lack of a clear, well-defined process for sovereign debt workouts is a
design weakness in the emerging markets that impedes broader participation in the
market. The uncertainty prevents the market from accurately pricing the risk of a
restructuring event. The uncertainty also complicates official sector and private
sector decision-making thereby leaving emerging markets more susceptible to
costly and painful crises than they need be. For this reason, incorporating such
clauses into sovereign bonds is an important component of the Administration's
overall emerging market strategy.
The goals of the overall strategy are to increase economic growth and reduce
economic instability in emerging market countries. To achieve these goals, strong
and stable private capital flows to emerging markets are essential. Unfortunately
those flows declined markedly after the increase in the frequency and severity of
financial crises in the 1990s. To restore these flows we are following an action plan
that aims to (1) better prevent crises, (2) reduce contagion from crises, (3) limit and
clarify official sector financial response to crises, and (4) improve the process of
sovereign debt workouts. The incorporation of new clauses into bonds by sovereign
issuers and creditors is a key means to achieve the fourth part of this action plan.
The Decentralized Approach
Last April in a speech in Washington I outlined the Administration's proposals for
putting new clauses into sovereign debt and I asked for action on its implementation
as soon as possible. The proposals had been under development in the U.S.
government since last fall in response to a request by Treasury Secretary Paul
O'Neill to find a better process for sovereign debt workouts. Others in the private
and the public sector had been developing similar proposals. Indeed, a G-1 0
working group suggested such an approach way back in 1996. And, as you know,
some collective action clauses are already incorporated in emerging market
sovereign bonds governed by the laws of the United Kingdom and Japan. About 30
percent of the total outstanding volume of emerging market sovereign bonds now
includes collective action clauses.
http://www.treaB.gov/preoolre~abe~po3672.htm
12/2312002
PO-3672: Remarks of Under Secretary John B. Taylor at the EMTA Annual Meeting
Page 2 of 5
Under the U.S. proposal, sovereign bonds governed by the laws of the United
States, Germany, and other key jurisdictions would also include collective action
clauses. We stressed the need for a particular type of a collective action clause-a
majority action clause that would allow a super-majority of bondholders to alter the
key financial terms of a bond. Over time, the 30 percent of debt with majority action
clauses would grow to 100 percent. The proposal also suggested including new
types of clauses-which we called engagement clauses and initiation clauses.
These new clauses would set forth the modalities of a sovereign debt workout. The
clauses would provide for early dialogue, coordination, and communication among
creditors and a sovereign and limit disruptive legal actions. Each type of clausemajority action, engagement, and initiation-had the purpose of better defining the
sovereign debt workout process and thereby making it more predictable.
We pointed out that this approach was market-based and decentralized in two
important senses. First, the clauses themselves would be developed and agreed to
by creditors and the issuers in a decentralized way. In other words, within the
parameters or guidelines in our proposal, sovereign borrowers along with their
creditors and their lawyers would work out the details as new bonds would be
issued. Eventually, new templates with these clauses would replace existing
templates without the clauses. The second way in which this approach was marketbased and decentralized is that in the event of a restructuring, the sovereign
government and its creditors would work out the terms of the restructuring on their
own guided by the clauses but without the involvement of a central group or panel.
The Response from EMTA and Others
Let me emphasize how pleased we were with the reactions to this proposal.
Representatives from the private sector stated their general support for the
introduction of clauses and have been working to develop the details much as we
had hoped. We have made much progress in the last six months. I very much
appreciate these efforts.
The EMTA Position Regarding the Quest for More Orderly-Sovereign Work-Outs
(October 17, 2002) is particularly helpful in this regard because it endeavors to lay
out a set of details that fit into the broad parameters of the decentralized approach.
The EMTA position emphasizes two principles. First, the clauses must be
"marketable" in the sense that they must be acceptable by the marketplace of
issuers and investors. Second, to the extent that the clauses make bonds easier to
restructure, they should not also make defaults and/or restructurings more likely.
We agree wholeheartedly with both of these principles.
Regarding the particular clauses, the EMTA proposal includes a majority action
clause, which would permit the amendment and waiver of key bond terms by
approval of an appropriate super-majority of bonds outstanding. The proposal also
includes an engagement clause "to facilitate constructive dialogue between a
sovereign debtor and its creditors when restructuring seems necessary." And there
is also an initiation clause "to inhibit precipitous litigation as a practical matter."
With this initiation clause "bonds should require 25 percent bondholder vote to
accelerate principal for event of default and provide for a 75 percent vote to rescind
acceleration." Note that this last suggestion is a type of majority enforcement
provision.
It is also very encouraging to see that many emerging market countries have
expressed their support for the decentralized approach. In early September, the
members of the European Union - including Italy, Spain and Sweden, which are all
countries that regularly issue in foreign jurisdictions - committed to using collective
action clauses in their external sovereign bond issuances. Eventually we would
expect new emerging market members of the European Union such as Poland and
Hungary to do the same. Moreover, the G-7 has not only stated its strong support
for the clauses in emerging market countries, it has agreed that G-7 countries that
issue bonds governed by the jurisdiction of another sovereign will include collective
action clauses. That is the strongest statement of support for collective action
clauses ever issued by the G-7 ..
http://www.treas.gov/pre5E.;r~liase.;po1672.htm
12/23/2002
PO-3672: Remarks of Under Secretary John B. Taylor at the EMTA Annual Meeting
Page 3 of 5
2003 is the Year for Action
With all this progress and show of support, the conditions now appear to be ripe for
issuers and their creditors, investment bankers, and lawyers to roll up their sleeves
and get to work writing new clauses into bonds as they are issued. There are
enough emerging market issuers-many with investment grade ratings-expected to
come forth in 2003 that the first mover problem should not be a problem. Each
issue that proceeds without the new clauses delays the day when we resolve this
uncertainty that still hangs over the markets.
I recognize, of course, that there are still some concerns and reservations about
incorporating new clauses into sovereign bonds, and that these concerns are
holding some issuers and market participants back. Let me try to address some of
the concerns that I have heard.
Concerns
One concern is simply that the clauses are unnecessary-that the current process for
sovereign debt restructuring works just fine. It is true that the market has found a
solution in some recent sovereign debt restructuring cases, including Pakistan and
Ukraine. But even in cases such as Pakistan and Ukraine, the process was by no
means straightforward. Uncertainty about how the restructuring would unfold-or
even if restructuring could unfold-complicated decision-making and potentially left
countries cut off from credit markets for longer periods than they would have been if
a more clearly defined process for restructuring had been in place. Clarification of
the debt restructuring process would most certainly be helpful in more complex
situations.
Ukraine is an interesting case in point. Ukraine's restructuring is frequently held up
as a successful example. But even in this case, complications arose because one
of Ukraine's bonds in the restructuring did not have majority action clauses. As a
result, the authorities needed to track down the bondholders and try to secure 100
percent consent to amend the financial terms of their bonds. This proved espeCially
difficult because retail investors owned a large portion of this bond. These
problems were not insurmountable in the case of Ukraine largely because the
authorities had only a small number of external debt instruments outstanding. But
this is not the case for so many other emerging market countries.
Others have raised concerns that the new clauses would not allow for aggregation
of debt across different instruments. It is true that most proposals do not allow for
collective action across different classes of debt. But this does not mean that the
process would not work or that it would not provide sufficient clarity to attract
additional investors and greatly improve predictability. Even without aggregation,
the clauses can be helpful in describing a process for workouts without the added
delay of developing a complex aggregation procedure.
Another worry is that the clauses will raise borrowing costs. But this is at odds with
empirical evidence and with comments we have received from many buy-side
participants. By comparing spreads on bonds with and without clauses studies
have found that majority action clauses have not raised borrowing costs. A key
advantage, as I already mentioned, of the clauses is that by providing a process for
workouts the risk of such workouts can be better priced. In fact, empirical evidence
shows that countries with good credit ratings have had their borrowing costs go
down with collective action clauses. Many investors have been favorable towards
collective action clauses and have indicated that they would buy bonds with
collective action clauses, provided such clauses do not infringe upon the rights of
creditors.
Another criticism is that the new clauses would only apply to new bonds and would
therefore impact a relatively narrow scope of debt. It would take many years before
the entire stock of outstanding bonds was covered. To me this is a reason to get
started now. Had the majority action clauses been introduced in New York and
http://www.tre()S.gov/~relea6es/JW.3672.htm
12/23/2002
PO-3672: Remarks of Under Secretary John B. Taylor at the EMTA Annual Meeting
Page 4 of5
Germany starting in 1996, when the idea was first proposed, we would have dealt
with a large part of the problem by now. According to the latest IMF Global
Financial Stability Report, from 1996 through the present, there have been about
$150 billion in sovereign bonds issued without collective action clauses.
Some have criticized the decentralized approach because it does not appear to be
new. Well, not all old ideas are bad. But more to the point, our decentralized
proposals went well beyond traditional collective action clauses to include both
engagement and initiation clauses. Still others have argued that the rogue creditor
problem is not so bad. To be sure, I did not even mention the rogue creditor
problem in my April speech. What we are trying to address is the current
uncertainty and lack of a well-defined process. Clauses requiring agreements by
100 percent of bondholders create more uncertainty and difficulty than clauses
requiring 75 percent.
Yet another criticism is that the improved sovereign debt process will only deal with
some crises. It is certainly true that not all crises are related to the sustainability of
sovereign debt issued in foreign jurisdictions. Currency and maturity mismatches in
the private sector, exchange rate pegs, poor supervision of financial institutions,
and indexed domestic debt are other potential sources of financial crises. We are
working in these areas too-and there have been improvements-especially in the
areas of exchange rate policy and transparency. But even if only a few crises could
be prevented, reforming the restructuring process should still be a high priority.
Moreover, crisis prevention is not the only goal. The attraction of a broader class of
investors to the emerging markets would strengthen the flows of capital and
increase economic growth in these countries.
In recent months another concern has been raised about going ahead with the
clause approach now. Namely there are worries about the impact of the recent
work by the International Monetary Fund on a centralized sovereign debt
restructuring process-frequently called the sovereign debt restructuring mechanism
(SDRM)-which would create a supra-national panel or court through an amendment
of the IMF Articles. This concern has been registered, for example, in the EMTA
position paper: "The possibility of an over-riding bankruptcy regime chills the
market-based approach because neither creditors nor issuers know what changes
can safely be made in existing documentation." I would like to address this concern
too.
First, let me state the U.S. position on the debate on the decentralized versus the
centralized approach. In our view, good public policy requires carefully investigating
all alternatives and pursuing the option or combination of options that will work
best. Regarding sovereign bonds there are three main possibilities: (1) the
decentralized approach, (2) the centralized approach, and (3) a combination of the
two where clauses are inserted into new debt instrument and a panel or court is
created to deal with aggregation and other issues not captured in the clauses. If
there is convincing evidence that the decentralized approach does a better job of
preventing crises and strengthening capital flows than the centralized or the
combined approaches, then the decentralized approach will be the choice
supported by the Bush Administration. Similarly, if one of the other approaches can
be shown to work better, then that option will be the one supported.
There has been a lot of discussion of the SDRM over the past year, but there is as
yet no specific proposal. That is why the G-7 Finance Ministers and Central Bank
Governors called for such a proposal by the time of the Spring IMF/World Bank
meetings next year. The G-7 has not endorsed the SDRM approach. It has simply
asked for a proposal by the spring of 2003 so that it can consider the pros and cons
of this proposal in a rational fashion.
Clearly there are differences between the clause approach and the SDRM. As I
have already mentioned, the clauses are much more decentralized than the
SDRM. Also, the SDRM would aggregate claims across different issues while the
clause approach would not. The SDRM would establish a panel or court, while the
clause approach would not. Obviously, the establishment of such a group raises
many issues about appointments and accountability that need to be considered
carefully. The SDRM would override existing bond contracts; the clauses would
http://www.trea8.~t)V/prtl6s1rilia~~£JpQ3672.htm
12/23/2002
PO-3672: Remarks of Under Secretary John B. Taylor at the EMTA Annual Meeting
Page 5 of5
apply to new issues or perhaps to old issues if they are swapped for new issues.
The clause approach could be implemented quickly, while the SDRM approach
would require a good deal of time in light of its relative complexity and the need to
gain legislative approval, including in the United States. So there are many
questions left to be answered. What we, and others, have urged is that work be
done to raise these questions so that decisions about an SDRM be made in light of
a thorough analysis and a full airing and discussion of the issues.
Conclusion
In sum, the introduction of new clauses into sovereign bonds offers an effective
approach to reforming the emerging market sovereign debt restructuring process.
We are very pleased about the positive support for this approach expressed by the
private sector during the last six months and for the work that has gone into
developing the details of this approach. We are also pleased that a number of
emerging market countries have expressed interest in the decentralized approach.
Given this support and the work that has been done already, I think it is time to
begin actually including these clauses. Although strong reservations about the
alternative centralized approach have been expressed, ongoing research on the
centralized approach is no reason not to proceed with the decentralized approach
as soon as possible.
http://www.trea~.g6Y/pr~eleases/pQ3672.htm
12/2312002
PO-3673: Remarks of Timothy S. Bitsberger To The Fixed Income Summit
Page 10f2
PF-'![SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 5, 2002
PO-3673
Remarks of Treasury Deputy Assistant Secretary for Federal Finance Timothy
S. Bitsberger To The Fixed Income Summit Palm Beach, FL
Treasury is Committed to Inflation Indexed Securities
Good morning. It is a pleasure to have the opportunity to speak with you again.
Yesterday, I tried to give you a feel for debt management at Treasury as well as our
position in the marketplace. We talked about the regularity and predictability of
Treasury debt management. I stressed that Treasury is not an opportunistic
borrower. We believe a regular auction calendar will provide investors with
certainty. That certainty will help translate into broader investor participation which
will then help lower Treasury's borrowing costs.
We also seek to lower Treasury's borrowing by increasing the pool of potential
investors. Which leads me to today's topic: inflation indexed securities, or TIIS.
If there is one message I want you to take away from my presentation today, it is
that we are committed to the TIIS market. This commitment is based on sound debt
management principles. By broadening our investor base and diversifying our
funding sources, we reduce our borrowing costs over time. By diversifying our types
of borrowing, we reduce exposure to a single adverse shock.
We believe that TIIS are a different asset class. As more and more investors accept
this distinction, growth of the TIIS market has been accelerating. Many investors
have had huge success with TIIS as a tactical allocation. Some have had even
greater success with TIIS as a strategic allocation. I believe that for many investors
and money mangers a percentage of their portfolios should be focused on real
rather than nominal rates of return. The market is still quite young-essentially five
years old-and it is still evolving. In fact, a year or two ago, there were concerns
that the TIIS program was in jeopardy. I am here to put those fears to rest. Even
with a return to surpluses, we are committed to the TIIS program.
I just said that TIIS represent a different asset class, but that does not mean we
manage them differently. We issue TII8 the same way we do nominal bonds. At
Treasury, we are committed to issuing large, liquid securities. We announced a new
TIIS policy in May of this past year. We increased the number of 1O-year note
auctions from two to three. We now auction a new security in July and reopen it in
both October and January. Reopenings can sometimes cost Treasury money
because we do not capture the on-the-run premium often associated with new
issuance. However, the benefits of large and predictable issuance - a more stable
and liquid secondary market - outweigh the cost of reopening.
We considered several options before we announced our current issuance program
[the high amount of TII8 maturing in July and the value in reopening securities over
six rather than twelve months]. However, it is important that we expand the auction
calendar without moving too fast and getting ahead of the market.
One point on this slide that I want to highlight is the deflation protection. Principal is
guaranteed at maturity. That is not a comment on interest rates but it is an option
that does have some value.
http://www.tre .. s.govlprc~/releflf~e6/pe3673.htm
12/2312002
PO-3673: Remarks of Timothy S. Bitsberger To The Fixed Income Summit
Page 2 of2
Our commitment to TIIS is also evident in our issuance. We have become the
world's largest liS issuer with more than $150 billion outstanding. However, at this
point we do plan to target our issuance as a percentage of gross issuance. Even
though we strive to be regular and predictable, we can not limit our flexibility as debt
managers by committing to specific issuance in the future. On the margin, factors
beyond my control, such as outlays and receipts, determine our borrowing needs.
A much higher percentage of auction awards are allocated to investment funds, a
further indication that the market has come to believe that we are committed to
TIIS. Though I have no empirical evidence to support this, I believe many of these
investors view TIIS as a tactical as well as a strategic investment.
Increased issuance and greater market acceptance has led to increased liquidity.
TIIS may never trade with the liquidity of nominal Treasuries, but that may not be
the appropriate standard - by any other measure, liquidity is good and promises to
get better. I also believe many dealers are committing more capital TIIS. Until
Treasury publicly announced commitment to TIIS, I think the dealers were a little
wary of committing personnel and capital. I am excited at the prospects for the
dealer community.
Over the 5 years we have been issuing inflation-indexed securities, some analysts
have said they are a more expensive form of borrowing than the comparable
nominal securities. It's too early to pass judgment on the cost effectiveness of these
instruments. It takes time and effort to build a critical mass of liquidity.
Diversifying our investor base may be the most important contribution of TIIS, but I
believe that over time they will be viewed as cost-effective. We are a long way from
making that assessment - at a minimum, cost-effectiveness should only be
determined after a product has been through an entire interest rate cycle. Even
then I think we have to be careful how to judge TIIS. The market does not judge, for
example, whether or not 3-month bills are more expensive to issue than 5-year
notes over time. Market participants recognize that Treasury is diversifying its
investor base and its exposure to adverse interest rate movements.
The decision to invest is yours and I do not want to encourage an investment that
mayor may not be appropriate for you. But I do want to point out a few things.
These securities are of particular value to investors because their prices move
differently from conventional securities. As you can see they have lower risk than
the Lehman index and 1O-year note, both absolute and relative. Their real (inflation
unadjusted) price varies inversely with real U.S. interest rates, not nominal interest
rates, making them very attractive for risk diversification. We also think that
Treasury Inflation-Indexed Securities are a unique asset class - dollardenominated, inflation- protected, backed by U.S. full faith and credit - that every
diversified investor should own.
Investors should also find the scale of TIIS attractive. Comparably sized markets
include global high yield debt, emerging market securities, and European
corporates. In comparison, the inflation-indexed market is highly liquid due to the
quality of the issuers, large issuance sizes and broad range of maturities.
We believe there is and will be strong demand for inflation protected notes backed
by the full faith and credit of the US Government. We are excited about the growth
prospects for TIIS. I would like to encourage everyone here to contact Treasury or
myself should you have any suggestions in how to grow this asset class.
Thank you very much. I would be happy to take any questions
http://www.treas.gov/press/r~lea.~~pQ3673.htm
12/23/2002
I
DEPARTl\'IENT
OF
THE
TREASURY
NEWS
or"'l! E or J'I HUl' .U ... \I J{~. 1:;00 I'n.;,\s\ 1.\.\ 'd \ .\\ E:>.II·:, ~." .• \\.'SIII"C!"O'. f).c.e ~O.!.!II. (~IJ!I (,!!.2<'MJ
EMBARGOED UNTIL 11: 00 A.M.
December 5, 2002
Contact: Office of Financing
202/691-3550
TREASURY OFFERS CASH MANAGEMENT BILLS
The Treasury will auction approximately $13,000 million of 6-day
Treasury cash management bills to be issued December 10, 2002.
Tenders for Treasury cash management bills to be held on the book-entry
records of Treasu~Direct will ~ be accepted.
Up to $1,000 million in noncompetitive bids from Foreign and International Monetary Authority (FIMA) accounts bidding through the Federal
Reserve Bank of New York will be included within the offering amount of
the auction. These noncompetitive bids will have a limit of $100 million
per account and will be accepted in the order of smallest to largest, up
to the aggregate award limit of $1,000 million.
Note: The closing times for receipt of noncompetitive and competitive
tenders will be at 11:00 a.m. and 11:30 a.m. eastern standard time,
respectively.
The allocation percentage applied to bids at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g.,
17.13%.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended) .
Details about the new security are given in the attached offering
highlights.
000
Attachment
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERING
OF 6-DAY CASH MANAGEMENT BILLS
December 5, 2002
Offering Amount .................... $13,000 million
Public Offering .................... $13,000 million
Description of Offering:
Term and type of security .......... 6-day Cash Management Bill
CUSIP number ....................... 912795 MW 8
Auction date ....................... December 9,2002
Issue date ......................... December 10, 2002
Maturity date ...................... December 16,2002
Original issue date ................ December 10,2002
Currently outstanding ............. .
Minimum bid amount and multiples ... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount
rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to
Federal Reserve Banks as agents for FIMA accounts will not exceed $1,000
million. A single bid that would cause the limit to be exceeded will be
partially accepted in the amount that brings the aggregate award total to
the $1,000 million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be prorated to
avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments
of .005%, e.g., 7.100%, 7.105%.
(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 $1
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.
~aximum
~ximum
Recognized Bid at a Single Rate ... 35% of public offering
Award ............................. 35% of public offering
of Tenders:
tenders:
Prior to 11:00 a.m. eastern standard time on auction day
:ompetitive tenders:
Prior to 11:30 a.m. eastern standard time on auction day
~eceipt
~oncompetitive
)ayment Terms:
date.
By charge to a funds account at a Federal Reserve Bank on issue
EMBARGOED UNTIL 11: 00 A.M.
November 27, 2002
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $29,000
million to refund an estimated $29,818 million of publicly held 13-week and 26-week
Treasury bills maturing December 5, 2002, and to pay down approximately $818 million.
Also maturing is an estimated $16,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced December 2, 2002.
The Federal Reserve System holds $12,975 million of the Treasury bills maturing
on December 5, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held December 3, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,096 million into the 13-week bill and $815 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
000
Attachment
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED DECEMBER 5, 2002
November 27, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . $ 4,900 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 and multiples . . . . . . . . . . .
91-day bill
912795 MB 4
December 2, 2002
December 5, 2002
March 6, 2003
September 5, 2002
$19,474 million
$1,000
$15,000 million
$15,000 million
None
182-day bill
912795 MQ 1
December 2, 2002
December 5, 2002
June 5, 2003
December 5, 2002
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position is $1 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.
Maximum Recognized Bid at a Single Rate ........ 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders ........ Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender.
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
record at their financial institution on issue date.
PO-3676: Treasury and IRS Propose Regulations for Cash Balance Pension Plans
Page 1 of 1
PHlSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 10, 2002
PO-3676
Treasury and IRS Propose Regulations for Cash Balance Pension Plans
Today the Treasury Department and the IRS issued proposed regulations on cash
balance pension plans. The regulations address the application of the pension plan
age discrimination rules to cash balance plans.
"The proposed regulations would provide long-needed guidance on significant
questions about cash balance plans. Cash balance plans are a type of defined
benefit plan adopted by many employers over the past ten years," stated Treasury
Assistant Secretary for Tax Policy Pam Olson. "Guidance on defined benefit plans
is important because under these plans the employer bears the investment risk
which results in retirement security not available under a defined contribution plan."
A cash balance pension plan combines the benefit formula of a defined contribution
plan with the investment security of a defined benefit plan. A cash balance plan
establishes a "hypothetical account" for each employee and credits the account with
hypothetical "pay credits" and "interest credits." The proposed regulations would
apply to cash balance plans the same rule that applies to defined contribution
plans. Consequently, a cash balance plan would generally satisfy the age
discrimination rules if the pay credits to an employee's account are not less than the
pay credits that would be made if the employee were younger.
The proposed regulations also address "conversions" of traditional pension plans to
cash balance plans. Under these rules, the plan must be age-neutral before the
conversion, age-neutral after the conversion, and age-neutral in the process of the
conversion. This means that each employee following a conversion must start with
a cash balance account calculated on an age-neutral basis. Assuming that is the
case, a "wear-away" period, during which cash balance benefits catch up with
benefits under the traditional plan would not run afoul of the proposed rules.
The proposed regulations are subject to public comment. The IRS will not begin
issuing administrative "determination letters" on converted cash balance plans prior
to consideration of all comments and the publication of final regulations.
The text of the proposed regulations is attached
http://www.treas.govfpress/rel~/po3676.htm
12/23/2002
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-209500-86, REG-164464-02]
RIN 1545-BA10,1545-BB79
Reductions of Accruals and Allocations Because of the Attainment of Any Age; Application
of Nondiscrimination Cross-Testing Rules to Cash Balance Plans
AGENCY: Intemal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that would provide rules
regarding the requirements that accruals or allocations under certain retirement plans not
cease or be reduced because of the attainment of any age. In addition, the proposed
regulations would provide rules for the application of certain nondiscrimination rules to
cash balance plans. These regulations would affect retirement plan sponsors and
administrators, and participants in and beneficiaries of retirement plans. This document
also provides notice of a public hearing on these proposed regulations.
DATES: Written comments, requests to speak and outlines of oral comments to be
discussed at the public hearing scheduled for April 10,2003, at 10 a.m., must be received
by March 13, 2003.
ADDRESSES: Send submissions to: CC:ITA:RU (REG-209500-86), room 5226, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the
alternative, submissions may be hand delivered to: CC:ITA:RU (REG-209500-86), room
5226, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.
-2Alternatively, taxpayers may submit comments electronically via the Internet by submitting
comments directly to the IRS Internet site at: www.irs.gov/regs. The public hearing will be
held in room 4718, Internal Revenue Building, 1111 Constitution Avenue NW., Washington,
DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda S. F.
Marshall, 202-622-6090, or R. Lisa Mojiri-Azad, 202-622-6030; concerning submissions
and the hearing, and/or to be placed on the building access list to attend the hearing,
Sonya Cruse, 202-622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax Regulations (26
CFR Part 1) under sections 401 and 411 of the Internal Revenue Code of 1986 (Code).
Section 411 (b)(1 }(H), which was added in subtitle C of the Omnibus Budget Reconciliation
Act of 1986 (OBRA '86) (100 Stat. 1874), provides that a defined benefit plan fails to
comply with section 411 (b) if, under the plan, an employee's benefit accrual is ceased, or
the rate of an employee's benefit accrual is reduced, because of the attainment of any age.
Under section 411 (b )(2)(A), added by subtitle C of OBRA '86, a defined contribution plan
fails to comply with section 411 (b) unless, under the plan, allocations to the employee's
account are not ceased, and the rate at which amounts are allocated to the employee's
account is not reduced, because of the attainment of any age.
Section 411 (b)( 1)(H)(iii) provides that any requirement of continued accrual of
benefits after normal retirement age is treated as satisfied to the extent benefits are
-3distributed to the participant or the participant's benefits are actuarially increased to reflect
the delay in the distribution of benefits after attainment of normal retirement age. Section
411 (a) requires a qualified plan to meet certain vesting requirements. In the case of a
participant in a defined benefit plan who works after attaining normal retirement age, these
vesting requirements are not satisfied unless the plan provides an actuarial increase after
normal retirement age for accrued benefits, distributes benefits while the participant is
working after normal retirement age, or suspends benefits as described in section
411 (a)(3)(8) (and the regulations of the Department of Labor at 29 CFR 2530.203-3).
Section 401 (a)(9)(C)(iii), added to the Code by the Small 8usiness Job Protection Act of
1996 (110 Stat. 1755) (1996), requires that the accrued benefit of any employee who
retires after age 70% be actuarially increased to take into account the period after age
70% during which the employee is not receiving benefits.
Section 4(i) of the Age Discrimination in Employment Act (ADEA) and sections
204(b )(1 )(H) and 204(b )(2) of the Employee Retirement Income Security Act of 1974
(ERISA) provide requirements comparable to those in sections 411 (b)(1 )(H) and 411(b)(2)
of the Code. Section 4(i)(4) of ADEA provides that compliance with the requirements of
section 4(i) with respect to an employee pension benefit plan constitutes compliance with
the requirements of section 4 of ADEA relating to benefit accrual under the plan.
Under section 101 of Reorganization Plan No.4 of 1978 (43 FR 47713), the
Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in
these regulations for purposes of ERISA, as well as the Code. Therefore, these
-4regulations apply for purposes of the parallel requirements of sections 204(b)(1 )(H) and
204(b )(2) of ERISA, as well as for section 411 (b) of the Code.
The Equal Employment Opportunity Commission (EEOC) has jurisdiction over
section 4 of ADEA. Section 9204(d) of OBRA '86 requires that the regulations and rulings
issued by the Department of Labor, the Treasury Department, and the EEOC pursuant to
the amendments made by subtitle C of OBRA '86 each be consistent with the others. It
further requires the Secretary of Labor, the Secretary of the Treasury, and the EEOC to
each consult with the others to the extent necessary to meet the requirements of the
preceding sentence. Executive Order 12067 requires all Federal departments and
agencies to "advise and offer to consult with the Equal Employment Opportunity
Commission during the development of any proposed rules, regulations, policies,
procedures or orders concerning equal employment opportunity." The IRS and Treasury
have consulted with the Department of Labor and the EEOC prior to the issuance of these
proposed regulations under sections 411 (b)(1 )(H) and 411 (b)(2) of the Code.
The EEOC published proposed regulations interpreting section 4(i) of ADEA in the
Federal Register on November 27, 1987 (52 FR 45360). Proposed regulations REG-
209500-86 (formerly EE-184-86) under sections 411 (b)(1 )(H) and 411 (b)(2) were
previously published by the IRS and Treasury in the Federal Register on April 11, 1988
(53 FR 11876), as part of a package of regulations (the 1988 proposed regulations) that
also included proposed regulations under sections 410(a}, 411 (a)(2), 411 (a}(8) and 411 (c)
(relating to maximum age for participation, vesting, normal retirement age, and actuarial
-5adjustments after normal retirement age). The IRS, Treasury, the Department of Labor,
and the EEOC consulted prior to the issuance of both sets of proposed regulations.
Notice 88-126 (1988-2 CB 538), addressed certain effective date issues for
sections 411(b)(1 )(H) and 411(b)(2). The EEOC issued a similar notice addressing those
effective date issues in the Federal Register on January 9, 1989 (54 FR 604). The United
States Supreme Court subsequently issued an opinion addressing the effective date of
section 411(b)(1)(H) in Lockheed Corp. v. Spink, 517 U.S. 882 (1996), which is discussed
below.
On October 20, 1999, the IRS and Treasury published a solicitation for comments in
the Federal Register (64 FR 56578) inviting comments regarding potential issues under
their jurisdiction with respect to cash balance plans (a type of defined benefit plan under
which the normal form of benefit is an immediate payment of a participant's hypothetical
account, which is adjusted periodically to reflect pay credits and interest credits),
conversions of traditional defined benefit plans to cash balance plans and associated
wear-away or benefit plateau effects. Hundreds of comments were received from a wide
range of parties with interests in cash balance plans, including employees, employers, and
their representatives. The most significant issue raised in the comments relates to the
application of section 411 (b)( 1)(H) to cash balance plans and conversions of traditional
defined benefit plans to cash balance plans.
These proposed regulations are being issued after consideration of the comments
on the 1988 proposed regulations, as well as more recent comments concerning the
-6application of sections 411 (b)( 1)(H) and 411 (b )(2). These proposed regulations address
the application of section 411 (b)(1 )(H) to cash balance plans, including conversions.
These proposed regulations would also amend the provisions of the regulations
under section 401 (a)(4) to provide rules for nondiscrimination testing for certain cash
balance plans.
Explanation of Provisions
Overview
These proposed regulations provide guidance on the requirements of section
411(b)(1 )(H), under which a defined benefit plan fails to be a qualified plan if, under the
plan, benefit accruals on behalf of a participant are ceased or the rate of benefit accrual on
behalf of a participant is reduced because of the participant's attainment of any age.
1
Similarly, these proposed regulations provide guidance on the requirements of section
1While section 4(i) of the ADEA, section 204(b)(1 )(H) of ERISA, and section
411 (b)(1 )(H) of the Code are worded similarly, the words "attainment of any" are not in
section 4(i) of the ADEA. The legislative history states that no differences among the
provisions is intended (OBRA 86 House Report No. 99-727 at 378-9), and the agencies
-7411 (b )(2), under which a defined contribution plan fails to be a qualified plan if, under the
plan, allocations to a participant's account are ceased or the rate of allocations to a
participant's account is reduced because of the participant's attainment of any age.
These proposed regulations follow the 1988 proposed regulations in many
respects. In particular, these proposed regulations would adopt many of the positions
taken under the 1988 proposed regulations for determining whether a plan ceases benefit
accruals or allocations because of the attainment of any age or provides for a direct or
indirect reduction in the rate of benefit accrual or allocation because of the attainment of
any age.
These proposed regulations also provide guidance on how to determine the rate of
benefit accrual or rate of allocation. In the case of defined benefit plans, the proposed
regulations would provide two basic approaches to determining the rate of benefit accrual:
a general approach applicable to all defined benefit plans; and a separate approach
applicable to eligible cash balance plans, as defined in these proposed regulations.
These proposed regulations also provide guidance on determining the rate of allocation
under a defined contribution plan.
have concluded that this particular difference in language has no effect.
-8Finally, these proposed regulations address other related issues also addressed in
the 1988 proposed regulations, including the application of sections 411 (b)( 1)(H) and
411 (b)(2) to optional forms of benefits, ancillary benefits and other rights and features, the
coordination of the requirements of sections 411 (b)( 1)(H) and 411 (b )(2) with certain other
qualification requirements under the Code, such as sections 40 1(a)(4), 411 (a), and 415,
and the effective date of sections 411 (b)( 1)(H) and 411 (b )(2).
Applicability Prior to Normal Retirement Age
Sections 411 (b)( 1)(H) and 411 {b )(2) prohibit cessation of accruals or allocations,
and reduction in the rate of benefit accrual or allocation, because of the attainment of any
age. Under these sections, attainment of any age means a participant's growing older.
Accordingly, these regulations, like the 1988 proposed regulations, would apply regardless
of whether the participant is older than, younger than, or at normal retirement age.
Some commentators have suggested that only cessations or reductions after
attainment of normal retirement age are prohibited by these sections. This interpretation is
not consistent with the language of the statute, which does not specify any minimum age at
which the rule applies, and is not adopted under these proposed regulations.
Reduction in Rate of Benefit Accrual Because of Attainment of Any Age
Under these proposed regulations, a defined benefit plan fails to comply with
section 411 (b)( 1)(H) if, either directly or indirectly, a participant's rate of benefit accrual is
reduced (which includes a cessation of participation in the plan or other discontinuance of
benefit accruals) because of the participant's attainment of any age. A plan provides for a
reduction in the rate of benefit accrual that is directly because of the attainment of any age
-9if, during a plan year, under the terms of the plan, any participant's rate of benefit accrual
for the plan year would be higher if the participant were younger. Thus, a plan fails to
comply with section 411 (b)(1 )(H) if, under the terms of the plan, the rate of benefit accrual
for any individual who is or could be a participant under the plan would be lower solely as a
result of such individual being older. Whether there is an actual participant at any particular
age is not relevant. Similarly, whether a reduction in the rate of benefit accrual is because
of the attainment of any age does not depend on a comparison of a participant's rate of
benefit accrual for a year to that participant's rate of benefit accrual in an earlier year.
These proposed regulations include a number of examples (at § 1.411 (b)-2(b )(3)(iii) of
these regulations) which illustrate whether a reduction in the rate of benefit accrual is
because of the attainment of any age.
A reduction in the rate of benefit accrual is indirectly because of a participant's
attainment of any age if any participant's rate of benefit accrual for the plan year would be
higher if the participant were to have a different characteristic that is a proxy for being
younger, based on all the relevant facts and circumstances. For example, if a company
assigns older workers to one division and younger workers to another even though they
perform the same work, then assignment to a division would be a proxy for being older or
younger.
Like the 1988 proposed regulations, these proposed regulations provide that a
reduction in a participant's rate of benefit accrual is not indirectly because of the attainment
of any age in violation of section 411 (b)( 1)(H) solely because of a positive correlation
between attainment of any age and a reduction in the rate of benefit accrual. In addition, a
-10defined benefit plan does not fail to satisfy section 411(b)(1 )(H) solely because, on a
uniform and consistent basis without regard to a participant's age, the plan limits the
amount of benefits a participant may accrue under the plan or limits the number of years of
service or participation taken into account for purposes of determining the accrual of
benefits under the plan, whether the plan reduces or ceases accruals for service in excess
of such limit. A limitation that is expressed as a percentage of compensation (whether
averaged over a participant's total years of credited service for the employer or over a
shorter period) is a permissible limitation on the amount of benefits a participant may
accrue under the plan.
Rate of Benefit Accrual
Neither section 411 (b)( 1)(H) nor the 1988 proposed regulations define the rate of
benefit accrual. These proposed regulations would provide two basic approaches to
determining the rate of benefit accrual, based on the way the benefit is expressed in the
plan. One approach may be used by all defined benefit plans. A second approach may be
used only by an eligible cash balance plan, as defined in these proposed regulations.
Under the general rule, the rate of benefit accrual for any plan year that ends before
the participant attains normal retirement age is the increase in the participant's accrued
normal retirement benefit for the year. Because the rate of benefit accrual is determined by
reference to the increase in the accrued benefit during the plan year, any subsidized
portion of an early retirement benefit, any qualified disability benefit, or any social security
supplement is disregarded.
-11Section 411 (b)(1 )(H)(iii)(lI) provides that a defined benefit plan does not fail to
comply with section 411 (b)( 1)(H) for a plan year to the extent of any adjustment in the
benefit payable under the plan during such plan year attributable to the delay in the
distribution of benefits after the attainment of normal retirement age. These proposed
regulations implement this rule (Le., permit a plan to offset any actuarial adjustment during
the year against the otherwise required accruals under the plan), by providing that the rate
of benefit accrual after normal retirement age is equal to the excess, if any, of the annual
benefit to which the participant is entitled at the end of the plan year over the annual benefit
to which the participant would have been entitled at the end of the preceding plan year. For
this purpose, the annual benefit is determined assuming that payment commences in the
normal form of benefit under the plan at the end of the applicable year. For purposes of
these proposed regulations, the normal form of benefit is the form under which payments
due to the participant are expressed under the plan, prior to adjustment for form of benefit.
The methodology of determining a year-by-year rate of accrual, taking into account
any actuarial increases during the plan year, is a departure from the methodology used in
the 1988 proposed regulations. As a consequence of the methodology used in these
proposed regulations, the plan may not reduce a participant's rate of benefit accrual in a
plan year to take into account the fact that, in the preceding plan year, the actuarial
increase was greater than the accrual under the plan formula.
While any actuarial adjustment made to the annual benefit to which the participant
would have been entitled at the end of the preceding plan year is included in the rate of
benefit accrual after normal retirement age, a defined benefit plan must separately comply
-12with the requirements of section 411 (a), which are not addressed in these proposed
regulations. Thus, for example, a plan that does not provide for suspension of benefits in
accordance with section 411 (a)(3) must provide for actuarial adjustments of the amount
that would otherwise be paid (or distributions of that amount) that are adequate to satisfy
section 411 (a) and 29 CFR 2530.203-3 of the regulations of the Department of Labor. In
addition, the plan must comply with section 401 (a)(9)(C)(iii) with respect to actuarial
adjustments for partiCipants who retire after attainment of 70%.
Section 411 (b)(1 )(H)(iii)(I) provides that a defined benefit plan will not fail to satisfy
section 411 (b)(1 )(H) to the extent of the actuarial equivalent of in-service distribution of
benefits. Under these proposed regulations, the rate of benefit accrual for a participant
who has attained normal retirement age may be reduced by the actuarial value of plan
benefit distributions made during the year. This reduction is the equivalent of the provision
described above under which a defined benefit plan may offset any actuarial adjustment
during the year against the otherwise required accruals for the year. As described
immediately below, the manner in which distributions made under the plan are taken into
account for a plan year under these regulations is designed so that compliance with
section 411 (b)( 1)(H) is not affected by the optional form in which the distribution is made.
In the plan year during which a distribution is made, distributions are taken into
account to the extent the actuarial value of the distribution does not exceed the actuarial
value of distributions that would have been made during the plan year had distribution of
the participant's full accrued benefit at the beginning of the plan year commenced at the
beginning of the plan year (or, if later, at the participant's normal retirement age) in the
-13normal form of benefit. Distributions in excess of the actuarial value of the distribution that
would have been made during the plan year had the distribution of the participant's full
accrued benefit commenced in the normal form (called accelerated benefit payments) are
disregarded for that plan year, but, as described below, are taken into account in
subsequent periods. If the participant is receiving a distribution in an optional form of
benefit under which the amount payable annually is less than the amount payable under the
normal form of benefit (for example, a QJSA under which the annual benefit is less than the
amount payable annually under a straight life annuity normal form), the participant may be
treated as receiving payments under an actuarially equivalent normal form of benefit.
Any accelerated benefit payments are taken into account in plan years after the plan
year in which the distribution was made by converting the accelerated benefit payments to
an actuarially equivalent stream of annual benefit payments under the plan's normal form of
benefit distributions, commencing at the beginning of the next following plan year. This
equivalent stream of annual benefit payments is then deemed to be paid in plan years after
the plan year in which the distribution was made, and the calculation of the rate of benefit
accrual after normal retirement age is adjusted by adding any of these deemed payments
for future plan years to the annual benefit to which the participant is entitled at the end of a
plan year. As so adjusted, therefore, the rate of benefit accrual is determined as the
excess, if any, of the sum of the annual benefit to which the participant is entitled at the end
of the plan year (assuming payment commences in the normal form at the end of the plan
year) plus the annuity equivalent of accelerated benefit payments deemed paid in the next
plan year, over the sum of the annual benefit to which the participant would have been
-14entitled at the end of the preceding plan year (assuming that payment commences in the
normal form at the later of normal retirement age and the end of the preceding plan year),
plus the annuity equivalent of accelerated benefit payments deemed paid during the plan
year. The effect of this adjustment, in the case of a single sum distribution, is to put the
participant in the same position as if the participant had received the distribution in the
normal form.
Eligible Cash Balance Plans
The 1988 proposed regulations did not contain any guidance specific to cash
balance plans. A cash balance plan is a type of defined benefit plan that determines
benefits by reference to an employee's hypothetical account. Since the 1988 proposed
regulations were issued, the number of cash balance plans has increased. The
development of cash balance plans has raised the issue of whether this design complies
with section 411 (b)(1 )(H).
Under a cash balance plan, an employee's hypothetical account balance is credited
with hypothetical allocations, often referred to as service credits or pay credits, and
hypothetical earnings, often referred to as interest credits. Under some cash balance
plans, the right to interest credits for future periods accrues at the same time as the pay
credit (i.e., the interest credit is not contingent on the performance of services in the future).
Under other cash balance plans, all or some portion of the interest credit for future periods
is contingent on the performance of services in the future. The benefit under a cash
balance plan is expressed in the plan document (and communicated to employees) as the
-15hypothetical account balance, although not all cash balance plans provide a single sum
distri bution.
Under a cash balance plan, the interest credits for a younger participant will
compound over a greater number of years until normal retirement age than for an older
participant. This will result in a larger accrual for younger employees, when measured as
the increase in the benefit payable at normal retirement age. Accordingly, some
commentators have argued that the basic cash balance plan design violates section
411 (b)(1 )(H). Others have asserted that cash balance plans do not violate section
411 (b)( 1)(H) if the additions to the hypothetical account are not smaller because of the
attainment of any age. They argue that, because pay credits under a cash balance plan
are comparable to allocations under a defined contribution plan, these pay credits are an
appropriate measure for testing whether a cash balance plan satisfies section
411(b)(1)(H).
These proposed regulations would provide that the rate of benefit accrual under an
eligible cash balance plan, as defined in these proposed regulations, is permitted to be
determined as the additions to the participant's hypothetical account for the plan year,
except that previously accrued interest credits are not included in the rate of benefit
accrual. Because the rate of benefit accrual is determined based on how benefits are
expressed under the plan, this method of determining the rate of benefit accrual is
restricted to eligible cash balance plans, as defined in these proposed regulations.
An eligible cash balance plan is a defined benefit plan that satisfies certain
requirements. First, for accruals in the current plan year, the normal form of benefit is an
-16immediate payment of the balance in a hypothetical account. As long as the normal form of
benefit is an immediate payment of the balance in a hypothetical account, a plan does not
fail to be an eligible cash balance plan merely because a single-sum distribution of that
amount is not actually available as a distribution option under the plan.
Second, a plan is an eligible cash balance plan only if the plan provides that, at the
same time that the participant accrues an addition to the hypothetical account, the
participant accrues the right to future interest credits (without regard to future service) at a
reasonable rate of interest that does not decrease because of the attainment of any age.
Because the rate of benefit accrual under an eligible cash balance plan is generally
determined by reference to additions to the hypothetical account disregarding interest
credits, these interest credits must be provided for all future periods, including after normal
retirement age, and an eligible cash balance plan cannot treat interest credits after normal
retirement age as actuarial increases that are offset against the otherwise required
accrual. A participant is not treated as having the right to future interest credits if the plan
provides that additions to the hypothetical account under the plan are reduced for the
actuarial equivalent of any in-service distributions because, as discussed above, such a
reduction is the equivalent of an offset for an actuarial adjustment. Any additional interest
credits und er an eligible cash balance plan that do not accrue at the same time as the
corresponding addition to the hypothetical account are included in determining the rate of
benefit accrual in the year in which those additional interest credits are accrued.
In addition, a plan that is converted to a cash balance plan is subject to certain
requirements, discussed below.
-17~
There are other hybrid designs that would satisfy some, but not all, of the
requirements for an eligible cash balance plan. For example, there are some designs
under which the normal form of benefit is the immediate payment of an account balance,
but which do not provide for reasonable interest credits on that account balance. Under
these proposed regulations, the rate of benefit accrual under these plans would be
determined under the general rules applicable to traditional defined benefit plans.
Plans With Mixed Formulas
Some defined benefit plans have both a traditional defined benefit formula and a
cash balance formula, and these proposed regulations provide rules for plans with such a
mixed formula. If a portion of the plan formula under a defined benefit plan would satisfy the
requirements for an eligible cash balance plan if that were the only formula under the plan,
then that portion of the plan formula is referred to as an eligible cash balance formula in
these proposed regulations. Any other portion of the plan formula is referred to as a
traditional defined benefit formula.
The portion that is an eligible cash balance formula (or formulas if the plan has
multiple eligible cash balance formulas) would be permitted to be tested using the rules for
eligible cash balance plans, with the remainder of the plan tested under the rules for a
traditional defined benefit formula (regardless of how many traditional defined benefit
formulas the plan may have). This rule applies only if each such separately-treated plan
would satisfy the maximum age conditions in section 41 0(a)(2) and the eligible cash
balance and traditional defined benefit formulas interact in one of three specific ways for
current and future accruals. The three ways are: (1) the plan provides that the participant's
-18benefit is based on the sum of accruals under two different formulas (either sequentially
where the cash balance formula goes into effect during the year or simultaneously where
the plan provides for a participant to accrue benefits under both a traditional defined
benefit formula and a cash balance formula at the same time with the participant to be
entitled to the sum of the two); (2) the plan provides a benefit for a participant equal to the
greater of the benefit determined under two or more formulas, one of which is an eligible
cash balance formula and the other of which is not; or (3) under the plan, some participants
are eligible for accruals only under an eligible cash balance formula and the remaining
participants are eligible for accruals only under a traditional defined benefit formula or the
other 2 specific methods. If the eligible cash balance formula and the traditional defined
benefit formula interact in any other manner, the plan is not treated as an eligible cash
balance plan for any portion of the plan formula.
Amendments Establishing an Eligible Cash Balance Formula
In many cases, a plan sponsor amends a traditional defined benefit plan to make it
a cash balance plan. This process is often referred to as a "conversion." The terms of
cash balance conversions vary, but often provide an opening hypothetical account balance
for each participant. In some cases, the opening balance may be based on the
participant's prior accrued benefit under the traditional defined benefit plan or on the
participant's prior service with the plan sponsor. In other cases, the opening balance is set
at zero, and each participant is entitled to the sum of the participant's accrued benefit
under the traditional defined benefit plan and the cash balance account.
-19Some commentators have questioned whether certain cash balance conversions
that provide for the establishment of an opening account balance satisfy section
411 (b)( 1)(H). These commentators have noted that, under section 411 (d)(6), the
participant can never be denied payment of the prior accrued benefit. They note that, if the
opening account balance and subsequent interest credits through normal retirement age
generate benefits that are not at least as large as the prior accrued benefit, the participant
will not accrue net benefits for some period after the conversion. This period, often
referred to as a "wear-away" period, will continue until the participant's account balance
generates benefits that exceed the prior accrued benefit. These commentators argue that
the wear-away period inherently produces a lower rate of accrual for older participants. 2
Other commentators have argued that a wear-away period does not violate section
411(b)(1 )(H) because the length of the wear-away period is determined not by the
participant's age but by the size of the participant's prior accrued benefit under the
traditional defined benefit plan. Additionally, commentators have pointed out that, because
the prior accrued benefit is calculated using an interest rate determined at the time of the
This type of wear-away differs from a wear-away that results from the fact that
certain optional forms of benefit may be subsidized under the traditional defined benefit
plan but not under the cash balance plan or that other actuarial factors may produce a
larger benefit amount prior to normal retirement age under the traditional defined benefit
plan but not under the cash balance plan. This may occur even though the actuarial value of
the accrued benefit under the traditional defined benefit plan is included in the participant's
opening account balance. Although section 411 (d)(6) protects optional forms of benefit
under the pre-amendment formula, section 411 (b)( 1)(H)(iv) specifically provides that a
reduction because of the attainment of any age does not occur as a result of the subsidized
portion of an early retirement benefit.
2
-20amendment but the interest credits under the cash balance plan often fluctuate under a
variable index, a participant may move in or out of a wear-away period after a cash
balance conversion solely because of future changes in interest rates.
Under these proposed regulations, the mere conversion of a traditional defined
benefit plan to a cash balance plan would not cause the plan to fail section 411 (b)(1 )(H).
However, a converted plan that otherwise would be treated as an eligible cash balance
plan must satisfy one of two alternative rules. Under the first alternative, the converted plan
must determine each participant's benefit as not less than the sum of the participant's
benefits accrued under the traditional defined benefit plan and the cash balance account.
A plan satisfying this first alternative will not have a wear-away period for benefits accrued
under the traditional defined benefit plan.
Under the second alternative, the converted plan must establish each participant's
opening account balance as an amount not less than the actuarial present value of the
participant's prior accrued benefit, using reasonable actuarial assumptions. For this
purpose, an interest rate assumption is not treated as reasonable if it increases, directly or
indirectly, because of the participant's attainment of any age (which would result in lower
present values for older participants). This alternative does not preclude the possibility of a
wear-away period for some or all the participants in the plan, but it ensures that the opening
account balance of each participant reflects the actuarial value of the prior accrued benefit,
determined by using reasonable assumptions. Any excess in the opening account balance
over the present value of a participant's previously accrued benefit is included as part of
the participant's rate of benefit accrual for the plan year, and thus is tested under section
-21411 (b)(1 )(H) along with other pay credits for the year. Effectively, this alternative provides
that a converted plan will not fail to satisfy section 411 (b )(1 )(H) if the benefit formula before
the conversion satisfies section 411 (b )(1 )(H), the opening account balance is based on
actuarial assumptions that are reasonable (and an interest rate that does not increase for
older participants), and the benefit formula after the conversion -- including any excess in
the opening account balance over the present value of a participant's previously accrued
benefit - satisfies section 411 (b )(1 )(H).
Use of Compensation in Calculating Rate of Benefit Accrual
A participant's rate of benefit accrual for a plan year can be determined as a dollar
amount. Alternatively, if a plan's formula bases a participant's accruals on current
compensation, then a partiCipant's rate of benefit accrual can be determined as a
percentage of the participant's current compensation. Likewise, if a plan's formula bases a
participant's accruals on average compensation, then a participant's rate of benefit accrual
can be determined as a percentage of that measure of the participant's average
compensation. In order for the participant's rate of benefit accrual to be determined as a
percentage of the participant's current or average compensation, compensation must be
determined without regard to attainment of any age. The alternative of using current or
average compensation simplifies testing, without changing the result.
Defined Contribution Plans
A defined contribution plan fails to comply with section 411 (b )(2) if, either directly or
indirectly, because of a participant's attainment of any age, the allocation of employer
contributions or forfeitures to the account of the participant is discontinued or the rate at
-22which the allocation of employer contributions or forfeitures is made to the account of the
participant is decreased. For determining if there is a cessation or reduction in allocations
because of attainment of any age, these proposed regulations would adopt a SUbstantive
standard that is similar to the standard that applies under these proposed regulations for
defined benefit plans and to the standard that was proposed in the 1988 proposed
regulations.
A reduction in the rate of allocation is directly because of a participant's attainment
of any age for a plan year if under the terms of the plan, any participant's rate of allocation
during the plan year would be higher if the participant were younger.
A reduction in the rate of allocation is indirectly because of a participant's
attainment of any age if any participant's rate of allocation during the plan year would be
higher if the participant were to have any characteristic which is a proxy for being younger,
based on applicable facts and circumstances. A cessation or reduction in allocations is
not indirectly because of the attainment of any age solely because of a positive correlation
between attainment of any age and a reduction in the allocations or rate of allocation.
Thus, a defined contribution plan does not provide for cessation or reduction in allocations
solely because the plan limits the total amount of employer contributions and forfeitures that
may be allocated to a participant's account or limits the total number of years of credited
service that may be taken into account for purposes of determining allocations for the plan
year.
Target benefit plans (defined contribution plans under which contributions are
determined by reference to a targeted benefit described in the plan) are subject to section
-23411 (b )(2) which applies to defined contribution plans. Under these proposed regulations,
a target benefit plan would satisfy section 411 (b )(2) only if the defined benefit formula used
to determi ne allocations would satisfy section 411 (b)( 1)(H) without regard to section
411 (b )(1 )(H)(iii) relating to adjustments for distributions and actuarial increases. A target
benefit plan would not fail to satisfy section 411 (b )(2) with respect to allocations after
normal retirement age merely because the allocation for a plan year is reduced to reflect an
older participant's shorter longevity using a reasonable actuarial assumption regarding
mortality. These proposed regulations also would authorize the Commissioner to develop
additional guidance with respect to the application of section 411 (b )(2) to target benefit
plans.
Optional Forms of Benefit and Other Rights and Features
These proposed regulations generally retain the requirements applicable to optiona I
forms of benefit that were in the 1988 proposed regulations. Under these rules, with the
exceptions noted below, a participant's rate of benefit accrual under a defined benefit plan
and a participant's allocations under a defined contribution plan are considered to be
reduced because of the participant's attainment of any age if optional forms of benefits,
ancillary benefits, or other rights or features otherwise provided to a participant under the
plan are not provided, or are provided on a less favorable basis, with respect to benefits or
allocations attributable to credited service because of the participant's attainment of any
age. In addition, a plan would not fail to satisfy section 411(b)(1)(H) merely due to variance
because of the attainment of any age with respect to the subsidized portion of an early
retirement benefit (whether provided on a temporary or permanent basis), a qualified
-24disability benefit (as defined in §1.411 (a)-7(c)(3)), or a social security supplement (as
defined in §1.411(a)-7(c)(4)(ii)).3 These proposed regulations also clarify that a plan would
not fail to satisfy section 411 (b)(1 )(H) merely because the plan makes actuarial
adjustments using a reasonable assumption regarding mortality to calculate optional forms
of benefit or to calculate the cost of providing a qualified preretirement survivor annuity, as
defined in section 417(c).
Coordination With Other Provisions
Sections 411 (b)(1 )(H)(v) and 411 (b)(2)(C) both provide for the coordination of the
requirements of each section with other applicable qualification requirements. Under these
proposed regulations, a plan will notfail to satisfy section 411 (b)( 1)(H) or 411 (b)(2)
because of a limit on accruals or allocations necessary to comply with the limitations of
section 415 or to prevent discrimination in favor of highly compensated employees within
the meaning of section 401 (a)(4). Additionally, these proposed regulations would
authorize the Commissioner to provide additional guidance relating to prohibited
discrimination in favor of highly compensated employees. These proposed regulations
would also provide that no benefit accrual or allocation is required under section
411 (b)( 1)(H) or 411 (b)(2) for a plan year to the extent such allocation or accrual would
cause the plan to fail to satisfy the requirements of section 401 (I) (relating to permitted
disparity) for the plan year, such as if a younger person has a smaller permitted disparity
due to having a later social security retirement age. Further, under these proposed
3The ADEA also includes special rules relating to certain of these benefits. See 29
U.S.C. 623(f)(2) and (I).
-25regulations, a plan would not fail to satisfy section 411 (b)( 1)(H) or 411 (b )(2) for a plan year
merely because of the distribution rights provided under section 411 (a)(11), including
deferral rights for participants whose benefits are immediately distributable within the
meaning of §1.411 (a)-11 (c).
Application of Section 401(a)(4) to New Comparability Cash Balance Plans
These proposed regulations also include a proposed amendment to the regulations
under section 401 (a)(4). This amendment would provide that a defined benefit plan that
determines compliance with section 411 (b)(1 )(H) by using the special definition of rate of
accrual for an eligible cash balance plan is not permitted to demonstrate that the benefits
provided under the arrangement do not discriminate in favor of highly compensated
employees by using an inconsistent method (Le., an accrual rate based on the normal
retirement benefit), unless the plan complies with a modified version of the provisions of
the regulations under section 401 (a)(4) related to cross-testing by a defined contribution
plan. Under these requirements, an eligible cash balance plan under which the additions to
the hypothetical account are neither broadly available nor reflect a gradual age and service
schedule, as defined under existing regulations relating to cross-tested defined
contribution plans, may test on the basis of benefits only if the plan satisfies a minimum
allocation gateway.
The minimum allocation gateway generally requires that the hypothetical allocation
rate for each nonhighly compensated employee be at least one-third of the hypothetical
allocation rate for the highly compensated employee with the highest hypothetical allocation
rate. However, the minimum allocation gateway is also satisfied if the hypothetical
-26allocation rate for each nonhighly compensated employee is no less than 5%, provided the
highest hypothetical allocation rate for any highly compensated employee is not in excess
of 25%. If the highest hypothetical allocation rate is above 25%, the 5% factor is
increased, up to as much as 7.5%. This minimum allocation gateway, which is normally
applicable to DB/DC plans (Le., defined benefit plans and defined contribution plans that
are combined for nondiscrimination testing), is used for purposes of eligible cash balance
plans, rather than the minimum allocation gateway normally applicable to defined
contribution plans, because hypothetical allocations under a cash balance plan can be
Significantly greater than allocations under a defined contribution plan.
If the eligible cash balance plan is aggregated with other plans that are not cash
balance plans, the regulations would treat the cash balance plan as a defined contribution
plan for purposes of applying the rules applicable to aggregated plans. For this purpose, a
plan with both an eligible cash balance formula and a traditional defined benefit formula is
treated as an aggregation of two plans.
Effective Date of Sections 411(b)(1 )(H) and 411(b)(2)
The 1988 proposed regulations included provisions related to the effective date of
sections 411 (b )(1 )(H) and 411 (b )(2). The effective date provisions in these proposed
regulations differ from the 1988 proposed regulations (and Notice 88-126) in order to
reflect the decision in Lockheed Corp. v. Spink, 517 U.S. 882 (1996).
In general, sections 411 (b)(1 )(H) and 411 (b)(2) are effective for plan years
beginning on or after January 1, 1988 with respect to a participant who is credited with at
least one hour of service in a plan year beginning on or after January 1, 1988. In the case
-27of a participant who is credited with at least one hour of service in a plan year beginning on
or after January 1, 1988, section 411 (b)(1 )(H) is effective with respect to all years of
service completed by the participant, except that, in accordance with Lockheed Corp. v.
Spink, plan years beginning before January 1, 1988 are excluded. For purposes of these
proposed regulations, an hour of service includes any hour required to be recognized
under the plan by section 410 or 411 .
Similarly, section 411 (b)(2) does not apply with respect to allocations of employer
contributions or forfeitures to the accounts of participants under a defined contribution plan
for a plan year beginning before January 1, 1988.
These proposed regulations would also provide a special effective date for a plan
maintained pursuant to one or more collective bargaining agreements between employee
representatives and one or more employers, ratified before March 1, 1986. For such
plans, sections 411 (b)(1 )(H) and 411 (b)(2) are effective for benefits provided under, and
employees covered by, any such agreement with respect to plan years beginning on or
after the later of (i) January 1, 1988 or (ii) the earlier of January 1, 1990 or the date on
which the last of such collective bargaining agreements terminates (determined without
regard to any extension of any such agreement occurring on or after March 1, 1986). The
otherwise generally applicable effective date rules would apply to a collectively bargained
plan, as of the effective date of section 411 (b)(1 )(H) or 411 (b)(2) applicable to such plan.
Proposed Effective Date
The regulations are proposed to be applicable to plan years beginning after the
date final regulations are published in the Federal Register. These proposed regulations
-28cannot be relied upon until adopted in final form. However, until these regulations are
adopted in final form, the reliance provided on the 1988 proposed regulations continues to
be available. In addition, the proposed regulations at §§1.41 O(a)-4A, 1.411 (a)-3, 1.411 (b)3 and 1.411 (c)-1 (f)(2) (relating to maximum age for participation, vesting, normal
retirement age, and actuarial adjustments after normal retirement age), which were
published in the same notice of proposed rulemaking as the 1988 proposed regulation and
which are not republished here, are also expected to be finalized for future plan years.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defi ned in Executive Order 12866. Therefore, a regulatory
assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulation does not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f)
of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations, consideration
will be given to written comments (preferably a signed original and eight (8) copies) that
are submitted timely to the IRS. Alternatively, taxpayers may submit comments
electronically to the IRS Internet site at www.irs.gov/regs. All comments will be available for
-29public inspection and copying. The IRS and Treasury request comments on the clarity of
the proposed rules and how they may be made easier to understand or to implement.
Comments are also requested on the following issues:
Because these proposed regulations are based on a year-by-year determination of
the rate of benefit accrual that does not accommodate averaging over a period of
earlier years, one result would be that, if a higher accrual is provided for older
workers in one year, the rates cannot be leveled out in subsequent periods in a
manner that takes the earlier higher accruals into account. This might occur for a
change from a fractional accrual method to a unit credit method for all years of
service. Comments are requested on whether rates should be permitted to be
averaged and, if so, under what conditions.
In the case of a conversion of a traditional defined benefit plan to a cash balance
plan, these proposed regulations generally provide for any excess of a participant's
opening hypothetical account balance over the present value of the participant's
prior accrued benefit to be tested for age discrimination. Comments are requested
on whether any other portion of the hypothetical account balance should be
disregarded in applying section 411 (b)( 1)(H) under other circumstances, for
example, if the opening account balance is a reconstructed cash balance account
(Le., the account balance that each participant would have had at the time of the
conversion if the cash balance formula had been in effect for the participant's entire
period of service). In addition, comments are requested on the effect of these
-30rules on employers, if any, that may have used the extended wear-away transition
rule of § 1.401 (a)(4 )-13(f)(2)(i).
Because these proposed regulations provide for the rate of benefit accrual und er
section 411 (b)(1 )(H) to be based on the annual increase in the accrued benefit
under the plan, the rate of benefit accrual under a floor offset plan, as described in
Rev. Rul. 76-259 (1976-2 CB 111), would be determined after taking into account
the amount of the offset. Comments are requested on whether the rate of benefit
accrual for a floor offset plan should be tested before application of the offset and, if
so, under what conditions. For example, should the rate of benefit accrual for a floor
offset plan be tested before application of the offset if the plan provides an actuarial
increase after normal retirement age or if the annuity purchase rate used to
calculate the offset is not less favorable after normal retirement age than the annuity
purchase rate applicable at normal retirement age.
A public hearing has been scheduled for April 10, 2003, at 10 a.m. in room 4718 of
the Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. All visitors
must present photo identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more than 30 minutes
before the hearing starts at the Constitution Avenue entrance. For information about
having your name placed on the building access list to attend the hearing, see the "FOR
FURTHER INFORMATION CONTACT" section of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments at the hearing must submit written comments and an outline of the
-31topics to be discussed and the time to be devoted to each topic (signed original and eight
(8) copies) by March 13,2003. A period of 10 minutes will be allotted to each person for
making comments. An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these proposed regulations are Linda S. F. Marshall and R.
Lisa Mojiri-Azad of the Office of the Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). However, other personnel from the IRS and Treasury
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR Part 1 is proposed to be amended as follows:
PART 1 --INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding the following
citation in numerical order:
Authority: 26 U.S.C. 7805 * * *
Section 1.411 (b)-2 is also issued under 26 U.S.C. 411 (b)(1 )(H) and 411 (b)(2). * * *
Par. 2. Section 1.401 (a)(4 )-3 is amended as follows:
1. A new sentence is added before the last sentence of paragraph (a)(1).
2. Paragraph (g) is added.
-32The additions and revisions read as follows:
§ 1.401 (a)(4 )-3 Nondiscrimination in amount of employer-provided benefits under a defined
benefit plan.
(a) Introduction--(1) Overview. * * * Paragraph (g) of this section provides additional
rules that apply to a plan that satisfies the requirements of section 411 (b)(1 )(H) and
§ 1.411 (b )-2 using the rate of benefit accrual determined pursuant to the rules of §1.411 (b)2(b )(2)(iii) for eligible cash balance plans. * * *
*****
(g) Additional rules for eligible cash balance plans--(1) In general. Notwithstanding
the provisions of paragraphs (a) through (f) of this section, a plan that satisfies the
requirements of section 411 (b )(1 )(H) and § 1.411 (b )-2 using the rate of benefit accrual
under the plan or a portion of the plan determined pursuant to the rules of §1.411 (b)2(b )(2)(iii) for eligible cash balance plans is permitted to satisfy the requirements of section
401 (a)(4) by satisfying the requirements of this section (relating to nondiscrimination in
amount of employer-provided benefits) only if the plan satisfies paragraph (g)(2) or (3) of
this section, as applicable.
(2) Eligible cash balance plans not aggregated with another defined benefit plan. A
plan described in paragraph (g)(1) of this section under which benefits are determined
solely in accordance with an eligible cash balance formula (as defined in §1.411 (b)2(b )(2)(iii)(C)(1)) satisfies this paragraph (g)(2) only if the plan meets either of the following
conditions--
-33(i) The plan would satisfy the requirements of §1.401 (a)(4)-8(b)(1 )(iii) or (iv) by
treating the additions to the hypothetical account that are included in the rate of benefit
accrual under the rules of §1.411 (b)-2(b)(2)(iii)(A) as allocations under a defined
contribution plan; or
(ii) The plan would satisfy the requirements of §1.401 (a)(4)-9(b)(2)(v)(D) by treating
the additions to the hypothetical account that are included in the rate of benefit accrual
under the rules of §1.411 (b)-2(b )(2)(i ii)(A) as allocations under a defined contribution plan
for purposes of determining equivalent normal allocation rates (within the meaning of
§1.401 (a)(4 )-9(b)(2)(ii)).
(3) Eligible cash balance plans aggregated with another defined benefit plan. In the
case of a plan described in paragraph (g)(1) of this section that is not described in
paragraph (g)(2) of this section (for example, an eligible cash balance plan that is
aggregated with another defined benefit plan that is not an eligible cash balance plan or a
plan that uses an eligible cash balance formula with a traditional defined benefit plan
formula as described in §1.411 (b)-2(b)(2)(iii)(C)), the plan would satisfy the requirements
of §1.401 (a)(4 )-9(b)(2)(v)(D) by treating the additions to the hypothetical account that are
included in the rate of benefit accrual under the rules of §1.411 (b )-2(b )(2)(iii)(A) as
allocations under a defined contribution plan.
Par. 3. Section 1.401(a)(4)-9 is amended by:
1. Amending paragraph (b)(2)(v) by removing the language "For plan years" and
adding in its place "Except as provided in paragraph (b)(2)(vi) of this section, for plan
years".
-342. Adding paragraph (b )(2)(vi).
The addition reads as follows:
§1.401(a)(4)-9 Plan aggregation and restructuring
*****
(b) * * *
(2) * * *
(vi) Special rules for cash balance plans aggregated with defined contribution plans-(A) In general. In the case of a DB/DC plan where the defined benefit plan (or any portion
thereof) satisfies the requirements of section 411 (b)( 1)(H) using the rate of benefit accrual
determined pursuant to the rules of §1.411 (b)-2(b)(iii) for eligible cash balance plans, the
DB/DC plan is permitted to demonstrate satisfaction of the nondiscrimination in amount
requirement of §1.401 (a)(4)-1 (b)(2) on the basis of benefits only if-(1) The plan would satisfy the requirements of paragraph (b )(2)(v) of this section if
the additions to the hypothetical account that are included in the rate of benefit accrual
under the rules of §1.411 (b)-2(b)(2)(iii)(A) are treated as allocations under a defined
contribution plan; or
~)
The plan is described in paragraph (b)(2)(vi)(B) of this section (regarding
eligible cash balance plans aggregated only with defined contribution plans).
(B) Special rule for cash balance plans aggregated with defined contribution plans
that are not aggregated with other defined benefit plans. A DB/DC plan is described in
this paragraph (b)(2)(vi)(8) if the DB/DC plan satisfies the following conditions--
-35(1) All defined benefit plans that are included in the DB/DC plan satisfy the
requirements of section 411 (b)(1 )(H) using the rate of benefit accrual determined pursuant
to the rules of § 1.411 (b )-2(b )(iii) for eligible cash balance plans; and
(g) The DB/DC plan would satisfy the requirements of §1.401(a)(4)-8(b)(1 )(i)(8)(1)
or (g) (regarding broadly available allocation rates or certain age-based allocation rates) if
the additions to the hypothetical account that are included in the rate of benefit accrual
under the rules of §1.411 (b )-2(b )(2)(iii)(A) are treated as allocations under a defined
contribution plan.
Par. 4. Proposed §1.411 (b )-2 published at 53 FR 11876 on April 11, 1988, is
revised to read as follows.
§ 1.411 (b )-2 Reductions of accruals or allocations because of attainment of any age.
(a) In general--(1) Overview. Section 411 (b)(1 )(H) provides that a defined benefit
plan does not satisfy the minimum vesting standards of section 411(a) if, under the plan,
benefit accruals on behalf of a participant are ceased or the rate of benefit accrual on
behalf of a participant is reduced because of the participant's attainment of any age.
Section 411 (b )(2) provides that a defined contribution plan does not satisfy the minimum
vesting standards of section 411 (a) if, under the plan,. allocations to a participant's account
are ceased or the rate of allocation to a participant's account is reduced because of the
participant's attainment of any age. Paragraph (b) of this section provides general rules for
defined benefit plans. Paragraph (c) of this section provides general rules for defined
contribution plans. Paragraph (d) of this section provides rules applying this section to
optional forms of benefit, ancillary benefits, and other rights or features under defined
-36benefit and defined contribution plans. Paragraph (e) of this section provides rules
coordinating the requirements of this section with certain other qualification requirements.
Paragraph (f) of this section contains effective date provisions.
(2) Attainment of any age. For purposes of sections 411(b)(1)(H), 411(b)(2), and
this section, a participant's attainment of any age means the participant's growing older.
Thus, the rules of sections 411 (b)(1 )(H), 411 (b)(2), and this section apply regardless of
whether a participant is younger than, at, or older than normal retirement age.
(b) Defined benefit plans--(1) In general--(i) Requirement. A defined benefit plan
does not satisfy the requirements of section 411 (b )(1 )(H) if a participant's rate of benefit
accrual is reduced, either directly or indirectly, because of the participant's attainment of
any age. A reduction in a participant's rate of benefit accrual includes any discontinuance
in the participant's accrual of benefits or cessation of participation in the plan.
(ii) Definition of normal form. For purposes of this paragraph (b), the normal form of
benefit (also referred to as the normal form) means the form under which payments to the
participant under the plan are expressed under the plan formula, prior to adjustment for
form of benefit.
(2) Rate of benefit accrual--(i) Rate of benefit accrual before normal retirement age.
For purposes of this paragraph (b), except as provided in paragraph (b )(2)(iii) of this
section, a participant's rate of benefit accrual for any plan year that ends before the
participant attains normal retirement age is the excess (if any) of-(A) The participant's accrued normal retirement benefit at the end of the plan year;
over
-37(8) The participant's accrued normal retirement benefit at the end of the preceding
plan year.
(ii) Rate of benefit accrual after normal retirement age. In the case of a plan for
which the rate of benefit accrual before normal retirement age is determined under
paragraph (b)(2)(i) ofthis section, except as provided in paragraph (b)(4)(iii)(C) of this
section, a participant's rate of benefit accrual for the plan year in which the participant
attains normal retirement age or any later plan year (taking into account the provisions of
section 411 (b)( 1)(H)(iii)(II)) is the excess (if any) of-(A) The annual benefit to which the participant is entitled at the end of the plan year,
determined as if payment commences at the end of the plan year in the normal form (or the
straight life annuity that is actuarially equivalent to the normal form if the normal form is not
an annual benefit that does not decrease during the lifetime of the partiCipant); over
(8) The annual benefit to which the participant was entitled at the end of the
preceding plan year, determined as if payment commences at the later of normal
retirement age or the end of the preceding plan year in the normal form (or the straight life
annuity that is actuarially equivalent to the normal form if the normal form is not an annual
benefit that does not decrease during the lifetime of the participant).
(iii) Rate of benefit accrual for eligible cash balance plans--(A) General rule. For
purposes of this paragraph (b), in the case of an eligible cash balance plan, a participant's
rate of benefit accrual for a plan year is permitted to be determined as the addition to the
participant's hypothetical account for the plan year, except that interest credits added to the
hypothetical account for the plan year are disregarded to the extent the participant had
-38accrued the right to those interest credits as of the close of the preceding plan year as
described in paragraph (b)(2)(iii)(8)(~) of this section.
(8) Eligible cash balance plans. For purposes of this section, a defined benefit plan
is an eligible cash balance plan for a plan year if it satisfies each of the following
requirements for current accruals under the plan for that plan year-(1) Plan design. The normal form of benefit is an immediate payment of the balance
in a hypothetical account (without regard to whether such an immediate payment is actually
available under the plan).
(~)
Right to future interest. With respect to a participant's hypothetical account
balance, the participant has accrued the right to annual (or more frequent) interest credits
to be added to the hypothetical account for all future periods without regard to future
service at a reasonable rate of interest that is not reduced, either directly or indirectly,
because of the participant's attainment of any age. A plan is treated as not satisfying the
requirement of this paragraph (b )(2)(iii)(8)(~) if it provides for any adjustment for benefit
distributions described in paragraph (b)(4) of this section.
(~)
Plan amendments adopting cash balance formula. In the case of a plan
amendment that has been amended to adopt a cash balance formula (as described in
paragraphs (b)(2)(iii)(8)(l) and
(~)
of this section) for a participant, the plan as amended
satisfies the requirements of either paragraph (b)(2)(iii)(O) or (E) of this section.
(C) Plans with mixed benefit formulas--(l) Eligible cash balance formula. If a portion
of the plan formula under a defined benefit plan would satisfy the requirements to be an
eligible cash balance plan if it were the only formula under the plan, then, for purposes of
-39this section, such portion of the plan formula is referred to as an eligible cash balance
formula and the other portion of the plan formula is referred to as a traditional defined
benefit formula. If the eligible cash balance formula and the traditional defined benefit
formula interact in a manner described in paragraph (b)(2)(iii)(C)(f), (~), or (1) of this
section for current and future accruals under the plan, then, for purposes of determining
whether the plan satisfies section 411 (b)( 1)(H), the plan is permitted to be treated as two
separate plans, one of which is an eligible cash balance plan and the other of which is not,
but only if each such plan would satisfy section 410(a)(2). Thus, such a plan satisfies the
requirements of section 411 (b)(1 )(H) if the eligible cash balance formula satisfies the
requirements of paragraph (b)(1) of this section with the participant's rate of benefit accrual
determined under paragraph (b)(2)(iii)(A) of this section and the portion of the plan's
formula that is a traditional defined benefit formula satisfies the requirements of paragraph
(b)( 1) of this section with the participant's rate of benefit accrual determined under
paragraph (b)(2)(i) or (ii) of this section, as applicable. If the eligible cash balance formula
and the traditional defined benefit formula interact in a manner other than as set forth in
paragraphs (b)(2)(iii)(C)(f),
(~),
or (1) of this section, the plan is not treated as an eligible
cash balance plan for any portion of the plan formula.
(f) Plans with additive formulas. A plan is described in this paragraph
(b )(2)(iii)(C)(~) if the participant's benefit is based on the sum of accruals under two
different formulas, one of which is an eligible cash balance formula and the other of which
is not.
-40(~) Plans with greater of formulas. A plan is described in this paragraph
(b )(2)(iii}(C)(~) if the plan provides a benefit for a participant equal to the greater of the
benefit determined under two or more formulas under the plan for a plan year, one of which
is an eligible cash balance formula and another of which is not.
(~) Different formulas for different participants. A plan is described in this
paragraph (b )(2)(iii)(C)(~) if some participants are eligible for accruals only under an
eligible cash balance formula and the remaining participants are eligible for accruals only
under a traditional defined benefit formula or a combination of a traditional defined benefit
formula or eligible cash balance formula described in paragraphs (b)(2)(iii)(C)(2) and Q) of
this section.
(D) Plan amendment adopting eligible cash balance formula using a sum of formula.
A plan satisfies this paragraph (b )(2)(iii)(D) only if for all periods after the amendment
becomes effective the plan provides benefits that are not less than the sum of the benefits
accrued as of the later of the date the amendment becomes effective or the date the
amendment is adopted, plus the benefits provided by the participant's hypothetical account
under the eligible cash balance formula.
(E) Plan amendment adopting eligible cash balance formula using an opening
account balance--(1) Calculation of opening account balance. A plan satisfies this
paragraph (b )(2)(iii)(E) only if the balance in the participant's hypothetical account,
determined immediately after the amend ment becomes effective, is not less than the
actuarial present value of the participant's accrued benefit payable in the normal form of
benefit, determined as of the later of the date the amendment becomes effective or the
-41date the amendment is adopted, with such present value determined using reasonable
actuarial assumptions. For this purpose, the actuarial assumptions are not reasonable if
they include an interest rate that increases, either directly or indirectly, because of a
participant's attainment of any age. The actuarial assumptions do not fail to be reasonable
merely because pre-retirement mortality is not taken into account.
(~) Bifurcation for purposes of determining rate of benefit accrual. If a plan satisfies
the requirements of paragraph (b )(2)(iii)(E)(1), only the portion of the participant's
hypothetical account balance in excess of the actuarial present value of the participant's
accrued benefit payable in the normal form of benefit is treated as an addition to the
participant's hypothetical account balance for the plan year for purposes of determining the
participant's rate of benefit accrual under paragraph (b )(2)(iii)(A) of this section.
(~)
Treatment of employees past normal retirement age. In addition, a plan does
not satisfy this paragraph (b )(2)(iii)(E) if the opening balance for a participant who has
attained normal retirement age is less than the balance that would apply if the participant
were at his or her normal retirement age.
(iv) Determination of rate of benefit accrual--(A) In general. A participant's rate of
benefit accrual for a plan year can be determined as a dollar amount. Alternatively, if a
plan's formula bases a participant's accruals on current compensation, then a participant's
rate of benefit accrual can be determined as a percentage of the participant's current
compensation. For example, for an accumulation plan (as defined in §1.401(a)(4)-12), the
participant's rate of benefit accrual under paragraph (b )(2)(i) of this section can be
determined as the excess of the accrued portion of the participant's normal retirement
-42benefit at the end of the plan year over the accrued portion of the participant's normal
retirement benefit at the end of the preceding plan year, divided by compensation taken
into account under the plan for the plan year. Likewise, if a plan's formula bases a
participant's accruals on average compensation, then a participant's rate of benefit accrual
can be determined as a percentage of that measure of the participant's average
compensation. For a plan that determines benefits as a percentage of average annual
compensation (as defined in §1.401(a)(4)-3(e)(2)), the rate of benefit accrual under
paragraph (b)(2)(i) of this section is determined as the excess of the accrued portion of the
participant's normal retirement benefit at the end of the plan year divided by average
annual compensation taken into account under the plan at the end of the plan year, over the
accrued portion of the participant's normal retirement benefit at the end of the preceding
plan year divided by average annual compensation taken into account under the plan at the
end of such preceding plan year. A plan is permitted to determine the participant's rate of
benefit accrual as a percentage of the participant's current or average compensation only if
compensation under the plan is determined without regard to attainment of any age.
(B) Benefits included in rate of benefit accrual. For purposes of determining a
participant's rate of benefit accrual, only benefits that are included in a participant's
accrued benefit are taken into account. Thus, for example, a participant's rate of benefit
accrual does not take into account benefits such as the benefits described in paragraph
(d)(3) of this section (relating to qualified disability benefits, social security supplements,
and early retirement benefits).
-43(v) Examples. The following examples illustrate the application of this paragraph
(b)(2). In each of the examples, normal retirement age is 65. The examples are as follows:
Example 1. Plan L is a defined benefit plan under which the normal form of benefit
is a monthly straight life annuity commencing at normal retirement age (or the date of actual
retirement, if later) equal to $30 times the participant's years of service. For purposes of
this section, a participant's rate of benefit accrual for any plan year is $30.
Example 2. (i) Plan M is a defined benefit plan under which the normal form of
benefit is an annual straight life annuity commencing at normal retirement age (or the date
of actual retirement, if later) equal to 1% of the average of a participant's highest 3
consecutive years of compensation times the participant's years of service.
(ii) For purposes of this section, a participant's rate of benefit accrual for any plan
year can be expressed as a dollar amount. Alternatively, a participant's rate of benefit
accrual for a plan year can be expressed as 1% of the participant's highest 3 consecutive
years of compensation (determined using the same rules applicable to determining
compensation under the plan for purposes of computing the normal form of benefit),
provided that the definition of compensation used for this purpose is determined without
regard to the attainment of any age. A participant's rate of benefit accrual cannot be
determined as a percentage of any other measure of compensation or average
compensation.
(iii) If Plan M were to provide that compensation earned after the attainment of age
65 is not taken into account in determining average compensation or were otherwise to
determine compensation in a manner that depends on a participant's age, then, for
purposes of this section, a participant's rate of benefit accrual would have to be expressed
as a dollar amount, and could not be expressed as a percentage of any measure of
compensation or average compensation.
Example 3. (i) Plan N is a defined benefit plan under which the normal form of
benefit is an immediate payment of the balance in a participant's hypothetical account. A
compensation credit equal to 6% of each participant's wages for the year is added to the
hypothetical account of a participant who is an employee. At the end of each plan year, the
hypothetical account is credited with interest based on the applicable interest rate under
section 417(e), as provided under the plan. All participants accrue the right to receive
interest credits on their hypothetical account in the future regardless of performance of
services in the future, including after normal retirement age.
(ii) Under paragraph (b)(2)(iii)(8) of this section, Plan N satisfies the requirements
to be an eligible cash balance plan. Participant A's compensation for a plan year is
$40,000. The compensation credit for Participant A allocated to A's hypothetical account
-44for that plan year is $2,400. Because Plan N is an eligible cash balance plan, the rate of
benefit accrual for Participant A is permitted to be determined as the addition to
Participant A's hypothetical account for the plan year, disregarding interest credits.
Therefore, Participant A's rate of benefit accrual is equal to $2,400, or 6% of wages.
Example 4. (i) The facts are the same as in Example 3, except that the cash
balance formula under Plan N is the result of a plan amendment. Under the plan, as
amended, the benefits equal the sum of -(1) 1% of the average of the participant's highest 3 consecutive years of base salary
times years of service, but disregarding service and salary after the effective date of the
amendment, in a normal form of benefit that is a straight life annuity commencing at normal
retirement age (or the date of actual retirement, if later); and
(2) the participant's hypothetical account under the same cash balance formula in
Example 3 that applies after the effective date of the amendment, in a normal form of
benefit expressed as an immediate payment of the balance of the participant's
hypothetical account.
(ii) Under paragraph (b)(2)(iii)(B)Q) of this section, the plan is an eligible cash
balance plan if the plan satisfies the requirements of paragraph (b)(2)(iii)(D) or (E) of this
section. The plan's formula is described in paragraph (b )(2)(iii)(D) of this section.
Accordingly, the portion of the plan formula that provides for compensation credits on a
partiCipant's hypothetical account is an eligible cash balance formula under paragraph
(b)(2)(iii)(B) of this section. Therefore, a participant's rate of benefit accrual under the
eligible cash balance formula is permitted to be determined as the addition to the
participant's hypothetical account for the plan year, disregarding interest credits.
PartiCipant B's base salary for the year is $50,000. The compensation credit for
Participant B credited to B's hypothetical account for the year is $3,000. The rate of
benefit accrual under the eligible cash balance formula for Participant B is equal to $3,000,
or 6% of base salary.
Example 5. (i) The facts are the same as in Example 3, except that Plan N is a
defined benefit plan that is converted to a cash balance plan by the adoption of a plan
amendment, effective at the beginning of the next plan year, establishing an opening
hypothetical account for each participant with an accrued benefit under the plan prior to
conversion. Prior to conversion, Plan N provided a benefit equal to 1% of the average of a
participant's highest 3 consecutive years of compensation times years of service.
Effective as of the date of the conversion, hypothetical accounts are established equal to
the present value of a participant's accrued benefit using section 417( e) interest and
reasonable mortality assumptions (except no pre-retirement mortality is used). Under the
cash balance portion of the formula, compensation and interest credits are made as
described in Example 3.
-45(ii) Under paragraph (b)(2)(iii){B){~) of this section, the plan is an eligible cash
balance plan only if the plan satisfies the requirements of paragraph {b )(2){iii){O) or (E) of
this section. The plan's formula is described in paragraph (b){2){iii)(E) of this section.
Accordingly, the portion of the plan formula that provides for compensation credits on a
participant's hypothetical account is an eligible cash balance formula. The rate of benefit
accrual for a participant is therefore permitted to be determined as the addition to the
participant's hypothetical account for the plan year, disregarding interest credits. In
addition, under paragraph (b){2){iii){E) of this section, because the opening hypothetical
account balance is equal to the actuarial present value of the participant's accrued benefit,
that balance is not treated as an addition for the plan year. The result would not be different
if the opening accounts were established using another interest rate or another mortality
assumption if the actuarial assumptions were reasonable. Participant C's wages for the
year are $60,000. The compensation credit allocated to C's hypothetical account for the
year is $3,600. The rate of accrual under the eligible cash balance formula for C is equal
to $3,600, or 6% of compensation.
Example 6. (i) The facts are the same as in Example 5, except that Plan N provides
for only new participants and participants who are less than age 55 at the time of the
conversion to be eligible for benefits under the cash balance formula. Accordingly.
participants who are age 55 or older at the time of the conversion are only eligible for the
benefit payable under the plan formula in effect before the conversion (1 % of the
participant's highest 3 consecutive years of compensation times years of service) taking
into account compensation and service after the conversion.
(ii) Because Plan N provides benefits based on a mixed formula under paragraph
{b )(2)(iii)(C) of this section, Plan N is permitted under paragraph (b )(2)(iii)(C)(1) of this
section to be treated as two separate plans for purposes of section 411 (b)(1 )(H), one of
which is an eligible cash balance plan and the other of which is not, but only if each plan
would satisfy section 41 0(a)(2). No portion of Plan N can be treated as an eligible cash
balance plan because the portion of Plan N that would otherwise be an eligible cash
balance plan would fail to satisfy section 41 0(a)(2) as a result of having a maximum age of
55 for individuals who are participants at the time of the conversion.
Example 7. (i) The facts are the same as in Example 5, except that Plan N provides
for participants to receive the greater of the benefit payable under the cash balance
formula or the benefit payable under the plan formula in effect before the conversion (1 % of
the participant's highest 3 consecutive years of compensation times years of service)
taking into account compensation and service after the conversion.
(ii) Because Plan N provides benefits based on the greater of the amount payable
under two different formulas, under paragraph (b )(2)(iii)(C)(~J of this section, Plan N is
tested for satisfaction of the requirements of section 411 (b)( 1)(H) and this paragraph (b) by
-46separately testing the eligible cash balance formula using a rate of benefit accrual equal to
compensation credits of 6% of compensation and the traditional defined benefit formulas
using a rate of benefit accrual equal to 1% of highest 3 consecutive years of compensation.
(3) Reduction that is directly or indirectly because of a participant's attainment of
any age--(i) Reduction in rate of benefit accrual that is directly because of a participant's
attainment of any age. A plan provides for a reduction in the rate of benefit accrual that is
directly because of a participant's attainment of any age for any plan year if, under the
terms of the plan, any participant's rate of benefit accrual for the plan year would be higher
if the participant were younger. Thus, a plan fails to satisfy section 411 (b)(1 )(H) and this
paragraph (b) if, under the terms of the plan, the rate of benefit accrual for any individual
who is or could be a participant under the plan would be lower solely as a result of the
individual being older.
(ii) Reduction in rate of benefit accrual that is indirectly because of a participant's
attainment of any age--(A) In general. A plan provides for a reduction in the rate of benefit
accrual that is indirectly because of a participant's attainment of any age for any plan year if
any participant's rate of benefit accrual for the plan year would be higher if the participant
were to have a different characteristic which is a proxy for being younger, based on the all
of relevant facts and circumstances. Thus, a plan fails to satisfy section 411 (b)(1 )(H) and
this paragraph (b) if the rate of benefit accrual for any individual who is or could be a
participant under the plan would be lower solely as a result of such individual having a
different characteristic which is a proxy for being older, based on all of the relevant facts
and circumstances.
-47(8) Permissible limitations. A reduction in a participant's rate of benefit accrual is
not indirectly because of the attainment of any age in violation of section 411 (b)( 1)(H)
solely because of a positive correlation between attainment of any age and a reduction in
the rate of benefit accrual. In addition, a defined benefit plan does not fail to satisfy section
411 (b)( 1)(H) and this paragraph (b) solely because, on a uniform and consistent basis
without regard to a participant's age, the plan limits the amount of benefits a participant
may accrue under the plan, limits the number of years of service or years of participation
taken into account for purposes of determining the accrual of benefits under the plan
(credited service), or provides for a reduced rate of accrual for credited service in excess
of a fixed number of years. For this purpose, a limitation that is expressed as a
percentage of compensation (whether averaged over a participant's total years of credited
service for the employer or over a shorter period) is treated as a permissible limitation on
the amount of benefits a participant may accrue under the plan.
(iii) Examples. The provisions of this paragraph (b )(3) may be illustrated by the
following examples. In each of the examples, except as specifically indicated, normal
retirement age is 65, the plan contains no limitations on the maximum amount of benefits
the plan will pay to any participant (other than the limitations imposed by section 415), on
the maximum number of years of credited service taken into account under the plan, or on
the compensation used for purposes of determining the amount of any participant's
accrued benefit (other than the limitation imposed by section 401(a)(17)), and the plan
uses the following actuarial assumptions in determining actuarial equivalence: a 7.5% rate
of interest and the 83 GAM (male) mortality table. The examples are as follows:
-48Example 1. (i) Plan M provides an accrued benefit of 1% of a participant's average
annual compensation, multiplied by the participant's years of credited service under the
plan payable in the normal form of a straight life annuity commencing at normal retirement
age or the date of actual retirement if later. Plan M suspends payment of benefits for
participants who work past normal retirement age, in accordance with section 411 (a)(3)(8)
and 29 CFR 2530.203-3 of the regulations of the Department of Labor, and does not
provide for an actuarial increase in computing the accrued benefit for participants who
commence benefits after normal retirement age.
(ii) The rate of benefit accrual for all participants in Plan M is 1% of average annual
compensation. Thus, there could be no participant who would have a rate of benefit
accrual that is greater than 1% if the individual were younger. Accordingly, there is no
reduction in the rate of benefit accrual because of the individual's attainment of any age
under this paragraph (b )(3) and Plan M satisfies the requirements of section 411 (b)( 1)(H)
and this paragraph (b).
Example 2. (i) Assume the same facts as in Example 1, except that Plan M
provides that not more than 35 years of credited service are taken into account in
determining a participant's accrued benefit under the plan. Participant A became a
participant in the plan at age 25 and worked continuously in covered service under Plan M
until A retires at age 70.
(ii) The rate of benefit accrual under Plan M is 1% of average annual compensation
for participants who have up to 35 years of credited service and zero for participants who
have more than 35 years of credited service. 8ecause a reduction from a rate of benefit
accrual from 1% of average annual compensation to zero is based on service, and would
not be affected if any participant were younger (with the same number of years of service),
Plan M does not provide for a reduction in the rate of benefit accrual that is directly
because of an individual's attainment of any age as provided in paragraph (b)(3)(i) of this
section. Under paragraph (b )(3)(ii) of this section, a uniform limit on the number of years of
service taken into account for purposes of determining the accrual of benefits under the
plan is not considered to be a reduction in the rate of benefit accrual that is indirectly
because of a participant's attainment of any age.
(iii) Upon A's retirement at age 70, A will have an accrued benefit under the plan's
benefit formula of 35% of A's average annual compensation at age 70 (1 % per year of
credited service x 35 years of credited service). Plan M will not fail to satisfy the
requirements of section 411 (b)(1 )(H) and this paragraph (b) merely because the plan
provides that the final 10 years of A's service under the plan are not taken into account in
determining A's accrued benefit. The result would be the same if Plan M provided that no
participant could accrue a benefit in excess of 35% of the participant's average annual
compensation.
-49Example 3. Assume the same facts as in Example 1, except that Plan M provides
that a participant's years of service after attainment of social security retirement age are
disregarded for purposes of determining a participant's accrued benefit under the plan.
Because a participant who is covered under the plan after social security retirement age
would have a higher rate of benefit accrual if he or she were younger (and had not attained
social security retirement age), that participant's rate of benefit accrual is reduced directly
because of the participant's attainment of any age under paragraph (b )(3)(i) of this section.
Consequently, Plan M fails to satisfy the requirements of section 411 (b)(1 )(H) and this
paragraph (b).
Example 4. (i) Assume the same facts as in Example 1, except that Plan M
provides that a participant's compensation after the attainment of age 62 is not ta ken into
account in determining the partiCipant's accrued benefit under the plan.
(ii) Accordingly, the plan's measure of average compensation cannot be used in
determining a participant's rate of benefit accrual because it does not apply to participants
in a uniform manner that is independent of age. Because a participant who is or could be
covered under Plan M after the attainment of age 62 whose compensation increases after
age 62 would have a higher rate of benefit accrual if the participant were younger than age
62, that participant's rate of benefit accrual is reduced directly because of the participant's
attainment of any age under paragraph (b)(3)(i) of this section. This reduction occurs
whether or not there is any actual participant in Plan M who has attained age 62 or whose
average annual compensation has increased after age 62. Consequently, the plan fails to
satisfy the requirements of section 411 (b )(1 )(H) and this paragraph (b).
Example 5. (i) Assume the same facts as in Example 1 , except that Plan M is
amended to cease all benefit accruals for all participants and is subsequently terminated.
(ii) After all benefit accruals have ceased, the rate of benefit accrual of all
participants is zero. Thus, there could not be any participant who would have a rate of
benefit accrual that is greater than zero if the participant were younger, so that there is no
reduction in the rate of benefit accrual that is because of the individual's attainment of any
age under paragraph (b)(3) of this section. Accordingly, Plan M satisfies the requirements
of section 411 (b)(1 )(H) and this paragraph (b).
Example 6. (i) Employer Y maintains Plan 0, a defined benefit plan that provides an
accrued benefit of 1% of a participant's highest 5 consecutive years of compensation,
multiplied by the sum of the participant's age and years of service, payable in the normal
form of a straight life annuity commencing at normal retirement age or the date of actual
retirement if later. Plan 0 provides that a participant's years of service after the sum of a
participant's age and years of service reach a total of 55 are disregarded for purposes of
determining the normal retirement benefit. Participant C is 45 years old and has 10 years
of credited service as of the beginning of a plan year. Thus, for that plan year, C's rate of
benefit accrual is 1% of C's highest 5 consecutive years of compensation.
-50-
(ii) If C were younger, for example age 39 (with the same years of service), C would
have a rate of benefit accrual of 2% of C's highest 5 consecutive years of compensation.
Accordingly, C's rate of benefit accrual is reduced directly because of C's attainment of
any age as provided in this paragraph (b)(3)(i). Consequently, Plan 0 fails to satisfy the
requirements of section 411 (b)(1 )(H) and this paragraph (b).
Example 7. (i) Plan P is a defined benefit plan that provides for a normal retirement
benefit of 40% of a partiCipant's average compensation for the participant's highest 3
consecutive years of compensation, payable in the normal form of a straight life annuity
commencing at normal retirement age or the date of actual retirement if later. If a
participant separates from service prior to normal retirement age, Plan P provides a
benefit equal to an amount that bears the same ratio to 40% of such average
compensation as the participant's actual number of years of service bears to the number of
years of service the participant would have if the participant's service continued to normal
retirement age. As of the end of a plan year, participant D is 45 years old and has
completed 20 years of service, and participant E is 41 years _old and has completed 1 year
of credited service. Thus, D's rate of benefit accrual for the plan year may be determined
as 1% of compensation for D's highest 3 consecutive years, and E's rate of benefit accrual
for the plan year may be determined as 1.6% of compensation for E's highest 3
consecutive years.
(ii) If D were younger than age 45 (with 20 years of service and the same
compensation history), D's rate of benefit accrual for the plan year would not be greater
than 1% of compensation for D's highest 3 consecutive years. Thus, there is no reduction
in the rate of benefit accrual for D that is directly because of the individual's attainment of
any age as provided in paragraph (b)(3)(i) of this section. In addition, there are no facts
and circumstances indicating that D's rate of benefit accrual is reduced indirectly because
of D's attainment of any age as provided in paragraph (b)(3)(ii) of this section. Likewise, if
E were younger than age 41 (with 1 year of service and the same compensation history),
E's rate of benefit accrual for the plan year would not be greater than 1.6% of
compensation for E's highest 3 consecutive years. Thus, there is no reduction in the rate of
benefit accrual for E that is directly because of the individual's attainment of any age as
provided in paragraph (b)(3)(i) of this section. In addition, there are no facts and
circumstances indicating that E's rate of benefit accrual is reduced indirectly because of
E's attainment of any age under paragraph (b )(3)(ii) of this section. These same results
would apply for any possible participant in Plan P. Accordingly, Plan P satisfies the
requirements of section 411 (b)(1 )(H) and this paragraph (b).
Example 8. (i) Plan A is a defined benefit plan that provides for an accrued benefit
of 2% of a participant's average compensation for the participant's highest 3 consecutive
years of compensation for the first 20 years of service, plus 1% of such average
compensation for years in excess of 20, payable in the normal form of a straight life annuity
-51commencing at normal retirement age or the date of actual retirement if later. However, if a
participant separates from service prior to normal retirement age, Plan P provides a
benefit equal to an amount that bears the same ratio to the total percentage of such
average compensation that the participant would have if service continued to normal
retirement age as the participant's actual number of years of service bears to the number
of years of service the participant would have if the participant's service continued to
normal retirement age. For participants who work past normal retirement age, Plan A
provides a benefit equal to 2% per year for years of service not in excess of 20, plus the
following rate for years of service in excess of 20: the sum of 40% plus the product of 1%
times service in excess of 20 years, with that sum divided by total service to the end of the
current plan year. As of the beginning of the plan year beginning January 1, 2008,
participant N is 64 years old and has completed 20 years of service, and participant 0 is
70 years old and has completed 20 years of credited service. Thus, N's rate of benefit
accrual for that plan year may be determined as 1.95% of compensation for N's highest 3
consecutive years (2% for 20 years, plus 1% for 1 year, with that sum divided by 21 equals
1.95%), and O's rate of benefit accrual for that plan year also may be determined 1.95% of
compensation for O's highest 3 consecutive years (40% for the first 20 years, plus 1% for
service to the end of 2008, with that sum divided by 21 equals 1.95%).
(ii) If 0 were younger than age 70 (with 20 years of service and the same
compensation history), O's rate of benefit accrual for the plan year would not be greater
than 1.95% of compensation for O's highest 3 consecutive years. The same conclusion
applies for any other possible participant. Thus, Plan A satisfies paragraph (b )(3)(ii) of this
section.
(iii) However, if Plan A were instead to provide a rate of benefit accrual for service
after normal retirement age equal to 2% for years of service not in excess of 20, plus 1%
for service in excess of 20, Plan A would fail to satisfy paragraph (b)(3)(ii) of this section.
For example, O's rate of benefit accrual would be 1% for 2008, whereas N's rate of benefit
accrual would be 1.95% for 2008, even though the only difference between 0 and N is that
N is younger.
Example 9. (i) The facts are similar to Example 8, except that the formula is 1% of a
participant's average compensation for the participant's highest 3 consecutive years of
compensation for the first 20 years, plus 2% of such average compensation for years in
excess of 20, payable in the normal form of a straight life annuity commencing at normal
retirement age or the date of actual retirement if later. As in Example 8, if a participant
separates from service prior to normal retirement age, Plan P provides a benefit equal to
an amount that bears the same ratio to the total percentage of such average compensation
that the participant would have if service continued to normal retirement age as the
participant's actual number of years of service bears to the number of years of service the
participant would have if the participant's service continued to normal retirement age.
-52Further, similar to the facts in Example 8(iii) of this paragraph (b )(3)(iii), for participants
who work past normal retirement age, Plan A provides a benefit equal to 1% per year for
years of service not in excess of 20, plus 2% per year for years of service in excess of 20.
As of the beginning of the plan year beginning January 1, 2008, participant K is 45 years
old and has completed 10 years of service, and participant M is 55 years old and has
completed 10 years of credited service. Thus, K's rate of benefit accrual for the plan year
may be determined as 1.33% of compensation for K's highest 3 consecutive years (1 % for
20 years, plus 2% for 10 more years, with the sum divided by 30 equals 1.33%), and M's
rate of benefit accrual for the plan year may be determined as 1% of compensation for D's
highest 3 consecutive years (1% for 20 years, with that amount divided by 20 equals 1%).
(ii) If M were younger than age 55 (with 10 years of service and the same
compensation history), M's rate of benefit accrual for the plan year would be greater than
1% of compensation for M's highest 3 consecutive years. (Plan A also provides for an
impermissible reduction in the rate of benefit accrual for a participant whose service
continues after normal retirement age in a manner that is comparable to Example 8(iii) of
this paragraph (b)(3)(iii).) Thus, Plan A fails to satisfy paragraph (b)(3)(ii) of this section.
Example 10. (i) Employer Z maintains Plan Q, a defined benefit plan that provides
an accrued benefit of $40 per month multiplied by a participant's years of credited service.
Participant F attains normal retirement age of 65 and continues in the full time service of Z.
At age 65, F has 30 years of credited service under the plan and could receive a normal
retirement benefit of $1 ,200 per month ($40 X 30 years) if F retires. The plan suspends
benefits for participants who work past normal retirement age, in accordance with section
411 (a)(3)(8) and 29 CFR 2530.203-3 of the regulations of the Department of Labor, and
does not provide for any actuarial increase for employment past normal retirement age.
Accordingly, the plan does not pay F's accrued benefit while F remains in the full time
service of Z and does not provide for an actuarial adjustment of F's accrued benefit
because of delayed payment. For example, if F retires at age 67, after completing 2
additional years of credited service for Z, F will receive a benefit of $1 ,280 per month ($40
x 32 years) commencing at age 67.
(ii) Under Plan Q, the rate of accrual for all participants is $40 per month. Thus,
there could not be any participant who would have a rate of benefit accrual that is greater
than $40 per month if the participant were younger, so that there is no reduction in the rate
of benefit accrual that is because of the individual's attainment of any age under paragraph
(b)(3)(i) of this section. Accordingly. Plan Q satisfies the requirements of section
411 (b)(1 )(H) and this paragraph (b).
Example 11. (i) Assume the same facts as in Example 10, except that the plan
provides that the amount of F's benefit at normal retirement age will be actuarially
increased for delayed retirement (even though the plan suspends benefits for participants
who work past normal retirement age), and this actuarially increased benefit will be paid if
it exceeds the plan formula, but no actuarial increase is provided for any amount that is
-53accrued after normal retirement age. The plan takes this actuarial increase into account as
part of the rate of benefit accrual in plan years ending after F's attainment of normal
retirement age, as provided under paragraph (b )(2)(ii) of this section.
(ii) Under section 411 (b)(1 )(H) and this paragraph (b), F's employment past normal
retirement age cannot cause F's rate of benefit accrual for any year to be less than $40 for
the year. Plan Q satisfies this requirement for the first year after normal retirement age
because, under the plan, F is entitled to receive, upon retirement at the end of the year
when F is age 66, an actuarially increased benefit of $1 ,344.68 per month, so that the rate
of benefit accrual for the year is $144.68 (which is $1,344.68 minus $1,200).
(iii) Further, for the second year past normal retirement age ending when F is age
67, F must be entitled to a rate of benefit accrual of at least $149.50 per month, which is
the highest rate of benefit accrual under Plan Q for any younger participant with 32 years of
service at the end of the year. (In these facts, all participants have a rate of accrual of $40
until normal retirement age and a participant who is age 66 with 32 years of service at the
end of the year would have a rate of benefit accrual of $149.50 due to an actuarial increase
on an age 65 benefit of $1 ,240 per month.) Under the plan, F is entitled to receive, upon
retirement at age 67, an actuarially increased benefit of $1 ,511.39 per month. Plan Q
satisfies the requirement that F be entitled to the highest rate of benefit accrual provided to
any younger participant because the rate of benefit accrual in that year ($1 ,511.39 minus
$1,344.68 equals $166.71) is not less than what the rate would be for F if F were younger.
These same results would apply for any possible participant in Plan Q. Accordingly, Plan
Q satisfies the requirements of section 411 (b)( 1)(H) and this paragraph (b).
Example 12. (i) Employer Z maintains Plan R, a defined benefit plan that provides
an accrued benefit of 2% of the average of a participant's high 3 consecutive years of
compensation multiplied by the participant's years of credited service under the plan.
Participant G, who has attained normal retirement age (age 65) under the plan, continues
in the full time service of Z. At normal retirement age, G has average compensation of
$40,000 for G's high 3 consecutive years and has 10 years of credited service under the
plan. Thus, at normal retirement age, G is entitled to receive an annual normal retirement
benefit of $8,000 ($40,000 X .02 X 10 years). Payment of G's retirement benefit is not
suspended, and the plan provides that retirement benefits that commence after a
participant's normal retirement age are actuarially increased for late retirement. Under the
plan provision relating to actuarial increase, the actuarial increase for the plan year is
made to the benefit that would have been paid had the participant retired as of the end of
the preceding plan year. The plan then provides the greater of this actuarially increased
benefit and benefits under the plan formula based on continued service, thereby including
the actuarial increase in the rate of benefit accrual in plan years ending after G's attainment
of normal retirement age, as provided in paragraph (b)(2)(ii) of this section. The foregoing
is illustrated in the following table with respect to certain years of credited service
performed by G after attaining normal retirement age 65. (Certain numbers may not total
due to rounding.)
-54-
Age
at
start
of
plan
year
Years of
service at
start of
plan year
Average pay
for high 3
consecutive
years at start
of plan year
Plan formula
at start of plan
year (.02
times column
2 times
column 3)
Additional
accruals for the
plan year under
plan formula
(column 4 minus
column 4 for
prior year)
Annual
benefit, as
actuarially
increased
(column 8
from prior
year
actuarially
increased)
Actuarial
increase on
the benefit
at prior age
(column 6
minus
column 8 for
prior year)
Annual
benefit to
which C is
entitled at
start of
year
(greater of
column 4 or
column 6)
Annual
benefit as
percent of
average pay
column 8 +
column 3)
Rate of
benefit
accrual
(column 9
less
column 9
for prior
year)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
65
10
$40,000
$8,000
nfa
nfa
nfa
$8,000
20%
2%
66
11
$42,000
$9,240
$1,240
$8,964
$964
$9,240
22%
2%
67
12
$58,000
$13,920
$4,680
$10,386
$1,142
$13,920
24%
2%
68
13
$60,000
$15,600
$1,680
$15,697
$1,777
$15,697
26.16%
2.16%
69
14
$66,000
$18,480
$2,880
$17,762
$2,065
$18,480
28%
1.84%
70
15
$68,000
$20,400
$1,920
$20,989
$2,509
$20,989
30.87%
2.87%
-55-
(ii) In the year Gis 69 at the beginning of the year, G's rate of benefit accrual (1.84%
of the average high 3 consecutive years of compensation) is lower than the rate of benefit
accrual that would apply to a younger participant because a participant who is younger than
age 65 with the same number of years of credited service and compensation history would
have a rate equal to 2% of average high 3 consecutive years of compensation.
Accordingly, Plan R fails to satisfy the requirements of section 411 (b)(1 )(H) and this
paragraph (b).
Example 13. (i) The facts are the same as in Example 10, except that, under the
plan provisions relating to retirement after normal retirement age, a partiCipant's benefit is
equal to the sum of the benefit that would have been paid had the participant retired as of
the end of the preceding plan year and the greater of the actuarial increase for the plan
year on that amount or the otherwise applicable accrual for the plan year under the plan
formula. The foregoing is illustrated in the following table with respect to certain years of
credited service performed by G after attaining normal retirement age 65.
-56-
Age
at
start
of
plan
year
Years
of
service
at start
of plan
year
Average pay
for high 3
consecutive
years at
start of plan
year
Plan formula at
start of plan
year (.02 times
column 2 times
column 3)
Additional
accruals
for the
plan year
under plan
formula
(column 4
minus
column 4
for prior
year)
Annual
benefit, as
actuarially
increased
(column 8
from prior
year
actuarially
increased}
Actuarial
increase on
the benefit at
prior age
(column 6
minus column
8 for prior
year)
Annual benefit to
which C is entitled
at start of year
(column 8 at prior
age plus the
greater of column
5 and column 7)
Annual
benefit as
percent of
average pay
column 8 +
column 3)
Rate of
benefit
accrual
(column 9
less
column 9
for prior
year)
i
I
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
65
10
$40,000
$8,000
n/a
n/a
n/a
$8,000
20%
2%
66
11
$42,000
$9,240
$1,240
$8,964
$964
$9,240
22%
2%
67
12
$58,000
$13,920
$4,680
$10,386
$1,142
$13,920
24%
2%
68
13
$60,000
$15,600
$1,680
$15,697
$1,777
$15,697
26.16%
2.16%
69
14
$66,000
$18,480
$2,880
$17,762
$2,065
$18,577
28.1%
2%
70
15
$68,000
$20,400
$1,920
$21,098
$2,521
$21,098
31.03%
2.93%
- -
-
-57(ii) In the year G is 69 at the beginning of the year, G's rate of benefit accrual (2% of
the average high 3 consecutive years of compensation) is not lower than the rate that would
apply to G if G were younger. For example, if G were age 68 with the same 14 years of
credited service and compensation history that G has at age 69, G would have a rate of
benefit accrual equal to 2% of average high 3 consecutive years of compensation (in
contrast to Example 12 in which the rate is 1.84% for an employee who is age 69 with 14
years of service, but would be 2% for younger employees with the same service and
compensation history). Similar results would apply for any other potential younger
participant in Plan R. Accordingly, Plan R satisfies the requirements of section
411 (b)( 1)(H) and this paragraph (b).
(iii) The decrease in G's rate of benefit accrual from 2.16% to 2% from age 68 to
age 69 is not an impermissible reduction because of age. Under paragraph (b)(3) of this
section, the determination of whether an impermissible reduction occurs because of age is
made by comparing any potential participant's rate of benefit accrual to what the rate would
be if the participant were younger (but with the same years of service, compensation
history, and any other relevant factors taken into account under the plan), not by comparing
a participant's rate in one year to that partiCipant's rate in an earlier year. As indicated in
paragraph (ii) of this Example 13, the rate of benefit accrual for a participant who is age 69
with 14 years of service at the beginning of the year is compared with the rate for all
younger participants with the same service and compensation history. Similarly, the 2.16%
rate for a participant who is age 68 with 13 years of service at the beginning of the year is
compared with the rate for all younger participants with the same service and
compensation history. Thus, for example, if G were age 67 with the same 13 years credited
service and high 3 years of compensation equal to $60,000 that G has at age 68, G would
have a rate of benefit accrual equal to 2.08% of average high 3 consecutive years of
compensation.
(4) Certain adjustments for benefit distributions--(i) In general. Under section
411 (b)( 1)(H)(iii)(I), a defined benefit plan may provide that the requirement for continued
benefit accrual under section 411 (b)( 1)(H)(i) and this paragraph (b) for a plan year is
treated as satisfied to the extent of the actuarial equivalent of benefits distributed, as
provided in this paragraph (b)(4). Distributions made before the participant attains normal
retirement age or during a period that is not "section 203(a)(3)(8) service," as defined in
29 CFR 2530.203-3(c) of the regulations of the Department of Labor, may not be taken
into account under this paragraph (b)(4).
-58(ii) Amount of the adjustment for benefits distributed. A defined benefit plan does
not violate paragraph (b) of this section for a plan year merely because the rate of benefit
accrual is reduced (but not below zero) to the extent of the actuarial equivalent of plan
benefit distributions made to the participant during the plan year. For this purpose,
distributions made during the plan year generally are disregarded for that year to the extent
the actuarial value of the distributions exceeds the actuarial value of distributions that would
have been made during the plan year had distribution of the participant's accrued benefit
commenced at the beginning of the plan year (or, if later, at the participant's normal
retirement age) in the normal form of benefit. (But see paragraph (b)(4)(iii) of this section
for rules taking this excess into account at the end of the current year and in future years.)
In addition, in any case in which the participant's benefits are being distributed in an
optional form of benefit under which the amount payable annually is less than the amount
payable under the plan's normal form of benefit (for example, a QJSA under which the
annual benefit is less than the amount payable annually under a straight life annuity normal
form), the plan may treat the participant as receiving payments under an actuarially
equivalent normal form of benefit for the plan year and all future plan years.
(iii) Treatment of accelerated benefit payments--(A) Accelerated benefit payments.
This paragraph (b)(4)(iii) applies if the actuarial value of the distributions made to the
participant during a plan year exceeds the actuarial value of the distributions that would
have been made during the plan year had distributions commenced at the beginning of the
plan year (or, if later, at the participant's normal retirement age) in the normal form of
benefit. In such a case, the excess payments (referred to as accelerated benefit
-59payments) are converted to an actuarially equivalent stream of annual benefit payments
under the plan's normal form of benefit, commencing at the beginning of the next plan year.
This conversion must be based on the same actuarial assumptions used under the plan to
determine the distributions made to the participant during the plan year. For purposes of
this paragraph (b)(4)(iii), the actuarially equivalent stream of annual benefit payments is
referred to as the annuity equivalent of accelerated benefit payments.
(8) Credit for annuity equivalent of accelerated benefit payments. For purposes of
applying paragraphs (b)(4 )(ii) and (iii)(C) of this section, the annuity equivalent of
accelerated benefit payments is deemed to be paid to the participant in each plan year
that begins after the plan year during which any accelerated benefit payment under
paragraph (b)(4)(iii)(A) of this section is made.
(C) Effect of accelerated benefit payments on rate of benefit accrual. If any
accelerated benefit payments under paragraph (b)(4)(iii)(A) of this section have been
made to a participant, then, in lieu of determining the participant's rate of benefit accrual
under paragraph (b )(2)(ii) of this section, the participant's rate of benefit accrual for a plan
year is determined as the excess (if any) of--
(.1) The sum of the annual benefit to which the participant is entitled at the end of the
current plan year, assuming payment commences in the normal form at the end of the
current plan year, plus the amount deemed paid in the next plan year under the annuity
equivalent of accelerated benefit payments; over
(~)
The sum of the annual benefit to which the participant was entitled at the end of
the preceding plan year, assuming that payment commences in the normal form at the later
-60of normal retirement age and the end of the preceding plan year, plus the amount deemed
paid during the current plan year under the annuity equivalent of accelerated benefit
payments.
(iv) Examples. The provisions of this paragraph (b)(4) may be illustrated by the
following examples. In each of the examples, except as otherwise indicated, normal
retirement age is 65 and the birthday of each participant is assumed to be January 1. In
addition, except as otherwise indicated, the plan contains no limitations on the maximum
amount of benefits the plan will pay to any participant (other than the limitations imposed by
section 415), on the maximum number of years of credited service taken into account
under the plan, or on the compensation used for purposes of determining the amount of any
participant's normal retirement benefit (other than the limitation imposed by section
401(a)(17)) and the plan uses the following actuarial assumptions for purposes of
determining the amount of any partiCipant's accrued benefit (other than the limitation
imposed by section 401(a)(17)), and the plan uses the following actuarial assumptions in
determining actuarial equivalence: a 7.5% rate of interest and the 83 GAM (male) mortality
table. The examples are as follows:
Example 1. (i) Facts relating to the year in which participant attains age 65.
Employer Z maintains Plan Q, a defined benefit plan that provides an accrued benefit of
$40 per month multiplied by the participant's years of credited service. Participant F
attains normal retirement age of 65 on January 1 and continues in the full time service of Z.
At the end of the year in which F attains age 65, F has 30 years of credited service under
the plan and could receive an accrued benefit of $1,200 per month ($40 x 30 years) if F
retires. Plan Q does not suspend payment of benefits for partiCipants who work past
normal retirement age and F commences benefit payments at normal retirement age.
(These are the same facts as in Example 10 of paragraph (b)(3)(iii) of this section, except
that the Plan Q does not provide for the suspension of normal retirement benefit payments.)
The plan offsets the value of the benefit distributions against benefit accruals in plan years
-61ending after the participant's attainment of normal retirement age, as permitted by
paragraph (b )(4 )(ii) of this section. PartiCipant F (who remains in the full time service of Y)
receives 12 monthly benefit payments after attainment of age 65 and prior to attainment of
age 66. The total monthly benefit payments of $14,400 ($1,200 x 12 payments) have an
actuarial value at the end of the year in which F turns 65 of $15,118 (reflecting interest and
mortality) which would produce a monthly life annuity benefit of $145 commencing at age
66. The rate of benefit accrual otherwise applicable under the plan formula for the year of
credited service F completes after attaining normal retirement age is $40 per month.
(ii) Conclusions relating to the year in which F attains age 65. Because the actuarial
value (determined as a monthly benefit of $145) of the benefit payments made during the
first year after F's attainment of normal retirement age exceeds the benefit accrual
otherwise applicable for the first year after F's attainment of normal retirement age, the plan
is not required to accrue benefits on behalf of F for the one year of credited service after
F's attainment of normal retirement age and the plan is not required to increase F's monthly
benefit payment of $1 ,200 during the year in which F attains age 65.
(iii) Facts relating to the year in which F attains age 66. Assume F receives 12
additional monthly benefit payments the next year prior to F's retirement at the end of the
next year when F attains age 66. The total monthly benefit payments of $14,400 ($1,200 x
12 payments) have an actuarial value at the end of that year of $15,135 (reflecting interest
and mortality) which would produce a monthly benefit payment of $149 commencing at age
67. The rate of benefit accrual otherwise applicable under the plan formula for the
additional year of credited service F completed that year is $40 per month.
(iv) Conclusions relating to the year in which F attains age 66. Because the actuarial
value (determined as a monthly benefit of $149) of the benefit payments made during that
year exceeds the benefit accrual otherwise applicable for the additional year of credited
service, the plan is not required to accrue benefits on behalf of F for the second year of
credited service F completed after attaining normal retirement age and the plan is not
required to increase F's monthly benefit payment of $1 ,200.
Example 2. (i) Facts. Employer Z maintains Plan R, a defined benefit plan that
provides an accrued benefit of 2% of the average of a participant's high 3 consecutive
years of compensation multiplied by the participant's years of credited service under the
plan. Payment of a participant's retirement benefit is not suspended, and the plan
provides that retirement benefits that commence after a participant's normal retirement age
are actuarially increased for late retirement. Under the plan provision relating to actuarial
increase, the actuarial increase for the plan year is made to the benefit that would have
been paid had the participant retired as of the end of the preceding plan year. The plan
then provides the greater of this actuarially increased benefit and benefits under the plan
formula based on continued service, thereby including the actuarial increase in the rate of
benefit accrual in plan years ending after attainment of normal retirement age, as provided
-62in paragraph (b)(2)(ii) of this section. Participant G, who has attained normal retirement
age (age 65) under the plan, continues in the full time service of Z. At normal retirement
age, G has average compensation of $40,000 for G'S high 3 consecutive years and has 10
years of credited service under the plan. Thus, at normal retirement age, G is entitled to
receive an annual normal retirement benefit of $8,000 ($40,000 x .02 x 10 years). G
continues working after normal retirement age, with G's average compensation increasing
to $68,000 at age 70. (The facts in this Example 2 are the same as Example 13 of
paragraph (b)(3)(ii) of this section, except that the employee does not retire at age 70, but
continues in the full time service of Z.) Upon G'S attainment of age 70, the plan
commences benefit payments to G. The annual benefit paid to G in the first plan year is
$21,098. In determining the annual benefit payable to G in each subsequent plan year, the
plan offsets the value of benefit distributions made to the participant by the close of the
prior plan year against benefit accruals otherwise applicable in plan years during which
such distributions were made, as permitted by paragraph (b)(4)(ii)(8) of this section.
(ii) Conclusion. Accordingly, for each subsequent plan year, G is entitled under the
plan to receive benefit payments based on G'S benefit at the close of the prior plan year,
plus the excess (if any) of the benefit for the plan year determined under the plan formula
otherwise applicable over the value of total benefit distributions made to G during the plan
year. The foregoing is illustrated in the following table with respect to certain years of
credited service performed by G while benefits were being distributed to G.
-63,-----
Age at
start of
plan
year
Years of
service at
start of
plan year
Average
pay for high
3
consecutiv
e years at
start of plan
year
Plan formula at
start of plan
year (.02 times
column 2 times
column 3)
Additional accruals
for the plan year
under plan formula
(column 4 minus
column 4 for prior
year)
Benefit
distributio
ns made
during the
prior year
Annual benefit
that is actuarial
equivalent of
column 6
Annual benefit
to which G is
entitled at end
of the year
(column 8 for
prior year, plus
the excess, if
any of column
5 for the current
year, over
column 7 for
current year)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
70
15
$68,000
$20,400
$1,920
none
none
$21,098
71
16
$70,000
$22,400
$2,000
$21,098
$2,799
$21,098
72
17
$90,000
$30,600
$8,200
$21,098
$2,891
$26,407
73
18
$100,000
$36,000
$5,400
$26,407
$3,743
$28,065
-
-64-
Example 3. (i) Facts relating to the year in which a participant attains age 65. Plan
X provides an accrued benefit equal to 1% of the average of a participant's highest 3
consecutive years of compensation times the participant's years of service, payable in the
normal form of a straight life annuity commencing at normal retirement age or at the date of
actual retirement if later. Plan X permits a participant who is an employee to commence
distributions after attainment of normal retirement age (age 65) and provides for benefits
otherwise accrued after normal retirement age to be offset by the actuarial equivalent of
any benefit distributions made to the participant. Plan X provides for a participant who
does not commence distributions to receive an actuarial increase for the year from the
amount payable at the end of the preceding year (if greater than the amount otherwise
accrued for H during the year under X's formula). Participant H attains age 65 on the first
day of a plan year when Participant H's average highest 3 consecutive years of
compensation is $60,000 and H has 20 years of service. Accordingly, Participant H's
accrued benefit at the beginning of the year is equal to a straight life annuity of $1 ,000 per
month (20% times $60,000 divided by 12) commencing at the beginning of the year.
Participant H elects to receive a single-sum distribution of $130,389 at the beginning of the
year, which is equal to the present value of H's accrued benefit under section 417(e) at that
time. Participant H continues to work through the end of the plan year and at the end of the
year has average compensation of $60,000 for the year. Plan X uses the actuarial
assumptions specified in section 417( e) for purposes of determining actuarial equivalence.
For purposes of this Example 3, the applicable interest rate under section 417(e) is
assumed to be 6%, and the applicable mortality table under section 417( e) is the mortality
table in effect on January 1, 2003.
(ii) Conclusion relating to effect of distributions made in the year H attains age 65.
Under this paragraph (b)(4), H would otherwise accrue an additional monthly benefit of $50
for the additional year of service under the plan's formula (21 % times $60,000 minus 20%
times $60,000, divided by 12). The plan is permitted under section 411 (b)( 1)(H)(iii)(I) to
offset additional accruals otherwise applicable after normal retirement age by the actuarial
value of distributions made during the year. However, under paragraph (b)(4)(ii) of this
section, distributions made during a plan year are disregarded to the extent that the
actuarial value of the distributions exceeds the actuarial value of distributions that would
have been made during the plan year had distribution of the participant's accrued benefit
commenced at the beginning of the plan year under the plan's normal form.
(iii) Conclusion relating to calculations for distribution made in the year H attains
age 65. At the end of the year, the actuarial value of the distribution made to H ($130,389
plus interest and mortality for the year equals $139,812) is greater than the year end
actuarial value of distributions that would have been made during the plan year had
distribution of the participant's accrued benefit at the beginning of the plan year
commenced in the normal form at the beginning of the plan year (which is $12,470, based
on the plan's actuarial assumptions). Accordingly, the $127,342 excess (referred to as an
-65accelerated benefit payment) is disregarded in the current year. (However, as described
below, the annuity equivalent ofthe $127,342 is deemed to be paid to H commencing at
the beginning of the first plan year after the plan year during which the accelerated benefit
payment is made.)
(iv) Conclusion relating to rate of benefit accrual for the year H attains age 65. To
determine the rate of benefit accrual for the year in which H attains age 65, the annuity
equivalent of accelerated benefit payments is calculated and, under paragraph
(b )(4 )(iii)(C) of this section, this amount is treated as part of the benefit payable at the end
of the year in calculating the rate of benefit accrual for the year. In this Example 3, the
annuity equivalent of the $127,342 accelerated benefit payment equals a straight life
annuity of $1,000 per month commencing at the beginning of the next plan year. Thus, for
purposes of applying paragraph (b )(4 )(iii) of this section to determine the rate of benefit
accrual for the plan year in which H attains age 65, paragraph (b)(4)(iii)(C)(1) of this
section is an annual straight life annuity commencing at end of the year equal to $1,000
(the sum of the annual benefit to which the H is entitled at the end of the plan year, which is
zero in this case, plus the amount deemed paid in the next plan year under the annuity
equivalent of accelerated benefit payments, which is $1 ,000 in this case) and the amount in
paragraph (b)(4 )(iii)(C)(.f.) of this section is an annual straight life annuity commencing at
end of the preceding plan year equal to $1,000. Thus, H's rate of benefit accrual for the
year is zero.
(v) Conclusion relating to whether rate of benefit accrual for year H attains age 65
satisfies section 411 (b)(1 )(H). Under paragraph (b)(4)(ii) of this section, a plan may reduce
the rate of benefit accrual otherwise applicable to the extent of distributions made during
the year. The actuarial equivalent of $12,470 (the actuarial value of the 12 $1,000 monthly
payments deemed paid to H during the plan year under paragraph (b)(4)(ii) of this section)
is a straight life annuity commencing at the end of the plan year equal to $98 per month.
Thus, the otherwise applicable accrual for the year may be reduced (but not below zero) by
$98 per month. The highest rate of benefit accrual for any participant with H's service and
compensation history who is younger is an annual straight life annuity of $50 per month.
Because the permissible reduction of $98 per month is not less than the otherwise
applicable accrual of $50 per month, Plan X is not required by this paragraph (b) for the
year and section 411 (b)( 1)(H) to provide H with any additional accruals for the year.
(vi) Conclusion relating to rate of benefit accrual for year H attains age 65 if no
distribution were made. If Participant H had not elected to receive any distribution during
the plan year, then H's accrued benefit at the end of the year would be a straight life annuity
of $1 ,098 per month commencing at the end of the year (which is actuarially equivalent to a
straight life annuity of $1 ,000 per month commencing at the beginning of the year). Thus,
H's rate of benefit accrual for that year would be $98 (but no adjustments for any
distribution would apply).
-66(vii) Facts relating to next year in which H attains age 66. Participant H works
another year and H's average compensation becomes $70,000. Under this paragraph
(b)(4), H would otherwise accrue an additional monthly benefit of $233 for the additional
year of service under the plan's formula (22% times $70,000, minus 21 % times $60,000,
divided by 12). However, the plan is permitted under section 411 (b)(1 )(H)(iii)(I) to offset
additional accruals after normal retirement age by the actuarial value of distributions made
during the year. Under paragraph (b)(4)(iii)(8) of this section, the $1,000 annuity equivalent
of accelerated benefit payments is deemed to be paid to H during this second year when H
attains age 66. These deemed payments are actuarially equivalent to an accrual of $100
per month payable at the end of that year. Accordingly, the plan reduces the otherwise
applicable accrual of $233 to the extent of the accrual of $100 per month payable at the
end of the year in which H attains age 66. Thus, the $233 accrual during the year in which
H becomes 66 is reduced by $100 to $133. Under the plan X, H's accrued benefit at the
end of the year is $133 per month.
(viii) Conclusion relating to rate of benefit accrual for year H attains age 66. To
determine the rate of benefit accrual for the second year when H attains age 66, the annuity
equivalent of accelerated benefit payments is calculated and, under paragraph
(b )(4 )(iii)(C) of this section, this amount is treated as part of the benefit payable at the end
of the year in calculating the rate of benefit accrual for the second year. In this Example 3,
the annuity equivalent of the $127,342 accelerated benefit payment that was made in the
year in which H attained age 65 equals a straight life annuity of $1 ,000 per month
commencing at the beginning of the next plan year. Thus, for purposes of applying
paragraph (b)(4)(iii) of this section to determine the rate of benefit accrual for the second
plan year, the amount in paragraph (b)(4)(iii)(C)(l) of this section is an annual straight life
annuity commencing at end of the year equal to $1,133 (the sum of the annual benefit to
which the H is entitled at the end of the plan year, which is $133 in this case, plus the
amount deemed paid in the next plan year under the annuity equivalent of accelerated
benefit payments, which is $1,000 in this case) and the amount in paragraph
(b)(4)(iii)(C)(~) of this section is an annual straight life annuity commencing at end of the
preceding plan year equal to $1,000. Thus, H's rate of benefit accrual for the year in which
H becomes age 66 is $133.
(ix) Conclusion relating to whether rate of benefit accrual for year H becomes 66
satisfies section 411(b)(1 )(H). Under paragraph (b)(4))(ii) of this section, a plan may
reduce the rate of benefit accrual to the extent of distributions made during the year. The
actuarial equivalent of $12,480 (the actuarial value of the 12 $1,000 monthly payments
deemed made to H during the plan year) is a straight life annuity commencing at the end of
the plan year equal to $100 per month. Thus, the otherwise applicable accrual for the year
may be reduced (but not below zero) by $100 per month. The highest rate of benefit
accrual for any participant with H's service and compensation history who is younger is an
annual straight life annuity of $233 per month. Thus, because the sum of $133 and $100 is
-67not less than the otherwise applicable accrual of $233 per month, Plan X satisfies this
paragraph (b) and section 411 (b)( 1)(H) for the year.
(c) Defined contribution plans--(1) In general. A defined contribution plan (including
a target benefit plan described in §1.410(a)-4(a)(1)) does not satisfy the requirements of
section 411 (b )(2) if the rate of allocation made to the account of a participant is reduced,
either directly or indirectly, because of the participant's attainment of any age. A reduction
in the rate of allocation includes any discontinuance in the allocation of employer
contributions or forfeitures to the account of the participant or cessation of participation in
the plan.
(2) Rate of allocation--(i) Aggregate allocations. For purposes of this paragraph (c),
a participant's rate of allocation for any plan year is the aggregate allocations taken into
accountfor the plan year under §1.401 (a)(4)-2(c)(2).
(ii) Determination of rate of allocation. A participant's rate of allocation for a plan
year can be determined as a dollar amount. Alternatively, if a plan's formula bases a
participant's allocations solely on compensation for the plan year and compensation is
determined without regard to attainment of any age, then a participant's rate of allocation
can be determined as a percentage of the participant's compensation for the plan year.
(3) Reduction that is directly or indirectly because of a participant's attainment of
any age--(i) Reduction in rate of allocation that is directly because of a participant's
attainment of any age. A plan provides for a reduction in the rate of allocation that is
directly because of a participant's attainment of any age for any plan year if, under the
terms of the plan, any participant's rate of allocation for the plan year would be higher if the
-68participant were younger. Thus, a plan fails to satisfy section 411 (b)(2) and this paragraph
(c) if, under the terms of the plan, the rate of allocation for any individual who is or could be
a participant under the plan would be lower solely as a result of such individual being older.
(ii) Reduction in rate of allocation that is indirectly because of a participant's
attainment of any age--(A) In general. A plan provides for a reduction in the rate of
allocation that is indirectly because of a participant's attainment of any age for any plan
year if any participant's rate of allocation for the plan year would be higher if the participant
were to have a characteristic that is a proxy for being younger, based on all of the relevant
facts and circumstances. Thus, a plan fails to satisfy section 411 (b )(2) and this paragraph
(c) if the rate of allocation for any individual who is or could be a participant under the plan
would be lower solely as a result of such individual having a different characteristic which is
a proxy for being older, based on applicable facts and circumstances.
(8) Treatment of limitations. A reduction in a participant's rate of allocation is not
indirectly because of the attainment of any age in violation of section 411 (b )(2) solely
because of a positive correlation between attainment of any age and a reduction in the rate
of allocation. Thus, a defined contribution plan (including a target benefit plan described in
§1.41 0(a)-4(a)(1)) does not fail to satisfy the minimum vesting standards of section 411 (a)
solely because the plan limits the total amount of employer contributions and forfeitures that
may be allocated to a participant's account (for a particular plan year or for the participant's
total years of credited service under the plan), solely because the plan limits the total
number of years of credited service for which a participant's account may receive
allocations of employer contributions and forfeitures, or solely because the plan limits the
-69number of years of credited service that may be taken into account for purposes of
determining the amount of, or the rate at which, employer contributions and forfeitures are
allocated to a participant's account for a particular plan year.
(iii) Special rule for target benefit plans. A defined contribution plan that is a target
benefit plan, as defined in §1.41 O(a)-4(a)(1), satisfies section 411 (b)(2) only if the defined
benefit formula used to determine allocations would satisfy section 411 (b )(1 )(H) without
regard to section 411 (b )(1 )(H)(iii). Such a target benefit plan does not fail to satisfy this
paragraph (c) with respect to allocations after normal retirement age merely because the
allocation for a plan year is reduced to reflect shorter longevity using a reasonable actuarial
assumption regarding mortality.
(iv) Additional rules. The Commissioner may prescribe additional guidance,
published in the Internal Revenue Bulletin (see §601.601 (d)(2)(ii)(b) of this chapter), with
respect to the application of section 411 (b )(2) and this section to target benefit plans.
(d) Benefits and forms of benefits subject to requirements--( 1) General rule. Except
as provided in paragraph (d)(2) or (3) of this section, sections 411 (b)(1 )(H) and 411 (b)(2)
and paragraphs (b) and (c) of this section apply to all benefits (and forms of benefits)
provided under the plan, including accrued benefits, benefits described in section
411 (d)(6), ancillary benefits, and other rights and features provided under the plan.
Accordingly, except as provided in paragraph (d)(2) or (3) of this section, a participant's
rate of benefit accrual under a defined benefit plan and a participant's allocations under a
defined contribution plan are considered to be reduced because of the participant's
attainment of any age if optional forms of benefits, ancillary benefits, or other rights or
-70features under the plan provided with respect to benefits or allocations attributable to
credited service prior to the attainment of the participant's age are not provided on at least
as favorable a basis with respect to benefits or allocations attributable to credited service
after attainment of the participant's age. Thus, for example, a plan may not provide a
single-sum payment only with respect to benefits attributable to years of credited service
before the attainment of a specified age. Similarly, except as provided in paragraph (d)(2)
or (3) of this section, if an optional form of benefit is available under the plan at a specified
age, the availability of that form of benefit, or the method for determining the manner in
which that form of benefit is paid, may not, directly or indirectly, be denied or provided on
terms less favorable to participants because of the attainment of any age. Similarly, if the
method for determining the amount or the rate of the subsidized portion of a joint and
survivor annuity or the subsidized portion of a preretirement survivor annuity is less
favorable with respect to participants who have attained a specified age than with respect
to participants who have not attained such age, benefit accruals or account allocations
under the plan will be considered to be reduced because of the attainment of such age.
(2) Special rule for actuarial assumptions regarding mortality. A plan does not fail to
satisfy section 411 (b)(1 )(H) or this paragraph (d) merely because the plan makes actuarial
adjustments using a reasonable assumption regarding mortality to calculate optional forms
of benefit or to calculate the cost of providing a qualified preretirement survivor annuity, as
defined in section 417(c).
(3) Special rule for certain benefits. A plan does not fail to satisfy section
411 (b)(1 )(H) or this paragraph (d) merely because the following benefits, or the manner in
-71which such benefits are provided under the plan, vary because of the attainment of any
higher age-(i) The subsidized portion of an early retirement benefit (whether provided on a
temporary or permanent basis);
(ii) A qualified disability benefit (as defined in §1.411 (a)-7(c)(3)); or
(iii) A social security supplement (as defined in §1.411 (a)-7(c)(4 )(ii)).
(e) Coordination with certain provisions. Notwithstanding section 411 (b)( 1)(H),
section 411(b)(2), and paragraphs (a) through (d) of this section, the following rules apply(1) Section 415 limitations. No benefit accrual with respect to a participant in a
defined benefit plan is required for a plan year by section 411 (b)( 1)(H)(i) and no allocation
to the account of a participant in a defined contribution plan (including a target benefit plan
described in §1.41 0(a)-4(a)(1)) is required for a plan year by section 411 (b)(2) to the
extent that the allocation or accrual would cause the plan to exceed the limitations of
section 415.
(2) Prohibited discrimination--(i) No benefit accrual on behalf of a highly
compensated employee in a defined benefit plan is required for a plan year by section
411 (b)( 1)(H)(i) to the extent such benefit accrual would cause the plan to discriminate in
favor of highly compensated employees within the meaning of section 401 (a)(4).
(ii) No allocation to the account of a highly compensated employee in a defined
contribution plan (including a target benefit plan) is required for a plan year by section
411 (b )(2) to the extent the allocation would cause the plan to discriminate in favor of highly
compensated employees within the meaning of section 401(a)(4).
-72(iii) The Commissioner may provide additional guidance, published in the Internal
Revenue Bulletin (see §601.601 (d)(2)(ii)(b) ofthis chapter), relating to prohibited
discrimination in favor of highly compensated employees.
(3) Permitted disparity. A defined benefit plan does not fail to satisfy section
411 (b )(1 )(H) for a plan year and a defined contribution plan does not fail to satisfy
411 (b )(2) for a plan year merely because accruals or allocations under the plan are
reduced to satisfy the uniformity requirements of §1.401 (/)-2(c) or 1.401 (I)-3(c) for the plan
year.
(4) Distribution rights under section 411. A defined benefit plan does not fail to
satisfy section 411 (b)(1 )(H) for a plan year and a defined contribution plan does not fail to
satisfy 411 (b )(2) for a plan year merely because of the right to defer distributions provided
under section 411 (a)( 11 ) or a plan provision consistent with section 411 (a)( 11 ).
(f) Effective dates--( 1) Effective date of sections 411(b )(1 )(H) and 411(b )(2) for
noncollectively bargained plans--(i) In general. Except as otherwise provided in paragraph
(f)(2) of this section, sections 411 (b)(1 )(H) and 411 (b)(2) are applicable for plan years
beginning on or after January 1, 1988, with respect to a participant who is credited with at
least 1 hour of service in a plan year beginning on or after January 1, 1988. Neither section
411 (b )(1 )(H) nor section 411 (b )(2) is applicable with respect to a participant who is not
credited with at least 1 hour of service in a plan year beginning on or after January 1, 1988.
(ii) Defined benefit plans. In the case of a participant who is credited with at least 1
hour of service in a plan year beginning on or after January 1, 1988, section 411 (b)(1 )(H) is
-73applicable with respect to all years of service completed by the participant other than plan
years beginning before January 1, 1988.
(iii) Defined contribution plans. Section 411 (b )(2) does not apply with respect to
allocations of employer contributions or forfeitures to the accounts of participants under a
defined contribution plan for a plan year beginning before January 1, 1988.
(iv) Hour of service. For purposes of this paragraph (f)(1), 1 hour of service means
1 hour of service recognized under the plan or required to be recognized under the plan by
section 410 (relating to minimum participation standards) or section 411 (relating to
minimum vesting standards). In the case of a plan that does not determine service on the
basis of hours of service, 1 hour of service means any service recognized under the plan or
required to be recognized under the plan by section 410 (relating to minimum participation
standards) or section 411 (relating to minimum vesting standards).
(2) Effective date of sections 411 (b )(1 )(H) and 411 (b )(2) for collectively bargained
plans--(i) In the case of a plan maintained pursuant to 1 or more collective bargaining
agreements between employee representatives and 1 or more employers, ratified before
March 1, 1986, sections 411 (b)( 1)(H) and 411 (b )(2) are applicable for benefits provided
under, and employees covered by, any such agreement with respect to plan years
beginning on or after the later of-(A) January 1, 1988; or
(8) The earlier of January 1, 1990, or the date on which the last of such collective
bargaining agreements terminates (determined without regard to any extension of any such
agreement occurring on or after March 1,1986).
-74(ii) The applicability date provisions of paragraph (f)(1) of this section shall apply in
the same manner to plans described in paragraph (f)(2)(i) of this section, except that the
applicable date determined under paragraph (f)(2)(i) of this section shall be substituted for
the effective date determined under paragraph (f)(1) of this section.
(iii) In accordance with the provisions of paragraph (f)(2)(i) of this section, a plan
described therein may be subject to different applicability dates under sections
411 (b)( 1)(H) and 411 (b )(2) for employees who are covered by a collective bargaining
agreement and employees who are not covered by a collective bargaining agreement.
(iv) For purposes of paragraph (f)(2)(i) of this section, the service crediting rules of
paragraph (f)(1) of this section shall apply to a plan described in paragraph (f)(2)(i) of this
section, except that in applying such rules the applicability date determined under
paragraph (f)(2)(i) of this section shall be substituted for the applicability date determined
under paragraph (f)(1) of this section. See paragraph (f)(1 )(iv) of this section for rules
relating to the recognition of an hour of service.
-75(3) Regulatory effective date. Paragraphs (a) through (e) of this section are
applicable with respect to plan years beginning on or after the date of publication of final
regulations in the Federal Register.
David A. Mader
Assistant Deputy Commissioner of Internal Revenue.
PO-3677: Assistant Secretary Randal K. Quarles "The U.S.-EU Positive Economic Agen...
Page 1 of 3
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 10, 2002
PO-3677
"The U.S.-EU Positive Economic Agenda on Financial Markets Issues"
Remarks by U.S. Assistant Secretary of the Treasury for International Affairs
Randal K. Quarles
The European Institute Transatlantic Seminar on Trade and Investment
Washington, DC
December 10, 2002
Thank you.
At the conclusion of the U.S.-EU Summit early last May, the White House and the
European Commission issued a FACT SHEET describing a Positive Economic
Agenda going forward, and the U.S.-EU financial markets dialogue was mentioned
as one of a number of initiatives. You may recall that the predominant theme of
press reports at that juncture was that the U.S. and the EU were engaged in a
transatlantic trade war and that there was little that was positive happening in the
relationship. The facts, however, portrayed a more balanced picture and it was in
that light that Presidents Bush and Prodi decided to put forth the Positive Economic
Agenda.
What is the dialogue all about?
The financial markets dialogue was launched in March 2002 to give U.S. and EU
officials an opportunity to discuss a range of financial and regulatory issues of
interest to both sides. It is led by the U.S. Department of Treasury and the
European Commission, with active participation of U.S. and EU member state
financial services regulators. A number of informal financial market dialogue
meetings have been held in Brussels and in Washington, both at the policy level
and at the technical level, and further discussions will take place in the weeks
ahead.
U.S. interests in the dialogue center on the EU's efforts to develop a single
European capital market by 2005, which the U.S. supports. The Financial Services
Action Plan is the center piece of this effort with measures aimed at the retail and
wholesale markets as well as supervision. There are other important initiatives at
the EU level that will help underpin a more integrated financial market. For
example, in response to increased concerns generated by corporate scandals in
the US and Europe, activity at the EU level also encompasses issues such as
corporate governance and auditing issues. Another example is the new rulemaking procedures.
To ensure that measures can b~ modified to reflect changes in the dynamic world
of finance, the European Commission has been given the authority to adopt
implementing regulations. In the securities areas the Commission is advised by the
newly created Committee of European Securities Regulators (CESR) representing
supervisors and the European Securities Committee representing policy officials.
European Finance Ministers have recently endorsed a similar approach for the
banking and insurance area. These provide a broad range of issues for discussion
in the dialogue.
As part of the dialogue, interested financial sector officials on both sides have been
consulting with U.S. and EU government officials, financial regulators and relevant
leaders in the Congress and in Hie European Parliament. The purpose of these
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PO-3677: Assistant Secretary Randal K. Quarles "The U.S.-EU Positive Economic Agen...
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exchanges is to help make the process of integration of Europe's capital markets as
transparent as possible and more generally to ensure that the views and expertise
of private sector players are taken into account.
Financial Services Action Plan
The EU's Financial Services Action Plan (FSAP) is a collection of 42 measures
designed to further integrate European capital markets. As of the end of November
31 measures have been completed, demonstrating that the Plan has momentum,
aided by the political backing of European Heads of State.
Well-managed, the FSAP offers a clear "win-win" opportunity for Europe, the United
States, the world economy and U,S. financial institutions, A recent study
undertaken for the Commission suggested that the reduced financing costs
associated with a more integrated European financial market could lift EU-wide
GDP 1.1 % by 2012, rising business investment, employment and per capita
incomes. The US clearly supports such an effort,
To gain such benefits elements of the plan need to be consistent with the reality of
an open, global financial system - working "with the grain of the market." Efficient,
innovative firms operating in the European market, both domestic and foreign,
should be able to reap rewards through healthy competition. This is the ideal.
To secure agreement among member states, we have the sense that sometimes
consensus is achieved that is inconsistent with existing market practices in some
member states, which means that the process of integration is moving away from
the market. We have raised such concerns with respect to the Prospectuses
Directive in which new rules would have been imposed that could have fragmented
an already existing pan EU bond market.
We also have urged the Commission to work with market participants and investors
in an open, transparent manner. Such an approach can help ensure that proposed
legislation addresses legitimate issues and that the "answer is right," that is
consistent with the operation of highly sophisticated financial markets.
After a false start with Prospectuses, the Commission undertook an extensive
consultation process in putting together a draft proposed Investment Services
Directive. This Directive is the foundation for securities market rules, The
Commission deservedly received good marks for its efforts - both on process and
substance. However, recent text modifications appeared to step back from the goal
of working with the grain of the market, which was being achieved through the
transparent consultation process.
Under the FSAP, the Commission will be assuming an increasingly important role in
adopting regulations to implement the plan. Therefore, it should take extra care to
issue the best draft technically pGssible and ensure that the draft regulations reflect
market realities and will solidly and seamlessly anchor a unified European financial
market in the global capital market. We discuss these issues and others in an
informal, two-way U.S.-EU financial markets dialogue.
Managing "Spillover" Effects
The dialogue serves as an important venue to raise issues that arise on both sides
of the Atlantic. In particular, it can help manage "spillover" effects that regulatory
action in one jurisdiction may have in another. Such spillovers are likely to be
increasingly the case in today's more tightly connected global capital markets.
European Commission officials have raised concerns about the effect of the
Sarbanes-Oxley Act provisions on EU firms since the Act makes no distinction
between domestic and foreign private issuers and auditing firms. If foreign issuers
and auditing firms are subject to robust measures in their home markets, then
double regulation imposes an unnecessary burden and cost.
Going in the other direction, one element of the FSAP, the Financial Conglomerates
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12/23/2002
PO-3677: Assistant Secretary Randal K. Quarles "The U.S.-ED Positive Economic Agen...
Page 3 of 3
Directive, raises issues with U.S. investment banks. Under the directive, U.S.based investment banks operating in Europe would be subject to supervision at the
holding company level. In the United States, however, investment banks are
supervised by the SEC at the broker-dealer level - not at the holding company
level. Therefore, absent a finding of "equivalent" oversight by EU authorities, U.S.based investment banks operating in Europe may face higher compliance and
operating costs.
We are using the informal financial markets dialogue to work on such cases of
regulatory "spillover" and to guard against others that could arise. We believe we
can successfully manage such issues because both sides share the same
objectives: sound financial market supervision and regulation, and efficient capital
markets that generate real benefits to firms and investors on both sides of the
Atlantic.
CDnclusion
While conflicts are inevitable given our varied experiences and attitudes toward
financial regulation and oversight, the financial markets dialogue has been a
successful forum for openly airing concerns on both sides. Both sides share the
same objectives: sound financial market supervision and regulation, and efficient
capital markets that generate real benefits to firms and investors on both sides of
the Atlantic.
I know that President Bush and Secretary O'Neill have been impressed by the
depth and professionalism of the talks thus far, and we are committed to continuing
our discussions in the weeks and months ahead and to assist our regulators in
developing "win-win" solutions to issues at hand that will benefit both sides. Such
efforts make the dialogue a positive exercise in cooperation and distinguish it from
a negotiation of trade issues, which is normally a zero-sum game.
Thank you.
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12/2312002
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
cOR IMMEDIATE RELEASE
lecember 09, 2002
RESULTS OF TREASURY'S AUCTION OF 6-DAY BILLS
6-Day Bill
December 10, 2002
December 16, 2002
912795MWB
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1. 235%
High Rate:
Investment Rate 1/:
Price:
1.278%
99 . 979
All noncompetitive and successful competitive bidders were awarded
ecurities at the high rate. Tenders at the high discount rate were
llotted 31.81%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FlMA (noncompetitive)
$
SUBTOTAL
47,119,000
$
$
13,001,053
o
o
o
o
47,119,000
13,001,053
o
o
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
47,119,000
$
13,001,053
Median rate
1.220%: 50% of the amount of accepted competitive tenders
tendered at or below that rate. Low rate
1.200%:
5% of the amount
: accepted competitive tenders was tendered at or below that rate.
IS
d-to-Cover Ratio = 47,119,000 / 13,001,053
=
3.62
Equivalent coupon-issue yield.
http://www.publicdebt. treas.gov
po
OrFI( For I'IRI.IC HT\IRS e I~OO 1'1' :\" ... , 1.\.\" \ .\\ F\ I I:, :'\.W. e \\'SIlI\t:T()~. IU.e 1021I1e0:11)2: (,121')(,11
EMBARGOED UNTIL 11:00 A.M.
December 9, 2002
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $16,000 million to
refund an estimated $20,000 million of publicly held 4-week Treasury bills maturing
December 12, 2002, and to pay down approximately $4,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,213 million of the Treasury bills maturing
on December 12, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FlMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
000
Attachment
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED DECEMBER 12, 2002
December 9, 2002
Offering Amount ..................... $16,000 million
Public Offering ..................... $16,000 million
NLP Exclusion Amount ................ $10,600 million
Description of Offering:
Term and type of security ........... 2S-day bill
CUSIP number ........................ 912795 LT 6
Auction date ........................ December 10,2002
Issue date .......................... December 12,2002
Maturity date ....................... January 9,2003
Original issue date ................. July 11,2002
Currently outstanding ............... $41,431 million
Minimum bid amount and multiples .... $l,OOO
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position is $1 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.
Maximum Recognized Bid at a Single Rate ... 35% of public offering
Maximum Award ............................. 35% of public offering
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
'OR IMMEDIATE RELEASE
lecember 09, 2002
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
December 12, 2002
March 13, 2003
912795MC2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.195%
High Rate:
Investment Rate 1/:
Price:
1.215%
99.698
All noncompetitive and successful competitive bidders were awarded
ecurities at the high rate.
Tenders at the high discount rate were
llotted 11.30%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
28,029,830
1,441,188
125,000
$
34,811,031
12,433,830
1,441,188
125,000
14,000,018 2/
5,215,013
5,215,013
Federal Reserve
LS
$
29,596,018
SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
$
19,215,031
Median rate
1.185%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.165%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
d-to-Cover Ratio = 29,596,018 / 14,000,018 = 2.11
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,135,014,000
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
'OR IMMEDIATE RELEASE
~cember 09, 2002
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
December 12, 2002
June 12, 2003
912795MR9
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.245%
High Rate:
Investment Rate 1/:
Price:
1.269%
99.371
All noncompetitive and successful competitive bidders were awarded
ecurities at the high rate.
Tenders at the high discount rate were
110tted 61.22%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
27,195,420
882,773
75,000
$
$
TOTAL
5,617,696
5,617,696
Federal Reserve
33,770,889
14,042,270
882,773
75,000
15,000,043 2/
28,153,193
SUBTOTAL
LS
Accepted
Tendered
Tender Type
$
20,617,739
Median rate
1.235%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.200%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
d-to-Cover Ratio
=
28,153,193 / 15,000,043
=
1.88
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $662,839,000
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
'OR IMMEDIATE RELEASE
lecember 10, 2002
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
December 12, 2002
January 09, 2003
912795LT6
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.205%
High Rate:
Investment Rate 1/:
Price:
1.227%
99.906
All noncompetitive and successful competitive bidders were awarded
=curities at the high rate.
Tenders at the high discount rate were
llotted 46.64%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
$
43,201,300
50,203
$
15,950,580
50,203
o
o
43,251,503
16,000,783
2,380,729
2,380,729
45,632,232
$
18,381,512
Median rate
1.200%: 50% of the amount of accepted competitive tenders
s tendered at or below that rate.
Low rate
1.180%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
d-to-Cover Ratio = 43,251,503 / 16,000,783 = 2.70
Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
PO-3683: Media Advisory Treasury Department and U.S. Postal Service Hold Wednesda... Page 1 of 1
PRES:SROb
M· ..
.
-
-,--.",_'
FROM THE OFFICE OF PUBLIC AFFAIRS
December 10, 2002
PO-3683
Media Advisory
Treasury Department and U.S. Postal Service Hold Wednesday
News Conference
The Treasury Department and the U.S. Postal Service tomorrow will hold a joint
news conference on the U.S. Postal Service.
Treasury Under Secretary for Domestic Finance Peter R. Fisher and Postmaster
General John E. Potter will host the news conference at 10:30 a.m. EST on
Wednesday, Dec. 11, 2002, in the Media Room (Room 4121) at the Treasury
Department, 1500 Pennsylvania Ave., NW., Washington, DC. They will be joined
by Robert F. Rider, Chairman of the Board of Governors the U.S. Postal Service.
of
The news conference will be web cast live at www.treasury.gov.
The room will be available for pre-set at 9:00 a.m. on Wednesday. Media without
Treasury or White House press credentials planning to attend should contact
Frances Anderson at Treasury's Office of Public Affairs at (202) 622-2960 by 9:00
a.m. on Wednesday with the following information: name, media organization,
social security number and date of birth. This information also may be faxed to
(202) 622-1999.
http://www.trea5.gov/pre~:J/relea6i1s1pQ.3683.htm
12/23/2002
For Immediate Release
December 11, 2002
Contact:
Betsy Holahan
202-622-2960
Statement of
Treasury Under Secretary for Domestic Finance Peter R. Fisher
on Presidential Commission on U.S. Postal Service
Good morning. We are here to announce that President Bush is establishing a Commission on
the U.S. Postal Service. At the request of the President, Jim Johnson and Harry Pearce will serve
as Co-Chairs of the Commission. I will introduce Mr. Johnson in a minute, Mr. Pearce tried to
be here this morning but because of the weather was unable to fly in. Postmaster General Jack
Potter and Postal Service Board Chairman Bob Rider are also here with us and will each say a
few words after my remarks.
The U.S. Postal Service is the linchpin of our domestic mailing industry. This industry as a
whole represents 8 percent of our Gross Domestic Product and nine million workers. As
business communications, bills and payments move increasingly to the Internet, the business
model of the Postal Service is increasingly at risk. For the last four years, the annual volume of
individual first-class letters declined from 54.3 billion to 49.3 billion, even as the cost structure
of the Postal Service has been expanding as more than a million and half new delivery addresses
are added each year. New technology, declining volume, and continued expansion of the
delivery cost base, combined with competition from the private sector, pose a fundamental
challenge to the Postal Service.
President Bush recognizes that now is the time to re-assess how the Postal Service should adapt
to pressure from customers, competitors and technology, and best fulfill its mission in the 21 st
century. The Commission will be an invaluable tool to develop strategies to meet the operational
challenges that the Postal Service faces and to chart a course that will build a healthy financial
foundation. It will help us learn how the Postal Service can execute its mission more efficiently
and cost-effectively. The Postal Service needs to press on with its own Transformation Plan;
nothing should hold back these efforts. The Commission will consider the potential need for
further steps that should be taken to secure the future of our entire system of mail delivery.
Inaction is unacceptable - for taxpayers, for mailers, and for current and former Postal Service
workers.
The way I think of this, there are just two things that are out of bounds. We don't want to
Commission to come back and suggest that the existing business model should be left in place
and the costs all rolled up on the taxpayer. We also don't want them to come back and say that
all of the existing costs should be rolled up on the rate payer. Everything else is on the table and
we hope they come back with their best ideas.
You know there are billions of dollars of postal operations that today are outsourced - from
planes and transportation to rural delivery routes. That said, our goal is not to privatize the
postal service. We do want the Commission to give us tre best ideas they can to make our mail
delivery system viable in the 21 st century. This is about ensuring the long-term viability of the
postal service, for mailers and for taxpayers. Nothing more and nothing less.
-30-
PO-3685: Bush Administration Announces Presidential Commission on U.S. Postal Service Page 1 of 2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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December 11, 2002
PO-3685
Bush Administration Announces Presidential Commission on
U.S. Postal Service
James A. Johnson and Harry Pearce Named as Commission Co-Chairs
Treasury Under Secretary for Domestic Finance Peter R. Fisher and Postmaster
General John E. Potter today announced that President George W. Bush is
establishing a Commission on the U.S. Postal Service. At the request of the
President, James A. Johnson, Vice Chairman of Perseus, L.L.C., and Harry Pearce,
Chairman of Hughes Electronics Corporation, will serve as Co-Chairs of the
Commission.
The nine-member bipartisan Commission will identify the operational, structural,
and financial challenges facing the Postal Service; examine potential solutions; and
recommend legislative and administrative steps to ensure the long-term viability of
postal service in the United States. The Commission will submit its report to the
President by July 31,2003.
"The President recognizes that now is the time to re-assess how the Postal Service
should adapt to pressure from customers, competitors, and technology, and best
fulfill its mission in the 21st century," said Under Secretary Fisher. 'The
Commission will be an invaluable tool to develop strategies to meet the operational
challenges that the Postal Service faces and to chart a course that will build a
healthy financial foundation. It will help us learn how the Postal Service can execute
its mission more efficiently and cost-effectively. Inaction is unacceptable - for
taxpayers, for mailers, and for current and former Postal Service workers."
"We remain committed to implementing the Transformation Plan that the Postal
Service submitted to Congress earlier this year," said Postmaster General Potter.
"Consistent with our Transformation Plan, we expect that the findings and
recommendations of the Commission will reaffirm our commitment to ensuring that
the Postal Service can maintain reliable and affordable mail service to all
communities across the country."
The U.S. Postal Service is the linchpin of a $900 billion domestic mailing industry.
The domestic mailing industry represents eight percent of Gross Domestic Product
and employs nine million workers. The fundamental challenge for the Postal
Service is that its business model is at great risk. Last reorganized in 1971, the
Postal Service has succeeded in reducing federal subsidies and, with other
improvements, has constrained cumulative losses to $6 billion since 1972.
However, at the end of their most recent fiscal year, the Postal Service owed the
Federal government, and ultimately the American taxpayer, $11 billion (cumulative
losses plus borrowings for capital and operational expenses).
One of the greatest challenges for the Postal Service is decreasing volume as
business communications, bills and payments, move increasingly to the Internet.
For the last four years, the annual volume of individual first-class letters has
nttp://www.treas.gov/pre3&releas~s/po3685.htm
12/23/2002
PO-3685: Bush Administration Announces Presidential Commission on U.S. Postal Service Page 2 of2
declined from 54.3 billion to 49.3 billion, even though the Postal Service adds about
1.7 million new delivery addresses per year. That decline, coupled with competition
from the private sector, has brought about a substantially different business
environment. These developments require a responsible federal government
review of government-provided mail service.
In addition to Co-Chairs Johnson and Pearce, Commission members include Dionel
Aviles, President of Aviles Engineering Corporation, Texas; Don Cogman,
Chairman, CC Investments, Arizona: Carolyn Gallagher, former President and
CEO, Texwood Furniture, Texas; Richard Levin, President, Yale University,
Connecticut; Norman Seabrook, President, New York City Correction Officers'
Benevolent Association, New York; Robert Walker, Chairman and CEO, Wexler
Group, Washington, DC; and Joseph Wright, President and CEO, PanAmSat,
Connecticut.
Related Documents:
• Executive Order
• Statement of John Potter
• Statement of Rober Rider
• Johnson biography
• Pearce biography
• Statement of Peter Fisher
lttp:llwww.treas.gov/pntss/releas esofpa3685.htm
12123/2002
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
December 11,2002
EXECUTIVE ORDER
PRESIDENT'S COMMISSION ON THE UNITED STATES POSTAL SERVICE
By the authority vested in me as President by the Constitution and the laws of the
United States of America, and to ensure the efficient operation of the United States
Postal Service while minimizing the financial exposure of the American taxpayers, it is hereby
ordered as follows:
Sectionl Establishment. There is established the President's Commission on the
United States Postal Service (Commission).
Sec. 2,. Membership. The Commission shall be composed of nine members appointed by
the President. The President shall designate two members of the Commission to serve as
Co-Chairs.
Sec. 3. Mission (a) The mission of the Commission shall be to examine the state of the
United States Postal Service, and to prepare and submit to the President a report articulating a
proposed vision for the future of the United States Postal Service and recommending the
legislative and administrative reforms needed to ensure the viability of postal services.
(b) In fulfilling its mission, the Commission shall consider the following issues and such
other issues relating to the Postal Service as the Commission determines appropriate:
(i) the role of the Postal Service in the 21 st century and beyond;
(ii) the flexibility that the Postal Service should have to change prices, control costs, and
adjust service in response to financial, competitive, or market pressures;
(iii) the rigidities in cost or service that limit the efficiency of the postal system;
(iv) the ability of the Postal Service, over the long term, to maintain universal mail
delivery at affordable rates and cover its unfunded liabilities with minimum exposure to
the American taxpayers;
(v) the extent to which postal monopoly restrictions continue to advance the public
interest under evolving market conditions, and the extent to which the Postal Service
competes with private sector services; and
(vi) the most appropriate governance and oversight structure for the Postal Service.
Sec. ~> Administration (a) The Department of the Treasury or any organizational entity
subject to the direction of the Secretary of the Treasury shall, to the extent permitted by law,
provide administrative support and funding for the Commission. The Commission is established
within the Department of the Treasury for administrative purposes only.
(b) Members of the Commission shall serve without any compensation for their work on
the Commission. Members appointed from among private citizens of the United States,
however, while engaged in the work of the Commission, may be allowed travel expenses,
including per diem in lieu of subsistence, as authorized by law for persons serving intermittently
in Government service (5 U.S.c. 5701-5707), to the extent funds are available.
(c) The Commission shall have a staff headed by an Executive Director.
(d) The Commission, with the concurrence of the Secretary of the Treasury, may
establish subcommittees, consisting of Commission members, as appropriate, to aid in its work.
(e) Consistent with such guidance as the President or, onthe President's behalf, the
Secretary of the Treasury, may provide, the Commission shall exchange information with and
obtain advice from Members of Congress; Federal, State, local, and tribal officials; commercial,
nonprofit, and residential users of the United States Postal Service; and others, as appropriate,
including through public hearings.
(f) Insofar as the Federal Advisory Committee Act, as amended, may apply to the
Commission, any functions of the President under that Act, except for those in section 6 of that
Act, shall be performed by the Secretary of the Treasury, in accordance with the guidelines that
have been issued by the Administrator of General Services.
(g) Nothing in this order shall be construed to impair or otherwise affect the functions of
the Director of the Office of Management and Budget relating to budget, administrative, or
legislative proposals.
Sec.~.
Report The Commission shall submit its report, consistent with its mission set
forth in section 3 of this order, to the President, through the Secretary of the Treasury, not later
than July 31,2003.
Sec. §.. General Provisions. (a) This order is intended only to improve the internal
management of the Federal Government and it is not intended to, and does not create, any right
or benefit, substantive or procedural, enforceable at law or in equity by a party against the
United States, its departments, agencies, instrumentalities or entities, its officers or employees, or
any other person.
(b) The Commission shall terminate 30 days after submitting its report and in no event
later than August 30, 2003.
GEORGE W. BUSH
THE WHITE HOUSE,
December 11, 2002.
###
Statement of Postmaster General John E. Potter
on the Establishment of a Postal Presidential Commission
I want to thank the President and Under Secretary Fisher for their hard work and foresight in
creating this commission. I would also note the impressive qualifications of those who have
been selected to serve. Individually and collectively, they will br~ng a valuable new perspective
to the challenging and complex issue of postal reform. The Postal Service welcomes the
Commission's consideration of the future of America's postal system.
This action is consistent with-and complementary to-the Postal Service's Transformation
Plan. Our Plan, which defines the actions the strategies being followed by the Postal Service to
protect affordable, universal service for everyone in America, also acknowledges the very real
need for legislative reform.
A similar Commission resulted in the establishment of today's Postal Service 30 years ago. That
critical modernization opened the door to an innovative business model that produced
unprecedented improvements in service and efficiency for America's mail users- from businesses
to consumers. And since 1982, we have done so without requiring taxpayer subsidies for our
daily operations.
The Postal Reorganization Act of 1970 has served the nation well. Since the creation of the
Postal Service in 1971, mail volume has more than doubled. Delivery addresses have increased
by more than 74 percent. And the price of the First-Class stamp, adjusted for inflation, is the
same as it was in 1971.
But the basic economic assumption of the business model-that continuing growth in mail
volume and revenue would support continued infrastructure growth-is no longer valid. In fact,
volume growth is at risk from competition and technology, while the number of delivery points
is increasing. Without postal reform, the widening divergence of volume growth and delivery
point expansion will make it impossible to continue the long-term successes that have been
achieved since postal reorganization.
This Commission has a historic opportunity to offer recommendations guaranteeing a postal
system as effective and dependable as today's-for many years to come. In the meantime, the
Postal Service will continue to aggressively manage the bus iness by implementing the strategies
in our Transformation Plan. In fact, in the last fiscal year, the Postal Service has reduced
operating expenses by $2.8 billion and, at the same time, achieved record levels of service. We
will continue our focused efforts to control costs, improve service and efficiency, and add value
to our products. These actions are critical to fulfilling our long-standing mission of serving the
nation. We look forward to the Commission's recommendations for a strong mail system for our
nation.
The Commission is good news coming at the right time. The Commission has the opportunity to
build on the achievements made possible by the Postal Reorganization Act of 1970 before
America faces a postal crisis.
The nation cannot afford a postal crisis. Themail is simply too important to the life of our
nation. The Postal Service is the foundation of a $900 billion dollar industry that employs 9
million people. American business relies on the Postal Service, an entire advertising and direct
mail industry has evolved and matured during the past 25 years and, even in this day of high
speed computer technology, the local post office provides a fundamental and low-cost
communication link for every American - from Alaska to Florida, from our soldiers serving in
the Gulf to families on Guam.
Let me close by again thanking the President for establishing the Commission. I also want to
congratulate co-chairs James Johnson and Harry Pearce and all of the members. Today's action
will have a long-term effect on the public policy of this nation. I look forward to working with
the Commission as it shapes that policy.
-30-
Statement of Robert F. Rider
Chairman of the Board of Governors of the U.S. Postal Service
On behalf of the Board of Governors of the United States Postal Service, I want to
express my gratitude to the President and Under Secretary Fisher for establishing a
Presidential Commission to examine the challenges facing the Postal Service and
recommend solutions that will ensure the long-term viability of America's postal system.
In their oversight of the nation's postal system, the Governors of the Postal Service are
chosen to represent the public interest.
This Board recognizes that the public interest requires fundamental change of the 33year-old statute that created a self-supporting United States Postal Service.
Acting on that conviction, the Board ms been a united and vocal advocate of legislative
action to protect the right of everyone in America. From the smallest, most remote towns
to the largest of cities, to affordable, dependable mail service.
We are gratified that our efforts, and the efforts of so many others in the mailing
community, in Congress, and in the Administration, have resulted in the creation of this
Commission.
As Governors acting in the public interest, we are committed to maintaining the
fundamental principal and vision that delivery of mail is an important and vital
government service, regardless of where one lives or what one's station in life might be.
We offer our full support to the Commission in its efforts to achieve this goal.
I offer my personal congratulations to co-chairs James Johnson and Harry Pearce
and to all the members of the Commission.
Along with all of the Governors, I look forward to working with them
to assure a strong postal system for America.
Thank you.
-30-
1
Biography
JAMES A. JOHNSON
James A. Johnson is Vice Chairman of Perseus, L.L.c., a merchant banking and private equity
finn based in Washington, DC and New York City.
Beginning in January of 1990 and continuing through December 1999 he was employed by
Fannie Mae. He served as Vice Chairman (1990), Chairman and CEO (1991-1998), and
Chairman of the Executive Committee (1999).
Prior to joining Fannie Mae, Johnson was a managing director in corporate fmance at Lehman
Brothers. Before joining Lehman, he was the president of Public Strategies, a Washingtonbased consulting finn he founded to advise corporations on strategic issues.
From 1977 to 1981, he served as executive assistant to Vice President Walter F. Mondale,
where he advised the Vice President on domestic and foreign policy and political matters.
Earlier, he was employed by the Target Corporation, worked as a staff member in the U.S.
Senate, and was on the faculty at Princeton University.
Johnson serves as chairman of The John F. Kennedy Center for the Performing Arts and is
chairman of the board of trustees of The Brookings Institution.
He also serves on the board of the following organizations: The Enterprise Foundation;
Gannett, Inc.; The Goldman Sachs Group, Inc.; KB Home; National Association on Fetal
Alcohol Syndrome; National Housing Endowment; Target Corporation; Temple-Inland, Inc.;
and UnitedHealth Group. He is also a member of The American Friends of Bilderberg, The
Business Council, the Council on Foreign Relations, the Trilateral Commission, and he is
Chairman of the Advisory Council for Public Strategies Incorporated. In March 1994, Johnson
was named "CEO of the Year" by The George Washington University School of Business and
Public Management. He also was named a 1998 "Washingtonian of the Year" by
Washingtonian Magazine. In May 2001, he was elected to the American Academy of Arts and
Sciences.
Johnson received a B.A. degree in political science from the University of Minnesota and a
Masters Degree in public affairs from the Woodrow Wilson School at Princeton. In 1997, Mr.
Johnson received an Honorary Doctor of Laws Degree from Colby College, in 1999 he
received an Honorary Doctor of Humane Letters Degree from Howard University, and in 2002,
he received a Doctor of Laws Degree from Skidmore College.
Mr. Johnson lives in Washington with his wife and their son.
December 2002
HARRY J. PEARCE
Harry J. Pearce was elected chairman of the Hughes Electronics Corporation Board of Directors, a
subsidiary of General Motors Corporation, in May 2001. Pearce has served on the HUGHES Board since
November 1992. He had been vice chairman and a director of the General Motors Corporation Board of
Directors since 1996 until his retirement from General Motors in May 2001.
Pearce had been an executive vice president since 1992 and was vice president and general
counsel with responsibility for GM's Legal Staff from May 1987 to August 1994. Pearce joined General
Motors as associate general counsel in October 1985, assuming responsibility for all product litigation and
product safety matters worldwide. Previously, he had been a senior partner in the law firm of Pearce &
Durick in Bismarck, N.D. In that capacity, he represented GM and other industrial companies nationwide in
a variety of product liability cases over a period of 15 years.
Pearce is Chairman of the United States Air Force Academy's Board of Visitors, Chairman of the
U.S. Air Force Academy's Sabre Society, and a lifetime member of the U.S. Air Force Academy's
Association of Graduates. He was the recipient of the U.S. Marine Corps Scholarship Foundation's Colonel
I. Robert Kriendler Memorial Award in 1998 and is also serving his fifth year as co-chairman of the U.S.
Marine Corps Scholarship Foundation's Annual Leatherneck Ball. In 2001, he was selected as a recipient of
the first U.S. Air Force Academy's Distinguished Graduate Award.
During his service career, Pearce served as a Staff Judge Advocate in the Air Force and was
certified as a military judge. On his return to civilian life, he joined a law firm in Bismarck. He was a
municipal judge in Bismarck from 1970 to 1976 and also served as United States Commissioner and
U.S. Magistrate.
Pearce is also a member of the board of directors of Marriott International, Inc., MDU Resources
Group, Inc., National Defense University Foundation, Air Force Academy Association of Graduates, the
Detroit Investment Fund, The Bone Marrow Foundation, The National Bone Marrow Transplant Link, the Lauri
Strauss Leukemia Foundation, the Stewart Francke Leukemia Foundation, Sabriya's Castle of Fun
Foundation, Chairman of the GM Cancer Research Foundation and The Marrow Foundation's Board of
Directors, president and board member of The Leukemia & Lymphoma Society Research Foundation, and a
member of Wayne State University's School of Medicine's board of visitors. He also serves as a member of
the Mothers Against Drunk Driving (MADD) board of advisors.
Pearce is a fellow in the American College of Trial Lawyers and a fellow in the International Society
of Barristers. He is chairman of the Product Liability Advisory Council Foundation and a founding member of
the Minority Counsel Demonstration Program of the American Bar Association's Commission on
Opportunities for Minorities in the Profession.
Pearce is a member of World Business Council for Sustainable Development (including co-chair of
the global mobility initiative on sustainability), The National Academies' Panel on Science, Technology and
Law, The Mentor Group's Forum for U.S.-EU (European Union) Legal-Economic Affairs, and The Conference
Board. He also serves as a trustee of Northwestern University, Howard University, United States Council for
International Business, and New Detroit Inc.
Pearce was born on Aug. 20, 1942, in Bismarck, N.D. He received a bachelor's degree in
engineering sciences from the United States Air Force Academy in 1964, where he was a member of the
Honor Committee, the Dean's List, the Commandant's List, and the Superintendent's List and a recipient of
the Major General Fechet Award. He earned his juris doctor degree from Northwestern University's School
of Law in 1967 where he was a Hardy Scholar, on the Dean's List, and a member of the National Moot Court
Team. He received an honorary degree of Doctor of Engineering from Rose-Hulman Institute of Technology
in 1997, and an honorary degree of Doctor of Laws from Northwestern University in 1998 and an Alumni
Merit Award in 1991.
Furthermore, in 2001 he received the International Association of Organ Donation's Corporate
Benefactor Award and The American Jewish Committee's National Human Relations Award; the National
Conference for Community & Justice Humanitarian Award and The Black Patriots Foundation Leadership
Award in 2000; Parents magazine's "As They Grow" Award in 1999; The Detroit News "Michigan ian of the
Year" Award in 1998; and the ABA's Commission on Opportunities for Minorities in the Profession's "Spirit
of Excellence" Award in 1997.
# # #
Revised 3/19/02
2
For Immediate Release
December 11, 2002
Contact:
Betsy Holahan
202-622-2960
Statement of
Treasury Under Secretary for Domestic Finance Peter R. Fisher
on Presidential Commission on U.S. Postal Service
Good morning. We are here to announce that President Bush is establishing a Commission on
the U.S. Postal Service. At the request of the President, Jim Johnson and Harry Pearce will serve
as Co-Chairs of the Commission. I will introduce Mr. Johnson in a minute, Mr. Pearce tried to
be here this morning but because of the weather was unable to fly in. Postmaster General Jack
Potter and Postal Service Board Chairman Bob Rider are also here with us and will each say a
few words after my remarks.
The U.S. Postal Service is the linchpin of our domestic mailing industry. This industry as a
whole represents 8 percent of our Gross Domestic Product and nine million workers. As
business communications, bills and payments move increasingly to the Internet, the business
model of the Postal Service is increasingly at risk. For the last four years, the annual volume of
individual first-class letters declined from 54.3 billion to 49.3 billion, even as the cost structure
of the Postal Service has been expanding as more than a million and half new de livery addresses
are added each year. New technology, declining volume, and continued expansion of the
delivery cost base, combined with competition from the private sector, pose a fundamental
challenge to the Postal Service.
President Bush recognizes that now is the time to re-assess how the Postal Service should adapt
to pressure from customers, competitors and technology, and best fulfill its mission in the 21 st
century. The Commission will be an invaluable tool to develop strategies to meet the operational
challenges that the Postal Service faces and to chart a course that will build a healthy financial
foundation. It will help us learn how the Postal Service can execute its mission more efficiently
and cost-effectively. The Postal Service needs to press on with its own Transformation Plan;
nothing should hold back these efforts. The Commission will consider the potential need for
further steps that should be taken to secure the future of our entire system of mail delivery.
Inaction is unacceptable - for taxpayers, for mailers, and for current and former Postal Service
workers.
The way I think of this, there are just two things that are out of bounds. We don't want to
Commission to come back and suggest that the existing business model should be left in place
and the costs all rolled up on the taxpayer. We also don't want them to come back and say that
all of the existing costs should be rolled up on the rate payer. Everything else is on the table and
we hope they come back with their best ideas.
You know there are billions of dollars of postal operations that today are outsourced - from
planes and transportation to rural delivery routes. That said, our goal is not to privatize the
postal service. We do want the Commission to give us tre best ideas they can to make our mail
delivery system viable in the 21 st century. This is about ensuring the long-term viability of the
postal service, for mailers and for taxpayers. Nothing more and nothing less.
-30-
FROM THE OFFICE OF PUBLIC AFFAIRS
ecember 11. 2002
0-3686
U.S. International Reserve Position
1e Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
taled $75,938 million as of the end of that week, compared to $75,737 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
November 29, 2002
December 6, 2002
75,737
75,938
TOTAL
---
~---
-_._._- . - ---'-- -
.---_.-- -'----
· Foreign Currency Reserves
I
Euro
Yen
TOTAL
Euro
Yen
·TOTAL·
6,407
12,817
19,225
6,515
12,717
19,232
-- •. '--
· Securities
----
-~.-
o
o
u.s.
if which.
issuer headquartered in the
... _--
-I
· Total deposits with:
10,579
.i. Other central banks and BIS
2,573
10,744
13,152
2,553
13,297
us.
0
0
.ii. Of which, banks located abroad
0
0
iii. Banks headquartered outside the US.
0
.iL Banks headquartered in the
-_._----_.
_
--- '-'. -
.. _----_._---------------,
-
..
..
.
iii. Of which, banks located in the U.S.
.-, ...
-.- ---
0
20,469
20,500
11,849 '
11,867
11,042
11,042
~
.----
-
--
----~
Special Drawing Rights (SDRs)
--
0
- - ----. "".- -
IMF Reserve Position 2
'--'~--.----
0
-,--.
---_.
2
-- -
Gold Stock 3
~
0
0
Other Reserve Assets
-
II. Predetermined Short-Term Drains on Foreign Currency Assets
-
,
November 29, 2002
Euro
..-.-----.-
--.-
._- --_.
-
- .--
TOTAL
Euro
-
~ggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
---------------
Yen
TOTAL
o
0
=oreign currency loans and securities
-~----
Yen
December 6, 2002
.
I
,
?a. Short positions
0
0
?h. Long positions
0
0
~.
0
0
Other
Ill. Contingent Short-Term Net Drains on Foreign Currency Assets
November 29,2002
Euro
· Contingent liabilities in foreign currency
Yen
TOTAL
December 6, 2002
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
.a. Collateral guarantees on debt due within 1
'ear
.h. Other contingent liabilities
· Foreign currency securities with embedded
ptions
· Undrawn, unconditional credit lines
.a. With other central banks
.h. With banks and otherfinancial institutions
readquartered in the
u.s.
c. With banks and otherfinancial institutions
'eadquartered outside the
u.s.
Aggregate short and long positions of
Jtions in foreign
urrencies vis-a-vis the U.S. dollar
a. Short positions
a.l. Bought puts
a.2. Written calls
b. Long positions
).1. Bought calls
).2. Written puts
Notes:
Icludes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
MA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
)sits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
eserves for the prior week are final.
(The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
31ued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
9cessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week may be
Jbject to revision. IMF data for the prior week are final.
'Gold stock is valued monthly at $42.2222 per fine troy ounce.
PO-3687: Brian C. Roseboro at The Bond Market Association's Repo and Securities Len...
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PH[SS FWOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 12, 2002
PO-3687
Statement of Treasury Assistant Secretary for Financial Markets
Brian C. Roseboro at The Bond Market Association's
Repo and Securities lending Conference
New York City
The Resilience of the U.S. Financial Markets, and Keeping It That Way
It would be an honor for anyone to speak to this distinguished gathering. It is
especially an honor for me as a Treasury official, because you play the central role
in the theme I'd like to examine today.
My theme is the remarkable resilience of the U.S. financial markets - and how you
in the private sector, and we in the public sector, need to work to keep it that way.
I begin with a scenario with which many of you may be familiar. Imagine that the
stock market has fallen, say a third, since its peak two years before. The economy
is in the doldrums. And to top it off, an enemy has attacked the United States,
slaying thousands of U.S. citizens. The stock market tanks even further.
The year? No, not 2001. It was 1941. And the story of the financial markets then,
as now, was one of bouncing back to meet the challenge. Has it been the financial
regulators, the government, that explains this resilience? I'd say no. While the
government may help (putting aside the military, which had a little to do with
defeating the Axis in the 1940s and AI-Qaeda and other terrorist threats today), the
real leadership has come from the private sector.
Take the corporate scandals of the past year or so. Of course, Sarbanes-Oxley
and the reforms the Securities and Exchange Commission has implemented have
helped. But the main reason calm has more or less returned to the equity markets
is that investors have forced a new discipline on corporate issuers, forcing them to
right their internal governance after an age of excess.
The same goes for the clarity of firms' financial reporting. As a number of leading
financial firms have discovered, investors now charge a premium for financial
disclosures as murky as a muddy pool.
And the private sector - that's you - also has a much richer appreciation now, as
do we all, of infrastructure resiliency. Before September 11, most of the financial
industry, certainly its high-flying leaders, saw back-up systems and sites - the
emergency plumbing of Wall Street - as the province of back-office worry-warts.
Important, maybe, but bothersome. But what those back-office guys knew is that
the deal isn't done until it's fully cleared and settled; and a Wall Street with cracked
pipes smells as rosy and functions as well as a stopped-up bathroom plumbing. It
turns out that all those Y2K preparations proved more useful than we had thought.
And going forward we won't make the same mistakes.
Admittedly, the effort to improve the resiliency of our financial markets involves
costs, but these are insurance premia. The costs of being unprepared would be
much higher to both you and the economy than the costs of improving financial
market resiliency.
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I'd like to discuss three ongoing projects or issues concerning financial markets of
interest to all of us. Your interest in these issues is due to your roles as financial
market participants. The Treasury's interest in the efficiency and resiliency of our
financial markets stems from our responsibilities for financial market policy. We
are also vitally interested in the secondary as well as primary government securities
markets. As this audience appreciates, the Treasury relies heavily on the primary
market to meet our financing needs and issues new securities every week of the
year. The primary market in turn relies on its backbone, the secondary market, to
attract consistent and deep interest.
First is the Federal Reserve's initiative to explore how to improve the arrangements
for payment and settlement of and related services for government security
transactions. The Federal Reserve is concerned about what happens if one of the
two major clearing banks for government securities is unable to provide services to
the dealer community. This concern, which we at the Treasury share, has received
greater attention because of the aftermath of September 11. However, we are not
just concerned about what happens as a result of a physical attack or natural
disaster, since there are other reasons that a clearing bank might be unable to
function. Some scenarios for an involuntary exit of a clearing bank from the
business may be unlikely, but are not impossible.
The first major step in the project was the Federal Reserve's and the SEC's white
paper in May - "Structural Change in the Settlement of Government Securities:
Issues and Options." Treasury staff were involved in the discussions with
interested parties prior to the release of the white paper and assisted in its
preparation.
In response to the comments on the white paper, the Federal Reserve last month
established a private-sector working group on government securities clearance and
settlement. That group is charged with preparing for the Federal Reserve a report
discussing possible mechanisms by which if one functional clearing bank for
whatever reason has to cease serving customers, the other could step in.
The working group includes representatives of the two clearing banks, the dealer
and broker community, the mutual fund industry, and other interested parties. Staff
from the Treasury, as well as from the Federal Reserve and the SEC, are attending
meetings of the working group as observers and technical advisers.
Many of the issues before the working group are far from easy, such as those
posed by triparty repos, and the group's task is important. The Treasury will
accordingly keep a close eye on developments in this area. Let me be clear,
however. We do not at this time prefer a particular solution for mitigating these
risks. We believe that the best solutions will come from a cooperative effort with
the private sector, as with the Federal Reserve's working group. I challenge you,
and ask you, to make the most of this project. Only if you provide the technical
expertise and analysis of those who work in the markets every day, and only if you
propose practical options that the various industry segments can accept, will this
working group lead the industry and us to a robust solution.
A second issue is the concerns that have been raised about General Collateral
Financing (GCF) repos cleared through the Government Securities Clearing
Corporation. The concerns center on the settlement practices for this product and
on the net debt cap limits on payments made through the Federal Reserve System.
We at the Treasury are monitoring this discussion with care. This product, which
has shown enormous growth in the last several years, provides important benefits
to participants in the government securities market. We hope that the parties
involved can devise creative solutions to the concerns raised. We have not taken a
position, but will continue to talk to interested parties and intend to be as helpful as
we can in assisting the effort to cpme up with solutions.
The last project of note is the draft white paper on "Sound Practices to Strengthen
Resilience of the U.S. Financial System," which the Federal Reserve, the Office of
the Comptroller of the Currency, and the SEC issued in August. We understand
that there is some controversy about aspects of this paper. How to improve
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Page 3 of 3
resiliency of our financial system in the event of catastrophic events and how best
to achieve and implement these mechanisms are and should be topics of legitimate
debate. We believe, however, that it is vitally important that we improve the
resiliency of the financial system because of its indispensable role in our
economy.
Let me return to my overall theme: that the primary responsibility and capability for
improving the resiliency of our financial markets lies, as a dictate of reality, with the
private sector. We are ready to do our part. But without your initiative, creativity,
expertise, and leadership, we cannot make our financial markets as robust as they
must be for the challenges ahead.
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FROM THE OFFICE OF PUBLIC AFFAIRS
December 12, 2002
PO-3688
Remarks of Randal K. Quarles
Assistant Secretary of the Treasury for International Affairs
Bretton Woods Committee Symposium
"Turmoil in Latin America - What is Happening and Why?"
It is a pleasure to join the Bretton Woods Committee for a timely discussion about
events in Latin America and prospects for the future.
I appreciate today's perspectives on Latin America and want to begin by noting the
diversity and promise in the region. Countries range from extremely poor nations
confronting difficult development challenges to economies with sophisticated
financial markets. Some states in Latin America are performing well economically.
Others are just beginning to implement good policies, and have much to look
forward to. Still others have recently experienced crises and stresses.
Since taking office, this administration has sought to promote both growth and
stability in Latin America and throughout the world. The high costs of
macroeconomic policy failures are particularly evident in this region at this time,
arguing for renewed efforts to prevent and address financial crises so that they do
not wipe out hard-won gains. It is critical, though, that the region be equally
focused on growth strategies. Wtlile it is easy to see how a crisis can set back
growth, it is also important to recognize how a sustained, day-in and day-out
commitment to policies that achieve higher growth can reduce vulnerability to
crisis. With even slightly faster economic expansion, debt burdens become more
manageable, fiscal adjustment is less painful, and investor confidence increases.
The evolution of economic prospects in Latin America this year calls for steps to
accelerate growth and highlights the need to do a better job of preventing and
managing financial crises. Conditions throughout the region became more difficult
this year with economic growth likely to be zero at best. This is in contrast to other
developing and emerging market regions where growth is positive this year - about
6% in Asia, 3% in Eastern Europe, and 3% in Africa.
Clearly raising economic growth in the region must remain a high priority.
The United States has emphasized three pillars that should underlie growth and
development strategies: ruling justly, investing in people, and promoting free
markets. These pillars are very much relevant for Latin America and shortcomings
in these areas help to explain erratic growth performance.
As we look at the region, it is important to keep in mind that geography is not
destiny in Latin America. For example, Chile - which enjoyed 6.8% average annual
growth throughout the 1990s - has distinguished itself by pursuing strong
macroeconomic and structural policies and has performed well despite turmoil
elsewhere in Latin America.
Promoting Trade and Financial Links
Raising living standards and expanding support for democratic institutions in Latin
America depend critically on achieving higher levels of productivity growth - a key
concern in a region where one-third of the people live on less than two dollars per
day.
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Increased trade is one of the most important ways to raise productivity and growth.
The United States is committed to comprehensive trade liberalization in the region
through the Free Trade Area of the Americas (FTAA). Indeed, with recently
approved Trade Promotion Authority, the United States has outlined an ambitious
agenda of trade opening initiatives. These include the recently finalized free trade
agreement with Chile, the Andean Trade Promotion and Drug Eradication Act,
negotiation of a Central American free trade area, and the United States proposal to
eliminate agricultural subsidies and lower agricultural tariffs as one element of the
Doha global trade negotiations.
At the bilateral level, the United States and Mexico have worked together through
the Partnership for Prosperity initiative to strengthen Mexico's economy through a
number of measures to improve access to capital, build capacity, and stimulate
private investment in areas that do not yet fully benefit from NAFTA. One key
element of the Partnership for Prosperity that could greatly facilitate the flow of
capital to Latin American countries involves a project to reduce the cost of
remittances sent from abroad. The Inter-American Development Bank estimates
that Latin Americans living in the United States send an average of $200 to their
native countries an average of seven to eight times per year. These remittances
surpassed $23 billion last year - about one fifth of total worldwide remittances and represent an enormous resource transfer to families and businesses that can
make direct use of the funds. Although remittance charges are declining, they still
range from 6-15% of the remitted amount plus an exchange margin that ranges
from 3-5%. Increased competition as more and more traditional financial
institutions offer remittance products should help to lower costs.
We are also seeking to boost private sector activity and enable businesses to take
full advantage of opportunities for trade by working with the lOB to facilitate access
to trade finance. Recent crises have made clear that once reliable sources of
finance for private firms may be less certain in times of financial stress. Facilitating
access to trade finance should help reduce the depth of crises and improve country
resilience in the wake of economic turbulence.
Promoting Stability and Preventing Crises
In recent years, a marked increase in the frequency and severity of financial crises
in emerging markets has contributed to deep recessions, instances of high
unemployment, volatile exchange rates, and high interest rates that cause real
hardships for people. The uncertainty caused by economic instability reduces
foreign and domestic investment - there have been steep declines in net private
capital flows to emerging markets - and has negative implications for productivity
and growth.
It almost goes without saying that the best way to deal with crises is to prevent
them from happening in the first place. This requires close monitoring of country
vulnerabilities, and taking appropriate action to reduce those vulnerabilities. At the
U.S. Treasury, for example, we have developed a "Blue Chip" index based on
numerical crisis indicators from a variety of public and private sources. We are also
asking that the IMF pay more attention to vulnerability in emerging market
economies to help detect potential trouble earlier. The multilateral development
banks are contributing to crisis prevention efforts by helping countries strengthen
financial sectors and institutions, thereby making their economies more resilient.
The emerging market countries themselves, of course, have the primary
responsibility to help prevent crises through strong policy actions. These policies
include credible and sustainable fiscal, monetary, and exchange rate policies,
responsible debt management, reforms to strengthen financial sectors, and greater
transparency.
In cases where difficulties cannot be avoided and countries turn to the official sector
for assistance, experience has shown that lending programs that lack strong
ownership by a country's leaders are likely to fail; we should not support such
programs. We must lend to countries whose leaders are willing and even eager to
take responsibility for making policy decisions that will have a long lasting positive
impact on economic development.
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This Administration also has emphasized that contagion should not be considered
"automatic" and that support for large scale financing through the IMF would not be
based on claims of contagion without evidence that there were fundamental links
between countries. We have worked to distinguish between direct links from one
country to another - which clearly exist in neighboring countries like the United
States and Mexico - and unfounded claims of an automatic spread of bad market
events from one country to another without such links.
While working to discourage unjustified contagion, the United States has supported
assistance for countries that are following good policies but are negatively affected
by a nearby crisis. We saw this when the United States welcomed an IMF program
for Brazil in August 2001 as a cushion against increasing difficulties in Argentina.
Similarly, United States support for Uruguay early this year was aimed at limiting
the impact of the Argentina crisis due to the direct or fundamental interdependence
between the two countries. In contrast, the alternative of supporting bad policies in
a crisis country due to fear of contagion effects undermines incentives to follow
good policies.
At the same time, we are working to increase discipline in terms of access to IMF
resources to reduce the size of IMF packages and thereby reduce the risk of moral
hazard - i.e., the belief that in a crisis, large-scale IMF assistance will protect
investors from the consequences of their decisions. The United States has
refrained from providing longer-term bilateral loan assistance in recent crisis cases,
as was done in the past, and has emphasized that the IMF must be the key source
of emergency support, thereby limiting official assistance to IMF resources. The
United States has moved gradually in implementing limits on financing - accepting
a waiver in Argentina in the spring 2001, and then agreeing to an augmentation so that investor expectations can adjust smoothly to new official sector policies.
In terms of program design, the IMF should work to structure international financial
packages so that strong incentives for good policy performance are maintained.
Prior actions that must be completed before a lending program begins, for instance,
can sometimes be a useful means for a country to demonstrate its commitment
before international funds are disbursed. The United States is encouraging the IMF
to concentrate more on the areas most central to its expertise: monetary, fiscal,
exchange rate, financial, and debt management policies. Narrowing the range of
conditionality in this direction should help achieve more focused programs with
increased country ownership. "Backloading" financial assistance, with smaller
amounts of money provided initially and larger amounts provided later on, can help
to ensure that a country's performance does not weaken over time.
In addition, we are working to create a more orderly and predictable process for
debt restructuring for cases where debts are unsustainable. The aim is not to
reduce the incentives for sovereign governments to pay their debts in full and on
time. Rather the aim is to reduce the great deal of existing uncertainty about
restructuring processes that currently exists and that complicates decision-making.
A more predictable sovereign debt restructuring process for countries that reach
unsustainable debt positions would help reduce this uncertainty, thereby leading to
better, more timely decisions, reducing the frequency and severity of crises.
As has been discussed in other fora, two approaches have been outlined: a
decentralized approach that would incorporate collective action clauses into bond
contracts and a more centralized approach that would address sovereign
bankruptcy through an amendment to the IMF Articles or through another
international treaty. We are seeking the most effective mechanism through full
consideration of both of these approaches and, possibly, a combination of the two.
If there is convincing evidence that the decentralized approach does a better job of
preventing crises and strengthening capital flows than the centralized or the
combined approaches, then the decentralized approach will be the choice
supported by the Bush Administration. Similarly, if one of the other approaches can
be shown to work better, then that option will be the one supported. In terms of
collective action clauses, given support from the private sector, from the official
sector, and from key emerging market countries, the time is ripe for moving ahead
and actually putting such clauses in new issues. This would be a tremendous step
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forward to creating a more orderly sovereign debt restructuring process.
Through these measures, we hope to reduce the frequency and harm of crises in
Latin America and other regions, increase private sector capital flows, and thereby
foster stability among emerging markets.
How then do these broad policy principles translate into specific policy actions for
countries experiencing difficulties? Let me now provide a brief update on three of
the key countries in the region that have received particular attention in recent
months - Uruguay, Brazil, and Argentina.
Uruguay is an example of getting the incentives right. The United States and the
international financial institutions made an extraordinary effort for Uruguay because
it was: 1) a victim of external shocks; 2) willing to pursue real financial sector
reform as well as fiscal adjustment; and 3) rightly focused on preventing the
collapse of its banking system.
Brazil's government's has demonstrated a sustained commitment to responsible
macroeconomic policy and this proven track record justified a strong response from
the international community. Official financing was rightly used to build confidence
in conjunction with good policy.
For Argentina, the U.S. has strongly supported efforts to provide Argentina
breathing room as it works with the IMF to develop a plan to strengthen its
monetary and fiscal framework.
Fighting Poverty, Strengthening the Rule of Law, and Improving the Environment
The United States is working on a range of efforts to help increase productivity and
overall economic growth in Latin America, reduce poverty, and protect the
environment.
At the World Bank and Inter-American Development Bank, the United States is
supporting development projects and programs that address the basic causes of
low productivity, including projects to raise health and education levels, increase
access to clean water and sanitation, and improve the climate for private sector
development. Higher quality education and training is particularly important to
equip people and countries to take advantage of the opportunities presented by
market liberalization. We believe these and other multilateral development bank
efforts will benefit from a renewed emphasis on measuring for results in order to
maximize development effectiveness. Particularly important will be efforts to
improve transparency and public'expenditure tracking so that resources are used
well.
Beginning in 2004, the Millennium Challenge Account initiative will dramatically
increase assistance from the United States to poor countries that demonstrate
strong performance - those that govern justly and uphold the rule of law, invest in
their own people, and create a favorable climate for private enterprise. The total
increase will reach $5 billion per year starting in 2006. These funds provide a
powerful incentive for countries to create an environment conducive to growth.
One specific area in which the United States has pushed for progress to raise living
standards and productivity is access to clean water. The United States strongly
supports efforts toward achievement of the objective for water under the Millennium
Development Goals, which call for reduction by half of the proportion of people
without sustainable access to clean drinking water. The lOB has estimated that
there is potential for about three-quarters of Latin American countries to reach this
goal by 2015. However, we must work together to ensure that all of Latin America
can achieve and even surpass this target more quickly. This will mean a strong
commitment by the countries themselves to provide an enabling environment
conducive to sustainable water services for cities and rural populations alike.
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Through the HIPC initiative, the United States has joined with other countries and
the international financial institutions in a comprehensive effort to provide debt relief
to the Heavily Indebted Poor Countries, including Bolivia, Guyana, Honduras, and
Nicaragua. The HIPC initiative is addressing the unsustainable debt burdens in
these countries, and helping to increase investments to spur greater productivity,
economic growth, and poverty reduction.
Through the multilateral development banks and other efforts, the United States
has encouraged lending to small businesses as an effective tool to provide credit to
the independent entrepreneurs who help drive growth in Latin America.
For a number of Latin American countries, illicit drug cultivation and production
rivals the legitimate economy, deprives the state of potential revenue, and
undermines government stability. Bilateral assistance and preferential trade access
from the United States are geared toward drug eradication and the promotion of
alternative development strategies - critical steps toward putting countries on a
path of rising growth.
The United States also has sought to link debt relief for developing countries to
environmental conservation. Building on the Enterprise for the Americas Initiative,
the Tropical Forest Conservation Act offers eligible developing countries reduction
on concessional debt in exchange for a commitment to fund tropical forest
conservation activities.
Conclusion
In spite of recent turbulence, there is good reason to be confident about the region's
prospects. First, the current economic cycle of slow or negative growth will improve,
especially as the U.S. economy continues to gain strength. At roughly 38% of
GDP, exports comprise a large percentage of income for the Latin American region
as a whole.
Many countries within the region have made important progress over the past
decade in strengthening the economic institutions and policies that will improve
their growth prospects. In a number of countries, for instance, central banks have
focused more on keeping inflation low. And many countries have abandoned soft
exchange rate pegs and maintained floating exchange rate regimes, helping them
to adjust more easily when faced with economic shocks. Others, such as EI
Salvador, have been successful with full dollarization.
Across the region, the private sector now contributes a larger percentage of GDP
than it did during the 1980s, which will help Latin American economies regain their
dynamism more quickly. Many countries now have more extensive trade and
financial linkages among themselves and with developed economies - such as the
United States and Europe - than they did in the past. This is a factor that will help
to accelerate their recovery once conditions improve. Latin America also has a
strong human capital and resource base that provides a solid underlying foundation
for future growth.
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L
:~;
S H L' (:'
Page 1 of 1
r'.',
FROM THE OFFICE OF PUBLIC AFFAIRS
December 12, 2002
PO-3689
Today the Treasury Department released the following
update on the financial war
on terrorism:
Total amount of terrorist assets blocked worldwide since September 11. 2001 (in
millions) - $123
Within the United States (in millions) 362
Other countries (in millions) 86.8
http://www.treas.gov/press/releasesJpo3689.htm
12/23/2002
DEPARTMENT
OF
THE
TREASURY
NEW
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TREASURY!~~r~,
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EMBARGOED UNTIL 11:00 A.M.
December 12, 2002
CONTACT:
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to!.!. C<If,1I
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $30,000
million to refund an estimated $31,005 million of publicly held 13-week and 26-week
Treasury bills maturing December 19, 2002, and to pay down approximately $1,005
million.
Also maturing is an estimated $20,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced December 16, 2002.
The Federal Reserve System holds $13,582 million of the Treasury bills maturing
on December 19, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held December 17, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,042 million into the 13-week bill and $787 million into the 26week bill.
Beginning with these auctions, a bidder must report its net long position if, in
the security being auctioned, the bidder's net long position plus its bids in the
auction meet or exceed a specific dollar-amount threshold.
That threshold amount,
equivalent to 35% of the offering amount of the security, will be stated in the
highlights of the security's auction announcement.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage pOint, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about each of the new securities are given in the attached offering
highlights.
000
Attachment
For press releases, speeches, public schedules and official biographies, call ollr 24-//olIr fax: lille at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED DECEMBER 19, 2002
December 12, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) ....
Maximum Recognized Bid at a Single Rate ...
NLP Reporting Threshold . . . . . . . . . . . . . . . . . . .
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
Description of Offering:
Term and type of security ..................
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturi ty date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue date . . . . . . . . . . . . . . . . . . . . . . . .
Currently outstanding . . . . . . . . . . . . . . . . . . . . . .
Minimum bid amount and multiples
$14,000
$ 4,900
$ 4,900
$ 4,900
$ 4,600
million
million
million
million
million
91-day bill
912795 MD 0
December 16, 2002
December 19, 2002
March 20, 2003
September 19, 2002
$17,916 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
1B2-day bill
912795 MS 7
December 16, 2002
December 19, 2002
June 19, 2003
December 19, 2002
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders ........ Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender.
TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
PO-3691: Pam Ulson Assistant Secretary for Tax Policy Before the IRS/George Washingt ... Page 1 of 5
..
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FROM THE OFFICE OF PUBLIC AFFAIRS
December 12, 2002
PO-3691
Remarks of Pam Olson Assistant Secretary for Tax Policy
Before the IRS/George Washington, University 15th Annual Institute on
Current Issues in International Taxation
Globalization and the U.S. International Tax Rules
Remarks today on hot topics for an international tax conference offer a wealth of
options. There are novel enforcement actions, new tax information exchange
agreements with countries once thought of as havens for those seeking to hide
assets or income - countries now proudly adopting the best practices of developed
nations for transparency and information exchange, significant developments in tax
treaties aimed at reducing barners to the free flow of capital, the World Trade
Organization's decision that our extraterritorial income exclusion rule constitutes a
prohibited export subsidy, U.S. citizens expatriating, U.S. companies inverting, and
the list goes on. Of course, a list like that would probably prompt our colleagues
outside of the tax world to tell us we need to get out morel And so we do. Instead
of any of these hot topics, I want to talk today about an area where one might say
we need to get out more. That area is the fundamentals of our international tax
rules.
Viewed from the vantage point of an increasingly global marketplace, our tax rules
appear outmoded, at best, and punitive of U.S. economic interests, at worst. Most
other developed countries of the world are concerned with setting a
competitiveness policy that permits their workers to benefit from globalization. As
Deputy Secretary Dam observed recently, however, our international tax policy
seems to have been based on the prinCiple that if we have a competitive
advantage, we should tax it l
Let's start with the basIcs. Our Income tax system as a whole dates back to shortly
after the turn of the last century, a time when cars were called horseless carriages
and buggy whip makers had Just gone out of business. A bit has happened since
then. Of course, significant changes have been made to the tax code as well. In
the international area, we added the subpart F rules back in 1962.
I would say that they haven't aged as well as a lot of the 40 somethings in this
room. In fact, they are showing their age. We also made fairly Significant changes
to the international tax rules in 1986. That would make those rules teenagers now,
and they have the characteristics of the average teenager. They're hard to
understand, messy, inconsistent. and display little regard for the real world.
The global economy looked very different when the subpart F rules were put In
place than it does today. The same is true of the U.S. role in the global economy.
Forty years ago the U.S. was dominant and accounted for over half of all
multinational investment in the world. We could make decisions about our tax
system essentially on the basis of a closed economy, and we could generally count
on our trade partners to follow our lead in tax policy.
The world has changed in the last 40 years. The globalization of the U.S. economy
puts ever more pressure on our international tax rules. When the rules were first
developed, they affected relatively few taxpayers and relatively few transactions.
http://www.trcas.gov/prcss/releasss/po3691.htm
12/23/2002
PO-3691: Pam Olson Assistant Secretary for Tax Policy Before the IRSIGeorge Washingt... Page 2 of 5
Today. there is hardly a U.S.-based company that is not faced with applying the
U.S. international tax rules to some aspect of its business.
What does globalization mean? This audience needs no explanation, but it is useful
to think about it for a minute. It means the growing interdependence of countries
resulting from increasing integration of trade, finance, investment, people and ideas
in one global marketplace. Globalization results in increased cross-border trade,
and the establishment of production facilities and distribution networks around the
globe. Technology is a key driving force behind globalization. Advances in
communications, information technology, and transport have slashed the cost and
time taken to move goods, capital, people, and information. Firms in this global
marketplace differentiate themselves by being smarter: applying more cost efficient
technologies or Innovating faster than their competitors. The returns to being
smarter are much higher than they once were as the benefits can be marketed
worldwide.
The significance of globalization to the U.S. economy since the enactment of
subpart F is apparent from the statistics on international trade and investment. In
1960, trade in goods to and from the U.S. represented just over six percent of
GOP. Today, trade in goods to and from the U.S. represents over 20 percent of
GOP, more than three times larger than in 1960, while trade in goods and services
represents more than 25 percent of GOP today. It is worth noting that numerous
studies confirm a strong link between trade and economic growth. Trade appears
to raise income by spurring the accumulation of physical and human capital and by
increasing output for given levels of capita/.
Cross border investment, both inflows and outflows, also has grown dramatically in
the last 40 years In 1960, cross border investment represented just over one
percent of GOP. In 2000, it was nearly 16% of GOP, representing annual crossborder flows of more than $1.5 trillion. The aggregate cross border ownership of
capital is valued at $15 trillion. In addition, U.S. multinational corporations are now
responsible for more than one-quarter of U.S. output and about 15 percent of U.S.
employment.
At the same time companies are competing for sales, they are also competing for
capital: U.S.-managed firms may have foreign investors, and foreign-managed firms
may have U.S. investors. Portfolio investment accounts for approximately twothirds of US investment abroad and a similar fraction of foreign investment in the
U.S.
The U.S. tax rules have important effects on international competitiveness both
because of the integration of domestic activities of U.S. multinational companies
with their foreign activities and because repatriated foreign earnings of foreign
investments are subject to U.S. domestic tax. Increasingly, the flow of goods and
services is not through purchases between exporters and importers, but through
transfers between affiliates of multinational corporations. The rules governing
transfer pricing, interest allocation, withholding rates, foreign tax credits, and the
taxation of actual or deemed dividends Impacts these flows.
The U.S. tax system should not distort trade or investment relative to what would
occur in a world without taxes. The difficulty IS that every country makes sovereign
decisions about its own tax system, so it is impossible for the U.S. to level all
playing fields simultaneously for each of the different forms competition might take
in every country.
.
The question we must answer is what should we do to increase the
competitiveness of U.S. businesses and workers. Professor Michael Graetz
observed in his book, The Decline (and Fall?) of the Income Tax:
The internationalization of the world economy has made it far more difficult for the
United States, or any other country for that matter, to enact a tax system radically
different from those in place elsewhere in the world. In today's worldwide economy,
we can no longer look solely to our own navels to answer questions of tax policy.
http://www.treas.gov/pre~~/releaws!p.o3691.htm
12/23/2002
PO-3691: Pam Olson Assistant Secretary for Tax Policy Before the IRS/George Washingt... Page 3 of 5
To date, our attempts to address one of the perceived competitive disadvantages
created by our laws have been repeatedly ruled inconsistent with the World Trade
Organization's rules. Earlier this year, a WTO appellate panel held that the
extraterritorial income exclusion regime of our tax law constituted a prohibited
export subsidy under the WTO rules. Just two years before, a WTO appellate
panel held that the foreign sales corporation provisions constituted a similar,
prohibited subsidy. President Bush has made clear that the U.S. must comply with
the WTO rulings. That result should be obvious because - let's face it - no one has
a greater stake In the WTO and in free trade than the US. Despite the WTO
decisions against our foreign sales corporation and extraterritorial income regimes,
the WTO rules serve the economic interests of American businesses and workers
by opening markets and ensuring fair play.
In addition to making clear that the U.S. must comply, the President made two
further decisions. He said that any response to the ruling must increase the
competitiveness of U.S. businesses. He also pledged to work with the Congress to
create the solution. Treasury is working closely with the tax-writing committees of
Congress to develop legislation that makes meaningful changes to our tax law to
satisfy the twin goals of honoring our WTO obligations and preserving the
competitiveness of U.S. businesses operating in the global marketplace.
We must consider the ways in which our tax system differs from that of our major
trading partners to identify aspects that may hinder the competitiveness of U.S.
companies and workers. About half of the OECD countries employ a worldwide tax
system as does the U.S. However, even limiting comparison of competition among
multinational companies established in countries uSing a worldwide tax system,
U.S. multinationals can be disadvantaged when competing abroad. This is
because the United States employs a worldwide tax system that. unlike other
worldwide systems, may tax active forms of business income earned abroad before
It has been repatriated and may more strictly limit the use of the foreign tax credits
that prevent double taxation of income earned abroad.
The Accelerator-Subpart F. The focus of the subpart F rules is on passive,
investment-type income that is earned abroad through a foreign subsidiary
However, the reach of the subpart F rules extends well beyond passive income to
encompass some forms of income from active foreign business operations. No
other country has rules for the immediate taxation of foreign-source income that are
comparable to the U.S. rules in terms of breadth and complexity.
For example, under subpart F, a US company that uses a centralized foreign
distribution company to handle sales of its products in foreign markets is subject to
current U.S. tax on the Income earned abroad by that foreign distribution
subsidiary In contrast, a local competitor making sales in that market is subject
only to the tax imposed by that country. Similarly, a foreign competitor that uses a
centralized distribution company to make sales into the same markets generally will
be subject only to the tax imposed by the local country. U.S. companies that
centralize their foreign distribution facilities therefore face a tax penalty not imposed
on their foreign competitors.
The subpart F rules also impose current U.S. taxation on income from certain
services transactions, shipping activities and oil related activities performed
abroad. In contrast, a foreign competitor engaged in the same activities generally
will not be subject to current home-country tax on its Income from these activities.
While the purpose of these rules is to differentiate passive or mobile income from
active business income, they operate to currently tax some classes of income
arising from active business operations structured and located in a particular
country for business reasons wholly unrelated to tax considerations.
Limitations on Foreign Tax Credits. The rules for determining and applying the
foreign tax credit are detailed and complex and can have the effect of subjecting
U.S.-based companies to double taxation on their income earned abroad. For
example, the foreign tax credit may be used only to offset U.S. tax on net foreignsource income and not to offset U.S. tax on U.S.-source income. Net foreignsource income is determined by reducing foreign-source income by U.S. expenses
allocated to such income. Under the current rules, the interest expense of a U.S.
http://www.trcas.gov!prc33/release&lpo3691.htm
12/23/2002
PO-3691: Pam Olson Assistant Secretary for Tax Policy Before the IRS/George Washingt... Page 4 of 5
affiliated group is allocated between U.S. and foreign-source income based on tile
group's total U.S. and foreign assets. These rules treat the interest expense of a
U.S. parent as relating to its foreign subsidiaries even where those subsidiaries are
equally or more leveraged than the U.S. parent. This over-allocation of interest
expense to foreign income inappropriately reduces the foreign tax credit limitation
because it understates foreign income The effect can be to subject U.S.
companies to double taxation. Other countries do not have expense allocation
rules that are nearly as extensive as ours.
The U.S. foreign tax credit rules are further complicated by the need to calculate
foreign and domestic source income, allocable expenses, and foreign tax credits
separately for different categories or "baskets" of income. Foreign taxes paid with
respect to income in a particular category may be used only to offset the U.S. tax
on income from that same category.
Under the current U.S. rules, if a U.S. company has an overall foreign loss in a
particular taxable year, that loss reduces the company's total income and therefore
reduces its u.s. tax liability for the year. Special overall foreign loss rules apply to
recharacterize foreign-source income earned in subsequent years as U.S-source
income until the entire overall foreign loss from the prior year is recaptured. This
recharacterization has the effect of limiting the U.S. company's ability to claim
foreign tax credits in those subsequent years. No comparable recharacterization
rules apply in the case of an overall domestic loss. However, a net loss in the U.S.
would offset income earned from foreign operations, income on which foreign taxes
have been paid. The net U.S. loss thus would reduce the US company's ability to
claim foreign tax credits for those foreign taxes paid. This gives rise to the potential
for double taxation when the U.S. company's business cycle for its U.S. operations
does not match the business cycle for its foreign operations.
Double Tax on Equity-Financed Investments. The U.S. is one of the few OEeD
countries that does not provide for some form of integration between taxes paid at
the corporate level and taxes paid by individuals on distributions from corporations.
Under U.S. law, $100 of corporate profits is first taxed at a 35% corporate tax rate.
The remaining $65 is then available for distribution to shareholders or for
reinvestment. If distributed to shareholders, it is subject to tax at the shareholders
tax rate - ranging from 0% for investments in qualified pension savings to 38.6% at
the top individual rate. If dividend tax rates paid by individuals average 25%, then
only 75% of the $65 distribution is left after individual taxes are paid, or less than
$50 of the original $100 in corporate profit.
The present U.S. system, by taxing income at the corporate level and dividends at
the individual level, increases the hurdle rate of return (i.e., the minimum rate of
return required on a prospective investment) undertaken by corporations. Whether
competing at home against foreign imports or competing abroad through exports
from the U.S. or through foreign production, the double tax makes It less likely that
the U.S. company can compete successfully against a foreign competitor. Most
OEeD countries alleviate this problem by reducing personal income tax payments
on corporate distributions.
Time for reform. We have a tax code that has not kept pace with the globalization
that has transpired over the last 40 years. It is time for us to review our rules based
on the world in which we live today and the world we imagine for the future.
We must design rules that equip us to compete In the global economy - not
fearfully, but hopefully The fact of the matter is that we - all of us - benefit
significantly from vigorous participation in the global economy.
Over the past 20 years, U.S. companies that invest abroad exported more
(exporting between one-half and three-quarters of all U.S. exports), paid their
workers more, and spent more on R&D and physical capital than companies not
engaged globally.
While 80 percent of U.S. investment abroad is located in high-income countries, it is
http://www.trc:as.guv/prcss/rclcu3es/p03691.htm
12/23/2002
PO-3691: Pam Olson Assistant Secretary for Tax Policy Before the IRS/George Washingt... Page 5 of 5
useful to say a word about the investment that goes into developing countries.
These countries recognize U.S. investment as Important to achieving sustainable
poverty-reducing growth and development. I'm asking you to look at this
altruistically, but if you can't, then look at it selfishly. Poker games are revenue
neutral, but international trade and Investment are not poker games. Healthy
foreign economies mean more markets for our products. They mean more
opportunities for us to profitably invest. But, I have to return the altruistic point.
Foreign investment means sharing our ideas, our knowledge, our values, and our
capital. That is not a zero sum game. I hope you will engage with us in a
discussion of what the future might bring.
IRS Voluntary Disclosure Practice
Before I conclude, I would like to briefly mention the IRS announcement this week
that it has revised and updated a key practice that assists agency investigators in
determining whether a case IS recommended for criminal prosecution. A taxpayer's
timely, voluntary disclosure of a substantial unreported tax liability has long been an
important factor in deciding whether the taxpayer's case should ultimately be
referred for criminal prosecution. The IRS has modernized this practice to allow
more taxpayers to voluntarily comply with their obligations and to reduce the
uncertainty over what constitutes a "timely" disclosure. This is an important step in
helping taxpayers and their advisers understand the steps they can take and the
circumstances in which they can get back into compliance with the tax laws without
fear of prosecution. With these practices in place, we hope that more taxpayers will
do the right thing and voluntarily disclose their outstanding tax liabilities.
PubliC dialogue
Let me close by noting that we are committed to a better and more open dialogue
with the public. The discussion we are having on international tax reform is one
illustration of that dialogue. The recent release of our promised quarterly update of
the business plan which reflects our continued conversation with you about the
issues we need to address is another illustration. Still another illustration is the
issuance in proposed form of section 302, consolidated return, and tax shelter
regulations. All of these are the opening in a dialogue with the public about what the
rules should be. We will work diligently to propose sound rules and to do so rapidly
enough to meet your needs.
Unfortunately, no immortals have yet been hired to work at IRS or Treasury. We're
all human. We will make mistakes. We will also have differences of opinion from
time to time. But have no doubt about it. While we much appreciate your praise, we
especially value your criticism. It helps us stay on track.
Thank you.
http://www.treds.guv/jJless/rclcD3c3/po3691.htm
12/23/2002
PO-3692: Secrdary O'Neill Annollnces Davis' Plans to Leave Treasury
Page 1 of 1
f-'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 13, 2002
PO-3692
SECRETARY O'NEILL ANNOUNCES DAVIS' PLANS TO LEAVE TREASURY
The Treasury Department today announced that Michele Davis, Assistant Secretary
of the Treasury for Public Affairs, will leave government service at the end of the
year.
DavIs plans to JOin Fannie Mae, as Vice President for Regulatory Policy.
"Michele has done an outstanding job communicaling President Bush's efforts to
keep America's economy strong and to spread prospenty around the world," said
Treasury Secretary Paul O'Neill.
Davis played an essential role at the Treasury Department over the last two years.
She led the Department's efforts to inform the nation of the benefits of President
Bush's tax relief program, the state of the government's finances, the need for
better results from international development assistance and the Secretary's
understanding of the American economy. Davis' tenure at Treasury included
tumultuous times for the nation, and she worked to ensure that the Treasury's
actions in the wake of September 11 were well understood - from implementation
of the PATRIOT act to improvements in border security to the opening of the
financial front in the war on terrorism.
"Michele brought Invaluable experience to her position and with that background
and perspective, she played an important role in shaping many of the public policy
debates within the Administration and on Capitol Hill," O'Neill concluded.
http://www.treas.gov/prcss/rcleases/po3692.htm
12123/2002
PO-3693: Treasury Department Statement Naming Nichols Acting Assistant Secretary for... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
December 13, 2002
PO-3693
TREASURY DEPARTMENT STATEMENT NAMING NICHOLS
ACTING ASSISTANT SECRETARY FOR PUBLIC AFFAIRS
The White House has asked Rob Nichols to serve as Acting Assistant Secretary for
Public Affairs until the President makes a decision on a permanent replacement.
http://www.trt.fts.gov/prc33/releases/p03693.htm
12/2312002
PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
December 16, 2002
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
December 19, 2002
March 20, 2003
912795MDO
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.200%
High Rate:
Investment Rate 11:
Price:
1. 219%
99.697
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 92.68%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
33,989,343
1,408,080
150,000
$
5,064,079
5,064,079
Federal Reserve
$
40,611,502
12,441,961
1,408,080
150,000
14,000,041 21
35,547,423
SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
$
19,064,120
Median rate
1.190%: 50% of the amount of accepted competitive tenders
.as tendered at or below that rate.
Low rate
1.175%:
5% of the amount
)f accepted competitive tenders was tendered at or below that rate.
3id-to-Cover Ratio = 35,547,423 I 14,000,041 = 2.54
~I Equivalent coupon-issue yield.
!/ Awards to TREASURY DIRECT = $1,143,464,000
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
FOR IMMEDIATE RELEASE
Decembe r 16, 2002
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
December 19, 2002
June 19, 2003
912795MS7
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.260%
High Rate:
Investment Rate 1/:
Price:
1.286%
99.363
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 41.83%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
33,621,125
1,053,731
50,000
$
5,910,919
5,910,919
Federal Reserve
$
40,635,775
14,896,489
1,053,731
50,000
16,000,220 2/
34,724,856
SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
$
21,911,139
Median rate
1.245%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.200%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,724,856 / 16,000,220 = 2.17
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $839,443,000
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550
CONTACT:
FOR IMMEDIATE RELEASE
December 16{ 2002
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
December 19{ 2002
March 20, 2003
912795MDO
Term:
Issue Date:
Maturity Date:
CUSIP Number:
l.200%
High Rate:
Investment Rate 1/:
Price:
l.219%
99.697
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 92.68%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
33{989{343
1{408,080
150{000
$
14,000,041 2/
35,547,423
SUBTOTAL
TOTAL
5{064{079
5,064,079
Federal Reserve
$
40{611{502
12{441{961
1,408,080
150{000
$
19{064{120
Median rate
1.190%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.175%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
35{547{423 / 14,000,041
=
2.54
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1{143,464,OOO
http://www.publicdebt.treas.gov
DEPARTl\fENT
OF
THE
TREASURY ,{~;~
-:-,,~~.!"/
NEW S
····i.;-"-"~_
EMBARGOED UNTIL 11:00 A.M.
December 16, 2002
TREASURY
_ _ _ _ _ _ _ _•
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $16,000 million to
refund an estimated $20,000 million of publicly held 4-week Treasury bills maturing
December 19, 2002, and to pay down approximately $4,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,582 million of the Treasury bills maturing
on December 19, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions.
Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
A bidder must report its net long position if, in the
the bidder's net long position plus its bids in the auction
dollar-amount threshold.
That threshold amount, equivalent
amount of the security, will be stated in the highlights of
announcement.
security being auctioned,
meet or exceed a specific
to 35% of the offering
the security's auction
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
000
Attachment
For press releases, speeches, public schedules alld official biographies, call our 24-hour fax lille at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED DECEMBER 19, 2002
December 16, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) ...
Maximum Recognized Bid at a Single Rate ..
NLP Reporting Threshold . . . . . . . . . . . . . . . . . .
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . .
$16,000
$ 5,600
$ 5,600
$ 5,600
$11,300
million
million
million
million
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 and multiples .........
28-day bill
912795 LU 3
December 17, 2002
December 19, 2002
January 16, 2003
July 18, 2002
$43,961 million
$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.
PO-3698: Treasury Issues Final Regulation Regarding Third-Party Contacts
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or pnnt the PDF content on /IllS page, download the free ,..1, II '/"
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December 17, 2002
PO-369B
TREASURY ISSUES FINAL REGULATIONS REGARDING
THIRD-PARTY CONTACTS
Today the Treasury Department issued final regulations regarding the requirement
in section 7602(c) that the IRS notify a taxpayer both before the IRS contacts third
parties in connection with an examination or collection of the taxpayer's tax liability
and after such third-party contacts are made (i,e" a report generally containing the
names of the persons actually contacted by the IRS),
"The final regulations clarify the rules under which the IRS will notify taxpayers of
third-party contacts," stated Treasury Assistant Secretary for Tax Policy Pam Olson,
This requirement, enacted as part of RRA 1998, is intended to help protect a
taxpayer's reputation and business interests by giving the taxpayer notice that third
parties might be contacted, At the same time, Congress recognized the privacy
interests of third parties and the IRS' responsibility to administer the internal
revenue laws effectively, The final regulations balance these important
considerations,
Related Documents:
•
The Text of the Final Regulations
http://www.tre3s.gov/pre66Irelease~/p()3698.htm
12/23/2002
[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG-104906-99]
RIN 1545-AX04
Third Party Contacts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations providing guidance on third-party
contacts made with respect to the determination or collection of tax liabilities. The
regulations reflect changes to section 7602 of the Internal Revenue Code made by section
3417 of the Internal Revenue Service Restructuring and Reform Act of 1998. The
regulations potentially affect all taxpayers whose Federal tax liabilities are being
determined or collected by the IRS.
DATES:
Effective Dates: These regulations are effective on [the date final regulations are
published in the Federal Register].
Applicability Dates: For the date of applicability, see section 301.7602-2(g).
FOR FURTHER INFORMATION CONTACT: Robert A. Miller, 202-622-3630 (not a toll-free
number).
-2SUPPLEMENTARY INFORMATION:
Background
Section 3417 of the IRS Restructuring and Reform Act of 1998 (RRA 1998), PUb. L.
No. 105-206 (112 Stat. 685), amended section 7602 by adding section 7602(c). This
provision prohibits IRS officers and employees from contacting any person, other than the
taxpayer, with respect to the determination or collection of the taxpayer's liability without
giving the taxpayer reasonable advance notice that contacts with persons other than the
taxpayer may be made.
On January 2,2001, the IRS published in the Federal Register a notice of proposed
rulemaking (66 FR 32479) to interpret and implement LR.e. § 7602(c). Two written
comments were received but a public hearing was not held. The proposed regulations, as
revised by this Treasury decision, are substantially adopted.
As described more fully in the preamble to the proposed regulations, the final
regulations balance a taxpayer's business and reputational interests with third parties'
privacy interests and the IRS' responsibility to administer the internal revenue laws
effectively. By providing general pre-contact notice followed by post-contact identification,
these final regulations enable a taxpayer to come forward with information required by the
IRS before third parties are contacted. The taxpayer's business and reputational interests
therefore can be addressed without impeding the IRS' ability to make those third-party
contacts that are necessary to administer the internal revenue laws.
-3These final regulations do not finalize the provisions in the proposed regulations
regarding periodic reports. Subsequent to the issuance of the proposed regulations, the
IRS determined that the issuance of periodic reports may result in harm to third parties
and, accordingly, has determined that periodic reports should not be issued. Taxpayers
will continue to receive pre-contact notice and may specifically request from the IRS reports
of persons contacted.
Comments on the Proposed Regulations
Section 301.7602-2(e)(3)(ii)-Post Contact Reports-The proposed regulations
provided that for contacts with the employees, officers, or fiduciaries of any entity who are
acting within the scope of their employment or relationship, it is sufficient to record the
entity as the person contacted.
One commentator noted that there may be situations where the name of a specific
employee of a business should be recorded and made available to the taxpayer. The
commentator suggests adopting a "safe harbor" rule that requires that the name of the
party contacted be recorded whenever there is any doubt about how the contact should be
recorded. The commentator stated that whenever an employee of a business is contacted
due to his or her personal knowledge or business relationship with the taxpayer, the name
of the specific employee contacted should be recorded in the contact record rather than (or
in addition to) the name of the business entity.
This comment has not been adopted in the final regulations. The final regulations
do not prevent IRS employees from providing more than the name of the entity in the record
of contact when an employee of a business is contacted. Because the information being
-4sought typically is that of the entity, and not of any specific employee outside of their
capacity as an employee, requiring the identification of the specific employees contacted
is not required to provide notice to the taxpayer of the contact made and may impede the
IRS' ability to obtain information from the entity.
Section 301.7602-2(f)(3)-Reprisal Exception-The proposed regulations provided
that a statement by the person contacted that harm may occur is good cause for the IRS to
believe that reprisal may occur. Such contacts are not reported by the IRS to the taxpayer.
One commentator asserted that the proposed regulations are inconsistent with the
statute's origin and purpose because the proposed regulations (i) subordinate the rights
given to taxpayers to the rights of third parties and the IRS; (ii) provide an insufficient
threshold for determining whether good cause exists to conclude that reprisal may occur;
(iii) permit a third party to express concerns that providing notice to the taxpayer may result
in reprisal against another person; (iv) permit the IRS to make a reprisal determination
based upon information obtained from any source; and (v) permit the IRS to make a
reprisal determination without peer or supervisory review. In brief, the commentator argued
that the scope of what would be considered reprisal is too broad and that the determination
of when reprisal would be considered to exist is too lenient. The commentator claimed that
the adoption of the proposed regulations would render the requirement in section 7602(c)
to provide taxpayers with a record of persons contacted a nullity.
The Treasury Department and the IRS do not agree that the proposed regulations
are either too broad with respect to what will be considered reprisal or too permissive with
respect to the determination of whether the potential for reprisal exists. As a general
-5matter, by including a reprisal exception to the notice requirements of section 7602(c),
Congress recognized that the rights of taxpayers to receive notice of third-party contacts
must be balanced with the rights of third parties to be free from adverse consequences that
may result from the IRS providing such notice. The reprisal exception reflects Congress'
determination that a taxpayer's right to know whom the IRS has contacted is outweighed by
a third party's right to be free from any reprisal. Moreover, since the statute's effective
date, the IRS has been operating under reprisal procedures consistent with the proposed
regulations. Based upon the small number of reprisal concerns expressed to date, the
Treasury Department and the IRS believe that the final regulations, which make no change
to the proposed regulations with respect to this issue, appropriately balance the competing
interests reflected in the statute and will not render section 7602(c)(2) a nUllity.
More specifically, the Treasury Department and the IRS believe that a third party is
in the best position to evaluate its relationship with a taxpayer and the potential for reprisal
if a contact with that third party is reported by the IRS to the taxpayer. Requiring the IRS to
investigate each claim of potential reprisal, including supervisory review of a reprisal
determination, would place a heavy administrative burden on the IRS and, more
importantly, would intrude into the third party's affairs and require IRS employees to make
judgments that they are not well positioned to make. For these reasons, the final
regulations do not adopt the "probable cause" standard suggested by the commentator. In
addition, the rights provided to a taxpayer under section 7602(c) (i.e., prior notice that
contacts with third parties may be made and a record of persons contacted) cannot be
-6equated with a person's Fourth Amendment right to be free from unreasonable searches
and seizures.
In addition, the statute clearly contemplates that the reprisal exception is not limited
to concerns of reprisal against the third party contacted. The reprisal exception applies
when providing notice to the taxpayer "may involve reprisal against any person." I.R.C.
§ 7602(c)(3)(8) (emphasis added). The statutory exception also does not restrict the
source of information that can be used in making a reprisal determination. In certain
cases, an IRS employee may be in possession of information that is unknown to the third
party contacted but which suggests that reprisal may occur against another person if the
contact with the third party is reported to the taxpayer.
Finally, limiting the reprisal exception to physical harm would be inconsistent with
the statute and Congress' clear concern that third parties be free from adverse
consequences as a result of being contacted by the IRS regarding a taxpayer's liability.
Congress did not define or limit the kind of reprisal situations with which it was concerned.
Excluding economic, emotional, or other types of harm would significantly diminish the
third-party protections provided by the reprisal exception.
Modifications of Proposed Regulations
Section 301.7602-2(c)(1 )(i)-The proposed regulations stated that for purposes of
section 7602(c), an IRS employee includes, inter alia, a person who, through a written
agreement with the IRS, is subject to disclosure restrictions consistent with section 6103.
The final regulations provide that an IRS employee includes a person described in section
6103(n), an officer or employee of such person, and a person who is subject to disclosure
-7restrictions pursuant to a written agreement in connection with the solicitation of an
agreement described in section 6103(n) and its implementing regulations. This change
was made to provide a legally precise statement of the rule and to clarify that persons who
provide tax administration services to the IRS and who enter into nondisclosure
agreements with the IRS, as well as prospective bidders who enter into nondisclosure
agreements, are treated as IRS employees for purposes of section 7602(c).
Section 301.7602-2(c)(1 Wi) Example 3-The regulations provide that returning
unsolicited telephone calls or speaking with persons other than the taxpayer as part of an
attempt to speak to the taxpayer are not initiations of third-party contacts. This provision is
illustrated by Example 3, where a revenue agent trying to contact the taxpayer to discuss
the taxpayer's pending examination twice calls the taxpayer's place of business. The first
call is answered by a receptionist, and the second call is answered by the office answering
machine. The example in the regulations states that in both situations the employee leaves
a message "stating only his name, telephone number, that he is with the IRS, and asks that
the taxpayer call him." The phrase "that he is with the IRS" has been deleted from the
example in the final regulations because there may be situations where it would be
inappropriate for an IRS employee to identify his or her employer in a telephone
conversation or message that can be seen or heard by persons other than the taxpayer.
See l.R.e. § 6304(b)(4).
Section 301.7602-2(c)(3)(ii}--The final regulations add Examples 6(a) and 6(b) to
illustrate the application of the third-party contact rules to audits of TEFRA partnerships.
another statute, regulation or administrative procedure. The proposed regulations provide
Section 30
-8that the Collection Due Process (COP) notice furnished under section 6330 and its
regulations is an example of a situation where the pre-contact notice requirement is fulfilled
by another notice. The final regulations modify the proposed regulations to clarify that COP
notices sent to taxpayers pursuant to section 6330 and its regulations constitute
reasonable advance notice that contacts with third parties may be made for purposes of
effectuating a levy.
Section 301.7602-2(f)(7)-The final regulations add examples to illustrate the
application of the nonadministrative contacts exception.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. Likewise, section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter
5) does not apply to this regulation, and because the regulations do not impose a collection
of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking was submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Charles B. Christopher of the Office of
Associate Chief Counsel, Procedure & Administration (Collection, Bankruptcy &
Summonses Division).
List of Subjects in 26 CFR Part 301
-9Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties,
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURES AND ADMINISTRATION
Par. 1. The authority citation for part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7602-2 is added to read as follows:
§301.7602-2 Third party contacts.
(a) In general. Subject to the exceptions in paragraph (f) of this section, no officer or
employee of the Internal Revenue Service may contact any person other than the taxpayer
with respect to the determination or collection of such taxpayer's tax liability without giving
the taxpayer reasonable notice in advance that such contacts may be made. A record of
persons so contacted must be made and given to the taxpayer upon the taxpayer's
request.
(b) Third-party contact defined. Contacts subject to section 7602(c) and this
regulation shall be called "third-party contacts." A third-party contact is a communication
which-(1) Is initiated by an IRS employee;
(2) Is made to a person other than the taxpayer;
(3) Is made with respect to the determination or collection of the tax liability of such
taxpayer;
-10(4) Discloses the identity of the taxpayer being investigated; and
(5) Discloses the association of the IRS employee with the IRS.
(c) Elements of third-party contact explained. (1) Initiation by an IRS employee-- (i)
Explanation. (A) Initiation. An IRS employee initiates a communication whenever it is the
employee who first tries to communicate with a person other than the taxpayer. Returning
unsolicited telephone calls or speaking with persons other than the taxpayer as part of an
attempt to speak to the taxpayer are not initiations of third-party contacts.
(8) IRS employee. For purposes of this section, an IRS employee includes all
officers and employees of the IRS, the Chief Counsel of the IRS and the National Taxpayer
Advocate, as well as a person described in section 61 03(n), an officer or employee of such
person, or a person who is subject to disclosure restrictions pursuant to a written
agreement in connection with the solicitation of an agreement described in section 6103(n)
and its implementing regulations. No inference about the employment or contractual
relationship of such other persons with the IRS may be drawn from this regulation for any
purpose other than the requirements of section 7602(c).
(ii) Examples. The following examples illustrate this paragraph (c)(1):
Example 1. An IRS employee receives a message to return an unsolicited call. The
employee returns the call and speaks with a person who reports information about a
taxpayer who is not meeting his tax responsibilities. Later, the employee makes a second
call to the person and asks for more information. The first call is not a contact initiated by
an IRS employee. Just because the employee must return the call does not change the fact
that it is the other person, and not the employee, who initiated the contact. The second call,
however, is initiated by the employee and so meets the first element.
Example 2. An IRS employee wants to hire an appraiser to help determine the
value of a taxpayer's oil and gas business. At the initial interview, the appraiser signs an
agreement that prohibits him from disclosing return information of the taxpayer except as
-11allowed by the agreement. Once hired, the appraiser initiates a contact by calling an
industry expert in Houston and discusses the taxpayer's business. The IRS employee's
contact with the appraiser does not meet the first element of a third-party contact because
the appraiser is treated, for section 7602(c) purposes only, as an employee of the IRS. For
the same reason, however, the appraiser's call to the industry expert does meet the first
element of a third-party contact.
Example 3. A revenue agent trying to contact the taxpayer to discuss the taxpayer's
pending examination twice calls the taxpayer's place of business. The first call is
answered by a receptionist who states that the taxpayer is not available. The IRS
employee leaves a message with the receptionist stating only his name and telephone
number, and asks that the taxpayer call him. The second call is answered by the office
answering machine, on which the IRS employee leaves the same message. Neither of
these phone calls meets the first element of a third-party contact because the IRS
employee is trying to initiate a communication with the taxpayer and not a person other
than the taxpayer. The fact that the IRS employee must either speak with a third party (the
receptionist) or leave a message on the answering machine, which may be heard by a third
party, does not mean that the employee is initiating a communication with a person other
than the taxpayer. Both the receptionist and the answering machine are only
intermediaries in the process of reaching the taxpayer.
(2) Person other than the taxpayer--(i) Explanation. The phrases "person other than
the taxpayer" and "third party" are used interchangeably in this section, and do not include-(A) An officer or employee of the IRS, as defined in paragraph (c)(1 )(i)(B) of this
section, acting within the scope of his or her employment;
(B) Any computer database or web site regardless of where located and by whom
maintained, including databases or web sites maintained on the Internet or in county
courthouses, libraries, or any other real or virtual site; or
(C) A current employee, officer, or fiduciary of a taxpayer when acting within the
scope of his or her employment or relationship with the taxpayer. Such employee, officer,
or fiduciary shall be conclusively presumed to be acting within the scope of his or her
employment or relationship during business hours on business premises.
-12(ii) Examples: The following examples illustrate this paragraph (c)(2):
Example 1. A revenue agent examining a taxpayer's return speaks with another
revenue agent who has previously examined the same taxpayer about a recurring issue.
The revenue agent has not contacted a "person other than the taxpayer" within the meaning
of section 7602(c).
Example 2. A revenue agent examining a taxpayer's return speaks with one of the
taxpayer's employees on business premises during business hours. The employee is
conclusively presumed to be acting within the scope of his employment and is therefore not
a "person other than the taxpayer" for section 7602(c) purposes.
Example 3. A revenue agent examining a corporate taxpayer's return uses a
commercial online research seNice to research the corporate structure of the taxpayer.
The revenue agent uses an IRS account, logs on with her IRS user name and password,
and uses the name of the corporate taxpayer in her search terms. The revenue agent later
explores several Internet web sites that may have information relevant to the examination.
The searches on the commercial online research seNice and Internet web sites are not
contacts with "persons other tha n the taxpayer."
(3) With respect to the determination or collection of the tax liability of such taxpayer-(i) Explanation. (A) With respect to. A contact is "with respect to" the determination or
collection of the tax liability of such taxpayer when made for the purpose of either
determining or collecting a particular tax liability and when directly connected to that
purpose. While a contact made for the purpose of determining a particular taxpayer's tax
liability may also affect the tax liability of one or more other taxpayers, such contact is not
for that reason alone a contact "with respect to" the determination or collection of those
other taxpayers' tax liabilities. Contacts to determine the tax status of a pension plan under
Chapter 1, Subchapter D (Deferred Compensation), are not "with respect to" the
determination of plan participants' tax liabilities. Contacts to determine the tax status of a
bond issue under Chapter 1, Subchapter B, Part IV (Tax Exemption Requirements for
State and Local Bonds), are not "with respect to" the determination of the bondholders' tax
-13liabilities. Contacts to determine the tax status of an organization under Chapter 1,
Subchapter F (Exempt Organizations), are not "with respect to" the determination of the
contributors' liabilities, nor are any similar determinations "with respect to" any persons
with similar relationships to the taxpayer whose tax liability is being determined or
collected.
(8) Determination or collection. A contact is with respect to the "determination or
collection" of the tax liability of such taxpayer when made during the administrative
determination or collection process. For purposes of this paragraph (c) only, the
administrative determination or collection process may include any administrative action to
ascertain the correctness of a return, make a return when none has been filed, or
determine or collect the tax liability of any person as a transferee or fiduciary under Chapter
71 of title 26.
(C) Tax liability. A "tax liability" means the liability for any tax imposed by Title 26 of
the United States Code (including any interest, additional amount, addition to the tax, or
penalty) and does not include the liability for any tax imposed by any other jurisdiction nor
any liability imposed by other federal statutes.
(0) Such taxpayer. A contact is with respect to the determination or collection of the
tax liability of "such taxpayer" when made while determining or collecting the tax liability of a
particular, identified taxpayer. Contacts made during an investigation of a particular,
identified taxpayer are third-party contacts only as to the particular, identified taxpayer
under investigation and not as to any other taxpayer whose tax liabilities might be affected
by such contacts.
-14(ii) Examples. The following examples illustrate the operation of this paragraph
(c)(3):
Example 1. As part of a compliance check on a return preparer, an IRS employee
visits the preparer's office and reviews the preparer's client files to ensure that the proper
forms and records have been created and maintained. This contact is not a third-party
contact "with respect to" the preparer's clients because it is not for the purpose of
determining the tax liability of the preparer's clients, even though the agent might discover
information that would lead the agent to recommend an examination of one or more of the
preparer's clients.
Example 2. A revenue agent is assigned to examine a taxpayer's return, which was
prepared by a return preparer. As in all such examinations, the revenue agent asks the
taxpayer routine questions about what information the taxpayer gave the preparer and what
advice the preparer gave the taxpayer. As a result of the examination, the revenue agent
recommends that the preparer be investigated for penalties under section 6694 or 6695.
Neither the examination of the taxpayer's return nor the questions asked of the taxpayer are
"with respect to" the determination of the preparer's tax liabilities within the meaning of
section 7602(c} because the purpose of the contacts was to determine the taxpayer's tax
liability, even though the agent discovered information that may result in a later
investigation of the preparer.
Example 3. To help identify taxpayers in the florist industry who may not have filed
proper returns, an IRS employee contacts a company that supplies equipment to florists
and asks for a list of its customers in the past year in order to cross-check the list against
filed returns. The employee later contacts the supplier for more information about one
particular florist who the employee believes did not file a proper return. The first contact is
not a contact with respect to the determination of the tax liability of "such taxpayer" because
no particular taxpayer has been identified for investigation at the time the contact is made.
The later contact, however, is with respect to the determination of the tax liability of "such
taxpayer" because a particular taxpayer has been identified. The later contact is also "with
respect to" the determination of that taxpayer's liability because, even though no
examination has been opened on the taxpayer, the information sought could lead to an
examination.
Example 4. A revenue officer, trying to collect the trust fund portion of unpaid
employment taxes of a corporation, begins to investigate the liability of two corporate
officers for the section 6672 Trust Fund Recovery Penalty (TFRP). The revenue officer
obtains the signature cards for the corporation's bank accounts from the corporation's
bank. The contact with the bank to obtain the signature cards is a contact with respect to
the determination of the two identified corporate officers' tax liabilities because it is directly
connected to the purpose of determining a tax liability of two identified taxpayers. It is not,
-15however, a contact with respect to any other person not already under investigation for
TFRP liability, even though the signature cards might identify other potentially liable
persons.
Example 5. The IRS is asked to rule on whether a certain pension plan qualifies
under section 401 so that contributions to the pension plan are excludable from the
employees' incomes under section 402 and are also deductible from the employer's
income under section 404. Contacts made with the plan sponsor (and with persons other
than the plan sponsor) are not contacts "with respect to" the determination of the tax
liabilities of the pension plan participants because the purpose of the contacts is to
determine the status of the plan, even though that determination may affect the participants'
tax liabilities.
Example 6(a). The IRS audits a TEFRA partnership at the partnership (entity) level
pursuant to sections 6221 through 6233. The tax treatment of partnership items is at issue,
but the respective tax liabilities of the partners may be affected by the results of the TEFRA
partnership audit. With respect to the TEFRA partnership, contacts made with employees
of the partnership acting within the scope of their duties or any partner are not section
7602(c) contacts because they are considered the equivalent of contacting the partnership.
Contacts relating to the tax treatment of partnership items made with persons other than
the employees of the partnership who are acting within the scope of their duties or the
partners are section 7602(c) contacts with respect to the TEFRA partnership, and
reasonable advance notice should be provided by sending the appropriate Letter 3164 to
the partnership's tax matters partner (TMP). Individual partners who are merely affected by
the partnership audit but who are not identified as subject to examination with respect to
their individual tax liabilities need not be sent Letters 3164.
Example 6(b). In the course of an audit of a TEFRA partnership at the partnership
(entity) level, the IRS intends to contact third parties regarding transactions between the
TEFRA partnership and specific, identified partners. In addition to the partnership's TMP,
the specific, identified partners should also be provided advance notice of any third-party
contacts relating to such transactions.
(4) Discloses the identity of the taxpayer being investigated--(i) Explanation. An IRS
employee discloses the taxpayer's identity whenever the employee knows or should know
-16that the person being contacted can readily ascertain the taxpayer's identity from the
information given by the employee.
(ii) Examples. The following examples illustrate this paragraph (c}(4):
Example 1. A revenue agent seeking to value the taxpayer's condominium calls a
real estate agent and asks for a market analysis of the taxpayer's condominium, giving the
unit number of the taxpayer's condominium. The revenue agent has revealed the identity of
the taxpayer, regardless of whether the revenue agent discloses the name of the taxpayer,
because the real estate agent can readily ascertain the taxpayer's identity from the
address given.
Example 2. A revenue officer seeking to value the taxpayer's condominium calls a
real estate agent and, without identifying the taxpayer's unit, asks for the sales prices of
similar units recently sold and listing prices of similar units currently on the market. The
revenue officer has not revealed the identity of the taxpayer because the revenue officer
has not given any information from which the real estate agent can readily ascertain the
taxpayer's identity.
(5) Discloses the association of the IRS employee with the IRS. An IRS employee
discloses his association with the IRS whenever the employee knows or should know that
the person being contacted can readily ascertain the association from the information
given by the employee.
(d) Pre-contact notice--(1) In general. An officer or employee of the IRS may not
make third-party contacts without providing reasonable notice in advance to the taxpayer
that contacts may be made. The pre-contact notice may be given either orally or in writing.
If written notice is given, it may be given in any manner that the IRS employee responsible
for giving the notice reasonably believes will be received by the taxpayer in advance of the
third-party contact. Written notice is deemed reasonable if it is-(i) Mailed to the taxpayer's last known address;
(ii) Given in person;
-17(iii) Left at the taxpayer's dwelling or usual place of business; or
(iv) Actually received by the taxpayer.
(2) Pre-contact notice not required. Pre-contact notice under this section need not
be provided to a taxpayer for third-party contacts of which advance notice has otherwise
been provided to the taxpayer pursuant to another statute, regulation or administrative
procedure. For example, Collection Due Process notices sent to taxpayers pursuant to
section 6330 and its regulations constitute reasonable advance notice that contacts with
third parties may be made in order to effectuate a levy.
(e) Post-contact reports--(1) Requested reports. A taxpayer may request a record
of persons contacted in any manner that the Commissioner reasonably permits. The
Commissioner may set reasonable limits on how frequently taxpayer requests need be
honored. The requested report may be mailed either to the taxpayer's last known address
or such other address as the taxpayer specifies in the request.
(2) Contents of record--(i) In general. The record of persons contacted should
contain information, if known to the IRS employee making the contact, which reasonably
identifies the person contacted. Providing the name of the person contacted fully satisfies
the requirements of this section, but this section does not require IRS employees to solicit
identifying information from a person solely for the purpose of the post-contact report. The
record need not contain any other information, such as the nature of the inquiry or the
content of the third party's response. The record need not report multiple contacts made
with the same person during a reporting period.
-18(ii) Special rule for employees. For contacts with the employees, officers, or
fiduciaries of any entity who are acting within the scope of their employment or relationship,
it is sufficient to record the entity as the person contacted. A fiduciary, officer or employee
shall be conclusively presumed to be acting within the scope of his employment or
relationship during business hours on business premises. For purposes of this paragraph
(e)(2)(ii), the term "entity" means any business (whether operated as a sole proprietorship,
disregarded entity under section 301.7701-2 of the regulations, or otherwise), trust, estate,
partnership, association, company, corporation, or similar organization.
(3) Post-contact record not required. A post-contact record under this section need
not be made, or provided to a taxpayer, for third-party contacts of which the taxpayer has
already been given a similar record pursuant to another statute, regulation, or
administrative procedure.
(4) Examples. The following examples illustrate this paragraph (e):
Example 1. An IRS employee trying to find a specific taxpayer's assets in order to
collect unpaid taxes talks to the owner of a marina. The employee asks whether the
taxpayer has a boat at the marina. The owner gives his name as John Doe. The employee
may record the contact as being with John Doe and is not required by this regulation to
collect or record any other identifying information.
Example 2. An IRS employee trying to find a specific taxpayer and his assets in
order to collect unpaid taxes talks to a person at 502 Fernwood. The employee asks
whether the taxpayer lives next door at 500 Fernwood, as well as where the taxpayer
works, what kind of car the taxpayer drives and whether the camper parked in front of 500
Fernwood belongs to the taxpayer. The person does not disclose his name. The
employee may record the contact as being with a person at 502 Fernwood. If the
employee then makes the same inquiries of another person on the street in front of 500
Fernwood, and does not learn that person's name, the latter contact may be reported as
being with a person on the street in front of 500 Fernwood.
-19Example 3. An IRS employee examining a return obtains loan documents from a
bank where the taxpayer applied for a loan. After reviewing the documents, the employee
talks with the loan officer at the bank who handled the application. The employee has
contacted only one "person other than the taxpayer." The bank and not the loan officer is
the "person other than the taxpayer" for section 7602(c) purposes. The contact with the
loan officer is treated as a contact with the bank because the loan officer was an employee
of the bank and was acting within the scope of her employment with the bank.
Example 4. An IRS employee issues a summons to a third party with respect to the
determination of a taxpayer's liability and properly follows the procedures for such
summonses under section 7609, which requires that a copy of the summons be given to
the taxpayer. This third-party contact need not be maintained in a record of contacts
available to the taxpayer because providing a copy of the third-party summons to the
taxpayer pursuant to section 7609 satisfies the post-contact recording and reporting
requirement of this section.
Example 5. An IRS employee serves a levy on a third party with respect to the
collection of a taxpayer's liability. The employee provides the taxpayer with a copy of the
notice of levy form that shows the identity of the third party. This third-party contact need
not be maintained in a record of contacts available to the taxpayer because providing a
copy of the notice of levy to the taxpayer satisfies the post-contact recording and reporting
requirement of this section.
(f) Exceptions. (1) Authorized by taxpayer--(i) Explanation. Section 7602(c) does
not apply to contacts authorized by the taxpayer. A contact is "authorized" within the
meaning of this section if-(A) The contact is with the taxpayer's authorized representative, that is, a person
who is authorized to speak or act on behalf of the taxpayer, such as a person holding a
power of attorney, a corporate officer, a personal representative, an executor or executrix,
or an attorney representing the taxpayer; or
(8) The taxpayer or the taxpayer's authorized representative requests or approves
the contact.
-20(ii) No prevention or delay of contact. This section does not entitle any person to
prevent or delay an IRS employee from contacting any individual or entity.
(2) Jeopardy--(i) Explanation. Section 7602(c) does not apply when the IRS
employee making a contact has good cause to believe that providing the taxpayer with
either a general pre-contact notice or a record of the specific person contacted may
jeopardize the collection of any tax. For purposes of this section only, good cause includes
a reasonable belief that providing the notice or record will lead to-(A) Attempts by any person to conceal, remove, destroy, or alter records or assets
that may be relevant to any tax examination or collection activity;
(8) Attempts by any person to prevent other persons, through intimidation, bribery,
or collusion, from communicating any information that may be relevant to any tax
examination or collection activity; or
(C) Attempts by any person to flee, or otherwise avoid testifying or producing
records that may be relevant to any tax examination or collection activity.
(ii) Record of contact. If the circumstances described in this paragraph (f)(2) exist,
the IRS employee must still make a record of the person contacted, but the taxpayer need
not be provided the record until it is no longer reasonable to believe that providing the
record would cause the jeopardy described.
(3) Reprisal--(i) In general. Section 7602(c) does not apply when the IRS employee
making a contact has good cause to believe that providing the taxpayer with either a
general pre-contact notice or a specific record of the person being contacted may cause
any person to harm any other person in any way, whether the harm is physical, economic,
-21emotional or otherwise. A statement by the person contacted that harm may occur against
any person is sufficient to constitute good cause for the IRS employee to believe that
reprisal may occur. The IRS employee is not required to further question the contacted
person about reprisal or otherwise make further inquiries regarding the statement.
(ii) Examples. The following examples illustrate this paragraph (f)(3):
Example 1. An IRS employee seeking to collect unpaid taxes is told by the taxpayer
that all the money in his and his brother's joint bank account belongs to the brother. The
IRS employee contacts the brother to verify this information. The brother refuses to confirm
or deny the taxpayer's statement. He states that he does not believe that reporting the
contact to the taxpayer would result in harm to anyone but further states that he does not
want his name reported to the taxpayer because it would appear that he gave information.
This contact is not excepted from the statute merely because the brother asks that his
name be left off the list of contacts.
Example 2. Assume the same facts as in Example 1 , except that the brother states
that he fears harm from the taxpayer should the taxpayer learn of the contact, even though
the brother gave no information. This contact is excepted from the statute because the
third party has expressed a fear of reprisal. The IRS employee is not required to make
further inquiry into the nature of the brothers' relationship or otherwise question the
brother's fear of reprisal.
Example 3. An IRS employee is examining a joint return of a husband and wife, who
recently divorced. From reading the court divorce file, the IRS employee learns that the
divorce was acrimonious and that the ex-husband once violated a restraining order issued
to protect the ex-wife. This information provides good cause for the IRS employee to
believe that reporting contacts which might disclose the ex-wife's location may cause
reprisal against any person. Therefore, when the IRS employee contacts the ex-wife's new
employer to verify salary information provided by the ex-wife, the IRS employee has good
cause not to report that contact to the ex-husband, regardless of whether the new employer
expresses concern about reprisal against it or its employees.
(4) Pending criminal investigations--(i) IRS criminal investigations. Section 7602(c)
does not apply to contacts made during an investigation, or inquiry to determine whether to
open an investigation, when the investigation or inquiry is--
-22(A) Made against a particular, identified taxpayer for the primary purpose of
evaluating the potential for criminal prosecution of that taxpayer; and
(8) Made by an IRS employee whose primary duties include either identifying or
investigating criminal violations of the law.
(ii) Other criminal investigations. Section 7602(c) does not apply to contacts which,
if reported to the taxpayer, could interfere with a known pending criminal investigation
being conducted by law enforcement personnel of any local, state, federal, foreign or other
governmental entity.
(5) Govemmental entities. Section 7602(c) does not apply to any contact with any
office of any local, state, federal or foreign governmental entity except for contacts
concerning the taxpayer's business with the government office contacted, such as the
taxpayer's contracts with or employment by the office. The term "office" includes any agent
or contractor of the office acting in such capacity.
(6) Confidential informants. Section 7602(c) does not apply when the employee
making the contact has good cause to believe that providing either the pre-contact notice
or the record of the person contacted would identify a confidential informant whose identity
would be protected under section 6103(h)(4).
(7) Nonadministrative contacts--(i) Explanation. Section 7602(c) does not apply to
contacts made in the course of a pending court proceeding.
(ii) Examples. The following examples illustrate this paragraph (f)(7):
Example 1. An attorney for the Office of Chief Counsel needs to contact a potential
witness for an upcoming Tax Court proceeding involving the 1997 and 1998 taxable
-23years of the taxpayer. Section 7602(c) does not apply because the contact is being
made in the course of a pending court proceeding.
Example 2. While a Tax Court case is pending with respect to a taxpayer's 1997
and 1998 income tax liabilities, a revenue agent is conducting an examination of the
taxpayer's excise tax liabilities for the fiscal year ending 1999. Any third-party
contacts made by the revenue agent with respect to the excise tax liabilities would
be subject to the requirements of section 7602(c) because the Tax Court
proceeding does not involve the excise tax liabilities.
Example 3. A taxpayer files a Chapter 7 bankruptcy petition and receives a
discharge. A revenue officer contacts a third party in order to determine whether the
taxpayer has any exempt assets against which the IRS may take collection action to
enforce its federal tax lien. At the time of the contact, the bankruptcy case has not
been closed. Although the bankruptcy proceeding remains pending, the purpose of
this contact relates to potential collection action by the IRS, a matter not before or
related to the bankruptcy court proceeding.
(g) Effective Date. This section is applicable on the date the final regulations are
published in the Federal Register.
Assistant Deputy Commissioner of Internal Revenue
Secretary of the Treasury
PO-3699: Treasury Issues Proposed Capitalization Regs
Page 1 of2
I--'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or prmt the PDF content on this page, download the free I'" Ir ,Ilr
i,r I, ,1',1/
I,!, ·,II!' ,,'.
December 18, 2002
PO-3699
Treasury Issues Proposed Capitalization Regs
Today, the Treasury Department issued proposed regulations on capitalizing costs
incurred in acquiring, creating or enhancing intangible assets, In January of 2002,
the Treasury Department and the IRS released an advance notice of proposed
rulemaking requesting comments on rules expected to be contained in the
proposed regulations, The proposed regulations generally follow the rules
described in the advance notice.
"Uncertainty regarding the proper treatment of amounts spent that result in
intangible assets has caused significant controversy between taxpayers and the
IRS in recent years," stated Treasury Assistant Secretary for Tax Policy Pam Olson.
"The proposed regulations are an important step to clear and administrable rules
that will allow taxpayers to compute their tax liability properly and the IRS to
administer the law efficiently and fairly, The rules in the proposed regulations will
reduce uncertainty and controversy in this area, freeing up both IRS and taxpayer
resources for more productive activities."
To clarify the application of section 263(a) of the Internal Revenue Code, the
proposed regulations describe specific categories of expenditures incurred in
acquiring, creating, or enhancing intangible assets that taxpayers are required to
capitalize. Expenditures incurred in acqUiring, creating or enhancing intangible
assets that are not described in the proposed regulations are not required to be
capitalized under section 263(a); however, such expenditures may need to be
capitalized under another provision of the Code.
To reduce the administrative and compliance costs associated with section 263(a),
the proposed regulations provide safe harbors and simplifying assumptions
permitting the current deduction of certain costs and significantly reducing
taxpayers' record-keeping burden, They Include (i) a "12 month" rule, covering
costs for certain intangible assets with relatively short useful lives, (ii) "de minimis"
rules, covering certain costs less than a specified dollar amount, (iii) an employee
compensation rule, covering salaries, bonuses, and commissions paid to
employees, and (IV) an overhead rule, covering fixed and variable overhead costs.
In addition, the regulations propose a 15-year safe harbor amortization period for
certain created intangible assets that do not have a readily ascertainable useful
life. The proposed regulations also explain how taxpayers may deduct debt
issuance costs. Comments are requested from the public regarding all of these
rules.
Related Documents:
•
Guidance Regarding Deduction and Capitalization of Expenditures
http://www.trcas.guv/Vlesslrclc1l3C3/p03699.htm
12/2312002
apital
ccess
rograms
A Summary of
Nationwide
Performance
Department of the Treasury
(Updated) October 1999
CAPITAL ACCESS PROGRAMS:
A Summary of Nationwide Performance
Department of the Treasury
November 1999
This report is available on-line at http://www.ustreas.govlreports/cap.pdf.
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C.
November 1,
1999
UNDER SECRETARY
Dear Friend:
Since 1986, when Michigan first developed the Capital Access Program (CAP) as a method to
increase the availability of credit to small businesses, many states have gradually enacted CAPs
of their own. In fact, by the end of 1998, the nationwide cumulative CAP lending was
approximately $1.2 billion.
Under the leadership of fonner Secretary Robert E. Rubin and now under Secretary Lawrence H.
Summers, the Treasury Department has undertaken a series of initiatives to expand access to
capital and encourage business investment in economically distressed communities. We
compiled this report in order to assess the reach of CAPs and to explore the features that
contribute to their success.
This report, Capital Access Programs: Nationwide Financial Perfonnance, reviews the following
areas:
nationwide CAP lending statistics through 1998 from the 19 states and 2 municipalities
•
that operate CAPs;
CAP lending perfonnance through 1998 to underserved communities;
•
lessons learned from states' CAPs.
•
I hope that this report will contribute to greater understanding of CAPs' perfonnance and their
future potential as a tool to foster a vibrant small business financing market.
I'd like to thank Cliff Kellogg, the principal author of this report, and acknowledge the research
assistance he received from Jim O'Connor, Alan Berube, and Greg Zucca. If you have any
questions, please contact Michael Barr, Deputy Assistant Secretary (Community Development
Policy) at (202) 622-0016.
cfZ!
6';1;" Gensler
rlnder Secretary
Domestic Finance
Table of Contents
Executive Summary ........................................................................................................................ I
I. Introduction ................................................................................................................................ 3
1.1 How CAPs Work: Program Mechanics ...................................................................... 3
1.2 How CAPs Work: Public Policy ................................................................................. 4
2. CAP Performance ....................................................................................................................... 5
2.1 General Financial Performance .................................................................................... 5
2.2 Performance in Lending to Specific Groups ................................................................ 9
3. Key Program Features of Large CAPs ..................................................................................... II
Appendix I ..................................................................................................................................... 15
Figure 1: Nationwide Cumulative CAP Loan Volume and Cumulative
Number of CAP Loans ....................................................................................... 1-1
Figure 2: New CAP Loan Volume and Number New CAP Loans 1997-1998 ................ .1-1
Figure 3: Distribution of State CAP Growth Rates 1998 ................................................. .1-2
Figure 4a: Cumulative CAP Loan Volume by State ........................................................ .1-2
Figure 4b: Cumulative CAP Loan Volume per Capita .................................................... .1-3
Figure 5a: New CAP Loan Volume by State 1998 .......................................................... .1-3
Figure 5b: New CAP Loan Volume per Capita 1998 ...................................................... .1-4
Figure 6: Distribution of Cumulative Average CAP Loan Size Across States ................ .1-4
Appendix II
CAP Data Summary ........................................................................................................ II-I
Appendix III
Capital Access Program State Laws ............................................................................... III-I
Capital Access Programs
Page 1
Executive Summary
In March, 1999, the Treasury Department's Community Development Policy Office compiled
this report summarizing the performance of state-level Capital Access Programs (CAPs) based
on a survey of the states with such programs. This report is the second national review' to
compile and assess:
•
•
•
nationwide CAP lending statistics through 1998 from the 19 states and 2
municipalities that operate CAPs;
CAP lending performance through 1998 to targeted groups of borrowers such as those
in low- and moderate-income communities;
lessons learned from states' CAPs.
The l3-year track record of state-run CAPs suggests that these programs encourage small
business lending in a cost-efficient and simple way. Under CAPs, the bank and the borrower pay
an up-front insurance premium, typically between 3% and 7% of the loan amount at the bank's
discretion, which goes into a reserve fund held at the originating bank. The state matches the
combined bank and borrower contribution with a deposit into the same reserve fund. The CAP
reserve fund allows a lending bank to make slightly higher risk loans than conventional
underwriting, with the protection of the reserve fund for its entire pool of CAP loans.
CAPs allow banks to use their own underwriting standards for eligible loans, without
governmental approval of the loan-making decision. Compared with the staff intensiveness of
other credit enhancement programs, CAPs require little administrative cost for banks, borrowers
or the government. States report that CAPs are staffed by 1 to 1.5 full-time equivalents. In most
states, almost all small businesses are eligible for the CAP, though some states limit maximum
loan sizes and eligible industries. A state's up-front payment of 3%-7% of the loan amount into
a bank's CAP reserve fund supports a bank loan that is 14 to 33 times larger than that amount.
Currently, 19 states and 2 cities operate CAPs, with total lending since 1986 of approximately
$1.2 billion and a cumulative average loan size of $59, 151. For three consecutive years, the
CAP dollar volume has increased, from $187 million in 1996, to $202 million in 1997 (8%
growth), and to $246 million in 1998 (22% growth). Over 315 banks actively originated loans in
1998. Nationally, cumulative CAP loan losses total $37.7 million, or 3.1 % of all loan volume;
net of these losses, remaining CAP loan loss reserves amount to $51.9 million, equal to 4.3% of
cumulative volume.
In 1998, Louisiana and Florida undertook to create CAPs in their states, with implementation to
begin in 1999; West Virginia discontinued its CAP program due to state budget constraints.
Ohio announced that it will extend its coverage for CAP beyond Akron to encompass the entire
state. Once these programs are launched, CAPs will operate in 22 states and one city.
The Treasury Department published the first report. Capital Access Programs: A Summary or
Nationwide Performance. in October, 1998.
Capital Access Programs
Page 2
Data on CAPs show that CAP loans reach some groups of borrowers not as well served by other
credit enhancement programs:
•
•
•
•
CAPs reach minority-owned businesses and low- and moderate-income communities in
substantial numbers.
CAP lending retains and creates a signi ficant number of jobs.
CAPs reach types of businesses, such as building contractors and wholesale trade
companies, that are not typically reached by other small business lending programs.
In some states, CAPs are used significantly for start-up businesses and for working
capital, both of which are often cited as needs unsatisfied by the private market without
public support.
The survey also revealed key aspects of the largest CAPs. Active marketing to banks appears to
be a central feature of large CAPs. Assuring adequate funding for states' CAPs may also
increase the volume of lending; even when funding limits are not hit, states that provide
insufficient appropriations may discourage both bank participation and full engagement by the
state agency administering the program. Similarly, restrictions on maximum loan size or eligible
industries may hinder overall program development without demonstrable advantage.
Capital Access Programs
Page 3
1. Introduction
The expansion of private sector small business lending under CAPs in the 19 states and 2
municipalities currently operating such programs suggests that CAPs provide an innovative way
to encourage banks to make loans to a portfolio of individually risky but cumulatively profitable
small business loans. CAPs provide financial backing for a bank to make slightly more risky
loans than through conventional methods, while still preserving a bank's motivation to
underwrite applications rigorously and avoid high losses. CAPs help banks overcome the risks
of small business lending by funding a reserve account to cover losses from loans that have
defaulted. The risk of the loan is partially subsidized by the state and spread over the portfolio of
all CAP loans. CAP loans are not guaranteed, and therefore lenders still bear the ultimate
financial risk. However, CAPs have proven helpful in encouraging banks prudently to extend
smaller business loans to new customers and, for existing customers, to offer CAP loans in
addition to conventional financing.
This report is an update and extension of the October, 1998 report by the Department of the
Treasury that summarized financial statistics on nationwide CAP lending and distilled some of
the states' best practices. Many of the initial findings from the 1998 report still hold true. This
report offers additional information in several areas, including marketing techniques and
administrative support, while providing the most up-to-date information on the key CAP
statistics. Policymakers and lenders would benefit from a more comprehensive study of CAP job
creation impact and the reach of CAP to communities and individuals out of the financial
mainstream as well as to particular industries. This report offers a nationwide overview of CAP
lending, and we hope it will stimulate further research and discussion.
1.1 How CAPs Work: Program Mechanics
In a CAP, the borrower obtains a loan and loan approval directly from the bank. There is no
governmental role in approving or reviewing the application. When making a CAP loan, the
bank and borrower pay an up-front insurance premium that, combined, is generally ranges from
3% to 7% of the loan amount. The exact percentage is at the discretion of the individual bank,
and in practice, the bank may pass most of its portion of the premium on to the borrower by
financing the premium in the loan proceeds. Banks have the discretion to set interest rates on
CAP loans as they see fit. In most states, all small businesses are eligible, although some states
restrict maximum loan sizes and eligible industries (discussed in more detail later in this report).
The bank holds all of the CAP premiums in a single, pooled reserve account. The bank enrolls
the loan by faxing a one- or two-page form to the state, providing the particulars and certifying
that it meets program eligibility requirements. The state then deposits a matching amount, most
often a one-to-one match, into the originating bank's CAP reserve account. In this way, each
bank creates its own funded loan loss reserve to cover a loss on any of its CAP loans. The bank
recovers any CAP loan losses by offsetting against the CAP reserve fund it holds. The bank
itself must absorb any losses over its accumulated CAP reserve fund.
The state government provides only the up-front matching premium. A few states do provide a
start-up credit line to give banks, in effect, an advance of future CAP premiums. This helps a
Capital Access Programs
Page 4
bank in the event the bank experiences an early CAP loss before the reserve fund has built up
enough to absorb the full loss. A bank would then repay the credit line from future CAP
premiums. Some states also increase their match rate for loans to targeted borrowers or areas,
such as state-designated Enterprise Zones.
CAPs are designed to encourage banks to underwrite loans to a higher risk threshold than
conventional lending criteria. Whereas most banks experience loan losses on their traditional
loan portfolio of under 0.5% ofloan principal outstanding annually, CAPs allow banks to absorb
greater losses with its CAP-funded reserve. CAPs thus serve the risk category just slightly
outside the scope of traditional bank lending.
1.2 How CAPs Work: Public Policy
The innovative feature of CAPs is the reserve fund that accumulates at each bank. This fund
helps the bank to hold and pool its risk, thereby enabling the bank to make profitable loans to
small business owners that would otherwise, on an individual basis, be viewed as too risky.
Capital Access Programs have five notable properties as public policy:
•
First, CAP loans generally do not appear to "crowd out" loans that the private sector
would otherwise make. Borrowers are always able to shop around to see whether another
bank would make the loan without requiring the CAP premium. In choosing a CAP loan,
borrowers signal that they are unable to find comparable funding elsewhere. Thus, CAPs
do not supplant unsubsidized loans made by the private sector but rather make capital
available to otherwise sidelined entrepreneurs. 2
•
Second, individual loan decisions in CAPs are made by those with the best information
available -- the private parties involved.
•
Third, CAPs align the incentives of the borrower, the bank, and the state in the lending
process. Private incentives work to encourage CAP loans up to the loss level provided by
the reserve fund. Banks may not use the CAP reserve for any purpose other than backing
CAP loans. Banks would be disinclined to set the CAP premium too high and thereby
miss the opportunity to approve a greater number of profitable loans. At the same time,
banks will underwrite CAP loans rigorously, because they must absorb any losses that
exceed the CAP reserve account.
•
Fourth, the leveraging effect of public funds is large, and the state's investment is certain
at the outset. For example, if the state matches a borrower and bank contribution of 5%
of the loan amount, its contribution is backing the bank to make a loan that is 20 times
larger than the state investment (5% premium x 20 = 100% loan amount). Moreover, the
state does not carry any contingent liability for potential future losses on CAP loans, as it
would for a loan guarantee program.
2
An in-depth 1998 study of the Michigan CAP by Roger Hamlin of Michigan State University estimated that
only 12% of CAP loans would have occurred in the absence of the program.
Capital Access Programs
•
Page 5
Fifth, program administration is straightforward, according to the participating states and
banks. Once the CAP is designed and enacted, the daily administration involves sending
the matching premiums to each bank's reserve fund as new loans are enrolled, marketing
the program to banks, and keeping accounts. In contrast, government guarantee
programs may require staffing of loan review officers, recordkeeping staff, workout
officers, legal staff and supervisory staff. All of the states that reported CAP
administrative staffing levels reported from 1.0-1.5 full time equivalents. This level of
support is consistent across state survey respondents regardless of size of the total volume
of loans.
The states with CAPs as well as the most active CAP lenders report that CAPs provide a
comparatively simple tool for banks to increase marginally their risk tolerance and, in so doing,
to bring capital to an expanded population of viable small businesses.
2. CAP Performance
The data presented here are the results of a nationwide survey conducted by the Treasury
Department during February and March of 1999. Comparisons are made to data collected by the
Department of Treasury in its October 1998 CAP Report. The complete data set is presented in
the Appendix.
2.1 General Financial Performance
This survey covered 19 states and 2 municipalities with operating CAPs. Two of these states,
Texas and Illinois, enacted CAPs and began operating their programs in 1997. Two other states,
Louisiana and Florida, are launching CAP programs; however, due to the premature nature of
their programs, none of their data is included in this report. Since the last survey in 1998, West
Virginia has discontinued its CAP program, which had supported over $2 million in CAP
lending, and reallocated its funding for other projects.
Loan Volume and Growth
CAP lending has grown at increasing rates in the last three years. By the end of 1998, total CAP
lending volume had increased to $1.2 billion. For three consecutive years, the CAP dollar
volume has increased, from $187 million in 1996, to $202 million in 1997 (8% growth), and to
$246 million in 1998 (22% growth). Figure 1 shows the rise in both total lending volume and
the total number of loans over the last three years, and Figure 2 shows the new loan volume and
new number of loans in 1997 and 1998.
CAP growth rates are strong across the country. Of the 19 states surveyed with CAPs, only three
state programs grew at less than a 10% rate in 1998, while the growth rates in eight states were in
excess of 30%. Illinois grew by 179% (its first full year in operation) while North Carolina and
Colorado achieved growth rates above 55% and 51 % respectively. Figure 3 shows the
distribution of growth rates across states.
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CAP lending remains especially pronounced in three states: California, Michigan, and
Massachusetts are responsible for nearly 68% of 1998 volume. California represents the largest
1998 volume with $80 million followed by Michigan with $52 million and Massachusetts with
$35 million (See Figure 5a).
CAP lending per capita provides another measure of the relative magnitude of states' CAPs. By
this measure, New Hampshire has the most far-reaching program in the country, with a
cumulative CAP loan volume of $57.23 per resident. 3 Figures 4a and 4 b present the largest
programs in both absolute and per capita terms. The fact that some small states operate large
CAPs on a per capita basis indicates much greater market penetration.
Another benchmark of CAPs' relative size is CAP lending per firm in a state. Using the 1992
Economic Census to calculate CAP lending per firm produces nearly identical results as the per
capita measure since, at the state level, the number of businesses closely correlates with the total
population. Cumulatively, Michigan's CAP lending per firm is the largest at $725.33 per firm,
followed by New Hampshire at $693.64 and Massachusetts at $305.11. Looking at CAP lending
in 1998 only, New Hampshire is the largest at $121.16 per firm, followed by Michigan at $95.03
per firm, and Massachusetts at $78.33 per firm.
The collected data show no evidence that CAP demand is saturated: First, the expansion of
existing programs is generating more volume increases than the creation of new programs.
Second, examining the largest programs -- those most likely to tap-out demand -- shows that in
both absolute terms and per capita terms these programs continued through 1998 to extend the
largest volume of new loans (see Figures 5a and 5b).
Average Loan Size
While the cumulative nationwide average size of a CAP loan is $59,151, there is considerable
variance across states. Banks in California and Texas originate the largest average loans, at
$150,526 and $106,338 respectively. Wisconsin and Vermont banks originate the smallest, at
$23,985 and $18,223 respectively. However, three of these four states are relatively large in per
capita terms, and analysis of the data for all states shows that there is no evident correlation
between loan size and any simple measure of CAPs' performance, such as total loan volume or
loan losses.
In particular, examination of the data shows that states with larger average CAP loans do not
appear to experience a larger percentage of loan losses. (California, however, is an exception,
producing both the largest average loans and loan losses, although well within the limits of its
CAP reserve fund.) Figure 6 shows the distribution of average loan size across states.
Financial Products
Different banks use CAPs to make different types of loans. Under CAPs, banks decide how to
deploy the risk-protection afforded by the loan loss reserve. For example, some banks use CAPs
3
Akron, Ohio reported cumulative CAP lending of $61.91 per resident.
Capital Access Programs
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to target a new customer base of small businesses. Other banks use CAPs for the unsecured
portion of a financing package in which the bank will also provide some conventional secured
financing.
The small business community often cites the financing of start-up businesses as an important
funding need not fully satisfied by the private market. The available data appears to show that
CAPs can address some of this need. Oregon reports that in 1998, almost 30% of its CAP loans
went to start-up businesses. In Massachusetts and Arkansas, in 1998, almost 19% of CAP loans
similarly went to start-ups. This suggests that start-ups are a market niche suitable to the CAP
product.
In California, one of the most distinguishing characteristics of CAP lending is its use for working
capital, another need often cited by small businesses that is difficult to accommodate under other
credit programs. In 1997, California reported that a significant 56% of its CAP lending was for
working capital revolving lines of credit, and 30% was for working capital term loans. The
concentration in working capital and revolving facilities may be due to CAPs' straightforward
loan administration and the banks' desire to limit its forward exposure, since these loans are
generally for short maturities.
Loan Losses and Reserve Funds
Through the end of 1998, of those states that reported data for both 1997 and 1998, 506 banks
were enrolled in CAPs nationwide and 315 of these were actively originating CAP loans. Many
of these banks have large branch networks. State CAP administrators suggest that bank mergers
have caused a slight decline in bank participation in some states, notably California, Connecticut,
and Michigan.
Through the end of 1998, cumulative CAP loan losses nationwide totaled approximately $38.2
million, or 3.2% of all loan volume extended. Net of these losses, banks nationwide held
approximately $52 million in their CAP reserve funds at the end of 1998, equal to 4.3% ofthe
total loan volume extended. CAP reserves as a percentage of loans currently outstanding would,
of course, be a much higher percentage since much of the cumulative loan volume ($1.2 billion)
has been repaid. 4 Adding the cumulative losses and remaining loss reserve indicates that banks'
total public and private CAP reserve fund contributions have been 7.5% of cumulative lending,
with the state usually contributing half of that amount (some states contribute more than a oneto-one match under certain circumstances). This is a measurable drop from 1997, when the total
contributions were 8.8% of cumulative lending, suggesting that the average CAP premium is
decreasing.
The data, as well as bank behavior, suggest that current CAP reserves may be adequate to meet
future losses, absent unforeseen circumstances. First, in some states, many CAP loans are for
short maturities. Since remaining current reserves are 1.4 times as large as cumulative historical
4
Data on CAP loans outstanding are unavailable for most states, and therefore CAP reserves as a
percentage of loans outstanding -- the usual measure of the adequacy of a loan loss reserve -- cannot be calculated.
Capital Access Programs
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losses and most programs are more than a few years old with presumably a substantial loan
volume having been repaid ("runoff'), it appears that the coverage available on outstanding loans
5
is sufficient. Second, banks made a record 3,660 loans totaling $246 million in 1998, so it
would appear that those banks believe themselves to be adequately covered. Finally, some banks
with CAP experience in one state are expanding CAP lending where new states have enacted
programs.
State Leverage
States have varying policies with regard to how much they require banks, borrowers, and the
state to contribute to the reserve fund. States typically match private contributions one-to-one
(that is, dollar-for-dollar), with many states increasing their match rate for target groups or areas,
as is discussed in the next section. All in all, state contributions to the reserve funds typically
range from 3% to 7% of the loan amount, implying public leverage of private funding in a range
from 33:1 to 14:1.
Some states have special strategies to help banks overcome a start-up dynamic in which the first
few loans do not on their own generate enough of a reserve pool to cover a default. For instance,
Vermont and Pennsylvania provide an initial $50,000 line of credit to their participating banks.
Other programs address this issue by increasing the public match rate for banks' initial loans.
For example, Michigan provides a two-to-one match for a bank's initial $2 million in loans and
then reduces the match to one-to-one. New York and Oklahoma also match at higher rates up to
the $2 million and $3 million thresholds respectively. At the same time, many states -- and some
with very large CAPs -- do not use start-up incentives at all.
One might expect to see a relationship between the size of a state's contributions to the reserve
funds and the resulting size of its CAP. New Hampshire's experience supports this expectation:
The average percentage of the loan contributed by New Hampshire to the loan loss reserve is the
second largest in the country, exceeding 9% of the total loan volume, and New Hampshire has
the most far-reaching program in the nation on a per-capita basis. However, across all programs,
only a weak correlation exists between public contributions and the size of a program. The fact
that there is not a stronger correlation suggests that state contributions are only one part of a
larger story in determining the relative magnitude of state programs. These factors are discussed
in Section 3.
Job Creation and Retention
As stated in the 1998 report, the data for jobs created or retained by CAP lending should be
viewed cautiously. While the field would benefit from more studies, the reported data suggest
the potential impact of CAP lending. Six states provided data on the number of jobs created or
retained through CAP lending. Calculating the amount of CAP loan dollars per job created or
Programs with the lowest ratio of current reserves to historical losses tend to be the largest CAPs in the
country. One explanation of this correlation is simply that larger CAPs tend to be older programs, so that there has
been a longer time frame over which existing loans can go into default. This cannot be the full explanation because
not all large CAPs are relatively old. A second explanation for the correlation might be that CAPs are larger in
states where banks lend more aggressively -- and hence coverage ratios are lower.
Capital Access Programs
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retained in these six states shows a significant variation, from $28,000 per job in one state to
$9,000 per job in another. These job retention and creation numbers are self-reported by the
borrower and by the state, and these figures are not independently reviewed. However, with
these caveats, applying the average employment effect for the six reporting states across the 19
states with operating CAPs suggests that as many as 84,248 jobs may have been created or
retained as a result of CAPs. These jobs created by the CAPs are efficiently generated at very
little cost to the government. Of the six states that reported this job creation data, the average
state subsidy cost per job created/retained is $777.
2.2 Performance in Lending to Specific Groups
Of the 19 states surveyed, eight states augment their CAP contributions for targeted groups.
Table 1 shows that four states target state-designated Enterprise Zones, while two target on the
basis of other geographical areas. Four states augment their contributions for minority-owned
businesses and one for female-owned businesses, disabled-owned businesses, and "welfaregraduate-owned" businesses.
Most states target by increasing their matching contribution to a bank's reserve fund, usually by
1.5 or 2 times their ordinary match. For example, California adds another 50% to its loan loss
reserve contribution for loans in severely affected communities, areas around closed military
bases, and for loans made by banks just entering the program. Thus, for these loans, California
contributes 150% of the combined premium payments made by the lender and borrower. For
example, if the lender and the borrower each contribute 2% to the loan loss reserve account,
California will contribute 6% instead of its usual 4%. Other states such as Illinois, Indiana, and
Pennsylvania increase their match rates if the loans are made to minorities. Connecticut targets
by providing a 20% supplemental loan guarantee for certain urban areas. This "first-loss"
guarantee reduces the lender's exposure and creates an additional incentive for banks to invest in
the targeted communities.
While data were limited, some states reported data showing that -- whether the state targets
specific groups or not -- significant percentages of CAP loans are reaching low and moderate
income areas as well as minority and female borrowers. In addition, CAPs appear to reach a
broad spectrum of industries.
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Page 10
Table 1: Targeted State Programs
StateDesignated
Zones
Other
Geographic
Zones
Minority
Owned
Businesses
Female
Owned
Businesses
Disabled
Owned
Businesses
Arizona
./
./
Illinois
./
Indiana
./
./
Connecticut
./
./
./
./
./
Pennsylvania
./
Texas
1)
Industry
Targeting
./
California
Utah
Welfare
Graduates
./
./
Low- and Moderate-Income Areas / Geographic Targeting. According to its own
definition of "distressed areas," Connecticut data showed that 34% of 1998 CAP loans by
volume were to businesses in low and moderate income areas. Wells Fargo Bank, which
continues to originate approximately 85% of all CAP loan volume in California, reported
in 1997 that 28% of its CAP loans went to businesses in census tracts with median
incomes at the low to moderate level. In Connecticut, the average loan size for low and
moderate income areas is 20% larger than the state average, while Wells Fargo loans in
these census tracts were 7% larger on average.
2)
Minority-Owned Businesses. In Illinois' first full year of CAP operations, 26% of all
loans have gone to minority entrepreneurs. In New York City, 36% of all loans have
gone to minority entrepreneurs while in Wisconsin, this number remains high at 26%
(down slightly from 29% in 1997). Comparing these figures with the percentage of
businesses which are minority-owned in these states shows that CAP lending reaches a
higher proportion of these businesses. In Illinois, 9.3% of businesses are minority owned
compared to 2.5% in Wisconsin. Notably, Wisconsin's CAP does not specifically target
minority-owned businesses. Across seven states that reported data, the average loan size
for minority borrowers is $50,275, which is slightly larger than the average loan for these
same seven states (though still below the overall nationwide average CAP loan size of
$59,151).
3)
Female-Owned Businesses. Of the five programs that reported lending data for femaleowned businesses, the percentage of female borrowers ranges from a low of 14% in
Texas to a high of 37% in Wisconsin. The average loan size for females ranges from
42% to 210% of the state average. Vermont and New York City both exceed 100% of
the overall average loan size at 113% and 210% respectively.
Capital Access Programs
4)
Page 11
Lending by Industry. Sixteen states provided industry-specific loan information, and the
data show that CAP loans are able to cover a broad spectrum of business types. CAP
loans in these states are made most often to service businesses, construction, and
manufacturing, while also reaching wholesale and transportation firms with significant
frequency. Notably, CAPs are reaching certain industries, such as building contractors
and wholesale trade companies, that are typically not well served by other types of credit
enhancement programs. The available data also indicate that CAP lenders adapt the
program to the needs of particular states. For example, for nine of the thirteen states
reporting, agribusiness loans represent only 1-3% of the state total, but in Arkansas
agribusiness lending comprises 53% of all CAP loans. Also, for nine of the thirteen
states reporting, 19% of all loans went to manufacturing businesses, with Indiana
reporting a high of 57% of its CAP loans to manufacturers.
3. Key Program Features of Large CAPs
Follow-up conversations with CAP agencies have suggested that there are several other elements
that are important to the growth of CAPs:
I)
Active marketing of the CAP
Many of the largest programs report that regular marketing is extremely important,
particularly in the initial stages of the program. Marketing to banks appears to be most
important, while marketing to borrowers is less important in developing a high-volume
CAP. Massachusetts, Illinois, and New Hampshire and others emphasize the importance
of reaching out to banks individually. Such one-on-one marketing, beyond informing
banks of the CAP's existence, provides an opportunity to answer questions about the
program. States point out that CAPs should be understood as a tool for expanding
business lending parameters and should be offered by banks on a careful and deliberate
business basis. State officials in California, Vermont and Virginia said that reaching
directly to banks through calls and seminars was an effective means of marketing their
CAP programs. Texas, which started its CAP in 1997, noted that press releases were one
of the most effective means of marketing their CAP. Texas's success using press releases
may be attributable to the fact that some Texas banks had CAP experience in other states
and simply needed to know that Texas was offering a similar product. Some states,
including Michigan, have chosen not to market their CAP at all, preferring to rely on
banks to market the program themselves through their own in-house marketing efforts.
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Page 12
Table 2: CAP Marketing Programs
Seminars/
Meetings
with
Lending
Institutions
Number of
States Utilizing
Marketing
Channel
2)
14
Brochures/
Mailings Sent
to Lending
Institutions
8
Marketing Channels
Direct Calls
N ewsletters/
Quarterly
to Lending
Institutions
Reports
Produced and
Distributed to
Public and
Lending
Institution
6
4
Bank
Marketing!
Advertising the
CAP Program
3
Press Releases
Sent To Public
and Lending
Institutions
2
Adequate state appropriations for the CAP
Eight state CAPs receive only limited appropriations, either through a one-time
appropriation or through an annual ceiling. Colorado and Oregon actually hit their limits
in 1997, and Colorado suspended its program until new funding was obtained. Oregon
kept its program operating uninterrupted by transferring funds from other budget sources.
West Virginia faced similar budget hurdles and has recently suspended its program,
choosing instead to allocate funding for other state credit enhancement programs. Even if
a state is not hitting its funding limit, low funding may discourage banks from joining the
program given lenders' need to originate a volume ofloans sufficient to build an
adequate loss reserve. Some banks reported that they chose not to participate in a state's
CAP because it was funded at too Iowa level for them to offer the CAP product
throughout their entire state branch network or to build up a sufficient reserve account.
Interestingly, three of the four states that reported no funding limits are also among the
largest programs in the country: California, Massachusetts, and New Hampshire.
States use a variety of funding sources for their CAPs. Pennsylvania generates the funds
for its CAP contributions from bond financing programs, while Illinois' CAP program
receives its funding from the state's Small Business Capital Revolving Loan Fund.
California charges a 1% Small Business Assistance Fund fee to large companies
obtaining environmental revenue bond financing through the state's bond issuing conduit.
3)
Fewer eligibility and size restrictions for CAP loans
Some states restrain potential CAP lending by limiting the types of loans allowed under
their program. In these states, CAP loans appear to work well for eligible businesses and
eligible loans, but the state's authorizing statute does not make the program available for
all small business loans.
•
Some states place a ceiling on allowable loan size. For example, in one state, the
maximum loan size is capped at $150,000. This limits the availability of CAP
Capital Access Programs
Page 13
lending for small businesses that require larger loans, and it potentially
discourages bank participation. As discussed above, it does not appear that loan
size and loan default rate are correlated. Some states limit the pern1issible CAP
loan size as a means of targeting the smallest borrowers and conserving state
resources; however, this creates the side effect of constraining the program's
broadest use.
•
Some states only lend to a limited set of industries. Most notably, public CAP
funds in California are generated through environmental bond issues, and
regulations require that these dollars only be used to support businesses that affect
the environment (this requirement excludes most retail and service businesses
from CAP eligibility). California's program estimates that 40-50% of possible
borrowers are excluded by this limitation, including all retail and service
industries. Discussions are currently underway in California to expand the reach
of the CAP program to other industries outside of those focused on the
environment.
CAP lending data suggest that the program successfully encourages small business lending with
a small average loan size to borrowers who might not otherwise meet bank underwriting criteria.
At the same time, the program's reach is limited to the states where enacted, and may be further
limited by specific funding and program limits in some states.
Capital Access Programs
Page 14
Capital Access Programs
Page 15
APPENDICES
Capital Access Programs
Appendix I-I
Figure 1: Nationwide Cumulative CAP Loan Volume and
Cumulative Number of CAP Loans
millions
$1,500
-
-- - -
---
-
-
-
--
---
20,500
16,837
$1,200
13,~~-
-------~-
~
---------~------$1,213
20,000
-------------------$967
15,000
$900
$757
10,000
$600
5,000
$300
$0
1996
1997
1998
Ic::JLoan Volume ($millions) ----- Number of loans I
Figure 2: New CAP Loan Volume and Number New CAP Loans
1997-1998
I c::J New Loan Volume ($millions) -----Number of new loans I
Capital Access Programs
Appendix /-2
Figure 3: Distribution of State CAP Growth Rates 1998
Number of states
7,-----------------------------------------------------------~
6
5
4
3
2
O~------~------~L-------~------~------~L-------Y_------~
0-10%
10-20%
20-30%
30-40%
40-50%
50-60%
Figure 4a: Cumulative CAP Loan Volume by State
through 12/31/98 ($millions)
Massachusetts
$135m
New Hampshire
$68m
Oregon $56m
Total Volume
= $1.2 billion
60% +
Capital Access Programs
Appendix /-3
Figure 4b: Cumulative CAP Loan Volume per Capita
through 12/31/98
$/person
70
$57.23
60
50
$40.72
40
$24.05
30
$21.98
$17.15
20
$8.26
10
0
New Hampshire
Michigan
Colorado
Massachusetts
Oregon
Program Average
Figure Sa: New CAP Loan Volume by State 1998
($millions)
Massachusetts
$34.7m
New Hampshire
$11.8m
Total New Volume
=$246 million
Capital Access Programs
Appendix /-4
Figure 5b: New CAP Loan Volume per Capita 1998
$/person
~------------------------------------------------------------,
12
11
$10.00
10
9
$8.11
8
7
$5.64
$5.33
6
5
4
$2.85
$2.46
3
$1.67
2
O~------------------------------------------------------------~
New Hampshire
Number of states
Colorado
Massachusetts
Michigan
Vermont
California
Program Average
Figure 6: Distribution of Cumulative Average
CAP Loan Size Across States
7
6
5
4
3
-
2
r--- r---
o
$0 - 10K $10K 20K
$20K 30K
$30K 40K
$40K 50K
$50K·
60K
$60K·
70K
$70K 80K
$80K·
90K
$90K·
100K
$100K - $110K +
110K
~
CAP Data Summary
~
1:;."
Data collected as of March 1999
Data based on self-reporting by states
e.
~
~
State
State pop'n
Total # Finns
Cumulative
Volume ($)
Cumulative
Volume ($)
Cumulative
Volume ($)
12/31/98
12/31/97
12/31/96
New Vol. ($)
1998
Cum. #
loans
Cum. #
loans
12/31/98
12/31/97
Cum. #
loans
12/31/96 New # 1998
Avg.Loan
Size ($)
Cum. Vol.
($) Per
Cum. Vol. 1998 Vol. (S)
capita (S) Per finn
Per finn
~
1".-.1
'"
~
~
Arkansas
2.538,303
159.820
8.128.718
7.572.608
6.255.223
556,109
205
182
149
23
39,652
Califomia
32.666.550
2,259.327
308,276,553
227,795.093
186,953.701
80,481,460
2048
1640
1388
408
Colorado
397.091
323.147
9.549,412
6.328,344
3.672,094
3.221.068
250
189
138
61
Connecticut
3.20
50.86
3.48
150,526
9.44
136.45
35.62
38,198
24.05
29.55
9.97
15.22
3.274.069
237,705
25,426,052
21.807,211
15.378,032
3.618.841
332
264
197
68
76,584
7.77
106.96
Illinois
12.045,326
726.974
21.443,969
7.697,456
o
13.746,513
415
129
nla
286
51,672
1.78
29.50
18.91
Indiana
5.899.195
364,253
77.544.687
64,093,204
47.555.900
13,451.483
1693
1414
1037
279
45.803
13.14
212.89
36.93
Massachusetts
6,147,142
442.848
135,119.329
100,431,404
67.000,000
34.687,925
2284
1793
1363
491
59.159
21.98
305.11
78.33
Michigan
9.817,242
551.091
399.721,976
347.349.705
284,286.235
52,372.271
7251
6349
5355
902
55.126
40.72
725.33
95.03
Minnesota
4.725,419
358,921
5,437.666
4,858,400
3,968,466
579.266
199
183
150
16
27.325
1.15
15.15
1.61
New Hampshire
1,185.048
97.772
67,818.168
55.972,130
40.190,552
11.846,038
1794
1407
984
387
37.803
57.23
693.64
121.16
New York City
7.322.564
nla
16,368.913
14.243.913
13,113.860
2.125,000
308
283
266
25
53,146
2.24
nla
nla
North Carolina
7,546,493
439.301
11.112,535
7,164.116
4,580.698
3,948,419
220
133
88
87
50.512
1.47
25.30
8.99
Akron.OH
223.019
nla
13.806.881
13,421.881
13,271.881
385.000
261
257
255
4
52.900
61.91
nla
nla
Oklahoma
3.346.713
248.936
22,951,353
18.929.991
16,086.366
4.021.362
760
578
436
182
30.199
6.86
92.20
16.15
31.74
Oregon
3,281.974
239,967
56.297.985
48.680.879
39.653.275
7,617,106
1479
1325
1129
154
38.065
17.15
234.61
Pennsylvania
12,001,451
728,063
6,852.642
5.042,543
2.970,112
1.810,099
168
126
43
42
40.790
0.57
9.41
2.49
Texas
19.759.614
1.256.121
8.081,697
450.000
0
7,631.697
76
4
nla
72
106.338
0.41
6.43
6.08
Utah
2,099.758
129.202
172.765
172,765
117,065
o
6
3
3
3
28.794
0.08
1.34
0.00
590.883
58.924
6,673.095
4.990.228
3.801.140
1.682,867
366
257
177
109
18.233
11.29
113.25
28.56
Virginia
6.791.345
391.451
3.981.982
3.270.761
2.234.586
711.221
59
34
21
25
67,491
0.59
10.17
1.82
Wisconsin
5.223.500
300,348
7.819,172
6,595,867
5,539,777
1.223.305
326
287
243
39
23.985
1.50
26.03
4.07
146.882,699
9.314.171
1.212,585.550
966.868,499
756.628,963
245.717,051
20.500
16,837
13,422
3.663
59.151
46.041,357
36.029,951
11.700.812
932
765
610
167
8.26
126.95
26.11
Vermont
Totals
Average
Growth in 98
57.742.169
25.4%
Note: In response to the survey, a number of states made minor corrections to 1996 and 1997 data. The most recently received data are reported here.
and therefore are not identical to the data reported in last yea~s edition.
21.8%
~
!
~
:g
~
~
><'
~
........
State
Existing
Reserves
12131198
Cumulative
Losses Total Reserves
12131198
Contribution
Total Public
Contribution
Participating
Participating
1998 Public
Patrlcipating
Contribution Banks 12131198 Banks 12131197 Banks 12131196
New Banks
1998
Active
Banks
12131198
I~e.
:::;..
~
l")
l")
Arkansas
506,350
163,195
669,545
287,529
15,389
10
9
8
California
6,553,451
19,753,493
26,306,944
13,343,091
3,372,548
45
42
39
3
10
Colorado
nfa
12
14
12
-2
7
3
~
C"'l
~
562,088
144,083
706,171
nla
Connecticut
2,665,301
145,582
2,810,883
1,700,806
180,942
30
33
27
-3
12
~
Illinois
1,612,854
43,731
1,656,585
944,157
590,077
51
43
0
8
23
::
Indiana
3,767,881
2,749,982
6,517,863
3,445,452
495,963
nfa
125
125
nfa
34
Massachusetts
7,401,563
3,082,507
10,484,070
nfa
nfa
nla
90
90
nfa
nla
14,600,000
4,515,514
19,115,514
14,893,437
1,883,942
69
77
72
-8
51
718,454
218,117
936,571
570,958
60,824
34
34
34
0
34
New Hampshire
6,605,552
2,104,665
8,710,217
6,134,497
1,048,282
37
36
32
New York City
1,383,497
599,775
1,983,272
1,048,036
107,625
11
12
11
North Carolina
840,125
61,487
901,612
480,580
148,057
26
26
26
0
9
Akron,OH
274,227
500,210
774,437
274,227
29,000
8
8
8
0
8
Michigan
Minnesota
Oklahoma
4
725,465
840,964
1,566,429
931,000
124,287
74
74
73
0
29
2,644,287
4,694,450
2,416,598
287,294
29
28
28
1
19
Pennsylvania
323,918
128,863
452,781
300,000
nfa
6
6
6
0
5
Texas
687,352
0
687,352
348,353
330,353
11
7
0
4
5
24,652
0
24,652
10,000
0
2
4
4
-2
2
Vermont
871,925
282,629
1,154,554
204,554
nfa
24
24
21
Virginia
226,744
45,871
272,614
35,000
nfa
6
41,228
21
21
Utah
Wisconsin
0
19
5
4
21
0
12
7
315
66,411
217,968
284,379
272,225
Totals
52,467,972
38,242,923
90,710,895
47,640,500
8,715,811
506
714
638
Average
2,498,475
1,821,092
4,319,566
2,507,395
544,738
27
34
30
C"'l
25
-1
2,050,163
Oregon
i:l
16
I~
"'\5
~
:::
£:..
~.
~
"-.l
Capital Access Programs
Appendix III-J
Capital Access Program State Laws
State
State Law
Date Enacted
Arkansas
Arkansas Statutes Annotated 15-5-1101 et seq.
1993
California
California Health & Safety Code § 44559.1 et seq.
1994
Colorado*
Colorado Revised Statutes 29-4-710.5 et seq.
1993
Connecticut*
Connecticut General Statutes § 8-167 et seq.
1993
Florida*
Florida Statutes 19-288.901 et seq.
1996
lIIinois*
30 Illinois Compiled Statutes 750/9 et seq.
1997
Indiana
Indiana Code 4-4-26
1992
Louisiana*
Louisiana Revised Statutes 51.2311 et seq.
1998
Massachusetts
General Laws of Massachusetts chap. 23A, § 57
1993
Michigan*
Michigan Statutes Annotated 3.541 (201) et seq.
1986
Minnesota
Minnesota Statutes chapter 116J.876
1989
New Hampshire
New Hampshire Revised Statutes chap. 162-A:12
1992
New York City*
New York State Consolidated Laws chap. 15
1993
North Carolina
North Carolina 1993 Session Laws, chap. 769, § 28.1 (a7)
1994
Ohio (Akron)*
Ohio Revised Code 1.166
1995
Oklahoma*
74 Oklahoma Statutes 5085.2 et seq.
1992
Oregon
Oregon Revised Statutes 285B.126
1989
Pennsylvania*
73 Pennsylvania Statutes 376.2
1994
Texas
Texas Government Code chap. 481, subchap. BB,
1997
§ 481.401 et seq.
Utah
Utah Code Annotated 9-2-1303 et seq.
1991
Vermont*
Vermont Statutes Title 10, chap. 12, § 279
1993
Virginia
Virginia Code 9-228.5 et seq.
1996
West Virginia*
West Virginia Code 31-15A-1 et seq.
1991
Wisconsin*
Wisconsin Statutes chap. 560.03
1992
*
No specific CAP legislation; generic economic development statute used.
'~.-r-~
- .
•
...
~
~
RCSS ROOM
...,-.
FROM THE OFFICE OF PUBLIC AFFAIRS
December 18, 2002
PO-3700
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $76,967 million as of the end of that week, compared to $75,943 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
December 6, 2002
December 13, 2002
75,943
76,967
TOTAL
I. Foreign Currency Reserves
I
a. Securities
Euro
Yen
TOTAL
Euro
Yen
TOTAL
6,515
12,717
19,232
6,625
13,031
19,656
o
o
Olwhich. issuer headqllartered in the Us.
b. Total deposits with:
10,744
b.i. Other central banks and BIS
2,553
13,297
10,905
2,616
13,521
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered olltside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
20,505
20,743
11,867
12,004
11,042
11,042
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 6, 2002
Euro
1. Foreign currency loans and securities
Yen
December 13, 2002
TOTAL
Euro
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
o
T
2.a. Short positiolls
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 6, 2002
Euro
I. Contingent liabilities in foreign currency
Yen
December 13, 2002
TOTAL
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
I.a. Collateral guarantees on debt due within I
year
I.b. Other contingent liabilities
2. Foreign cunency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central ballks
3.b. With banks and otherjinancial institutions
Headquartered ill the Us.
3.c. With banks and other./inancial institutiolls
Headquartered olltside the US.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. doIlar
4.a. Short positions
4.a.l. Bought puts
4.a.2. Written caIls
4.b. Long positions
4.b.l. Bought cal1s
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week may be
subject to revision. IMF data for the prior week are final.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
PO-3/v 1: Assistant Treasury
Secr~tary
for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 1 of 9
"
'~-f-"
''-1
.
..
",,-
PRLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 18, 2002
PO-3701
U.S. Assistant Treasury Secretary for Tax Policy Pam Olson
Remarks to the Tax Executives Institute
New York City, New York
December 18, 2002
Good afternoon. I would like to thank the New York Chapter of TEl for this
opportunity to discuss several tax policy issues to which we at Treasury have been
devoting considerable time - complex issues that truly demand our attention today.
My remarks this afternoon are going to touch on a wide range of tax issues, from
our international tax rules, to inversions, tax shelters, simplification, regulations on
R&E credits and capitalization, the voluntary disclosure initiative unveiled last week,
and the ongoing public dialogue we seek with all of you. That's a lot of ground to
cover in one lunch, but I promise not to dwell on any of the topics for an extended
time.
I. International Tax Rules
I'll begin with the topic of our international tax rules, a relatively small part of the
code that has caused a lot of headache, and created a competitive disadvantage
for many U.S. companies doing business abroad. The U.S. international tax rules
first developed in the early 1960s, when the U.S. economy was by far the dominant
economy in the world, and U.S. companies accounted for over half of all
multinational investments worldwide. Needless to say, the world has changed in
the past 40 years. When the rules were first developed, they affected relatively few
taxpayers and relatively few transactions. Today, there are very few U.S.-based
companies that are not faced with applying some aspect of the U.S. international
tax rules to their businesses.
To understand the significance of getting the tax rules right, it may be helpful to
consider for a moment the importance of international trade to the US economy
relative to what it was in the past. In 1960, trade in goods to and from the U.S.
represented just over six percent of GOP.
Today, trade in goods to and from the U.S. represents over 20 percent of GOP,
more than three times larger than in 1960, while trade in goods and services
represents more than 25 percent of GOP today.
Cross border investment, both inflows and outflows, also has grown dramatically in
the last 40 years. In 1960, cross border investment represented 1.1 % of GOP. In
2000, it was 15.9% of GOP, or annual cross-border flows of more than $1.5 trillion.
The aggregate cross border ownership of capital is valued at $15 trillion. Consider
the role of U.S. multinational corporations in the economy. They are now
responsible for more than one-quarter of U.S. output and about 15% of U.S.
employment.
At the same time companies are competing for sales, they are also competing for
capital: US-managed firms may have foreign investors, and foreign-managed firms
may have U.S. investors. Portfolio investment accounts for approximately 2/3 of
US investment abroad and a similar fraction of foreign investment in the U.S.
Viewed from the vantage point of an increasingly global marketplace, our tax rules
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PO-3 71] 1: Assistant Treasury Secn:tary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 2 of 9
appear outmoded, at best, and punitive of U.S. economic interests, at worst. Most
other developed countries of the world are concerned with setting a
competitiveness policy that permits their workers to benefit from globalization As
Deputy Secretary Dam observed recently, however, our international tax policy
seems to have been based on the principle that if we have a competitive
advantage, we should tax it!
Let's start with the basics. Our income tax system as a whole dates back to shortly
after the turn of the last century, a time when cars were called horseless carriages
and buggy whip makers had just gone out of business. A bit has happened since
then. Of course. significant changes have been made to the tax code as well. In
the international area, we added the subpart F rules back in 1962. I would say that
they haven't aged as well as a lot of the 40 somethings in this room. We also made
fairly significant changes to the international tax rules in 1986. That would make
those rules teenagers now, and they have the characteristics of the average
teenager. They're hard to understand, messy, inconsistent, and display little regard
for the real world.
The global economy looked very different when the subpart F rules were put in
place than it does today. The same is true of the U.S. role in the global economy.
Forty years ago the U.S. was dominant, accounting for over half of all multinational
investment in the world. We could make decisions about our tax system
essentially on the basis of a closed economy, and we could generally count on our
trade partners to follow our lead in tax policy. But the world has changed in the last
40 years, and the globalization of the U.S. economy puts ever more pressure on
our international tax rules.
What does globalization mean? This audience needs no explanation, but it is useful
to think about it for a minute. It means the growing interdependence of countries
resulting from increasing integration of trade, finance, investment, people and ideas
in one global marketplace. Globalization results in increased cross-border trade,
and the establishment of production facilities and distribution networks around the
globe. Technology is a key driving force behind globalization. Advances in
communications, Information technology, and transport have slashed the cost and
time taken to move goods, capital, people, and information. Firms in this global
marketplace differentiate themselves by being smarter: applying more cost efficient
technologies or innovating faster than their competitors. The returns to being
smarter are much higher than they once were as the benefits can be marketed
worldwide.
The significance of globalization to the U.S. economy since the enactment of
subpart F is apparent from the statistics on international trade and investment I
mentioned earlier. It is worth noting that numerous studies confirm a strong link
between trade and economic growth. Trade appears to raise income by spurring
the accumulation of physical and human capital and by increasing output for given
levels of capital.
The U.S. tax rules have important effects on international competitiveness both
because of the integration of domestic activities of U.S. multinational companies
with their foreign activities and because repatriated foreign earnings of foreign
investments are subject to U.S. domestic tax. Increasingly, the flow of goods and
services is not through purchases between exporters and importers, but through
transfers between affiliates of multinational corporations. The rules governing
transfer pricing, interest allocation, withholding rates, foreign tax credits, and the
taxation of actual or deemed dividends impacts these flows.
The U.S. tax system should not distort trade or investment relative to what would
occur in a world without taxes. The difficulty is that every country makes sovereign
decisions about its own tax system, so it is impossible for the U.S. to level all
playing fields simultaneously for each of the different forms competition might take
in every country.
The question we must answer is what should we do to increase the
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PO-3',O 1: Assistant Treasury Secretary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 3 of 9
competitiveness of U.S. businesses and workers. Professor Michael Graetz
observed in his book, The Decline (and Fall?) of the Income Tax:
The internationalization of the world economy has made it far more difficult for the
United States, or any other country for that matter, to enact a tax system radically
different from those in place elsewhere in the world. In today's worldwide economy,
we can no longer look solely to our own navels to answer questions of tax policy.
To date, our attempts to address one of the perceived competitive disadvantages
created by our laws have been repeatedly ruled inconsistent with the World Trade
Organization's rules. Earlier this year, a WTO appellate panel held that the
extraterritorial income exclusion regime of our tax law constituted a prohibited
export subsidy under the WTO rules.
Just two years before, a WTO appellate panel held that the foreign sales
corporation provisions constituted a similar, prohibited subsidy. President Bush has
made clear that the US. must comply with the WTO rulings. That result should be
obvious because - let's face it - no one has a greater stake in the WTO and in free
trade than the U.S Despite the WTO decisions against our foreign sales
corporation and extraterritorial income regimes, the WTO rules serve the economic
interests of American businesses and workers by opening markets and ensuring
fair play.
In addition to making clear that the U.S. must comply, the President made two
further decisions. He said that any response to the ruling must increase the
competitiveness of U.S. businesses. He also pledged to work with the Congress to
create the solution. Treasury is working closely with the tax-writing committees of
Congress to develop legislation that makes meaningful changes to our tax law to
satisfy the twin goals of honoring our WTO obligations and preserving the
competitiveness of U.S. bUSinesses operating in the global marketplace.
We must consider the ways in which our tax system differs from that of our major
trading partners to identify aspects that may hinder the competitiveness of U.S.
companies and workers. About half of the OECD countries employ a worldwide tax
system as does the U.S. However, even limiting comparison of competition among
multinational companies established in countries using a worldwide tax system,
U.S. multinationals can be disadvantaged when competing abroad. This is
because the United States employs a worldwide tax system that, unlike other
worldwide systems, may tax active forms of business income earned abroad before
it has been repatriated and may more strictly limit the use of the foreign tax credits
that prevent double taxation of income earned abroad.
The Accelerator-Subpart F. The focus of the subpart F rules is on passive,
investment-type income that is earned abroad through a foreign subsidiary.
However, the reach of the subpart F rules extends well beyond passive income to
encompass some forms of income from active foreign business operations. No
other country has rules for the immediate taxation of foreign-source income that are
comparable to the U.S. rules in terms of breadth and complexity.
For example, under subpart F, a U.S company that uses a centralized foreign
distribution company to handle sales of its products in foreign markets is subject to
current U.S. tax on the income earned abroad by that foreign distribution
subsidiary In contrast, a local competitor making sales in that market is subject
only to the tax imposed by that country. Similarly, a foreign competitor that uses a
centralized distribution company to make sales into the same markets generally will
be subject only to the tax imposed by the local country. U.S. companies that
centralize their foreign distribution facilities therefore face a tax penalty not imposed
on their foreign competitors.
The subpart F rules also impose current U.S. taxation on income from certain
services transactions, shipping activities and oil related activities performed
abroad. In contrast, a foreign competitor engaged in the same activities generally
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PO-37tH: Assistant Treasury Secretary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 4 of 9
will not be subject to current home-country tax on its income from these activities.
While the purpose of these rules is to differentiate passive or mobile income from
active business income, they operate to currently tax some classes of income
arising from active business operations structured and located in a particular
country for business reasons wholly unrelated to tax considerations.
Another significant problem with our international tax law is the rules regarding
Limitations on Foreign Tax Credits. The rules for determining and applying the
foreign tax credit are detailed and complex and can have the effect of subjecting
U.S.-based companies to double taxation on their income earned abroad. For
example, the foreign tax credit may be used only to offset U.S. tax on net foreignsource income and not to offset U.S. tax on U.S.-source income. Net foreignsource income is determined by reducing foreign-source income by U.S. expenses
allocated to that income. Under the current rules, the interest expense of a U.S.
affiliated group is allocated between U.S. and foreign-source income based on the
group's total U.S. and foreign assets. These rules treat the interest expense of a
U.S. parent as relating to its foreign subsidiaries even where those subsidiaries are
equally or more leveraged than the U.S. parent. This over-allocation of interest
expense to foreign income inappropriately reduces the foreign tax credit limitation
because it understates foreign income. The effect can be to subject U.S.
companies to double taxation. Other countries do not have expense allocation
rules that are nearly as extensive as ours.
The U.S. foreign tax credit rules are further complicated by separate foreign tax
credit basket limitations and overall foreign loss limitations, both of which give rise
to the potential for double taxation.
A third problem with our international tax rules is the Double Tax on EquityFinanced Investments. The U.S. is one of the few OECD countries that does not
provide for some form of integration between taxes paid at the corporate level and
taxes paid by individuals on distributions from corporations.
The present U.S. system, by taxing income at the corpora·te level and dividends at
the individual level, increases the hurdle rate of return (i.e., the minimum rate of
return required on a prospective investment) undertaken by corporations. Whether
competing at home against foreign imports or competing abroad through exports
from the U.S. or through foreign production, the double tax makes it less likely that
the U.S. company can compete successfully against a foreign competitor. Most
OECD countries alleviate this problem by reducing personal income tax payments
on corporate distributions.
We have a tax code that has not kept pace with the globalization that has transpired
over the last 40 years. It is time for us to reconsider the rules based on today's
realities and the future unfolding before us.
We must design rules that equip us to compete in the global economy - not
fearfully, but hopefully. The fact of the matter is that we - all of us - benefit
significantly from vigorous participation in the global economy.
Over the past 20 years, U.S. companies that invest abroad exported more
(exporting between one-half and three-quarters of all U.S. exports), paid their
workers more, and spent more on R&D and physical capital than companies not
engaged globally.
While 80 percent of U.S. investment abroad is located in high-income countries, it is
useful to say a word about the investment that goes into developing countries.
These countries recognize U.S. investment as important to achieving sustainable
poverty-reducing growth and development. I'm asking you to look at this
altruistically, but if you can't, then look at it selfishly. Poker games are revenue
neutral, but international trade and investment are not poker games. Healthy
foreign economies mean more markets for our products. They mean more
opportunities for us to profitably invest. But to return to the altruistic point - foreign
investment means sharing our ideas, our knowledge, our values, and our capital.
That is not a zero sum game.
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PO-31V 1: Assistant Treasury Secretary for Tax Policy Pam Olson Remarks to the Tax Ex... Page 5 of 9
II. Inversions
Now I would like to discuss a problem that is a corollary to our international tax
rules: the problem of "inversions." None of us want to see a company effectively
renounce its citizenship for tax purposes, which is what an inversion is, though the
departure is only on paper. The fact that inversions have been considered,
planned, and executed highlights two serious problems with U.S. tax laws: the
opportunities for reducing U.S. income tax on U.S.-based operations and the extent
to which our tax laws are out of step with the global economy and the laws of our
major trading partners.
The rapid response to inversion transactions by Treasury and both tax-writing
committees appears to have halted the transactions. Although Treasury and the
Hill have taken different approaches to the issue, we have been united in our
determination to address them. This united front makes it highly unlikely the
transactions will return before Congress has the opportunity to act.
The delay in enacting legislation has had an ancillary benefit. It has provided us
with more time to consider and craft an appropriate response. A too rapid response
quite likely would have taken the form of an attempt to ban the transactions - much
like treating the symptoms without curing the underlying disease. In this case, the
treatment would have masked the symptoms quite effectively. But, the disease
would live on and manifest itself in alternatives that achieved the same result with
equally - or more - unfortunate consequences for the economy.
As a policy matter, there is no reason for us to enact laws that encourage
companies to form offshore, or that favor foreign acquisitions relative to domestic
acquisitions. Yet that is the current slope of the playing field, and it is that slope we
must correct. DOing so involves reconsidering many of our international tax rules
and removing opportunities to inappropriately reduce U.S.-based income,
something that must be done without discouraging or harming foreign investment.
Striking a satisfactory balance between protecting the U.S. tax base and not
harming foreign investment is a difficult task. The many helpful comments we have
received will, I am confident, result in the crafting of appropriate rules.
III. Tax Shelters
My next subject is tax shelters. For the last few years, it seems like we've been
tuned to radio station NOTAX, broadcasting all shelters, all the time! With all the
attention focused on the topic, with legislative changes, regulatory changes, and a
torrent of anti-shelter words, how is it that the perception is the problem has grown
worse?
In part, it is because the torrent of words was not connected to a torrent of actions.
While the risk to the system was identified, the compliance resource allocation
remained largely unchanged. For example, shelter registrations filed between
1997 and 2000 included a number of listed transactions. However, until the Office
of Tax Shelter Analysis was formed and a strong Treasury commitment to pursuing
the transactions was made clear, those registrations gathered dust.
What happens when promoters register transactions and get no response? Same
thing that happens when children act up and no one tells them to quit it. They do it
again. So promoters told their customers the IRS is "OK" with the transactions.
The IRS knows about the transactions and has done nothing to shut them down so
obviously things are copasetic, right? Wrong. Companies under continuous audit like those for whom you in this room work - know better than to believe that. You
know the difference between approval and neglect. But, many did not understand
that - or they chose to believe otherwise - and so tax practice deteriorated without
adult supervision.
Well, folks, the parents have arrived at the party. Unfortunately, we have a lot of
cleaning up to do, but the effort is underway. By moving resources from accounting
http://www.treas.gov/press/reieaSeslp03701.htm
12/23/2002
PO-37U1: Assistant Treasury Secr6iary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 60f9
method nits to transactions promising large permanent tax losses, by supporting
taxpayer disclosure, and by acting promptly to resolve issues, we firmly believe we
can put this problem behind us and begin to restore a measure of confidence in our
tax system. With B. John Williams on board as Chief Counsel and the Justice
Department aiding the effort, I believe the efforts of the IRS operating divisions are
beginning to get traction.
As we work to put this problem behind us, many of you in this room - including
some who have never entered into an abusive tax avoidance device - will have to
live through the clean up efforts and our efforts to get our arms around the
problem. I apologize for that. We recognize that the new disclosure and list
keeping regulations will impose an additional burden on you. We are considering
ways to minimize that burden while preserving our goals of increased transparency
and certainty. As I see this, taxpayers, practitioners, and the government share a
mutual goal here - reducing the burden of complying with and administering the law
while ensuring that the IRS's resources are devoted to productive endeavors. You
have my commitment that we will work with you to produce the least burdensome
rules we possibly can. We hope that you will continue to give us suggestions on
how to improve the new disclosure and list keeping rules.
Shelter legislation the Treasury Department helped to craft was introduced in both
Houses of Congress this year, but was not enacted. We believe some of the
legislative changes at are important to further deterring tax shelter activity. Some of
it, we fear, would make tax administration more difficult, thus potentially worsening
rather than improving tax compliance. The piece of legislation I would most like to
see passed is the change to the registration rules under section 6111. That change
would allow us to conform the definition of a potentially abusive tax shelter across
the board - for return disclosure, registration, and list maintenance purposes.
One thing I have become convinced of since joining Treasury is the importance of
acting even without a legislative mandate. We don't always need laws to tell us the
difference between right and wrong or to tell us what we ought to do.
Consequently, we are exploring what the IRS and Treasury can do to implement
registration on a voluntary basis. Why, you may ask, would anyone voluntarily
register anything? Because doing so illustrates best practices, and it is time for us
as good citizens to adopt best practices without an act of Congress compelling us
to do so. We'll be considering what action we can take to support the voluntary
adoption of best practices. The IRS offering such support is not unheard of. Similar
support was provided for a best practice - disclosure - in the disclosure initiative
and settlement guidelines released a year ago. We welcome your thoughts.
IV. Simplification
Now onto one of our most deadly dull, but important issues, tax simplification. The
problems with the U.S. tax system go beyond outdated international tax rules,
corporate inversions, and abusive tax shelters. We have complicated compliance
by legislating detailed rules on the calculation of taxable income that differ from the
rules used to calculate book income, creating inevitable disparities that undermine
confidence in our tax and financial accounting systems. We have created a
labyrinth of rules so complicated we cannot satisfactorily predict results, then iced
the cake with an alternative minimum tax calculation pro-cyclical in effect and
loaded with other unintended consequences. We have written rules that have less
to do with measuring income than with penalizing certain behaviors or certain
classes of taxpayers. We have created a system so complicated that it has eroded
the public's confidence.
This is surely not a tax system anyone would set out to create, but it is the system
that has evolved over time. Let's face it. We have reached the point where our tax
system is held together by chewing gum and chicken wire. Moreover, a lot of the
chewing gum and chicken wire was applied in haste, not strategically. It is time for
us to clean house.
Last year, the Joint Committee published a 3-volume list of simplification without
touching the complexities that reflect congressional policy choices. That is
http://www.treas.gov/press/release5lp03701.htm
12/2312002
PO-37Ul: Assistant Treasury Secr€tary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 7 of9
illustrative of how much must be done.
Let me give you an example. The Code contains five different definitions of child.
While there are reasons for the differences, they don't outweigh the complexity they
create or the frequent mistakes that result. Last spring, the Treasury Department
proposed a uniform definition of child that would apply for all five of the child benefit
provisions of the code. That would be significant simplification. It would shorten
instructions, make record-keeping simpler, and reduce errors. Of course, there
would still be five different provisions in the code covering child benefits. The next
step is to find a way to combine some or all of those benefits - perhaps yielding a
look-up table of some sort - that would make filing much simpler and give
taxpayers a clear picture of what their tax liabilities are likely to be.
The system needs an overhaul because it has become too complex and a barrier to
- rather than a facilitator of - economic growth. While we proclaim our desire for a
tax system that does not deter individuals from saving and investing, we offer a
system that taxes those who save more heavily than those who consume. While
we proclaim our desire for a tax system that encourages businesses to invest and
grow, we offer a tax system so complex and disadvantageous that we face the
specter of companies moving their operations overseas because doing so allows
them to lower their taxes. While we proclaim our desire for a system inexpensive to
comply with, we offer instead a system that requires burdensome record-keeping,
changes year after year, and compels even average Americans to pay someone to
prepare their returns to avoid mistakes and find the benefits that would otherwise
elude them.
The Treasury Department is developing recommendations for a thorough overhaul
of our tax system. The task will be neither easy nor quick. Our economy has
grown up around our current system. The result is entanglements that can only be
unwound with care. There are no easy or obvious paths to take; each involves
trade-offs that must be carefully weighed. But we believe the potential benefits
make this a task worth undertaking.
The following are the goals we will strive to achieve:
1. A system that is simple and easy to understand, with reasonable filing and
record-keeping requirements, and non-intrusive tax administration.
2. A system that is efficient and minimizes interference in economic decisions.
3. A system that supports the international competitiveness of U.S. businesses and
workers.
4. A system that is fiscally sound, raising the revenues necessary for government
operations.
5. A system that is stable enough to avoid the constant tinkering of years past.
6. A system that is understood to be fair, treating similarly situated taxpayers alike
and equitably distributing tax burdens.
Our citizens deserve a tax system that is transparent, fair, and that assists rather
than impedes economic growth. Our current system meets none of those
objectives. We must step back and design a system that will drive our economic
engine through the 21 st Century and beyond.
V. R&E and Capitalization
Legislative simplification is not, of course, the only way to simplify compliance and
administration. We are also trying to create simpler and more administrable rules
under the current system. I would like to take a moment now to briefly discuss two
of the more significant projects that we have been working on: the R&E credit and
capitalization. These projects reflect Treasury's view - a view shared by the IRS that taxpayers should be provided clear rules in advance of undertaking expenses,
gathering information, and filing returns, and that issues should be resolved through
the rule-making process (either administrative or legislative) and not through
litigation. Resolution of issues through litigation is expensive, time-consuming, and
http://www.treas.gov!press/releaSes!p03701.htm
12/23/2002
PO-37ul: Assistant Treasury Secretary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 8 of9
risky to tax administration and the development of sound tax policy. With a properly
functioning published guidance process, litigation should be unnecessary except to
enforce the laws.
R&E
We have two projects in the research credit area. The first addresses the allocation
of the credit among members of a controlled group. The second addresses the
qualification of expenses for the credit. Both projects are priorities.
As many of you know, the proposed regulations last December made a number of
important changes to the earlier final regulations issued in January of 2001. In
particular, the proposed regulations addressed the general standard for qualifying
expenses as well as the definition and qualification of internal use software. The
proposed regulations also eliminated the credit-specific record-keeping
requirements.
Most of the comments we have received support the changes we made in the
proposed regulations. However, a number of taxpayers, including many financial
institutions have expressed considerable concern about the definition of internal
use software.
This definition generally requires that the software be sold for separately stated
consideration in order to not be considered internal use software. Other concerns
have been expressed about the additional three-part test that applies to this type of
software.
As I mentioned earlier, one of our priorities is guidance that resolves controversies
between taxpayers and the IRS. By that, we do not mean guidance that simply
moves the line of controversy in one direction or another. The definition of internal
use software contained in the proposed regulations is intended to provide a clear
rule based on a factor that distinguishes internal use software from commercial
software. As with any bright-line rule, there are many cases that will be near that
line, on both sides.
We recognize the concerns expressed by many taxpayers, in a number of different
industries, that the proposed definition of internal use software is too broad-that it
sweeps in software that is outside Congress' original contemplation of what should
qualify for the credit. We recognize the concern that the proposed definition may
disadvantage taxpayers who undertake software development in house rather than
purchasing software from a vendor and taxpayers providing services other than
computer services relative to taxpayers in the computer service business.
We are considering all of these comments with an eye towards issuing final
guidance as soon as possible. As many of you know, the research credit has been
one of the most contentious issues between large taxpayers and the IRS, and our
goal for this guidance is the resolution of those controversies.
Capitalization
This morning, Treasury and the IRS issued proposed regulations addressing when
costs to acquire, create or enhance intangible assets must be capitalized under
section 263(a). The objectives of the proposed regulations are to reduce
controversy, provide certainty regarding the expenses that must be capitalized,
facilitate record keeping for those expenses, reduce examination resources
currently devoted to capitalization issues, and balance administrative and record
keeping costs with clear reflection of income principles.
The proposed regulations follow the structure of the advance notice of proposed
rulemaking issued in January. Similar to the advanced notice, the proposed
regulations describe specific categories of expenditures that taxpayers will be
required to capitalize under section 263(a). These categories include costs certain
to result in future benefits of a substantial nature that historically have been
understood to be capital expenditures. Other expenditures for intangible assets
http://www.treas.gov/press/releaseslp03701.htm
12/23/2002
PO-3701: Assistant Treasury Secretary for Tax Policy Pam Olson Remarks to the Tax Ex...
Page 9 of9
would not be subject to capitalization under section 263(a). The standard we have
used to guide our formulation of the rules is the significant future benefit test
articulated by the Supreme Court, flavored by practicality and common sense. It is
important to note that "significant future benefit" is not, standing alone, a rule. That
is because it would not provide useful guidance to taxpayers or IRS agents. It is,
rather, the measunng rod we have used to determine the correctness of the rules
we have proposed.
By creating an exclusive list of capitalized costs, the proposed regulation seeks to
provide clear and administrable rules that will reduce controversy between
taxpayers and the IRS.
To reduce administrative and record keeping costs, the proposed regulations also
propose safe harbors and simplifying assumptions-that practically and common
sense that I mentioned. For example, they include a "12 month rule" that permits
deduction of the costs of certain intangible assets whose lives are of a relatively
short duration, de minimis rules that permit deduction of certain costs that do not
exceed $5,000, and a rule that permits deduction of employee compensation
(including bonuses and commissions) and overhead costs. The proposed
regulations also contain a 15 year safe harbor amortization period for costs to
create certain intangible assets that do not have a readily ascertainable useful life.
We believe these proposed regulations, when finalized, will significantly reduce the
amount of controversy that we've seen in the capitalization area in recent years.
VI. Voluntary Disclosure Initiative
Before I conclude, I would like to briefly mention the IRS announcement last week
that it has revised and updated a key practice that assists agency investigators in
determining whether a case is recommended for criminal prosecution. A taxpayer's
timely, voluntary disclosure of a substantial unreported tax liability has long been an
important factor in deciding whether the taxpayer's case should ultimately be
referred for criminal prosecution. The IRS has modernized this practice to allow
more taxpayers to voluntarily comply with their obligations and to reduce the
uncertainty over what constitutes a "timely" disclosure. This is an important step in
helping taxpayers and their advisers understand the steps they can take and the
circumstances in which they can get back into compliance with the tax laws without
fear of prosecution. With these practices in place, we hope that more taxpayers will
do the right thing and voluntarily disclose their outstanding tax liabilities.
VII. PubliC dialogue
Let me close by noting that we are committed to a better and more open dialogue
with the public. One illustration of that is our quarterly updates of the business plan,
which reflect our continued conversation with you about the issues we need to
address. Another illustration of that is the issuance in proposed form of section
302/318, consolidated return, and tax shelter regulations. A notice of proposed
rulemaking is the opening in a dialogue with the public about what the rules should
be. We will work diligently to propose sound rules and to do so rapidly enough to
meet your needs.
Unfortunately, no immortals have yet gone to work at IRS or Treasury. We're all
human. We will make mistakes. We will also have differences of opinion from time
to time. But have no doubt about it. We appreciate it when you praise us, but we
especially value your criticism. It helps us stay on track.
http://www.treas.gov/presslreleases!p03701.htm
12/2312002
Bureau of the Public Debt: Treasury's Inflation-Indexed Securities Reference CPI Numbe ... Page 1 of 1
...
-------------------------fii'PUBLIC DEBT NEWS ::\;~>);I
...:;,;:::"'~"""""-
-------------------------\~~.f./Department of th ... Treasury· !lure." 01 the Publl" I).bt • W"shlrl>:t''''. DC 2()2:19
~~/
FOR IMMEDIATE RELEASE
December 17, 2002
Contact: Office of Financing
(202) 691-3550
TREASURY'S INFLATION-INDEXED SECURITIES
JANUARY REFERENCE CPI NUMBERS AND DAILY INDEX RATIOS
Public Debt announced today the reference Consumer
Price Index (CPI) numbers and daily index ratios
for the month of January for the following
Treasury inflation-indexed securities:
(1) 3-3/8, 10-i'ear notes (ich' c:ranuary 1 ),2007
(2) 3-5/8% 10-year notes due January 15, 2008
(3) 3-5/8% 30-year bonds due April 15, 2028
(4) 3-7/8% 10-year notes due January 15, 2009
(5) 3-7/8% 30-year bonds due April 15, 2029
(6) 4-1/4% 10-year notes due January 15, 2010
(7) 3-1/2% 10-year notes due January 15, 2011
(8) 3-3/8% 30-1/2-year bonds due April 15, 2032
(9) 3-3/8% 10-year notes due January 15, 2012
(10) 3% 10-year notes due July 15, 2012
1
This information is based on the non-seasonally
adjusted u.S. City Average All Items Consumer Price
Index for All Urban Consumers (CPI-U) published by
the Bureau of Labor Statistics of the U.S. Department
of Labor.
In addition to the publication of the reference CPI's
(Ref CPI) and index ratios, this release provides the
non-seasonally adjusted CPI-U for the prior threemonth period.
The information for February is expected to be
released on January 16, 2003.
000
January Reference CPI Numbers and Daily Index Ratios Table PDF format (file size-16KB, uploaded12117/02)
Intellectual Property
I
Privacy & Security Notices
I Terms
& Conditions
I Accessibility I
Data Quality
U.S. Department of the Treasury, Bureau of the PubliC Debt
Last Updated January 12, 2005
fO /370?-http://w~rwpublicdebttreas.gov/ofrofcpi012003pr.htm
5/5/2005
Bureau ()fthe Public Debt: 3-3/S'Yo TREASURY lO-YEAR INFLATION-INDEXED NO ... Page 10f2
3-3/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2007
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2007
9128272M3
January 15, 1997
February 6, 1997
April 15, 1997
January 15, 2007
158.43548
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181.0
181.3
181.3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
Index Ratio
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
1.14431
http://w~rw.publicdebt.treas.gov/of/oflOa012003.htm
5/5/2005
Bureau of the Public Debt: 3-5/8% TREASURY lO-YEAR INFLATION-INDEXED NO ... Page 1 of2
3-5/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15,2008
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2008
9128273T7
January 15, 1998
January 15, 1998
October 15, 1998
January 15, 2008
161.55484
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181. 0
181. 3
181. 3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
Index Ratio
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
1.12222
http://www.publicdebt.treas.gov/of/oflOb012003.htm
5/5/2005
Bureau of the Public Debt : 3-5/8~/o TREASURY 30-YEAR INFLATION-INDEXED BO ... Page 1 of2
3-5/8% TREASURY 30-YEAR INFLATION-INDEXED BONDS
Due April 15, 2028
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998
April 15, 2028
161.74000
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181. 0
181. 3
181. 3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Janua'ry
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://wVl·w.publicdebt.treas.gov/otlot30a012003.htm
Index Ratio
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
1.12093
5/5/2005
Bureau vfthe Public Debt: 3-7/&% TREASURY 10-YEAR INFLATION-INDEXED NO ... Page I of2
3-7/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2009
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2009
9128274Y5
January 15, 1999
January 15, 1999
July 15, 1999
January 15, 2009
164.00000
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181. 0
181. 3
181. 3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://wv:w.publicdebttreas.gov/ot!oflOcOI2003.htm
Index Ratio
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
1.10549
5/5/2005
Bureau of the Public Debt: 3-7/8% TREASURY 30-YEAR INFLATION-INDEXED BO ... Page 1 of2
3-7/8% TREASURY 30-YEAR INFLATION-INDEXED BONDS
Due April 15, 2029
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATES:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Bonds of April 2029
912810FH6
April 15, 1999
April 15, 1999
October 15, 1999
October 15, 2000
April 15, 2029
164.39333
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181.0
181.3
181.3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://www.publicdebt.treas.gov/of/of30b012003.htm
Index Ratio
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
1.10284
5/512005
Bureau of the Public Debt: 4-1I4'ro TREASURY 10-YEAR INFLATION-INDEXED NO ... Page 1 of2
4-1/4% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2010
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series A-2010
9128275W8
January 15, 2000
January 18, 2000
July 17, 2000
January 15, 2010
168.24516
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181. 0
181. 3
181. 3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://wv.w.publicdebt.treas.gov/of!~f10d012003.htm
Index Ratio
1.07759
1.07759
1. 07759
1.07759
1. 07759
1.07759
1.07759
1. 07759
1.07759
1. 07759
1.07759
1.07759
1.07759
1.07759
1.07759
1.07759
1.07759
1. 07759
1.07759
1.07759
1.07759
1.07759
1.07759
1. 07759
1.07759
1.07759
1. 07759
1.07759
1.07759
1.07759
1. 07759
5/5/2005
Bureau of the Public Debt: 3-112% TREASURY 10-YEAR INFLATION-INDEXED NO ... Page I of2
3-1/2% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2011
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
Ref CPI and Index Ratios for January 2003:
3-1/2% TREASURY 10-YEAR INFLATION-INDEXED NOTES
DESCRIPTION:
Series A-2011
CUSIP NUMBER:
9128276R8
DATED DATE:
January 15, 2001
ORIGINAL ISSUE DATE:
January 16, 2001
July 16, 2001
ADDITIONAL ISSUE DATE:
MATURITY DATE:
January 15, 2011
174.04516
Ref CPI on DATED DATE:
January 2003
TABLE FOR MONTH OF:
31
NUMBER OF DAYS IN MONTH:
181. 0
181. 3
181.3
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://www.publicdebt.treas.gov/offoflOeOI2003.htm
Index Ratio
1. 04168
1.04168
1.04168
1.04168
1.04168
1. 04168
1. 04168
1. 04168
1. 04168
1.04168
1.04168
1. 04168
1. 04168
1. 04168
1. 04168
1.04168
1. 04168
1.04168
1. 04168
1. 04168
1.04168
1. 04168
1. 04168
1. 04168
1.04168
1.04168
1.04168
1.04168
1. 04168
1.04168
5/5/2005
Bureau of the Public Debt: 3-3/8% TREASURY 30-1/2-YEAR INFLATION-INDEXED ... Page 1 of2
3-3/8% TREASURY 30-1/2-YEAR INFLATION-INDEXED
BONDS
Due April 15, 2032
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
April 15, 2032
177.50000
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181. 0
181. 3
181. 3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Bonds of April 2032
912810FQ6
October 15, 2001
October 15, 2001
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181. 30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://wv.-w.publicdebt.treas.gov/offcDOc012003.htm
Index Ratio
1. 02141
1.02141
1.02141
1.02141
1. 02141
1.02141
1.02141
1.02141
1.02141
1.02141
1.02141
1.02141
1.02141
1.02141
1.02141
1.0214]:
1.02141
1.02141
1. 02141
1.02141
1.02141
1.02141
1.02141
1.02141
1. 02141
1. 02141
1.02141
1.02141
1. 02141
1.02141
1.02141
5/5/2005
Bureau of the Public Debt: 3-3/8CYo TREASURY IO-YEAR INFLATION-INDEXED NO ... Page 1 of2
3-3/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2012
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
January 15, 2012
177.56452
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181. 0
181. 3
181. 3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Series A-2012
9128277J5
January 15, 2002
January 15, 2002
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://wv.w.publicdebt.treas.gov/ovoflOfOI2003.htm
Index Ratio
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
1. 02104
1.02104
1.02104
1.02104
1.02104
1.02104
1.02104
5/5/2005
Bureau of the Public Debt: 3% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Page I of2
30/0 TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due July 15, 2012
Ref CPI and Index Ratios for January 2003
Contact: Office of Financing
202-691-3550
DESCRIPTION:
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH:
Series C-2012
912828AF7
July 15, 2002
July 15, 2002
October 15, 2002
July 15, 2012
179.80000
January 2003
31
CPI-U (NSA) September 2002
CPI-U (NSA) October 2002
CPI-U (NSA) November 2002
181.0
181.3
181.3
Month
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
January
Calendar Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Year
Ref CPI
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181. 30000
181. 30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
181.30000
http://www.publicdebt.treas.gov/ofioflOgOI2003.htm
Index Ratio
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
1.00834
5/5/2005
PO-3~/03:
Telecommunications S.£:rvice Priority (TSP) Program,
Page 1 of 1
f-'HLSS H()OM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Acioilc'J') ArIO/JaICr) P("HJel" '.
December 19, 2002
PO-3703
Telecommunications Service Priority (TSP) Program,
The Financial and Banking Information Infrastructure Committee (FBIIC), chaired
by Treasury Assistant Secretary for Financial Institutions Wayne A. Abernathy,
today announced its policy and process for sponsoring qualified private sector
financial organizations for the Telecommunications Service Priority (TSP) Program.
The TSP Program, administered by the National Communications System (NCS),
was developed to ensure priority treatment for the nation's most important
telecommunication services -- those supporting National Security and Emergency
Preparedness (NS/EP) missions. The TSP Program authorizes and requires
service vendors to provide and restore TSP-assigned services before non-TSP
services. It also provides vendors with legal protection for giving preferential
treatment to NS/EP users over non-NS/EP users.
The FBIIC is a standing committee of the President's Critical Infrastructure
Protection Board and also serves as the Office of Homeland Security Financial
Markets Work Group. The FBIIC is charged with coordinating federal and state
financial regulatory efforts to improve the reliability and security of the U.S. financial
system.
Members of the FBIIC include representatives of the Commodity Futures Trading
Commission, the Conference of State Bank Supervisors, the Federal Deposit
Insurance Corporation, the Federal Housing Finance Board, the Federal
Reserve Bank of New York, the Federal Reserve Board, the National Association
of Insurance Commissioners, the National Credit Union Administration, the
Office of the Comptroller of the Currency, the Office of Federal Housing
Enterprise Oversight, the Offices of Homeland and Cyberspace Security, the
Office of Thrift Supervision, and the Securities and Exchange Commission.
The FBIIC Telecommunications Service Priority policy is attached. It is also
available on the FBIIC website wwwfbilc.gov.
Related Documents:
•
TSP Policy
http://www.treas.gov/press/release~po3703.htm
12/23/2002
Issued: December 11, 2002
Financial and Banking Information Infrastructure Committee
Sponsorship of Priority Telecommunications Access for Private Sector Entities
through the National Communications System
Telecommunications Service Priority (TSP) Program
Background
The National Communications System (NCS) was established in 1963 to provide priority
communications support to critical government functions during emergencies. In 1984 the National
Security and Emergency Preparedness (NS/EP) capabilities of NCS were broadened and· an
interagency group (currently twenty-two federal departments and agencies) was formed to help
coordinate and plan NS/EP services. The NCS has developed a number of priority
telecommunications services that are also available to private sector entities through sponsorship by
an NCS member department or agency. The events of September 11, 2001 put a new focus on the
importance of these programs to the nation and to the financial sector.
In order to provide guidance to financial organizations seekin¥ sponsorship for NCS services, the
Financial and Banking Information Infrastructure Committee (FBIIC) is developing a series of
policies on the sponsorship of priority telecommunications access for private sector entities through
the NCS. The goal of the policies is twofold: first, to make financial organizations and service
providers aware of NCS programs and, second, to provide a consistent set of guidelines regarding
qualification criteria and the appropriate process for organizations that want to gain access to the
programs.
As a first step, on July 22, 2002 the FBIIC established a policy and process to sponsor qualifying
financial organizations for Government Emergency Telecommunications Service (GETS)2. The
enclosed policy addresses the FBIIC's policy and process to sponsor qualifying financial sector
organizations for the NCS Telecommunications Service Priority (TSP) Program.
TSP Program
The TSP Program was developed to ensure pnonty treatment for the Nation's most important
telecommunication services, services supporting NS/EP missions. Following natural or technical
disasters, telecommunications service vendors may become overwhelmed with requests for new
services and requirements to restore existing services. The TSP Program authorizes and requires
service vendors to provision and restore TSP assigned services before non-TSP services and
provides vendors with legal protection for giving preferential treatment to NS/EP users over nonNS/EP users.
I The Financial and Banking Information Infrastructure Committee (FBIIC) is a standing committee of the President's
Critical Infrastructure Protection Board, serves as the Office of Homeland Security Financial Markets Work Group, and is charged
with coordinating federal and state financial regulatory efforts to improve the reliability and security of the U.S. financial system.
Treasury's Assistant Secretary for Financial Institutions chairs the committee. Members of the FBIIC include representatives of the
Commodity Futures Trading Commission, the Conference of State Bank Supervisors, the Federal Deposit Insurance Corporation, the
Federal Housing Finance Board, the Federal Reserve Bank of New York, the Federal Reserve Board, the National Association of
Insurance Commissioners, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of
Federal Housing Enterprise Oversight, the Offices of Homeland and Cyberspace Security, the Office of Thrift Supervision, and the
Securities and Exchange Commission.
2
The GETS Policy is posted atwww.fbiic.gov.
FBIIC Telecommunications Service Priority (TSP) Sponsorship Policy
The TSP Program has two components: restoration and provIsIOning. A restoration prIOrIty is
applied to new or existing telecommunication services to ensure their restoration before any nonTSP services. Priority restoration is necessary for a TSP service because interruptions may have a
serious adverse effect on the supported NS/EP function. TSP restoration priorities must be
requested and assigned before a service outage occurs. As a matter of general practice,
telecommunications service vendors restore existing TSP services before provisioning new TSP
services. A provisioning priority is obtained to facilitate priority installation of new
telecommunication services. Provisioning on a priority basis becomes necessary when a service user
has an urgent need for a new NS/EP service that must be installed immediately (e.g., in an
emergency) or in a shorter than normal interval.
Telecommunication carrier tariffs for providing TSP are filed with the FCC and state regulatory
agencies. The tariffs permit carriers to assess a one-time charge and a monthly charge for each
circuit assigned a TSP restoration authorization code. In the event new service is provisioned under
TSP, carriers can apply a surcharge to the normal installation charges for each telecommunication
service ordered. Finally, telecommunication carriers can assess a penalty to TSP customers for
reporting an erroneous outage on a TSP circuit that is traced to the customer's premise equipment.
Private-sector organizations that lease circuits that are granted TSP status must bear the cost of all
tariffs for TSP. More information about the TSP program is available on the NCS website
(http:,\\\\\\.ncs.!!m) under Programs.
All NS/EP missions fall into one of five TSP Program categories. All NS/EP telecommunication
services qualify for some level of TSP protection. The level is determined in part by the category
that represents the organization's mission. The five categories are: (A) National Security
Leadership, (B) National Security Posture and US Population Attack Warning, (C) Public Health,
Safety, and Maintenance of Law and Order, (D) Public Welfare and Maintenance of the National
Economic Posture, and (E) Emergency (Provisioning Requests Only). Categories A through Dare
referred to as "essential services".
Telecommunications services are designated as essential where a disruption of "a few minutes to
one day" could seriously affect the continued operations that support an NS/EP function. Essential
services are assigned a priority on a scale of 1 to 5 (with 1 as the highest priority) based on the
appropriate subcategory. Services in subcategory A qualify for priority levels 1-5; those in
subcategory B qualify for priority levels 2-5; those in subcategory C qualify for priority levels 3-5;
and services in subcategory D qualify for priority levels 4-5.
Any organization, Federal government, State government, local government, private industry, or
foreign government that has telecommunication services supporting an NS/EP mission is eligible to
participate in the TSP Program. All non-Federal TSP requests must be sponsored by a Federal
agency. A sponsor can be any federal agency with which a non-Federal user may be affiliated. The
sponsoring Federal agency ensures the telecommunications service supports an NS/EP function and
merits TSP.
2
FBIIC Telecommunications Service Priority (TSP) Sponsorship Policy
Sponsorship Criteria
The FBIIC policy builds upon and extends the TSP sponsorship policies established by the Federal
Reserve Board. The FBIIC policy contains additional sponsorship criteria to explicitly encompass a
broader group of eligible telecommunication circuits.
The FBIIC agencies have determined that to qualify for TSP sponsorship, financial organizations
and their service providers must support the performance of NS/EP functions necessary to maintain
the national economic posture (category D above). The FBIIC agencies will sponsor circuits which
meet the criteria described below.
1)
Circuits Supporting Critical Payment System Participants (Depository Institutions, Financial Utilities)
The Federal Reserve Board originally established policies and procedures for its sponsorship of
organizations for priority provisioning and restoration of telecommunications services under the
TSP program in 1993 (58 FR 38569, July 19, 1993). The Board recently updated its sponsorship
policy and expanded its sponsorship criteria. Further information is available through the Board's
website www.federalreserve.gov.
2) Circuits Supporting Key Securities & Derivatives Markets Participants
In addition, the Securities and Exchange Commission and the Commodity Futures Trading
Commission will sponsor circuits owned or leased by organizations that play key roles in the
conduct or operation of the securities and derivatives markets and related clearance and settlement
systems.
3) Circuits Supporting Other NSIEP Services
The FBIIC agencies will also sponsor circuits owned or leased by an organization that do not meet
the above sponsorship criteria if a disruption of those circuits could seriously affect operations that
support the maintenance of the national economic posture.
Sponsorship Process
The individual FBIIC agencies will contact appropriate financial organizations and service
providers for which they are the primary regulator and inform them of the process to be followed to
apply for TSP sponsorship.
If a financial organization or service provider believes that one or more of its circuits qualify for
TSP sponsorship, it should submit a sponsorship request in accordance with the process established
by its primary regulator.
PO-37\}4: Treasury Department Announces Additional Interim Guidance on Terrorism In...
Page 1 of2
f-' f-i L S S H () () M
FROM THE OFFICE OF PUBLIC AFFAIRS
December 18, 2002
PO-3704
Treasury Department Announces Additional Interim Guidance
on Terrorism Insurance for Insurance Industry
The Treasury Department today announced additional interim guidance for the
insurance industry in meeting certain requirements under the Terrorism Risk
Insurance Act of 2002, which was signed into law by President Bush on November
26,2002.
Today's interim guidance is designed to assist insurers in determining whether they
are covered by, and how they may comply with, certain immediately applicable
provisions of the Terrorism Risk Insurance Act prior to the issuance of final
regulations by the Treasury.
"We emphaSize again that the terrorism risk insurance program is in force today,
even as we refine the operational details," said Treasury Assistant Secretary
Wayne Abernathy, who oversees the Terrorism Risk Insurance Program. "We hope
that today's round of guidance will serve as an immediate, if temporary, roadmap
for insurers as they continue to incorporate the new law's provisions into their
business models. We will continue our close and productive working relationship
with the National Association of Insurance Commissioners (NAIC) to develop and
issue the most effective guidance possible."
Today's interim guidance, along with interim guidance issued by the Treasury on
December 3, 2002, can be used by insurers in complying with the statutory
requirements prior to the issuance of regulations, and remains in effect until
superceded by regulations or subsequent notice. Both interim guidance notices
and other information related to the Terrorism Risk Insurance Program can be
found at 'i N'!' II'l;, I~,ury fjO'.',lllp. Prior to issuance of final regulations, insurers and
other interested parties will have an opportunity to submit comments on proposed
regulations.
Today's notice provides interim guidance concerning the definition of insurer in
general and also concerning specific categories of insurers under the Act. All
entities that meet the definition of insurer under the Act are required to participate in
the Program. This includes state-licensed or admitted insurers, eligible alien surplus
line carriers, and insurers that are approved by federal agencies in connection with
maritime. aviation, or energy activity.
ThiS guidance builds upon the Treasury's previous interim guidance (that described
the lines of commercial property and casualty Insurance covered by the Program
and how an Insurer's "direct earned premium" would be measured).
In addition to providing further guidance concerning which entities are considered
insurers under the Program, the notice provides guidance concerning the scope of
insurance coverage, including geographic scope, under the Program, and how an
insurer under the Program may calculate its deductible for purposes of the
Program. For alien surplus line carriers and foreign insurers that are approved by a
federal agency in connection with maritime, aviation or energy activity, this
guidance describes procedures that should be followed so that this category of
insurers is treated in a manner similar to domestic insurers and so that they may
estimate the portion of their insurance coverage that covered by the Program,
http://www.treas.gov/press/releases!p03704.htm
12/23/2002
PO-37li~: Treasury Department Announces Additional Interim Guidance on Terrorism In...
Page 2 of 2
To assist all categories of insurers under the Program, the guidance provides
clarification regarding participation by affiliates and parent companies and how the
Treasury Intends to treat such entities for purposes of the Program. As described in
this guidance, all affiliates that meet the definition of insurer and are under common
control with an insurer should be considered as one insurer for purposes of the
Program. The guidance also describes how newly-formed insurers (e.g. newly
formed insurance companies that meet the definition of insurer but do not have the
necessary data to calculate their deductibles) can calculate their deductibles.
This guidance also provides a list of state residual market entities and state
workers' compensation funds that are required to participate in the Program.
Although these entities are required to participate as insurers in the Program, some
may be unable to determine their risk exposure at this time. The Treasury is waiving
the disclosure and "make available" requirements for this limited group of entities
and funds until regulations are issued for this group.
Finally, although the Treasury stated in its previous interim guidance that the
NAIC's model disclosures were not the exclusive means by which insurers could
comply with the Act, the Treasury has received numerous questions on that issue.
Today's interim guidance provides additional disclosure guidance.
http://www.treas.goy/press/releasevp03704.htm
12123/2002
PO-37U4b: Treasury Department Announces Additional Interim Guidance on Terrorism 1... Page 1 of 2
f-' f., l S S H () Co M
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free ;1,/, '/"
;1." ,,',,,(
I:, .11/'"
December 18, 2002
PO-3704b
Treasury Department Announces Additional Interim Guidance
on Terrorism Insurance Industry
The Treasury Department today announced additional interim guidance for the
insurance industry in meeting certain requirements under the Terrorism Risk
Insurance Act of 2002, which was signed into law by President Bush on November
26.2002.
Today's interim guidance is designed to assist insurers in determining whether they
are covered by, and how they may comply with, certain immediately applicable
provisions of the Terrorism Risk Insurance Act prior to the issuance of final
regulations by the Treasury.
"We emphasize again that the terrorism risk insurance program is in force today,
even as we refine the operational details," said Treasury Assistant Secretary
Wayne Abernathy, who oversees the Terrorism Risk Insurance Program. "We hope
that today's round of guidance will serve as an immediate, if temporary, roadmap
for insurers as they continue to incorporate the new law's provisions into their
business models. We will continue our close and productive working relationship
with the National Association of Insurance Commissioners (NAIC) to develop and
issue the most effective guidance possible."
Today's interim guidance, along with Interim guidance issued by the Treasury on
December 3, 2002, can be used by insurers in complying with the statutory
requirements prior to the issuance of regulations, and remains in effect until
superceded by regulations or subsequent notice. Both interim guidance notices
and other information related to the Terrorism Risk Insurance Program can be
found at VWIN treJSIJl j' ijCi'J/trlp. Prior to issuance of final regulations, insurers and
other interested parties will have an opportunity to submit comments on proposed
regulations.
Today's notice provides interim guidance concerning the definition of insurer in
general and also concerning specific categories of insurers under the Act. All
entities that meet the definition of insurer under the Act are required to participate in
the Program. This includes state-licensed or admitted insurers, eligible alien surplus
line carriers, and insurers that are approved by federal agencies in connection with
maritime, aviation, or energy activity.
This gUidance builds upon the Treasury's previous interim guidance (that described
the lines of commercial property and casualty insurance covered by the Program
and how an insurer's "direct earned premium" would be measured).
In addition to providing further guidance concerning which entities are considered
insurers under the Program, the notice provides guidance concerning the scope of
insurance coverage, including geographic scope, under the Program, and how an
insurer under the Program may calculate its deductible for purposes of the
Program. For alien surplus line carriers and foreign insurers that are approved by a
federal agency in connection with maritime, aviation or energy activity, this
guidance describes procedures that should be followed so that this category of
insurers is treated in a manner similar to domestic insurers and so that they may
http://wwv/.treas.gov/press/releases/p03704b.htm
12123/2002
PO-37lJ1b: Treasury Department Announces Additional Interim Guidance on Terrorism I...
Page 2 of2
estimate the portion of their insurance coverage that covered by the Program.
To assist all categories of insurers under the Program, the guidance provides
clarification regarding participation by affiliates and parent companies and how the
Treasury intends to treat such entities for purposes of the Program. As described in
this guidance, all affiliates that meet the definition of insurer and are under common
control with an insurer should be considered as one insurer for purposes of the
Program. The guidance also describes how newly-formed insurers (e.g. newly
formed insurance companies that meet the definition of insurer but do not have the
necessary data to calculate their deductibles) can calculate their deductibles.
This guidance also provides a list of state residual market entities and state
workers' compensation funds that are required to participate in the Program.
Although these entities are required to participate as insurers in the Program, some
may be unable to determine their risk exposure at this time. The Treasury is waiving
the disclosure and "make available" requirements for this limited group of entities
and funds until regulations are issued for this group.
Finally, although the Treasury stated in its previous interim guidance that the
NAIC's model disclosures were not the exclusive means by which insurers could
comply with the Act, the Treasury has received numerous questions on that issue.
Today's interim guidance provides additional disclosure guidance.
Related Documents:
•
Interim Guidance on Terrorism Insurance
http://ww.v.treas.gov/press/relea~es!p03704b.htm
12/23/2002
BILLING CODE 4810-02
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN IS0S-AA87
Financial Crimes Enforcement Network; Anti-Money Laundering Requirements B:orrespondent
Accounts for Foreign Shell Banks; Recordkeeping and Termination of Correspondent Accounts
for Foreign Banks.
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Final Rule.
SUMMARY: The Financial Crimes Enforcement Network (FinCEN) is issuing this final rule to extend the
time by which certain financial institutions must obtain infonnation from each foreign bank for which they
maintain a correspondent account concerning (1) the foreign bank's status as "shell" bank, (2) whether the
foreign bank provides banking services to foreign shell banks, (3) certain owners of the foreign bank, and
(4) the identity of a person in the United States to accept service of legal process.
DATES: This final rule is effective [INSERT DATE OF PUBLICATION IN THE FEDERAL
REGISTER].
FOR FURTHER INFORMATION CONTACT: Office of the Chief Counsel (FinCEN), (703) 905-
3590; Office of the Assistant General Counsel for Banking & Finance (Treasury), (202) 622-0480, or
Office of the Assistant General Counsel for Enforcement (Treasury), (202) 622-1927 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On September 26,2002, FinCEN published a final rule (67 FR 60562) implementing sections 313(a)
and 319(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the Act). Section 313(a) of the Act added
subsection U) to 31 U.S.C. 5318, which prohibits a Acovered financial
institutio~
from providing
Acorrespondent accounts@ in the United States to foreign banks that do not have a physical presence in any
country (foreign shell banks). Section 313(a) also requires those fmancial institutions to take reasonable
steps to ensure that correspondent accounts provided to foreign banks are not being used to provide
banking services indirectly to foreign shell banks.
Section 319(b) of the Act added subsection (k) to
31 U. S. C. 53 18, which requires any covered fmancial institution that provides a correspondent account to a
foreign bank to maintain records of the foreign bank:s owners and to maintain the name and address of an
agent in the United States designated to accept service of legal process for the foreign bank for records
regarding the correspondent account.
The September 26, 2002 fmal rule provided that a covered fmancial institution could SltisfY the
requirements of section 313(a) and 319(b) by obtaining from a foreign bank a certification that contained
the necessary information, or by otherwise obtaining documentation of the required information. With
respect to correspondent accounts that existed on October 28, 2002, the final rule required a covered
fmancial institution to close a correspondent account, within a commercially reasonable time, if the covered
financial institution did not receive the certification from the foreign bank, or otherwise obtain documentation
of the required information, on or before December 26,2002.
2
A significant nwnber of covered financial institutions, principally in the securities industry, have noted
that the December 26, 2002 deadline to obtain the required information is proving to be inadequate. Many
securities firms indicated that providing an effective explanation of their duties under the Act to a wide
variety of foreign banks, which may speak different languages and operate in different ways than their U.S.
counterparts, has in some cases, lengthened the process.
Moreover, the broad definition of a
correspondent account found in the Final Rule has increased the number of accounts subject to these
requirements and, consequently, has increased the burden on U.S. banks and broker-dealers to secure the
required information. Finally, because the Act has generally increased the overall level of regulatory
requirements for securities firms and depository institutions, they have been managing an increased overall
workload as a result of additional regulations, within a finite set of resources. For these reasons, the
process of gathering the necessary information to comply with section 313(a) and 319(b) of the Act is
taking longer than the time provided in the September 28 fmal rule.
II. The Current Rulemaking
This rule extends the time by which a covered financial institution must obtain the information required
to satisfy the requirements of sections 313( a) and 319(b) from December 26, 2002 to March 31, 2003.
Treasury and FinCEN do not anticipate granting a further extension beyond March 31 and expect that
covered financial institutions will comply with the September 26, 2002 final rule with respect to
correspondent accounts established for foreign banks that have not provided the required information by
that date.
III. Procedural Requirements
3
Because this rule extends the time by which a covered financial institution must obtain the infonnation
necessary to satisfy the requirements of section 313(a) and 319(b) of the Act before taking actions to
terminate a correspondent account, it has been detennined that notice and public procedure are
unnecessary pursuant to 5 US.c. 553 (b )(B) and that a delayed effective date is not required pursuant to 5
US.c. 553(d)(1).
It has been determined that this rule is not a significant regulatory action for purposes of Executive
Order 12866. Because no notice of proposed rulemaking is required, the provisions of the Regulatory
Flexibility Act (5 US.c. 601 et seq.) do not apply.
List of Subjects in 31 CFR Part 103
Banks, banking; Brokers; Counter money laundering; Counter-terrorism; Currency; Foreign banking;
Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamble, 31 CFR part 103 is amended as follows:
PART 103? FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as follows:
Authority: 12 U.S.c. 1829b and 1951-1959; 31 US.C. 5311-5314 and 5316-5332; title III, sees.
312,313,314,319,352, Pub. L. 107-56, 115 Stat. 307.
2. Section 103.177 is revised by amending paragraph (d)(1) to read as follows:
103.177 Prohibition on correspondent accounts for foreign shell banks; Records concerning
owners of foreign banks and agents for service of legal process.
*****
4
(d) Closure of correspondent accounts. (1) Accounts existing on October 28.2002. In the
case of any correspondent account that was in existence on October 28, 2002, if the covered fmancial
institution has not obtained a certification (or recertification) from the foreign bank, or has not otherwise
obtained docwnentation of the information required by such certification (or recertification), on or before
March 31, 2003, and at least once every three years thereafter, the covered financial institution shall close
all correspondent accounts with such foreign bank within a commercially reasonable time, and shall not
permit the foreign bank to establish any new positions or execute any transaction through any such account,
other than transactions necessary to close the account.
*****
DATED: _ _ _ , 2002
James Sloan
Director, Financial Crimes Enforcement Network
5
PO-3~/05:
Treasury Issues Rule EKtending the Deadline for USA PATRIOT Act
Page 1 of2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/)e® Acrobat® Reader®.
December 18, 2002
PO-3705
Treasury Issues Rule Extending the Deadline for
Obtaining Shell Bank Certifications Under the USA PATRIOT Act
The Treasury Department today sent to the Federal Register a final rule extending
by 90 days the deadline for U.S. depository institutions and securities brokerdealers to confirm that correspondent accounts maintained for foreign banks are
not being used to provide services, directly or indirectly, to foreign shell banks. This
final rule similarly extends the deadline for the requirement that these two types of
financial institutions obtain certain information from foreign banks for which they
maintain correspondent accounts. The new deadline is March 31, 2003.
Section 313 of the USA PATRIOT Act prohibits U.S. depository institutions and
securities broker-dealers ("covered financial institutions") from maintaining
correspondent accounts for foreign shell banks, and requires that they take
reasonable steps to ensure that they are not providing banking services to foreign
shell banks indirectly through correspondent accounts maintained for other foreign
banks. A shell bank is a foreign bank with no physical presence in any jurisdiction.
Section 319(b) of the Act requires any covered financial institution that provides a
correspondent account to a foreign bank to maintain records of the owners of the
foreign bank and to maintain the name and address of an agent in the United
States designated to accept service of legal process for the foreign bank for records
regarding the correspondent account. Final Treasury regulations issued in
September provided that a covered financial institution could satisfy the
requirements of section 313(a) and 319(b) by obtaining from a foreign bank a
certification that contained the necessary information, or by otherwise obtaining
documentation of the required information.
With respect to correspondent accounts that existed on October 28, 2002, the final
rule required a covered financial institution to close a correspondent account within
a commercially reasonable time, if the covered financial institution did not receive
the certification from the foreign bank, or otherwise obtain documentation of the
required information, on or before December 26,2002. Despite diligent efforts by
U.S. financial institutions, the Treasury has learned that many covered financial
institutions have not been able to obtain all required certifications from their foreign
bank customers by this deadline. Accordingly, the Treasury has determined that it
is necessary and appropriate to extend this deadline for a brief period of 90 days to
afford covered financial institutions an opportunity to secure the necessary
certifications before terminating correspondent accounts.
The Treasury expects that this extension will be published in the Federal Register
prior to December 26, 2002. However, should publication be delayed, covered
financial institutions will not be expected to begin the process of terminating
accounts on that date.
Related Documents:
http://ww...".treas.gov/press/re1easeslpo3705.htm
12/23/2002
PO-37{)5: Treasury Issues Rule Rxtending the Deadline for USA PATRIOT Act
•
Page 2 of2
Final Extention Rule
http://WW.N.treas.gov/press/releasevp03705.htm
12/2312002
BILLING CODE 4810-02
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN IS0S-AA87
Financial Crimes Enforcement Network; Anti-Money Laundering Requirements B:orrespondent
Accounts for Foreign Shell Banks; Recordkeeping and Termination of Correspondent Accounts
for Foreign Banks.
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Final Rule.
SUMMARY: The Financial Crimes Enforcement Network (FinCEN) is issuing this final rule to extend the
time by which certain financial institutions must obtain information from each foreign bank for which they
maintain a correspondent account concerning (1) the foreign bank's status as "shell" bank, (2) whether the
foreign bank provides banking services to foreign shell banks, (3) certain owners of the foreign bank, and
(4) the identity of a person in the United States to accept service of legal process.
DATES: This final rule is effective [INSERT DATE OF PUBLICATION IN THE FEDERAL
REGISTER].
FOR FURTHER INFORMATION CONTACT: Office of the Chief Counsel (FinCEN), (703) 905-
3590; Office of the Assistant General Counsel for Banking & Finance (Treasury), (202) 622-0480, or
Office of the Assistant General Counsel for Enforcement (Treasury), (202) 622-1927 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
On September 26,2002, FinCEN published a final rule (67 FR 60562) implementing sections 3 13 (a)
and 319(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the Act). Section 313(a) of the Act added
subsection (j) to 31 U.S.C. 5318, which prohibits a Acovered financial institutiortel from providing
Acorrespondent accounts@ in the United States to foreign banks that do not have a physical presence in any
country (foreign shell banks). Section 313(a) also requires those fmancial institutions to take reasonable
steps to ensure that correspondent accounts provided to foreign banks are not being used to provide
banking services indirectly to foreign shell banks.
Section 319(b) ofthe Act added subsection (k) to
31 U.S.C. 5318, which requires any covered financial institution that provides a correspondent account to a
foreign bank to maintain records of the foreign bank:s owners and to maintain the name and address of an
agent in the United States designated to accept service of legal process for the foreign bank for records
regarding the correspondent account.
The September 26, 2002 fmal rule provided that a covered fmancial institution could SltisfY the
requirements of section 313(a) and 319(b) by obtaining from a foreign bank a certification that contained
the necessary information, or by otherwise obtaining documentation of the required information. With
respect to correspondent accounts that existed on October 28, 2002, the final rule required a covered
financial institution to close a correspondent account, within a commercially reasonable time, if the covered
financial institution did not receive the certification from the foreign bank, or otherwise obtain documentation
of the required information, on or before December 26,2002.
2
A significant nwnber of covered financial institutions, principally in the securities industry, have noted
that the December 26, 2002 deadline to obtain the required information is proving to be inadequate. Many
securities firms indicated that providing an effective explanation of their duties under the Act to a wide
variety of foreign banks, which may speak different languages and operate in different ways than their U. S.
counterparts, has in some cases, lengthened the process.
Moreover, the broad definition of a
correspondent account found in the Final Rule has increased the nwnber of accounts subject to these
requirements and, consequently, has increased the burden on u.s. banks and broker-dealers to secure the
required information. Finally, because the Act has generally increased the overall level of regulatory
requirements for securities firms and depository institutions, they have been managing an increased overall
workload as a result of additional regulations, within a finite set of resources. For these reasons, the
process of gathenng the necessary information to comply with section 313(a) and 319(b) of the Act is
taking longer than the time provided in the September 28 fmal rule.
II. The Current Rulemaking
This rule extends the time by which a covered financial institution must obtain the information required
to satisfy the requirements of sections 313( a) and 319(b) from December 26, 2002 to March 31, 2003.
Treasury and FinCEN do not anticipate granting a further extension beyond March 31 and expect that
covered financial institutions will comply with the September 26, 2002 final rule with respect to
correspondent accounts established for foreign banks that have not provided the required information by
that date.
III. Procedural Requirements
3
Because this rule extends the time by which a covered financial institution must obtain the information
necessary to satisfy the requirements of section 313(a) and 319(b) of the Act before taking actions to
terminate a correspondent account, it has been determined that notice and public procedure are
unnecessary pursuant to 5 U.S.C. 553 (b )(B) and that a delayed effective date is not required pursuant to 5
U.S.C. 553( d)( 1).
It has been determined that this rule is not a significant regulatory action for purposes of Executive
Order 12866. Because no notice of proposed rulemaking is required, the provisions of the Regulatory
Flexibility Act (5 U.S.c. 601 et seq.) do not apply.
List of Subjects in 31 CFR Part 103
Banks, banking; Brokers; Counter money laundering; Counter-terrorism; Currency; Foreign banking;
Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamb Ie, 31 CFR part 103 is amended as follows:
PART 103? FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as follows:
Authority: 12 U.S.c. 1829b and 1951-1959; 31 U.S.c. 5311-5314 and 5316-5332; title III, secs.
312, 313, 314, 319, 352, Pub. L. 107-56, 115 Stat. 307.
2. Section 103.177 is revised by amending paragraph (d)(l) to read as follows:
103.177 Prohibition on correspondent accounts for foreign shell banks; Records concerning
owners of foreign banks and agents for service of legal process.
*****
4
(d) Closure of correspondent accounts. (I) Accounts existing on October 28, 2002. In the
case of any correspondent account that was in existence on October 28, 2002, if the covered financial
institution has not obtained a certification (or recertification) from the foreign bank, or has not otherwise
obtained documentation of the information required by such certification (or recertification), on or before
March 31, 2003, and at least once every three years thereafter, the covered financial institution shall close
all correspondent accounts with such foreign bank within a commercially reasonable time, and shall not
permit the foreign bank to establish any new positions or execute any transaction through any such account,
other than transactions necessary to close the account.
*****
DATED: _ _ _, 2002
James Sloan
Director, Financial Crimes Enforcement Network
5
PO-3'i06: Treasury Department Vv ill Begin Releasing Auction Results Electronically in 2... Page 1 of 1
PHCSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 18, 2002
PO-3706
Treasury Department Will Begin Releasing Auction Results
Electronically in 2003
The Treasury Department today announced that beginning January
13, 2003, it will begin releasing the official results of Treasury bill
and note auctions electronically to accredited news services and the
public.
"Automating this process is an important step forward in our effort to
achieve a consistent two-minute release of Treasury auction results
to the market," said Peter Fisher, Treasury Under Secretary for
Domestic Finance.
The results will be posted to a special Intemet site for automated
retrieval by the news services. Auction results will also be posted on
the Bureau of the Public Debt's public website as quickly as possible
thereafter. The official release time of Treasury bill and note auctions
will be the time the auction results data is made available to the news
services on the special Intemet site.
http://www.treas.gov/press/releasedpo3706.htm
12/23/2002
PO-37J)7: FBIIC Outlines Policy for Telecommunications Service Priority Program
Page 1 of 1
PfilSS FWOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ac/oIJe(I'.' AU()/)ClI"': r'<CdC/r-,,'C".
December 19, 2002
PO-3707
FBIIC Outlines Policy for Telecommunications
Service Priority Program
7The Financial and Banking Information Infrastructure Committee (FBIIC), chaired
by Treasury Assistant Secretary for Financial Institutions Wayne A. Abernathy,
today announced its policy and process for sponsoring qualified private sector
financial organizations for the Telecommunications Service Priority (TSP) Program.
The TSP Program, administered by the National Communications System (NCS),
was developed to ensure priority treatment for the nation's most important
telecommunication services -- those supporting National Security and Emergency
Preparedness (NS/EP) missions. The TSP Program authorizes and requires
service vendors to provide and restore TSP-assigned services before non-TSP
services. It also provides vendors with legal protection for giving preferential
treatment to NS/EP users over non-NS/EP users.
The FBIIC is a standing committee of the President's Critical Infrastructure
Protection Board and also serves as the Office of Homeland Security Financial
Markets Work Group. The FBIIC is charged with coordinating federal and state
financial regulatory efforts to improve the reliability and security of the U.S. financial
system.
Members of the FBIIC include representatives of the Commodity Futures Trading
Commission, the Conference of State Bank Supervisors, the Federal Deposit
Insurance Corporation, the Federal Housing Finance Board, the Federal
Reserve Bank of New York, the Federal Reserve Board, the National Association
of Insurance Commissioners, the National Credit Union Administration, the
Office of the Comptroller of the Currency, the Office of Federal Housing
Enterprise Oversight, the Offices of Homeland and Cyberspace Security, the
Office of Thrift Supervision, and the Securities and Exchange Commission.
The FBIIC Telecommunications Service Priority policy is attached. It is also
available on the FBIIC website www.fbiic.gov.
Related Documents:
•
TSP Policy
http://wv·w.treas.gov/press/release:;/po3707.htm
12/23/2002
.'!
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
Issued December 11, 2002
Financial and Banking Information Infrastructure Committee
Sponsorship of Priority Telecommunications Access for Private Sector Entities
through the National Communications System
Telecommunications Service Priority (TSP) Program
Background
The National Communications System (NCS) was established in 1963 to provide priority
communications support to critical government functions during emergencies. In 1984 the National
Security and Emergency Preparedness (NS/EP) capabilities of NCS were broadened and an
interagency group (currently twenty-two federal departments and agencies) was formed to help
coordinate and plan NS/EP services. The NCS has developed a number of priority
telecommunications services that are also available to private sector entities through sponsorship by
an NCS member department or agency. The events of September 11, 2001 put a new focus on the
importance of these programs to the nation and to the financial sector.
In order to provide guidance to financial organizations seekin sponsorship for NCS services, the
Financial and Banking Information Infrastructure Committee (FBIIC) is developing a series of
policies on the sponsorship of priority telecommunications access for private sector entities through
the NCS. The goal of the policies is twofold: first, to make financial organizations and service
providers aware of NCS programs and, second, to provide a consistent set of guidelines regarding
qualification criteria and the appropriate process for organizations that want to gain access to the
programs.
f
I The Financial and Banking Information Infrastructure Committee (FBIIC) is a standing committee of the President's
Critical Infrastructure Protection Board, serves as the Office of Homeland Security Financial Markets Work Group, and is charged
with coordinating federal and state financial regulatory efforts to improve the reliability and security of the U.S. financial system.
Treasury's Assistant Secretary for Financial Institutions chairs the committee. Members of the FBIIC include representatives of the
Commodity Futures Trading Commission, the Conference of State Bank Supervisors, the Federal Deposit Insurance Corporation, the
Federal Housing Finance Board, the Federal Reserve Bank of New York, the Federal Reserve Board, the National Association of
Insurance Commissioners, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of
Federal Housing Enterprise Oversight, the Offices of Homeland and Cyberspace Security, the Office of Thrift Supervision, and the
Securities and Exchange Commission.
FBIIC Telecommunications Service Priority (TSP) Sponsorship Policy
As a first step, on July 22, 2002 the FBIIC established a policy and process to sponsor qualifying
financial organizations for Government Emergency Telecommunications Service (GETS)2. The
enclosed policy addresses the FBIIC's policy and process to sponsor qualifying financial sector
organizations for the NCS Telecommunications Service Priority (TSP) Program.
TSP Program
The TSP Program was developed to ensure PrIOrIty treatment for the Nation's most important
telecommunication services, ~rvices supporting NS/EP missions. Following natural or technical
disasters, telecommunications service vendors may become overwhelmed with requests for new
services and requirements to restore existing services. The TSP Program authorizes and requires
service vendors to provision and restore TSP assigned services before non- TSP services and
provides vendors with legal protection for giving preferential treatment to NS/EP users over nonNS/EP users.
The TSP Program has two components: restoration and provIsIOning. A restoration prIOrIty is
applied to new or existing telecommunication services to ensure their restoration before any nonTSP services. Priority restoration is necessary for a TSP service because interruptions may have a
serious adverse effect on the supported NS/EP function. TSP restoration priorities must be
requested and assigned before a service outage occurs. As a matter of general practice,
telecommunications service vendors restore existing TSP services before provisioning new TSP
services. A provisioning priority is obtained to facilitate priority installation of new
telecommunication services. Provisioning on a priority basis becomes necessary when a service user
has an urgent need for a new NS/EP service that must be installed immediately (e.g., in an
emergency) or in a shorter than normal interval.
Telecommunication carrier tariffs for providing TSP are filed with the FCC and state regulatory
agencies. The tariffs permit carriers to assess a one-time charge and a monthly charge for each
circuit assigned a TSP restoration authorization code. In the event new service is provisioned under
TSP, carriers can apply a surcharge to the normal installation charges for each telecommunication
service ordered. Finally, telecommunication carriers can assess a penalty to TSP customers for
reporting an erroneous outage on a TSP circuit that is traced to the customer's premise equipment.
Private-sector organizations that lease circuits that are granted TSP status must bear the cost of all
tariffs for TSP. More information about the TSP program is available on the NCS website
(1Ittl': \\ \\ \\lll'c-CCl)\) under Programs.
All NS/EP missions fall into one of five TSP Program categories. All NS/EP telecommunication
services qualify for some level of TSP protection. The level is determined in part by the category
that represents the organization's mission. The five categories are: (A) National Security
Leadership, (B) National Security Posture and US Population Attack Warning, (C) Public Health,
Safety, and Maintenance of Law and Order, (0) Public Welfare and Maintenance of the National
Economic Posture, and (E) Emergency (Provisioning Requests Only). Categories A through 0 are
referred to as "essential services".
2
The GETS Policy is posted at www.fbiic.gov.
2
FBIIC Telecommunications Service Priority (TSP) Sponsorship Policy
Telecommunications services are designated as essential where a disruption of "a few minutes to
one day" could seriously affect the continued operations that support an NS/EP function. Essential
services are assigned a priority on a scale of 1 to 5 (with 1 as the highest priority) based on the
appropriate subcategory. Services in subcategory A qualify for priority levels 1-5; those in
subcategory B qualify for priority levels 2-5; those in subcategory C qualify for priority levels 3-5;
and services in subcategory 0 qualify for priority levels 4-5.
Any organization, Federal government, State government, local government, private industry, or
foreign government that has telecommunication services supporting an NS/EP mission is eligible to
participate in the TSP Program. All non-Federal TSP requests must be sponsored by a Federal
agency. A sponsor can be any federal agency with which a non-Federal user may be affiliated. The
sponsoring Federal agency ensures the telecommunications service supports an NS/EP function and
merits TSP.
3
FBIIC Telecommunications Service Priority (TSP) Sponsorship Policy
Sponsorship Criteria
The FBIIC policy builds upon and extends the TSP sponsorship policies established by the Federal
Reserve Board. The FBIIC policy contains additional sponsorship criteria to explicitly encompass a
broader group of eligible telecommunication circuits.
The FBIIC agencies have determined that to qualify for TSP sponsorship, financial organizations
and their service providers must support the performance of NS/EP functions necessary to maintain
the national economic posture (category D above). The FBIIC agencies will sponsor circuits which
meet the criteria described below.
1) Circuits
Supporting Critical Payment System Participants (Depository Institutions, Financial Utilities)
The Federal Reserve Board originally established policies and procedures for its sponsorship of
organizations for priority provisioning and restoration of telecommunications services under the
TSP program in 1993 (58 FR 38569, July 19, 1993). The Board recently updated its sponsorship
policy and expanded its sponsorship criteria. Further information is available through the Board's
website www.federalreserve.gov.
2) Circuits Supporting Key Securities & Derivatives Markets Participants
In addition, the Securities and Exchange Commission and the Commodity Futures Trading
Commission will sponsor circuits owned or leased by organizations that play key roles in the
conduct or operation of the securities and derivatives markets and related clearance and settlement
systems.
3) Circuits Supporting Other NSIEP Services
The FBIIC agencies will also sponsor circuits owned or leased by an organization that do not meet
the above sponsorship criteria if a disruption of those circuits could seriously affect operations that
support the maintenance of the national economic posture.
Sponsorship Process
The individual FBIIC agencies will contact appropriate financial organizations and service
providers for which they are the primary regulator and inform them of the process to be followed to
apply for TSP sponsorship.
If a financial organization or service provider believes that one or more of its circuits qualify for
TSP sponsorship, it should submit a sponsorship request in accordance with the process established
by its primary regulator.
4
DEPARTMENT
4) /
III /' 0 I 1'1 III I {
OF
THE
TREASURY
\ I /' \ I It'> • /:' HII "~I, , " ... \ I, \ \ ' I \ \\ /' \I I , ,. \\ .• \ \ \:-." " L I ()'. I •. ( .• ~ 4I! ! II
EMBARGOED UNTIL 11:00 A.M.
December 19, 2002
CONTACT:
• ,
! IJ !, (, ~!
~%
II
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $30,000
million to refund an estimated $30,507 million of publicly held 13-week and 26-week
Treasury bills maturing December 26, 2002, and to pay down approximately $507 million.
Also maturing is an estimated $22,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced December 23, 2002.
The Federal Reserve System holds $13,604 million of the Treasury bills maturing
on December 26, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held December 24, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $992 million into the 13-week bill and $582 million into the 26-week
bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highligh ts .
000
Attachment
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED DECEMBER 26, 2002
December 19, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) .....
Maximum Recognized Bid at a Single Rate ....
NLP Reporting Threshold . . . . . . . . . . . . . . . . . . . .
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . .
$14,000
$ 4,900
$ 4,900
$ 4,900
$ 4,600
million
million
million
million
million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturi ty date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue date . . . . . . . . . . . . . . . . . . . . . . . .
Currently outstanding . . . . . . . . . . . . . . . . . . . . . .
Minimum bid amount and multiples
91-day bill
912795 ME 8
December 23, 2002
December 26, 2002
March 27, 2003
September 26, 2002
$18,025 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
182-day bill
912795 MT 5
December 23, 2002
December 26, 2002
June 26, 2003
December 26, 2002
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders ........ Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender.
TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
DEPARTMENT
OF
THE TREASURY
11 n 1(' I·. 0 F I' 1 HI II' \ I· .. \ 111 ~ • L- UII I' I' \ \ ... YI \ \ \ I \ \\ I \ If. \. \\ .• \\ \ ~ II " C; J'( 1\. II. (' .' !" ~ ~ II • I ~ 41 !
EMBARGOED UNTIL 11:00 A.M.
December 19, 2002
CONTACT:
I II ~
2. ~ 'i hi I
Office of Financing
202/691-3550
TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $27,000 million of 2-year notes to refund $20,679
million of publicly held notes maturing December 31, 2002, and to raise new cash of
approximately $6,321 million.
In addition to the public holdings, Federal Reserve Banks hold $6,195 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new security.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction.
These noncompetitive
bids will have a limit of $100 million per account and will be accepted in the order
of smallest to largest, up to the aggregate award limit of $1,000 million.
Note:
The closing times for receipt of noncompetitive and competitive tenders
will be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.
TreasuryDirect customers requested that we reinvest their maturing holdings
of approximately $521 million into the 2-year note.
The auction will be conducted
tive and noncompetitive awards will
tenders.
The allocation percentage
be rounded up to the next hundredth
in the single-price auction format.
All competibe at the highest yield of accepted competitive
applied to bids awarded at the highest yield will
of a whole percentage point, e.g., 17.13%.
The notes being offered today are eligible for the STRIPS program.
The 2-year notes being announced today will mature on Friday, December 31, 2004.
Federal Reserve Banks intend to be open and make payments on that date.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about the new security are given in the attached offering highlights.
000
Attachment
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED DECEMBER 31, 2002
December 19, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) ........
Maximum Recognized Bid at a Single Rate .......
NLP Reporting Threshold . . . . . . . . . . . . . . . . . . . . . . .
$27,000
$ 9,450
$ 9,450
$ 9,450
million
million
million
million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . . .
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dated date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2-year notes
V-2004
912828 AR 1
December 23, 2002
December 31, 2002
December 31, 2002
December 31, 2004
Determined based on the highest
accepted competitive bid
yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
Interest payment dates . . . . . . . . . . . . . . . . . . . . . . . . June 30 and December 31
Minimum bid amount and multiples .............. $1,000
Accrued interest payable by investor .......... None
Premium or discount . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
STRIPS Information:
Minimum amount required . . . . . . . . . . . . . . . . . . . . . . . $1,000
Corpus CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . 912820 HN 0
Due date(s) and CUSIP number(s)
for additional TINT(s) . . . . . . . . . . . . . . . . . . . . . . December 31, 2004 - - 912833 ZC 7
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a yield with three decimals, e.g., 7.123%.
(2) Net long position for each bidder must be reported when the sum of the total
bid amount, at all yields, and the net long position equals or exceeds the NLP
reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the
closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 11:00 a.m. eastern standard time on auction day.
Competitive tenders:
Prior to 11:30 a.m. eastern standard time on auction day.
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date,
or payment of full par amount with tender.
TreasuryDirect customers can use the Pay
Direct feature which authorizes a charge to their account of record at their
financial institution on issue date.
PO-3 i! 0: Remarks by Kenneth
Vo,'
Dam Delivered to the Washington Institute for Foreig...
Page 1 of 5
!-'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 17, 2002
PO-3710
"The U.S. Treasury in Foreign Affairs"
Remarks by Kenneth W. Dam
Deputy Secretary of the Treasury
Delivered to the Washington Institute for Foreign Relations
December 17, 2002
This afternoon I would like to discuss the U.S. Treasury's role, not as a domestic
agency, but as a foreign policy institution. There can be no denying the Treasury's
influence and effect on U.S. foreign policy.
Consider Treasury's role. Treasury controls some of the key financial levers of U.S.
foreign policy. It guides U.S. participation in the major international financial
institutions, such as the World Bank, International Monetary Fund, and several
regional development banks. Treasury is at the vanguard of President Bush's
development agenda and his efforts to reform the effectiveness of foreign
assistance. Treasury also possesses a high degree of technical competence on
international issues, from terrorist finance to international tax policy to money
laundering to the financial aspects of trade policy.
Despite the clear nexus between these core Treasury activities and U.S. foreign
policy, I am always struck that many people are puzzled by Treasury's perspective
in the interagency process. Some attribute to us a purely marginal role in traditional
foreign policy matters. Others believe Treasury is essentially a domestic agency.
Both views hold kernels of truth. After all, Treasury is the key steward of a more
than $10 trillion U.S. economy.
But we also appreciate that U.S. economic performance disproportionately impacts
the global economy. Consider that in 2001, U.S. gross domestic product accounted
for more than 20 percent of total world output. When you factor in Japan's
underperformance and Europe's recently sluggish growth, the U.S. economy's
impact on the global economy is even more profound. When the United States
grows, the rest of the world grows, and vice-versa.
That is why the number of Treasury policymakers who focus on international
economic affairs is roughly comparable to that of those who deal with domestic
issues. Each day, Treasury policymakers work on major international issues. Let's
explore a few.
I. Financial Levers of U.S. Foreign Policy
Treasury leads our nation's fight to disrupt the flow of money to terrorists and their
supporters. We chair an interagency committee that sets the strategic priorities for
the financial front of the war on terrorism and works on the implementation of these
priorities, through actions such as public designation and asset freezing, law
enforcement, diplomacy, and cooperation with and through multilateral institutions.
Our most public weapon in the financial war on terrorism has been the public
designation of terrorist-related entities and the blocking of their assets. To date, we
have blocked more than the $123 million. Our actions have also significantly
disrupted and deterred further terrorist finance. By working with our allies to
implement an international mechanism for designation and freezing, we have made
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PO-3 ~I ~ 0: Remarks by Kenneth v.,'. Dam Delivered to the Washington Institute for Foreig...
Page 2 of 5
it much harder for terrorists to hide their money in the world's banks or send it
abroad through formal financial channels.
But our strategy goes well beyond designation and blocking. We and our allies
have vigorously engaged multilateral institutions such as the IMF, the World Bank,
the UN, and the Financial Action Task Force (FATF) in an effort to set improved
standards for transferring funds abroad through less traditional means. For
example, new standards have been set to protect charitable institutions from being
abused as vehicles for terrorist financing, and new principles are being established
to regulate informal systems of transferring money, often known as hawala.
Of course, we cannot fight the financial war on terrorism alone - and we haven't
had to. Over 200 countries and jurisdictions have joined us in issuing blocking
orders. We will continue to work with members of the international community to
set new standards, to assess country performance, and to assist one another in this
fight. While I am generally pleased with our overall successes to date, I believe we
can always do better - and we will.
Another important area where Treasury impacts U.S. foreign policy is through U.S.
participation in the major international financial institutions, a number of which I
have already mentioned, such as the International Monetary Fund, the World Bank
and the multilateral development banks. The U.S. is the biggest contributor to most
of these institutions. Since the executive boards use weighted voting, we have a
considerable voice in whether, when, how much, and under what conditions they
lend to countries like Argentina, Brazil or Turkey. This is a tremendous
responsibility.
Consider the notion of financial contagion, for example. The Bush Administration
has worked hard - as have many in the private sector - to dispel the fiction that
contagion necessarily and automatically spreads when one emerging market
economy faces difficulties. Already, we believe that investors are beginning to
make better judgments about specific emerging markets. They are no longer
allowing conditions in one country to lead inexorably to crises in others. Current
examples of so-called contagion, such as the impact of Argentina on Uruguay, can
be explained in other ways, for example, by examining the close economic linkages
between specific countries.
Treasury is also working to improve the transparency and predictability of the way
in which sovereign debt is restructured - if such restructuring proves necessary such as by including collective action clauses in sovereign debt agreements. We
also have encouraged the IMF to study whether a Sovereign Debt Restructuring
Mechanism might serve well as a possible complement over time to such collective
action clauses.
In addition to leading U.S. participation in the major international financial
institutions, Treasury, in cooperation with the State Department and USAID, also
implements the President's international development agenda. Development is a
complex international issue. Bridging the gap between the needs of the poorest
countries and their capacity to use external and domestic resources effectively is a
challenge.
We are convinced that the international community can do a better job in combating
poverty by focusing on measures to increase productivity and hence living
standards. One way is to focus on the factors that enable people and countries to
become more productive, such as policies that encourage a strong private sector,
that improve the quality of education and health care, and that increase access to
safe water. A second complementary way is to insist on the better use of public
funds by demanding measurable results.
These principles are reflected in the President's development agenda and his newly
proposed Millennium Challenge Account, or MCA. The concept that underlies the
MCA is a simple one. Countries that are committed to ruling justly, to promoting
economic freedom, and to investing in their people will receive more U.S.
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assistance. Country performance will be measured on the basis of clear, concrete
and objective criteria that closely correlate to economic growth and poverty
reduction.
Already we are putting money behind our ideas, with the MCA representing a 50%
increase in our core bilateral assistance program. This means a $5 billion annual
increase over current levels, phased in over three years, and more U.S. money for
programs that raise productivity growth, such as programs for primary education,
communicable disease prevention and clean water. The approach is geared to
producing real results for real people.
Our development responsibilities also give us an important role in post-conflict
assistance. Take our recent efforts to aid in the reconstruction of Afghanistan. On
December 4, President Bush signed the Afghanistan Freedom Support Act, which
confirms our long-term financial commitment to rehabilitation and rebuilding of
Afghanistan. The next few years will be critical ones for the country's future.
Afghanistan's government needs to develop administrative, financial and legal
structures, and it needs to produce results that will change the lives of the Afghan
people. This means better roads, improved public services, and enhanced security
for the Afghan people so that they may earn their livelihoods in peace.
II. Treasury's Technical Expertise on International Issues: Trade, FSC &
International Taxation
The U.S. Treasury is also an institution with an impressive technical capacity that its
senior policymakers bring to bear on a number of complex international issues.
Take the issue of international trade, for example.
While the United States Trade Representative (USTR) leads most aspects of U.S.
trade negotiations, Treasury negotiates most financial services provisions of U.S.
trade agreements, in part because of its close ties to the financial community and
its regulators, 9ut also because of its core competency on financial services issues.
Recently, we worked closely with USTR to finalize the U.S.-Chile Free Trade
Agreement. We are working just as hard to reach an agreement with Singapore.
Treasury is also leading U.S. efforts to liberalize financial services markets
worldwide as part of the new Doha round of WTO negotiations.
Though complementary to USTR's approach on broader trade issues, Treasury's
tactics can be different, particularly in the realm of financial services. In our
discussions with foreign financial and economic officials, we are able to make the
case for freer trade in financial services in the context of economic reform. Since
most developing countries have no interest in seeking access to U.S. financial
services markets, haggling over concessions holds little promise. We try to present
trade liberalization as a sound policy option rather than as a negotiated
concession.
Take, for example, the "Asian Tigers," a group of countries that now are beginning
to experience the limits of export-led growth.
Export-led growth may have served much of Asia well in the 1980's and 1990's, but
with cheaper exports emerging from China, not to mention a recent worldwide
economic slowdown, export-led growth no longer seems to be a winning strategy.
Instead, countries that are successfully weathering the global economy today are
those that took steps to diversify and focused on stimulating domestic demand. For
many in this latter group, like Korea, liberalized financial services markets have
been key engines of growth. Through official dialogue, Treasury has supported
Korea in these efforts. In other countries, we are providing direct technical
assistance.
Treasury also plays a leading role in resolving an international dispute that features
elements of both tax and trade. Earlier this year, a WTO appellate panel held that
the extraterritorial income exclusion regime of U.S. tax law constituted a subsidy
violating WTO rules. Just two years before, a WTO appellate panel held that the
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foreign sales corporation provisions constituted a similar, prohibited subsidy. The
WTO arbitration panel has issued its findings on damages, authorizing retaliation of
up to $4 billion a year of U.S. exports, a figure unprecedented in WTO history.
Such retaliation would have an impact on the global economy far beyond the
specific U.S. products targeted.
President Bush has made clear that the United States will comply with the WTO's
ruling. We believe the United States has too great a stake in the WTO, and in freer
trade, to turn our backs on WTO rules. The President has also made clear that our
response to the WTO's decision must increase the competitiveness of U.S.
business, and he has pledged to work closely with the Congress to create the
solution. Therefore, Treasury is working closely with Congress' tax-writing
committees to develop legislation that will meaningfully amend our tax law to honor
our WTO obligations and preserve the competitiveness of U.S. businesses
operating in the global marketplace.
Together with Congress, Treasury has the responsibility of setting the rules that
govern the taxation of foreign income earned by U.S. corporations. Our challenge
is to set these rules in a way that is fair to taxpayers both with foreign operations
and without them. A necessary goal is to ensure that companies headquartered in
the United States are not disadvantaged when competing in the global
marketplace.
This is particularly important because most goods and services no longer flow
through purchases between exporters and importers, but through transfers between
the affiliates of multinational corporations. Therefore, the rules governing transfer
pricing, interest allocation, withholding rates, foreign tax credits, and the taxation of
actual or deemed dividends impact these flows significantly.
In a related sphere, Treasury also negotiates international tax treaties. These
treaties help increase the amount of investment between the United States and
other countries. In addition, we negotiate international tax information exchange
agreements, which provide for the exchange of information upon request for use in
civil or criminal tax cases. In the past year, we have signed eight of these
agreements with significant financial centers around the world, and more are on the
way. The agreements - such as the ones we have entered into with Antigua and
Barbuda, the Bahamas, the British Virgin Islands, the Cayman Islands, the
Netherlands Antilles, Guernsey, Jersey, and the Isle of Man - help clean up the
international financial system. Tax evasion, money laundering and terrorist finance
flourish together.
III. Conclusion
While Treasury's core international activities center on boosting growth in the U.S.
economy, reforming the international financial institutions, promoting economic
development and freer trade, enhancing international tax policy and fighting
financial crime and terrorist finance, there are still other areas where Treasury
engages abroad. Treasury, for instance, chairs an important dialogue with the
European Union on financial and regulatory issues, data privacy, and accounting
reform, among other issues. Tre'asury, as I mentioned before, also provides
technical assistance to a number of countries around the globe. I could delve much
more deeply into any of these areas, but conSidering the list I have just reviewed,
I'd like to cite a couple of observations.
My first observation is the great importance of the first item: promoting growth in
the U.S. economy. With the U.S. economy growing faster than other major
developed economies, albeit not as fast as we would like, no single thing matters
more for international economic policy - and especially the developing world's
future - than the health of the U.S. economy.
Ironically, the U.S. economy is the very part of the world economy on which
practitioners of foreign relations spend the least amount of time. U.S. fiscal, tax, and
monetary policy are driven by government institutions where a domestic
perspective predominates.
http://ww<N.treas.gov/press/releasesip03710.htm
12/23/2002
PO-3"dO: Remarks by Kenneth W. Dam Delivered to the Washington Institute for Foreig...
Page 5 of 5
My second observation concerns the importance of the private sector. For
example, in advancing the economies of poor countries, we cannot rely on loans
and grants from international financial institutions to do the job. Rather, we try to
focus the U.S. development agenda on helping to establish minimal conditions in
which local enterprises can grow, prosper, and attract foreign investment. Our
efforts in the area of development, as well as on trade and tax policy, center on the
recognition that the private sector is the most important implementer of international
economic policy. This is true, to a degree, even in the hunt for terrorist finance. We
cannot be successful in stemming terrorist finance without the cooperation of
private sector financial institutions. Incidentally, I am pleased to say that we have
been getting their cooperation in abundance.
Economic policy is well recognized today as an essential component of foreign
relations. At the same time, the things that matter most in the international
economic policy arena are one or two steps removed from the focal point of most
foreign policy executives, both here and abroad. Therefore, the U.S. Treasury must
and will continue its leadership on the hard, incremental work of establishing the
right conditions for worldwide economic growth.
http://ww·v.treas.gov/press/release::Jp03710.htm
12/2312002
PO-37i 1: Fact Sheet Regarding
t~
Treasury Department's Use of Sanctions Authorized ...
Page 1 of 2
PHCSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free A(ini)(,:" I1r.ru/),i/'" i'<r'iJ(iClti, '.
December 20, 2002
PO-3711
Fact Sheet Regarding the Treasury Department's Use of Sanctions
Authorized Under Section 311 of the USA PATRIOT ACT
"With our designations today under Section 311. we are signaling to the world that
we are serious about ensuring that the international financial system is safeguarded
against the threat of money laundering. Our words have meaning and our actions
have real teeth: these jurisdictions are bad for business, and U.S. institutions now
must recognize this fact."
"We are telling the world clearly that these jurisdictions are bad for business and
that their financial controls cannot be trusted. We are serious about ensuring that
the international financial system not be abused by money launderers, terrorist
financiers, and other criminals."
"Our use of Section 311 today to designate two jurisdictions as "primary money
laundering concerns" is yet another tool that we are using to ensure the
international financial system is not abused by criminals. The world stands on
notice: these jurisdictions do not take the fight against money laundering and
financial crime seriously."
-Deputy Treasury Secretary Ken Dam
USA PATRIOT Act Section 311
Section 311 (31 U.S.C. 5318A) authorizes Treasury to designate a foreign
jurisdiction, financial institution, class of transactions, or type of account as being of
"primary money laundering concern," and to impose one or more of five "special
measures."
Four of the special measures impose information-gathering and record-keeping
requirements upon those U.S. financial institutions dealing either directly with the
jurisdiction designated as one of primary money laundering concern, or dealing with
those having direct dealings with the designated jurisdiction. Under the fifth special
measure, a U.S. financial institution may be prohibited from opening or maintaining
in the U.S. a correspondent account or a payable-through account for a foreign
financial institution if the account involves the designee.
This is the first time this authority has been invoked.
Countries Designated: Ukraine and Nauru
Ukraine
Treasury, in consultation with other U.S. agencies, designated Ukraine as being of
"primary money laundering concern" on December 20, 2002.
http://www.treas.goy/press/releases!po3711.htm
1212312002
PO-37U: Fact Sheet Regarding tOe Treasury Department's Use of Sanctions Authorized ...
Page 2 of2
Treasury intends to impose requirements on U.S. financial institutions based on
Special Measures 1 - 4.
Treasury is soliciting comments from U.S. financial institutions regarding the
parameters of the proposed special measure.
Nauru
Treasury. in consultation with other U.S. agencies, designated Nauru as being of
"primary money laundering concern" on December 20, 2002.
The Treasury intends to impose Special Measure 5, which will prohibit U.S.
financial institutions from opening or maintaining correspondent accounts with
Nauru-licensed financial institutions.
Financial Action Task Force (FATF)
FATF is the premier multilateral body in the international fight against money
laundering and terrorist financing. For more information on FATF consult its
website at www.tatf-gafi.org.
Through its Non-Cooperative Countries and Territories (NCCT) process, FATF
seeks to identify and take action with respect to jurisdictions that fail to meet
international anti-money laundering standards.
As a result of their failure to put into place sufficient anti-money laundering
frameworks, FATF - through the NCCT process - has called upon its members to
impose countermeasures with respect to Ukraine and Nauru.
Related Documents:
•
Designation of Nauru and Ukrame as Primary Money Laundenng Concerns
http://ww.~.treas.gov/press/releasesfp03711.htm
12/2312002
BILLING CODE 4810-25
DEPARTMENT OF THE TREASURY
Departmental Offices
Designation of Nauru and Ukraine as Primary Money Laundering Concerns
AGENCY: Departmental Offices, Treasury.
ACTION: Notice of Designation.
SUMMARY: This notice advises the public that the Department of the Treasury, on
December 20, 2002, designated the countries of Nauru and Ukraine as primary money
laundering concerns pursuant to section 5318A of title 31, United States Code, as added
by section 311 of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of2001.
DA TES: The designations made by this notice are effective December 20, 2002.
Comments on certain aspects of this notice should be submitted by [INSERT DATE
THAT IS 30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL
REGISTER]. In making comments, please refer to the "Public Comments Requested" in
the supplementary information portion of this preamble.
ADDRESSES: Commenters are encouraged to submit comments by electronic mail
because paper mail in the Washington, D.C. area may be delayed. Comments submitted
by electronic mail may be sent to regcomments@do.treas.gov with the caption in the
body of the text, "ATTN: Section 311 - Designation of Jurisdictions." Comments also
may be submitted by paper mail (preferably and original and three copies) to Department
of the Treasury, 1500 Pennsylvania Avenue, NW. Washington, DC 20220 "ATTN: 311
- Designation of Jurisdictions." Comments should be sent by one method only.
Comments may be inspected at the Department of the Treasury between 10 a.m. and 4
p.m., in Washington, D.C. Persons wishing to inspect the comments submitted must
request an appointment by telephoning (202) 622-0990 (not a toll- free number).
FOR FURTHER INFORMATION CONTACT: Office of Enforcement, Department
of the Treasury, (202) 622-0400 ; Office of the Assistant General Counsel (Enforcement),
(202) 622-1927; or the Office of the Assistant General Counsel (Banking and Finance),
(202) 622-0480 (not toll- free numbers).
SUPPLEMENTARY INFORMATION:
I. Designation of Nauru and Ukraine as Primary Money-Laundering Concerns
This document formally designates the countries of Nauru and Ukraine as primary
money-laundering concerns under 31 U.S.C. 5318A, as added by section 311(a) of the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of2001 (Public Law 10756) (the Act).
II. Imposition of Special Measures
The Department of the Treasury places these jurisdictions, and those with whom
they have dealings, upon notice of its intent, after appropriate consultation, to follow this
designation with the imposition of special measures authorized by section 5318A(a).
With respect to Nauru, Treasury intends to impose the special measure described in
section 5318A(b )(5), which will prohibit financial dealings by U.S. financial institutions
with any Nauru licensed institution, unless otherwise excepted. Under the terms of
section 5318A(a)(2)(C), this special measure can be imposed only by promulgation of a
rule. Treasury intends to initiate a rulemaking shortly.
With respect to Ukraine, Treasury intends to impose one or more of the
information-gathering and record- keeping requirements of the special measures described
in section 5318A(b)(l) through (4). Those special measures can be imposed by an order,
which is limited in duration to 120 days, and which may be extended indefinitely through
2
a rulemaking (see section 53 18A(a)(2) and (3». Treasury intends to issue an order while
simultaneously initiating a rulemaking to impose special measures on Ukraine.
III. Public Comments Requested
The Department of the Treasury solicits comments from all interested persons
concerning the appropriate special measures to impose on Ukraine. Specifically,
Treasury solicits comments from the financial sector, including domestic financial
institutions and domestic financial agencies, concerning its ability to comply with orders
or regulations that impose actions under special measures one through four authorized by
section 5318A(a). Treasury has also determined to propose imposition of special
measure five upon Nauru, but solicits comments from any institution licensed by Nauru
as to reasons the institution should be excepted from the prohibitions imposed under this
measure. The prohibitions of special measure five would not apply to the Bank of Nauru.
IV.
Background
On October 26, 2001, the President signed into law the USA PATRIOT Act.
Title III of the Act makes a number of amendments to the anti- money laundering
provisions of the Bank Secrecy Act (BSA), which are codified in subchapter II of chapter
53 of title 31, United States Code. These amendments are intended to make it easier to
prevent, detect, and prosecute international money laundering and the financing of
terrorism.
BSA section 5318A, as added by section 311 of the Act, authorizes the Secretary
of the Treasury (Secretary) to designate a foreign jurisdiction, institution, class of
transactions or type of account as being of "primary money laundering concern," and to
impose one or more of five "special measures" with respect to such a jurisdiction,
institution, class of transactions, or type of account. The Secretary has delegated his
authority under section 5318A to the Under Secretary of the Treasury (Enforcement).
Section 5318A specifies those factors that the Secretary must consider before
designating a jurisdiction, institution, transaction, or account as of "primary money
3
laundering concern." The evaluation of these factors against the summary of the
administrative record, as subsequently set forth in this designation, has resulted in the
conclusion that both jurisdictions are of primary money laundering concern I
Once the Secretary has considered the factors, consulted with the Secretary of
State and the Attorney General (or their designees), and made a finding that a jurisdiction
is a primary money laundering concern, the Secretary is authorized to impose one or
more of the five "special measures" described in 5318A(b). These special measures can
be imposed individually, jointly, or in combination with respect to a designated "primary
money laundering concern." Four of the special measures impose information-gathering
and record-keeping requirements upon those domestic financial institutions and agencies
dealing either directly with the jurisdiction designated as one of primary money
laundering concern, or dealing with those having direct dealings with the designated
jurisdiction. 2 Those four measures require: (l) keeping records and filing reports on
particular transactions, including the identities of the participants in the transactions and
I The following factors, in accordance with the requirements of section 5318A( c )(2)(A), are considered to
be potentially relevant factors in evaluating the necessity of designating Nauru and Ukraine. Nauru and
Ukraine meet the majority of these factors. First, whether organized criminal groups, international
terrorists, or both, have transacted business within the designated jurisdiction. Second, with respect to its
banking practices, Treasury must also evaluate (1) the extent to which the jurisdiction or financial
institutions operating in the jurisdiction offer bank secrecy or special regulatory advantages to nonresidents or nondomiciliaries of the jurisdiction; (2) the substance and quality of administration of the bank
supervisory and counter-money laundering laws of the jurisdiction; (3) the relationship between the volume
of financial transactions occurring in the jurisdiction and the size of the economy of the jurisdiction; and (4)
the extent to which the jurisdiction is characterized as an offshore banking or secrecy haven by credible
international organizations or multilateral expert groups. Third, with respect to its enforcement
mechanisms, Treasury must evaluate whether the United States has a mutual legal assistance treaty with the
jurisdiction, and determine the experience of United States law enforcement officials and regulatory
officials in obtaining information about transactions originating in, or routed through to, such jurisdiction.
Finally, Treasury must evaluate the extent to which the jurisdiction is characterized by high levels of
official or institutional corruption.
2 Treasury is currently examining the extent of the applicability of these requirements on those financial
institutions enumerated under the USA PATRIOT Act.
4
the beneficial owners of the funds involved; (2) obtaining information on the beneficial
ownership of any account opened or maintained in the United States by a foreign person
or a foreign person's representative; (3) identifying and obtaining information about
customers permitted to use, or whose transactions are routed through, a foreign bank's
"payable-through" account; or (4) identifying and obtaining information about customers
permitted to use, or whose transactions are routed through, a foreign bank's
"correspondent" account.
Under the fifth special measure, a domestic financial institution or agency may be
prohibited from opening or maintaining in the United States a correspondent account or a
payable-through account for or on behalf of a foreign financial institution if the account
involves the designee.
In selecting which special measures to impose, the Secretary must consider a
number of factors. 3 In addition, imposition of special measures (1) through (4) requires
consultation with the Chairman of the Board of Governors of the Federal Reserve
System, any other appropriate Federal banking agency (as defined in section 3 of the
Federal Deposit Insurance Act), the Secretary of State, the Securities and Exchange
Commission, the Commodity Futures Trading Commission, the National Credit Union
Administration Board, and any other agencies and interested parties as the Secretary may
find appropriate. Imposition of special measure (5) requires consultation with the
3 In determining generally what special measures to select and to impose, the Secretary, in consultation
with the agencies and "interested parties" set forth immediately above, must consider the following factors:
(1) whether similar action has been or is being taken by other nations or multilateral groups; (2) whether
the imposition of any particular special measure would create a significant competitive disadvantage,
including any undue cost or burden associated with compliance, for financial institutions organized or
licensed in the United States; (3) the extent to which the action or the timing of the action would have a
significant adverse systemic impact on the international payment, clearance, and settlement system, or on
legitimate business activities involving the particular jurisdiction, institution or class of transactions; and
(4) the effect of the action on United States national security and foreign policy.
5
Secretary of State, the Attorney General and the Chairman of the Board of the Federal
Reserve System.
The Treasury intends, after consultation as provided above, to impose the fifth
special measure with respect to Nauru, and actions under special measures one through
four with respect to Ukraine. Section 5318A lists several factors that the Secretary must
consider, in consultation with the Secretary of State and the Attorney General, before
imposing these special measures. Pursuant to section 5318A, any of these first four
special measures can be imposed by order, regulation or as otherwise permitted by law.
Special measures imposed by an order can be effective for not more than 120 days, unless
subsequently continued by a regulation promulgated before the end of the 120-day
period.
The fifth special measure can only be imposed through the issuance of a
regulation. The issuance of the fifth measure also requires consultation with the
Chairman of the Federal Reserve.
A. Nauru:
At one point in time, the island of Nauru had one of the highest per capita
incomes in the developing world due to the mining and export of phosphates, a funding
source expected to be completely depleted within five to ten years. Most of the funds
emanating from the phosphate mining, originally contained in the country's trust funds,
have been depleted through waste, poor investments and fraud. In addition to these
problems, the Nauru government itself has been characterized by extensive instability.
In an effort to raise funds, the island has resorted to several alternate endeavors,
including the selling of offshore banking licenses. Nauru is notorious for permitting the
establishment of offshore banks with no physical presence in Nauru or in any other
country. These banks maintain no banking records that Nauru or any other jurisdiction
6
can reVIew. The evidence indicates that the entities that obtain these offshore banking
licenses are subject to cursory and wholly inadequate review by the country's officials
and lack any credible on- going supervision. In addition, one of the common
requirements imposed by Nauru on these offshore banks is they not engage in economic
transactions involving either the currency of Nauru (currently the Australian dollar) or its
citizens or residents. Consequently, these offshore banks have no apparent legitimate
connection with the economy or business activity of Nauru. Indeed, only one bank
appears to be physically located in Nauru, the "Bank of Nauru " It is a local community
bank that also serves as the Central Bank.
Nauru's Banking Act also prohibits employees or officers of a financial institution
from revealing to anyone, including government officials, any information relating to
banking transactions in and out of Nauru. In addition, foreign authorities may only
receive, with the prior approval of the Nauruan Minister of Finance, macro-level
information, such as the total sums of moneys and types of currency transferred from a
country into Nauru. Foreign authorities cannot receive information regarding individual
transactions. Consequently, there is an extensive secrecy regime surrounding the Nauru
banking system.
The Financial Crimes Enforcement Network has recently reported that 400
offshore banks have been granted licenses by Nauru 4 It has been verified by on-site
reports that a 1,000 square foot wooden structure is "home" to some 400 of these banks
who have no physical or legal residence anywhere else in the world. The United States
Government has been able to verify the names of 161 of the institutions licensed by
Nauru, and they are presented as Appendix A to this designation. These are institutions
for which the limited information available indicated that there is a strong likelihood as to
their status as offshore shell banks that are not subject to effective banking supervision
4
FinCEN Advisory Issue 21 (July 2000).
7
Although tre jurisdiction, and not the institutions themselves, are being designated, the
list of institutions demonstrates the extensive opportunities for money-laundering activity
on the island.
As a consequence of the current practices of Nauru, the Financial Action Task
Force (FATF) placed Nauru on the "Non-Cooperative Country and Territory" (NCCT)
list in June 2000 for maintaining an inadequate anti-money laundering (AML) regime
according to international standards. According to the FATF, Nauru's anti-money
laundering weaknesses included, but were not limited to, the following: money
laundering was not a criminal offense; offshore banks licensed by Nauru were not
required to maintain customer identification or transaction records; Nauruan financial
institutions were under no obligation to report suspicious transactions; and Nauru
maintained strong bank secrecy laws. On August 28, 2001, Nauru passed the AntiMoney Laundering Act of2001 ("the AML Act"). On September 25,2001, however,
FATF indicated that the AML Act was not consistent with international standards
because it did not apply to the numerous offshore banks licensed by Nauru. In response
to FATF pressure, on December 6,2001, Nauru passed amendments to its AML Act.
Nonetheless, according to the FA TF, the revised anti- money laundering law that now
exists provides for a wholly inadequate anti- money laundering legislative and regulatory
regime. In addition, Nauru has not yet addressed the remaining and most important
deficiency of its AML legislation, that is, adequate procedures for licensing, regulating
and supervising its offshore banks. Thus, despite repeated warnings by FA TF of its
concern with Nauru's practices, and the clear consequences of not amending its practices,
Nauru has not shouldered its responsibility to establish a sufficient AML regime.
On the basis of FA TF' s determination, an evaluation of the factors set forth in
section 5318A, and after consulting with the Secretary of State and the Attorney General,
the Secretary has determined that reasonable grounds exist for concluding that Nauru is a
"primary money laundering concern." Accordingly, Treasury is prepared to subsequently
8
impose by regulation special measure five against Nauru, which would prohibit any U.S.
financial institution from opening or maintaining in the United States any correspondent
account or a payable-through account for a foreign financial institution if the account
involves Nauru or any institution licensed by Nauru. This prohibition would not,
however, apply to the Bank of Nauru. Treasury has determined to except the Bank of
Nauru, which as noted, serves as the Central Bank, from these prohibitions in order to
ensure the people of Nauru can continue to meet their legitimate banking needs. Those
U.S. financial institutions currently dealing with the Nauru licensed institutions
(Appendix A) should begin considering their compliance obligations in anticipation of
the imposition of this measure.
Treasury solicits submissions from any bank located in or licensed by Nauru that
would establish its legitimacy for purposes of being granted an exception under any
proposed regulation imposing special measure five with respect to Nauru.
B. Ukraine:
Ukraine suffers from widespread corruption.. On Transparen::y International's
2002 Corruption Perception Index, Ukraine ranked eighty- fifth out of the 102 listed
countries. 5 Prosecutions of corruption are based upon the law "On Combating
Corruption," that was passed in October 1995. This law is, however, rarely enforced, and
on the rare occasions when it is enforced, it is normally aimed at lower or middle-level
state employees. With respect to the economy, the Ukrainian system is primarily a cashbased system, with limited use of non-cash financial instruments. The banking system of
Ukraine has only been in existence for approximately ten years and contains several
deficiencies, including the lack of any record-keeping requirements for banks. While the
Transparency International (TI) is an international non-governmental organization devoted to combating
corruption. One of its services is to conduct surveys of businesses and analysts (both within and outside the
country) in order to determine this annual ranking. Each year, a composite index is compiled and Ukraine
has consistently been near the bottom of this ranking. TI's annual Corruption Perceptions Index ("CPI") is
cited by the world's media as the leading index in the field. The CPI ranks countries by perceived levels of
corruption among public officials.
5
9
current banking legislation prohibits the opening of anonymous accounts, there
nonetheless remain within the system thousands of anonymous, coded, or numbered
accounts containing a total of more than US $20,000,000. In addition, there is a thriving
gray or black market system within Ukraine. With regard to recordkeeping requirements,
the secrecy laws in the banking sector of Ukraine provide administrative authorities with
limited access to customer account information. Furthermore, although banks in Ukraine
are required to report both large-scale and dubious transactions, they are not subject to
penalty or sanction for failing to make such reports, thus making the requirement wholly
voluntary. In addition, ron-bank financial institutions are under no obligation to identify
beneficial owners when their clients appear to be acting on behalf of another party.
The FATF identified Ukraine in September 2001 as being non-cooperative in the
fight against money laundering and placed Ukraine on the NCCT list. Ukraine was
placed on the NCCT list because it lacked an effective anti-money laundering regime,
including an efficient and mandatory system for reporting suspicious transactions to a
financial intelligence unit, adequate customer identification provisions, and sufficient
resources devoted to combating money laundering. Currently, Ukraine does not have a
comprehensive anti- money laundering law that meets international standards. On the
basis of Ukraine's lack of an adequate anti- money laundering regime, the FA TF decided
that counter-measures should take effect on December 15,2002, unless Ukraine emcted
comprehensive legislation that meets international standards .. On November 28,2002,
Ukraine's Supreme Council (Parliament) passed a Law on Prevention and Counteraction
of the Legalization (Laundering) of the Proceeds from Crime, and the President of
Ukraine signed the Law on December 7. Notwithstanding this new legislation, the
system for reporting suspicious transactions remains so constrained as to be virtually
ineffective. Additionally, the statute contains contradictory language regarding the
ability of Ukraine's financial intelligence unit to share information with law enforcement.
Thus, the unit's authority to fulfill this fundamental responsibility remains very much in
10
doubt. Having analyzed the legislation, FA TF has detennined it to be inadequate and has
called on its members to apply counter- measures.
On the basis of FA TF' s detennination, an evaluation of the factors set forth in
Section 311 and the appropriate consultations, the Secretary has detennined reasonable
grounds exist for concluding that Ukraine is a "primary money laundering concern."
Furthennore, unless Ukraine demonstrates that it has taken proactive steps to address the
concerns giving rise to its designation, Treasury anticipates issuing a notice of proposed
rule making, subsequent to this designation, concurrent with an order imposing actions
under special measures one through four for a period of 120 days. While this order is in
effect, the imposition of a final rule imposing these treasures would be evaluated. There
are two measures under consideration by Treasury. U.S. financial institutions would be
required to identify and record the nominal or beneficial owners of accounts with anyone
of the following characteristics: (1) the accountholder has an address in Ukraine; (2)
$50,000 or more is transferred from a U.S. account into an account in the Ukraine; or (3)
$50,000 or more is transferred from an account in the Ukraine into a U.S. account. A
broader requirement would require U.S. financial institutions to identify and record the
beneficial owners involved in a financial transaction that is captured electronically and
that is over $50,000.
11
V. Designation of Nauru and Ukraine as Primary Money Laundering Concerns
By virtue of the authority vested in me as Under Secretary of the Treasury,
including section 5318A of title 31, United States Code, for the foregoing reasons I
hereby designate the countries of Nauru and Ukraine as "primary money laundering
concerns" for purposes of section 5318A of title 31, United States Code.
DA TED: DECEMBER 20, 2002
Jimmy Gurule
Under Secretary of the Treasury
12
Appendix A
The following is a list of financial institutions believed to be licensed by Nauru. It is not
intended to be an exhaustive list, and the requirement to terminate correspondent
relationships will apply to all Nauru institutions, not just those on this list.
Certain Nauru institutions on this list are known to bear a name resembling that ofan
unrelated US regulated institution or of an international organization. In addition, there
may be other entities unrelated to the Nauru institutions with similar or identical names.
As such, financial institutions should not assume that any institution that they may
encounter with a name similar or identical to any entity on this list, is in fact, related to
any Nauru entity without additional inquiry.
NAURU-REGISTERED BANKS
Access Bank International Ltd
Adriatica Bank
Agro Trust Bank, Inc.
Ako Bank (A.K.A. AkobanklAko-BankiAkkobank) Corp.
Alliance Bank (possibly A.K.A. European Credit Alliance Bank, Inc.)
Amoko Bank Corporation
Apollo Bank, Inc.
Ardex International Bank
Atlantic Capital Trust PLC
Augusta Bank Corp.
Babylon Bank Corp.
Baltic Pacific Bank
Bank for International Settlements Corp. (A.K.A. Bis Corp.)
Bank of the Nations
Bank Thalia
Bartang Bank and Trust, Inc.
Benmore Union Bank
Business Mediterranean Bank
Capital Bank Inc.
Capital International Bank Ltd. Corp.
Caribbean Unified Bank
Carlton Bank Trust Inc.
Cassaf Bank Corp. (A.K.A. Casaf, Kasaf)
Central Pacific Bank
Central Pacific National Bank
Chierici Bank
City Trading Bank, Inc.
Cometa Bank (A.K.A. Kometa)
Commercial Intercontinental Bank, Inc.
CommexBank
13
Communication Pacific Bank Corp.
Continental Assets, Ltd.
Cortex Bank of London
CPBank
Creditbankinc (A.K.A. Credit Bank Inc.)
Crystal Merchant Bank
Diffusion (A.K.A. Diffusion Finance) Bank, Inc.
Dom Mitra Bank (A.K.A. Dom Mitra National)
Doris Bank
East and Central Asian Bankers Trust, Inc ..
East Investment Bank Corp.
Eastock Bank (A.K.A. Eastok)
East-West International Bank S.A.
Ecumene Bank, Inc. (A.K.A. Ecumene Bank Ltd.)
Elmstone Bank, Inc ..
Energy Capital Bank S.A.
Euro-American Bank
Euro-Atlantic Bank Corp. (A.K.A. Euro-Atlantik)
Euro Capital Bank Inc.
Euro-Central Investment Bank, Inc.
Euro-Nord Bank Corp.
European Credit Alliance Bank, Inc. (A.K.A. ECAB)(possibly A.K.A. Alliance Bank)
European Overseas Bank Incorporated
Exchange Bank and Trust
Export and Import Bank Corp. (A.K.A. EXIM)
Federal Commercial Bank
Fidelity International Bank, Inc.
Financial Continent Bank, Inc.
First American International Bank
First Capital Bank
First Credit and Trade Bank
First European Charter Bank, Inc.
First Fidelity Bank, Inc.
First Financial Security Bank, Inc.
First International Bank
First Investment Bank
First Republic Bank of Nauru
First Sky Bank Corp.
First Southern Banking Corp.
First Southern Bank of Nauru
First Trading Bank Corp. (A.K.A. First Trading Bank Inc.)
Founders Bank Ltd.
General Europe Bank Inc.
Global Heritage Bank
Global Market Development Bank
Global Specialty Bank
14
Greater International Bank of Nauru (A.K.A. Greater International Bank Corp.)
Guardian Bank Corp.
Guardian Banking Corp.
Hampshire Bank and Trust Inc. (A.K.A. H-Bank)
Harmony Investment Bank, Inc.
IMRI Credit Bank, Inc.
Info Assets Management Bank Corp.
Innovation Development Bank
Intercredit Bank (A.K.A. Interkredit Bank)
Inter Development Bank
International Bank for Economic Affairs Corp.
International Cassaf Bank
International Commercial Bank Corp. (A.K.A. International Commercial Banking Corp.)
(possibly A.K.A. International Commerce Bank Corp.)
International Exchange Bank
International Industrial and Investment Bank, Inc.
International Metal Trading Bank (A.K.A. IMTB)
International Overseas Bank, Inc. (A.K.A. Interoverseas Bank)
International Prime Bank Corp.
International Trade and Finance Bank Corp.
International Treasury Banking Corporation, Inc.
Intertrust Credit (A.K.A. Intertrust and Credit) Bank
Investment Bank of London Inc.
Jefferson Bank and Trust Inc.
Liberty International Bank and Trust.
Maritime Pacific Bank, Inc.
Mars Bank
MCBank
Mediterranean International Bank Corp.
Merchant Deposit Bank Corp.
Meridian Merchants Bank, Inc.
MFC Bank Ltd.
Millenium Bank Corp.
National Commerce Bank Inc.
Nations Bank
Nations Trust Bank
Nistru Bank, Inc.
Nord-West Investment Bank, Inc.
Northern Security Bank
North- West Bank, Inc.
NRBank
NTBank
Pam Bank
Panacea Bank and Trust
Panin Bank International
Pioneer (A.K.A. Pioner) Invest Bank
15
Prime International Bank
Private Finance Bank and Trust, Inc.
Ram Bank
Reconversion and Development Bank (A.K.A. RDB-Bank)
Republic and Commercial Bank, Inc.
Rockland Bank
Royal Meridian International Bank Inc.
Russian Clearing and Commercial Bank, Inc.
SCB Bank
Sinex Bank
South Pacific Commercial Bank
Sovereign Allied Bank
Sprint Bank, Inc.
Standard Capital Bank Corp.
Standard Hellier Bank Inc.
Standard Investments Bank, Inc.
Sterling International Bank, Inc.
Supreme Banking Corporation
Swiss American Bank
Swiss Trading Bank, Inc.
Swiss Union Bank Corp.
T-Bank, Inc.
TOCA Bank.
Tower Bank.
Tridal Investment Bank, Inc.
Trust Investment Bank, Inc.
Trust Merchant Bank, Inc.
Unibank International, Inc.
Union Credit Bank, Inc.
Union Lombard Bank and Trust Corp.
United Bank and Trust Company
United Bank of Industry and Trade (A.K.A. UBIT Bank)
United Industrial Bank, Inc. (A.K.A. Uninbank, A.K.A. Unin Bank)
United West Bank (A.K.A. Unwest Bank), Inc.
Universal Bank
Universal Baltic Bank Inc.
Universal European Bank, Inc. (A.K.A. Unieurobank)
Veksmarkbank
Westerhall Private Bank
Westock (A.K.A. Westok) Bank
White Knight Merchant Bank
16
PO-3"/ i2: Treasury Clarifies
Fon:~gn
Tax Credit Changes for 2003
Page 1 of 1
fJf';LSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free A(ioiJc'''' /1(lOiJatrr" eeacfew.'.
December 20, 2002
PO-3712
TREASURY CLARIFIES FOREIGN TAX CREDIT CHANGES FOR 2003
Today, the Treasury Department and the IRS issued Notice 2003-5 to provide
guidance to taxpayers regarding the application of statutory changes to the foreign
tax credit rules that were enacted as part of the Taxpayer Relief Act of 1997 but that
apply only as of January 2003.
"This timely and much needed guidance gives taxpayers the rules for the foreign
tax credit reforms now taking effect," stated Assistant Secretary for Tax Policy Pam
Olson. "While the transition into the new look-through rules for dividends from
10/50 corporations is complicated, our aim is to provide clear rules and minimize
complexity. Legislative proposals have been introduced that would further simplify
these rules. We look forward to working with Congress on those proposals. We
expect to issue regulations incorporating this guidance early next year and look
forward to taxpayer's comments."
The 1997 Act included a provision significantly reforming the treatment for foreign
tax credit purposes of dividends paid by certain foreign corporations with U.S.
ownership (so-called "10/50 corporations"). The 1997 Act provision, which is
effective for taxable years beginning after December 31,2002, eliminates the
separate foreign tax credit baskets for dividends from each 10/50 corporation and
instead provides "look-through" treatment for dividends paid by a 10/50 corporation
out of earnings and profits accumulated in post-2002 taxable years.
The notice provides guidance on the application of the new look-through rules and
the transition from the previous treatment. The notice indicates that Treasury and
the IRS intend to issue regulations incorporating this guidance and that taxpayers
may rely on the notice. The transition issues addressed include the carryover and
carryback of excess foreign tax credits and the treatment of separate limitation
losses and overall foreign losses. Other issues addressed include ordering rules
for distributions and the treatment of distributions of pre-acquisition earnings.
The text of the notice is attached.
Related Documents:
•
Notice 2003-5
http://www.treas.gov/press/releases/oo3712.htm
12/23/2002
Notice 2003-5
I. PURPOSE
This notice provides guidance relating to the application of section 904 to dividends paid
by a foreign corporation that is a noncontrolled section 902 corporation as defined in
section 904(d)(2)(E) (10/50 corporation).1 This guidance is necessary to reflect the
provisions of the Taxpayer Relief Act of 1997 that modified the treatment of dividends from
10/50 corporations in taxable years beginning after December 31,2002 (post-2002
taxable years). Treasury and the Service intend to issue regulations concerning the
treatment of dividends paid by a 10/50 corporation that incorporate the guidance set forth
in this notice.
II. BACKGROUND
Prior to the Taxpayer Relief Act of 1997 (Public Law 105-34, 111 Stat. 788 (the 1997 Act)),
section 904(d)(1 )(E) required a domestic corporation meeting the stock ownership
requirements of section 902(a) (qualifying shareholder) to compute a separate foreign tax
credit limitation for dividends received from each 10/50 corporation. The 1997 Act
eliminated the requirement that the foreign tax credit limitation be computed on the basis of
a separate category (basket) for dividends from each 10/50 corporation, and instead
provided that dividends paid by a 10/50 corporation out of earnings and profits
accumulated in post-2002 taxable years (post-2002 earnings) generally will be treated as
income in a separate basket based on the separate basket of the underlying earnings and
profits being distributed (look-through treatment). Section 904(d)(4). Dividends paid by
10/50 corporations that are not passive foreign investment companies (PFICs) out of
earnings and profits accumulated in taxable years beginning before January 1, 2003 (pre2003 taxable years, and pre-2003 earnings) will be assigned to a single 10/50 dividend
basket. Dividends paid by each 10/50 corporation that is a PFIC out of pre-2003 earnings
will be assigned to a separate 10/50 dividend basket. Sections 904(d)(1)(E) and
904( d)(2)(E)(iv).
The 1997 Act amendments provide look-through treatment to qualifying shareholders for
dividends paid by a 10/50 corporation in a manner similar to the treatment of dividends
paid by a controlled foreign corporation (CFC). Dividends paid by a CFC to a U.S.
shareholder (as defined in section 951 (b)) are entitled to look-through treatment if the
distribution is out of earnings and profits accumulated during periods in which the CFC
1 Unless otherwise noted, references to section 904 in this notice are to the Internal
Revenue Code of 1986 (Code), as in effect for taxable years beginning after December
31,2002.
1
was a CFC. Sections 904(d)(2)(E)(i) and 904(d)(3). A dividend paid by a CFC out of
earnings accumulated when the CFC was not a CFC but was a 10/50 corporation is
treated as a dividend from a 10/50 corporation. Accordingly, such a dividend receives
look-through treatment if paid out of post-2002 earnings, but is treated as income in the
single 10/50 dividend basket if paid out of pre-2003 earnings. Section 904(d)(3) extends
look-through treatment to interest, rents, and royalties paid to a U.S. shareholder by a CFC
as well as to inclusions of income under section 951 (a)(1 )(A) (subpart F inclusions). In the
case of a 10/50 corporation, however, only dividends paid out of post-2002 earnings are
eligible for look-through treatment.
III. APPLICATION OF LOOK-THROUGH RULES TO DIVIDENDS PAID BY 10/50
CORPORATIONS IN POST-2002 TAXABLE YEARS
A. In general
Under section 904(d)(4), dividends paid by a 10/50 corporation out of post-2002 earnings
generally will be eligible for look-through treatment. Dividends paid by a 10/50 corporation
out of pre-2003 earnings will be treated as income in the single 10/50 dividend basket (or,
in the case of dividends from a PFIC, in a separate 10/50 dividend basket). Sections
904(d)(1 )(E) and 904(d)(2)(E)(iv). Look-through treatment also applies to dividends paid
by a CFC out of earnings accumulated during periods when it was a CFC. Section
904(d)(2)(E)(i). In light of this rule, Treasury and the Service believe that it is appropriate to
provide comparable treatment for dividends paid by a 10/50 corporation out of such
earnings. Accordingly, the regulations will apply look-through treatment to dividends paid
by a 10/50 corporation out of pre-2003 earnings that were accumulated in periods during
which the 10/50 corporation was a CFC, except as discussed below.
Proposed §1.904-4(g)(3)(i)(C)(1) would not provide look-through treatment in the case of
earnings accumulated while the distributing corporation was a CFC but distributed after a
pre-2003 intervening period during which the distributing corporation was a 10/50
corporation. See also Proposed §1.904-4(g)(3)(i)(C)(2) (providing the same result more
generally where a look-through corporation has an intervening period during which such
corporation was not a look-through corporation). Treasury and the Service are considering
modifying the proposed regulations when they are finalized to provide for look-through
treatment in such cases.
B. Distributions by 10/50 corporations out of pre-acquisition earnings and profits
The Secretary is authorized to prescribe regulations regarding the treatment of
distributions by a 10/50 corporation out of earnings and profits accumulated in periods
prior to the taxpayer's acquisition of the stock. See section 904(d)(4 )(C)(ii)(II). Pursuant to
this authority, the regulations will apply look-through treatment to dividends paid to a new
qualifying shareholder by a 10/50 corporation out of post-2002 earnings accumulated
during periods when the foreign corporation was either a 10/50 corporation with respect to
any qualifying shareholder or a CFC but before the recipient became a shareholder of the
2
corporation. The regulations also will provide that dividends paid by a 10/50 corporation
out of post-2002 earnings accumulated in periods when the 10/50 corporation was neither
a 10/50 corporation with respect to any qualifying shareholder nor a CFC are assigned to
the single 10/50 dividend basket in the case of a distribution from a 10/50 corporation that
is not a PFIC, and to a separate 10/50 dividend basket in the case of a 10/50 corporation
that is a PFIC. Consistent with §1.904-4(g)(3)(iii) (concerning earnings accumulated in the
taxable year in which a corporation becomes a CFC), the regulations also will provide that
earnings and profits accumulated in the taxable year in which the corporation became a
10/50 corporation will be considered earnings and profits accumulated after the
corporation became a 10/50 corporation.
C. Ordering rule for post-2002 distributions from 10/50 corporations
Under section 902(c)(3), the multi-year pools of post-1986 undistributed earnings (as
defined in section 902(c)(1)) and post-1986 foreign income taxes (as defined in section
902(c)(2)) of a foreign corporation are determined by taking into account only periods
beginning on and after the first day of the foreign corporation's first taxable year in which a
domestic corporation owns 10 percent or more of its voting stock, or in the case of a lowertier foreign corporation, such corporation is a member of a "qualified group" (as defined in
section 902(b )(2)).
Under section 902(c)(6)(8)(i), dividends are treated as paid first out of the post-1986
undistributed earnings. Pre-198? accumulated profits (defined in section 902(c)(6)(A) and
§1.902-1(a)(10) to include both earnings accumulated in pre-198? taxable years and
earnings accumulated in post-1986 taxable years preceding the first year in which the
foreign corporation has a qualifying shareholder) are treated as distributed only after the
pools of post-1986 undistributed earnings are exhausted, and then out of annual layers of
earnings and taxes on a last-in, first-out (LIFO) basis. Distributions out of pre-198?
accumulated profits are governed by the section 902 rules in effect under pre-198?law.
Section 902(c)(6)(A).
Section 1.904-4(g)(3)(i)(8) sets forth a LIFO ordering rule for determining the earnings to
which a dividend paid by a CFC is attributable. The dividend is deemed made first from
the pools of post-1986 undistributed earnings attributable to the period after the
corporation was a CFC (look-through pools), next from the non-look-through pool of post1986 undistributed earnings (as defined in §1.904-4(g)(3)(iv)(8)), if any, and finally on a
LIFO basis from the annual layers of pre-198? accumulated profits. Since 10/50
corporations will be considered look-through entities beginning in post-2002 taxable years,
the regulations will provide a similar LIFO ordering rule for dividends from a 10/50
corporation. Specifically, a dividend from a 10/50 corporation will be deemed made first
from post-1986 undistributed earnings attributable to the post-2002 period when the
corporation was eligible for look-through; second, from the non-look-through pool of post1986 undistributed earnings; and finally, on a LIFO basis from pre-198? accumulated
profits. Treasury and the IRS request comments on the allocation of deficits in the lookthrough pools or the non-look-through pool in determining the earnings to which a dividend
3
from a 10/50 corporation is attributable, consistent with the rules of § 1.902-2.
IV. ALLOCATING AND APPORTIONING EXPENSES OF 10/50 CORPORATIONS;
DIVIDENDS PAID BY LOWER-TIER CORPORATIONS
A. Expense allocation
Because 10/50 corporations will be treated as look-through entities with respect to certain
dividends paid in post-2002 taxable years, deductible expenses of a 10/50 corporation will
reduce the corporation's pools of post-1986 undistributed earnings. The regulations will
generally provide that expenses of a 10/50 look-through corporation will be allocated and
apportioned in the same manner as expenses of a CFC. See, e.g., section 954(b)(5);
§1.904-5(c)(2)(ii).
However, the regulations will not extend the special allocation rule for related person
interest expense under section 954(b)(5) and §1.904-5(c)(2)(ii) (providing that interest paid
by a CFC to a U.S. shareholder or any related look-through entity is first allocated to
reduce foreign personal holding company income which is passive income) to interest paid
by 10/50 corporations, since such corporations are not look-through entities with respect to
interest payments and are not subject to subpart F. Accordingly, all interest paid by a
10/50 corporation will be apportioned to reduce the payor's pools of post-1986
undistributed earnings under the rules applicable to unrelated person interest expense.
B. Look-through treatment of dividends paid by certain lower-tier corporations
In order for a taxpayer to qualify for look-through treatment with respect to a dividend from a
10/50 corporation, the taxpayer must be a qualifying shareholder with respect to the 10/50
corporation. Sections 904(d)(2)(E) and 904(d)(4). Because a shareholder's eligibility for
look-through treatment under section 904(d)(4) is based on the eligibility requirements
under section 902, the regulations will apply look-through treatment to a dividend paid by a
10/50 corporation to another foreign corporation where the recipient is eligible to compute
foreign taxes deemed paid under section 902(b)(1), (i.e., where both the payor and payee
corporations are members of the same qualified group as defined in section 902(b)(2)).
A taxpayer's eligibility for look-through treatment of a dividend paid by a 10/50 corporation
is based on eligibility requirements under section 902. In contrast, a taxpayer's eligibility
for look-through treatment of a dividend from a CFC is based on whether the taxpayer is a
U.S. shareholder with respect to the CFC. See sections 904(d)(3)(A) and 904(d)(3)(D).
Treasury and the Service believe that the eligibility requirements for look-through treatment
for 10/50 corporations and CFCs should be conformed to the extent possible, taking into
account the differing eligibility requirements under the Code for look-through treatment of
dividends from CFCs and 10/50 corporations. Accordingly, the regulations will apply lookthrough treatment to any dividend paid by a CFC to another member of the same qualified
group (as defined in section 902(b)). Finally, the regulations will retain the current rule of
§1.904-5(i)(3), to the extent it applies look-through treatment to dividends between CFCs
4
that have a common 10 percent U.S. shareholder but do not meet the qualified group test.
C. Tax accounting elections
Section 1.964-1 (c)(3) permits "controlling U.S. shareholders" of a CFC to make or change
tax accounting elections on behalf of the CFC. The controlling U.S. shareholders must
meet several requirements before an election is deemed made on behalf of the CFC. See
§1.964-1 (c)(3). Section 1.861-9T(f)(3)(ii) provides similar rules to allow the controlling U.S.
shareholders to elect the asset method or modified gross income method for purposes of
apportioning interest expense.
The regulations will apply similar rules in order to provide a mechanism for shareholders of
a 10/50 corporation to make or change tax elections on behalf of the corporation for
purposes of computing the 10/50 corporation's earnings and profits for U.S. tax purposes.
Specifically, the regulations will permit the majority domestic corporate shareholders of a
10/50 corporation to make or change tax elections on behalf of the corporation (subject to
generally applicable restrictions, such as elections requiring the consent of the
Commissioner). The term "majority domestic corporate shareholders" means those
domestic corporations that meet the ownership requirements of section 902(a) with
respect to the 10/50 corporation (or to a first-tier foreign corporation that is a member of
the same qualified group as the 10/50 corporation), that, in the aggregate, own directly or
indirectly more than 50 percent of the combined voting power of all of the voting stock of
the 10/50 corporation that is owned directly or indirectly by all domestic corporations that
meet the ownership requirements of section 902(a) with respect to the 10/50 corporation
(or a relevant first-tier foreign corporation). See §1.985-2(c)(3)(i).
V. CARRYOVERS AND CARRYBACKS OF EXCESS FOREIGN TAXES UNDER
SECTION 904(c)
Section 904(c) provides that to the extent a taxpayer's foreign income taxes paid or
accrued in any taxable year exceed the limitation under section 904 for that year, the
excess is carried back first to the second taxable year preceding the taxable year, and then
to the first taxable year preceding the taxable year, and finally is carried forward to the five
taxable years following the taxable year. As discussed below, regulations will provide
transition rules for the carryover and carryback of excess foreign income taxes (excess
credits) between pre-2003 taxable years (when pre-2003 distributions from 10/50
corporations are treated as income in separate 10/50 dividend baskets) and post-2002
taxable years (when distributions out of post-2002 earnings are subject to look-through
treatment, and distributions out of pre-2003 earnings are treated as income in the single
10/50 dividend basket or, in the case of a PFIC, a separate 10/50 dividend basket).
Except as discussed below in Part VI.A, to the extent a taxpayer has pre-2003 excess
credits in any non-PFIC separate 10/50 dividend basket and these credits are carried
forward to post-2002 taxable years, the regulations will provide that such credits may be
used to the extent that the single 10/50 dividend basket has excess foreign tax credit
5
limitation. This treatment is consistent with consolidating in the single 10/50 dividend
basket dividends paid by all non-PFIC 10/50 corporations out of pre-2003 accumulated
earnings. Treasury and the Service do not believe that it is consistent with the statute to
carry forward excess credits in the separate 10/50 dividend baskets, on a look-through
basis, to the baskets to which dividends paid by a 10/50 corporation out of post-2003
earnings are assigned. Excess credits in separate 10/50 dividend baskets should be
carried forward to the single 10/50 dividend basket and not the look-through baskets
because such excess credits are most appropriately associated with pre-2003 earnings,
dividends out of which are allocated to the single 10/50 dividend basket.
With respect to carrybacks of excess credits from post-2002 taxable years to pre-2003
taxable years, the regulations will apply a rule similar to the carryforward rule discussed
above: to the extent a taxpayer has post-2002 excess credits in the single 10/50 dividend
basket and these credits are carried back to pre-2003 taxable years, the credits will
reduce excess limitation in separate 10/50 dividend baskets (other than 10/50 dividend
baskets with respect to PFICs). If the amount of credits carried back to the 2001 or 2002
taxable year is smaller than the aggregate excess limitation in all of the taxpayer's
separate 10/50 dividend baskets for the year, the regulations will provide that the amount
will be allocated pro rata among the non-PFIC separate 10/50 dividend baskets based on
the relative amount of excess limitation in each such basket. The regulations will provide
that to the extent a taxpayer has post-2002 excess credits in a look-through basket and
these credits are carried back to pre-2003 taxable years, the credits will be carried back
within the same look-through basket and not to the separate 10/50 dividend baskets.
Excess credits in one separate 10/50 dividend basket carried forward from taxable years
beginning in 1998-2002 cannot then be carried back to reduce excess limitation in a
different separate 10/50 dividend basket with excess limitation in taxable years beginning
in 2001 or 2002. Under section 904(c), only foreign taxes that are paid or accrued in a
taxable year (and not taxes that are carried forward from a prior taxable year) are eligible
to be carried back to prior taxable years.
VI. SEPARATE LIMITATION LOSSES AND OVERALL FOREIGN LOSSES
Section 904(f) contains rules for allocating and recapturing foreign losses. To the extent a
loss in a separate basket (separate limitation loss or SLL) exceeds income in the same
basket, the SLL is allocated to and reduces income in other baskets on a proportionate
basis. Section 904(f)(5)(B). The SLL is subject to recapture in subsequent years to the
extent income is earned in the loss basket. Section 904(f)(5)(C). An overall foreign loss
(OFL) arises where there is a loss in all of a taxpayer's baskets combined. To the extent
an OFL reduces U.S. source taxable income, it is subject to recapture in subsequent years
at a rate of 50 percent (or such larger percent as the taxpayer may choose) of any foreign
source income earned. Section 904(f)(1); §1.904(f)-1 (d)(1). Since all the non-PFIC
separate 10/50 dividend baskets will be replaced by a single 10/50 dividend basket in
post-2002 taxable years, the regulations will provide transition rules, as described below,
for recapture in a post-2002 taxable year of (1) an OFL or SLL in a separate 10/50
dividend basket that offset U.S. source income or foreign source income in other baskets
6
in a pre-2003 taxable year, and (2) an SLL in another basket (~, the general or passive
basket) that offset income in a separate 10/50 dividend basket in a pre-2003 taxable year.
A. Recapture of an OFL or SLL arising in a separate 10/50 dividend basket
The regulations will provide that a taxpayer consolidates OFL and SLL accounts of nonPFIC separate 10/50 dividend baskets (Le., OFLs and SLLs arising in non-PFIC separate
10/50 dividend baskets that offset U.S. source income or foreign source income in other
baskets, respectively) into one set of OFL and SLL accounts of the single 10/50 dividend
basket beginning in the taxpayer's first post-2002 taxable year. Thus, for example, where a
taxpayer had OFLs and SLLs in non-PFIC separate 10/50 dividend baskets that offset
U.S. source income and foreign source income in the general and passive baskets, the
OFL and SLL recapture accounts will be consolidated in the single 10/50 dividend basket,
and income subsequently earned in the single 10/50 dividend basket will be recaptured as
U.S. source income and foreign source income in the general and passive baskets to the
extent of the respective OFL and SLL combined accounts. Any SLL recapture account in a
non-PFIC separate 10/50 dividend basket with respect to another non-PFIC separate
10/50 dividend basket will be eliminated since "recapture" to and from the single 10/50
dividend basket would be meaningless.
Treasury and the Service recognize that requiring taxpayers to consolidate the separate
10/50 OFL and SLL recapture accounts into one set of OFL and SLL accounts of the
single 10/50 dividend basket may be unfavorable to taxpayers that have an OFL or SLL
account in a separate 10/50 dividend basket and that no longer are qualifying shareholders
with respect to the foreign corporation. In pre-2003 taxable years, recapture of the OFL or
SLL account would not occur because the taxpayer would not receive any additional
dividends from the corporation that would be treated as 10/50 dividend income in the
separate 10/50 loss basket (unless the former shareholder reacquired a sufficient interest
in the corporation to become a qualifying shareholder). Accordingly, the regulations will
provide that where a taxpayer no longer is a qualifying shareholder with respect to a foreign
corporation on December 20,2002 (or no longer is a qualifying shareholder on the first day
of the taxpayer's first post-2002 taxable year, pursuant to a transaction that is the subject of
a binding contract which is in effect on December 20, 2002), any OFL or SLL recapture
accounts with respect to the taxpayer's separate 10/50 dividend basket for that corporation
will not be consolidated into the single 10/50 dividend basket's OFL and SLL accounts.
Consistent with the exception for OFL and SLL accounts with respect to stock of a foreign
corporation in which the taxpayer is no longer a qualifying shareholder, the regulations will
not permit a taxpayer to carry over excess credits arising in separate 10/50 dividend
baskets to the single 10/50 dividend basket where OFL and SLL accounts in the separate
10/50 dividend baskets are not consolidated into the OFL and SLL accounts of the single
10/50 dividend basket. However, the regulations will allow a taxpayer to elect to carry over
all excess credits in non-PFIC separate 10/50 dividend baskets to the single 10/50
dividend basket if the taxpayer consolidates the OFL and SLL recapture accounts of all
such separate 10/50 dividend baskets into the OFL and SLL accounts of the single 10/50
7
dividend basket.
B. Recapture of an SLL arising in other baskets
The regulations will provide that to the extent an SLL in another basket (~, the general or
passive basket) offset income in a non-PFIC separate 10/50 dividend basket in a pre2003 taxable year, income in the loss basket subsequently earned in post-2002 taxable
years will be recaptured as income in the single 10/50 dividend basket. Recapturing SLL
accounts that originally offset income in separate 10/50 dividend baskets as income in the
single 10/50 dividend basket is consistent with the rule (discussed in Part V, above)
permitting taxpayers to carry over excess credits from separate 10/50 dividend baskets
into the single 10/50 dividend basket. For example, assume a general basket SLL offset
income in a separate 10/50 dividend basket. In such a case, any excess credits in that
separate 10/50 basket will carry over to the single 10/50 dividend basket, and general
basket income in a post-2002 taxable year will be recharacterized as income in the single
10/50 dividend basket.
VII. TREATMENT OF SEPARATE 10/50 DIVIDEND BASKETS MAINTAINED AT THE
CFC LEVEL
Where a CFC has non-PFIC separate 10/50 dividend baskets containing earnings and
deficits accumulated in pre-2003 taxable years, the regulations will require, as a general
rule, that the earnings and deficits be consolidated in and form the opening balance of the
earnings pool of the single 10/50 dividend basket beginning in the CFC's first U.S. post2002 taxable year. The pools of post-1986 foreign income taxes in the non-PFIC separate
10/50 dividend baskets similarly will be consolidated in the post-1986 foreign income
taxes pool of the single 10/50 dividend basket. However, a separate 10/50 dividend
basket containing non-look-through earnings of the CFC accumulated in periods prior to
becoming a CFC will not be consolidated. These earnings will be treated as earnings in
the non-look-through pool of post-1986 undistributed earnings, which are deemed
distributed only after distributions exhaust the post-1986 look-through pools, which include
the earnings in the pool of the post-2002 single 10/50 dividend basket. See §1.9044(g)(3)(i)(B).
The regulations also will provide an exception from the general rule combining earnings
and deficits and foreign income taxes where a CFC has an accumulated deficit in a
separate 10/50 dividend basket with respect to stock in a foreign corporation that is no
longer a member of a qualified group that includes the CFC. Treasury and the SeNice
were concerned that requiring consolidation in this case could result in a large deficit in the
single 10/50 dividend basket for some CFCs. Treasury and the SeNice also believe it is
appropriate in this situation to simplify the general rule requiring the ratable allocation of
deficits in determining deemed-paid taxes in connection with distributions or inclusions.
See §1.960-1 (i)(4). Accordingly, the regulations will provide that where a CFC has a
deficit in a separate 10/50 dividend basket with respect to stock in a foreign corporation
that is not a member of a qualified group that includes the CFC on December 20,2002 (or
8
is not a qualified group member on the first day of the CFC's first post-2002 taxable year
pursuant to a binding contract in effect on December 20, 2002), the deficit in the separate
10/50 dividend basket will not be consolidated in the opening balance of the CFC's single
10/50 dividend basket. Instead, the deficit will be allocated to reduce post-1986
undistributed earnings in the CFC's other baskets (ratably on the basis of accumulated
earnings in the other baskets as of the first day of the CFC's first post-2002 taxable year),
and the deficit will be permanently reduced to zero. In pre-2003 taxable years, only
dividend income from the same 10/50 corporation could eliminate the deficit in the
separate 10/50 dividend basket, so that if the 10/50 corporation was no longer a member
of the same qualified group as the CFC, the CFC would not have any additional earnings
in that basket out of which to pay a dividend, and its U.S. shareholder therefore would be
ineligible to claim an indirect credit with respect to any foreign taxes in the deficit basket.
See § 1.902-1 (b )(4). Accordingly, any foreign taxes in the separate 10/50 dividend basket
will remain in that basket, and a qualifying shareholder of the CFC generally will not be
eligible to claim an indirect credit for these taxes.
VIII. EFFECTIVE DATE
Regulations to be issued relating to the guidance set forth in this notice will be effective for
taxable years beginning after December 31,2002. Until such regulations are issued,
taxpayers may rely on this notice.
IX. REQUEST FOR COMMENTS AND CONTACT INFORMATION
Treasury and the Service request comments on the rules described in this notice and any
additional issues that should be addressed by regulations. Written comments may be
submitted to the Office of Associate Chief Counsel (International), Attention: Ginny Chung
(Notice 2003-5), room 4555, CC:INTL:Br3, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, 20224. Alternatively, taxpayers may submit comments
electronically to Notice.Comments@m1.irscounseLtreas.gov. Comments will be available
for public inspection and copying. Treasury and the IRS request comments by February
18, 2003. For further information regarding this notice, contact Ginny Chung of the Office
of Associate Chief Counsel (International) at (202) 622-3850 (not a toll-free call).
9
PO-3 713: ATSB Decision On E\"Crgreen International Airlines, Inc.
Page 1 of 1
PHCSS fiOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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December 20, 2002
PO-3713
ATSB Decision On Evergreen International Airlines, Inc.
WASHINGTON, DC - The Air Transportation Stabilization Board (Board)
announced today its conditional approval of the application by Evergreen
International Airlines, Inc. for a Federal guarantee pursuant to the Air
Transportation Safety and System Stabilization Act (Act) and implementing
regulations promulgated by the Office of Management and Budget (Regulations).
The Board's decision was unanimous.
The Board's approval is subject to several conditions, including a reduced
guarantee amount, certain structural and financial enhancements and other
conditions identified in the letter to Evergreen International Airlines, Inc., which is
attached below.
Additional information about the ATSB is available on its web site,
www.ustreas.gov/offlces/domestlc-flnance/atsb/.
Related Documents:
•
Evergreen International Airlines. Inc Decision Letter
http://www.treas.goY/press/releaseUpo3713.htm
12123/2002
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
AIR TRANSPORTATION STABILIZATION BOARD
December 20,2002
Mr. Delford M. Smith
Chairman
Evergreen International Airlines, Inc.
3850 Three Mile Lane
McMinnville, Oregon 97128
Re: Application for a Loan Guarantee Under the Air
Transportation Safety and System Stabilization Act
Dear Mr. Smith:
We refer to the application of Evergreen International Airlines, Inc. (the "Applicant"),
dated June 27, 2002 as supplemented (the "Application"), for a Federal loan guarantee under
the Air Transportation Safety and System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230
(the "Act") and the regulations promulgated thereunder, 14 CFR Part l300 (the
"Regulations"). The Applicant has requested a Federal guarantee in connection with a $150
million financing. The Air Transportation Stabilization Board (the "Board") is asked to
participate by providing a Federal government guarantee of $148.5 million, representing 99
percent of the total financing.
The Board has carefully considered the Application under the standards set out in the
Act and Regulations. The Board's consideration has included a review and analysis of the
Application by the Board's staff and the Board's financial and industry consultants. Based on
its review, the Board has determined that the Application meets the requirements for a Federal
loan guarantee under the Act and the Regulations. In particular, the Board has determined
that the Applicant has demonstrated a reasonable assurance of repayment.
While the Applicant has demonstrated that its business plan is financially sound,
certain terms of the proposed loan transaction are unacceptable to the Board. Accordingly,
the Board has determined to extend an offer of a guarantee, subject to satisfaction, as
Mr. Delford Smith
December 20, 2002
Page 2
determined by the Board in its sole discretion, of all the conditions in the Act and the
Regulations and the following:
> The Board is willing to guarantee an amount not to exceed $90,000,000.
> Terms must include certain structural and financial enhancements acceptable to the Board.
>
Certain issues as to collateral, asset sales and existing and future senior and subordinate
indebtedness must be resolved in a manner acceptable to the Board.
>
The Board must receive additional fees and warrants in amounts and on terms acceptable
to the Board.
> Final loan documents, guarantees, certifications, the warrant and registration rights
agreement, and appropriate opinions of counsel, all in form and substance satisfactory to
the Board, remain to be negotiated by the Board. We note that the Board rmy require
control rights, representations, warranties, covenants (including, without limitation,
covenants relating to the Applicant's financial ratios), anti-dilution protections and
registration rights in connection with the warrants, and other customary lending provisions
which are different from or in addition to those described in the Summary of Indicative
Terms and Conditions included in the Application. All the conditions referred to in the
Summary of Indicative Terms and Conditions must be satisfied.
The Board will continue to perform business and legal due diligence as the transaction
progresses. The Board's willingness to issue the guarantee, and the specific terms it may
require in the loan documents, are subject, therefore, to on- going due diligence and the
Board's satisfaction with the results thereof, in particular, with respect to the Applicant's
participation in the CRAF program. In the event that the Board discovers any materially
negative information concerning the Applicant not currently known to it, the Board in its sole
discretion may decline to issue its guarantee. The issuance of the Board's guarantee is subject
also to the absence, in the sole judgement of the Board, of any material adverse change in the
condition (financial or otrerwise), business, property, operations, prospects, assets or
liabilities of the Applicant, or in the Applicant's ability to repay the loan, or in the value of the
collateral between the date of the Application and the date the guarantee is issued.
The Board and Board staff look forward to working with you toward the successful
completion of this transaction.
Sincerely,
Mr. Delford Smith
December 20,2002
Page 3
Daniel G. Montgomery
Executive Director
Cc:
Edward Gramlich
Kirk Van Tine
Peter Fisher
PO-3'i J 4: ATSB Decision on Great Plains Airlines
Page 1 of 1
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PHlSS FWOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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December 20,2002
PO-3714
ATSB Decision on Great Plains Airlines
WASHINGTON, DC - The Air Transportation Stabilization Board (Board)
announced today that it has denied the application of Great Plains Airlines for a
Federal guarantee of $17.0 million on an $25.0 million loan pursuant to the Air
Transportation Safety and System Stabilization Act (Act) and implementing
regulations promulgated by the Office of Management and Budget (Regulations).
The Board concluded its review based on the standards set out in the Act and the
Regulations and determined that Great Plains' application did not meet the
applicable standards for the reasons described in the attached letter. The vote to
deny the application was unanimous.
Additional information about the ATSB is available on its web site,
www.ustreas.gov/offlces/domestic-finance/atsb/.
Related Documents:
•
Great Plains Airlines Decision Letter
http://www.treas.gov/press/releases!p03714.htm
12123/2002
:!
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
AIR TRANSPORTATION ST ABILIZA TION BOARD
December 20, 2002
Mr. Jack Knight
President and Chief Executive Officer
Ozark Airlines, Inc. d.b.a. Great Plains Airlines
6501 E. Apache Street
Tulsa, Oklahoma 74115
Dear Mr. Knight:
In accordance with the Air Transportation Safety and System Stabilization Act, Pub.
L. No.1 07-42, 115 Stat. 230 (the "Act") and the regulations promulgated thereunder, 14 CFR
Part 1300 (the "Regulations"), the Air Transportation Stabilization Board (the "Board") has
considered the application of Ozark Airlines, Inc. d. b.a. Great Plains Airlines ("Great Plains")
dated June 28, 2002, as supplemented (the "Application"), for a Federal loan guarantee of $17
million on a loan of $25 million.
During the process of reviewing the Application, the Board staff held telephone calls
with you and communicated requests for additional information. The Board staff met with
you and your advisors during the summer and this fall on October 21, November 7 and
December 11. Representatives of each Board member attended the meeting on October 21.
Following these meetings and communications, the Board staff and representatives of each
Board member fully briefed the Board members on the Application.
The Board has carefully considered the Application under the standards set out under
the Act and the Regulations. The Board's consideration included a review and analysis of the
Application by the Board's staff and the Board's financial and industry consultants. The
Board staff has repeatedly requested details of the proposed transaction, but such information
has not been submitted. Based on its review, the Board determined that the Application did
not meet the applicable standards, and, accordingly, the Board unanimously voted to deny the
Application.
The Board determined that Great Plains' proposal did not provide a reasonable
assurance that Great Plains would be able to repay the loan, an important evaluation criteria
that the Board is required to consider in assessing loan applications. The Board's financial
consultant assigned Great Plains' proposed financing an extremely low credit rating. Such a
rating implies a high probability of default. For all government-guaranteed loan applications,
a credit subsidy is computed, which represents the expected cost to the U.S. taxpayers of
guaranteeing the loan. The figures for Great Plains implied a high probability of default and
related credit subsidy that the Board deemed too high to impose on the U.S. taxpayers. In
addition, based upon Great Plains' past financial results and the Board's concerns about Great
Plains' optimistic expansion strategy and the financial projections related thereto, the Board
was unable to conclude that the loan by Great Plains was prudently incurred.
If you have any questions regarding this matter, please do not hesitate to contact me.
Sincerely,
Daniel G. Montgomery
Executive Director
Cc:
Edward Gramlich
Kirk Van Tine
Peter Fisher
PO-3i J 5: Statement Regarding Argentina-IMF Discussions
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FROM THE OFFICE OF PUBLIC AFFAIRS
December 20, 2002
PO-3715
Statement Regarding Discussions Between the Government of Argentina and
the IMF
The United States welcomes the IMF Board's agreement to support a framework for
completing negotiations on a transitional program for Argentina. Such a transitional
program can help strengthen stabilization of the economic and financial situation in
the period leading up to the election and installation of a new government. In
January, the Argentine authorities and the IMF are expected to finalize a suitable
monetary and fiscal framework. If approved by the IMF Board, the program will
provide resources during the political transition, but will not increase Argentina's
debt to the IMF. As strong implementation is critical to program success, we
welcome Argentina's commitment to strictly adhere to the agreed framework.
Argentina is also expected to clear its arrears and service its obligations to the
World Bank and Inter-American Development Bank. Over the coming months, the
international community will continue to work with Argentina to develop a longerterm program geared toward restoring a path of sustainable growth.
http://wv·w.treas.gov/press/releases{oo3715.htm
12/23/2002
PO-3'n 6: Olson Statement on the Home Sale Rules
Page 1 of 1
PRESS rWOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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December 23, 2002
PO-3716
OLSON STATEMENT ON THE HOME SALE RULES
Today the Treasury Department and the Internal Revenue Service issued final,
temporary and proposed regulations under section 121 regarding the exclusion of
gain on the sale of a principal residence.
Treasury Assistant Secretary for Tax Policy Pam Olson made the following
statement:
"These rules will help people who do not meet the two year residency requirement
because of unforeseen circumstances, such as divorce or loss of job, by allowing
them a proportion of the exclusion that would otherwise be available. The
regulations provide the relief and clarity needed by taxpayers whose circumstances
change to continue on with their lives."
The texts of the final, temporary and proposed regulations are attached and will be
published by the Federal Register December 24, 2002.
The IRS press release is also attached.
Related Documents:
•
•
•
IRS Press Release
Final Regulations
Temporary Regulations
http://www.treas.gov/press/release~po3716.htm
1113/2003
INTERNAL REVENUE SERVICE
•
I
www.lrs.govi
~1News
Media Relations Office
For Release: 12/23/02
Release
Washington, D.C.
Tel. 202.622.4000
Release No: IR-2002-142
IRS ISSUES HOME SALE EXCLUSION RULES
WASHINGTON - The Internal Revenue Service today issued guidance in the
form of both final and temporary regulations related to excluding gain on the sale of a
principal residence. A 1997 law substituted an exclusion of up to $250,000 ($500,000
for a married couple filing jointly) for the old "replacement residence" rules. Unlike a
previous once-in-a-lifetime exclusion for senior citizens, the new exclusion may be
claimed repeatedly, but usually only once every two years.
The final regulations cover such topics as:
• how to determine if a home is a principal residence;
• when gain from the sale of vacant land that was used as part of the residence
may be excluded;
• when and how to allocate the gain between residential and business use of
the property;
• how the exclusion applies to joint owners who are not married; and
• how to fulfill the req uirement that the taxpayer own and use the home as a
principal residence for two of the five years before the sale.
For taxpayers with multiple homes, the regulations list several factors relevant to
determining which home is the principal residence. Among these are amount of time
used; place of employment; where other family members live; the address used for tax
returns, driver's license, car and voter registration, bills and correspondence; and the
location of the taxpayer's banks, religious organizations or recreational clubs.
The home sale exclusion may include gain from the sale of vacant land that has
been used as part of the residence, if the land sale occurs within two years before or
after the sale of the residence.
Taxpayers need not allocate gain between business and residential use if the
business use occurred within the same dwelling unit as the residential use. They must
pay tax on the gain equal to the total depreciation they took after May 5, 1997, but may
exclude any additional gain on the residence, up to the maximum amount. If the
business use property was separate from the dwelling unit, they would allocate the gain
and be able to exclude only the gain on the residential unit.
(more)
- 2 -
For joint owners who are not married, up to $250,000 of gain is tax-free for each
qualifying owner.
To exclude gain, a taxpayer must both own and use the home as a principal
residence for two of the five years before the sale. The ownership and use periods
need not be concurrent. The two years may consist of 24 full months or 730 days.
Short absences, such as for a summer vacation, count as periods of use, but longer
breaks, such as a one-year sabbatical, do not. The taxpayer also must not have
excluded gain on another home sold during the two years before the current sale.
The IRS made these final regulations available for public comment in October
2000. Several changes resulted from the comments received, including the treatment
of gain on property used for both business and residential purposes.
Today, the IRS invited comments on new temporary regulations on the subject of
excluding gain, but with a reduced maximum amount, when the seller does not satisfy
one of the time rules. The tax law provides an exception to the two -year rules for use,
ownership and claimed exclusion when the primary reason for the sale is health,
change in place of employment, or, to the extent provided in IRS regulations,
"unforeseen circumstances."
Taxpayers may establish by the facts and circumstances of their situations that
their home sales were for one of these reasons. To make things easier, the IRS has
identified various "safe harbors" that will automatically establish that the sale is for one
of these reasons.
The temporary regulations provide that a home sale will be considered related to
a change in employment if a qualified person's new place of work is at least 50 miles
farther from the old home than the old workplace was from that home. This is the same
distance rule that applies for the moving expense deduction. The employment change
must occur during the taxpayer's ownership and use of the home as a residence. A
qualified person is the taxpayer, the taxpayer's spouse, a co-owner of the home, or a
member of the taxpayer's household.
A sale will be considered because of health if the primary reason is related to a
disease, illness, or injury of a qualified person. If a physician recommends a change in
residence for health reasons, that will suffice. In addition to the persons listed above, a
qualified person for health reasons includes certain close relatives, so that sales related
to caring for sick family members will qualify.
(more)
- 3 A sale will be considered as occurring primarily because of "unforeseen
circumstances" if any of these events occur during the taxpayer's period of use and
ownership of the residence:
• death,
• divorce or legal separation,
• becoming eligible for unemployment compensation,
• a change in employment that leaves the taxpayer unable to pay the mortgage
or reasonable basic living expenses,
• multiple births resulting from the same pregnancy,
• damage to the residence resulting from a natural or man-made disaster, or an
act of war or terrorism, and
• condemnation, seizure or other involuntary conversion of the property.
Any of the first five situations listed must involve the taxpayer, spouse, co-owner,
or a member of the taxpayer's household to qualify. The regulations also give the IRS
Commissioner the discretion to determine other circumstances as unforeseen.
For qualifying sellers, the maximum exclusion amount of $250,000 ($500,000 for
a married couple filing jointly) is limited to the percentage of the two years that the
person fulfilled the requirements. Thus, a qualifying seller who owns and occupies a
home for one year (half of two years) - and who has not excluded gain on another
home in that time - may exclude half the regular maximum amount, or up to $125,000
of gain ($250,000 for most joint returns). The proportion may be figured in days or
months.
A taxpayer who now qualifies for a reduced maximum exclusion and has already
reported a gain from the sale of a residence on a prior year's tax return may use Form
1040X to file an amended return claiming the exclusion. Taxpayers may generally
amend returns until three years from the original due date. The law did not require
taxpayers to meet one of the exceptions before using the reduced maximum exclusion
for homes owned on August 5, 1997, and sold within two years after that date. Thus,
nearly all taxpayers qualifying under these regulations should be able to use them by
amending a recent year's return.
Treasury Decision 9030, the final home sale regulations, and T.D. 9031, the
temporary and proposed regulations on the reduced maximum exclusion, will be
published in the Federal Register on December 24,2002, and will be available at
www.federalregister.gov. These regulations will also be published in Internal Revenue
Bulletin. The proposed regulations will also be available for comment soon on the IRS
Web site at www.irs.gov.
xxx
:!
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TO 9030]
RIN 1545-AX28
Exclusion of Gain from Sale or Exchange of a Principal Residence
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations relating to the exclusion of gain
from the sale or exchange of a taxpayer's principal residence. These regulations reflect
changes to the law made by the Taxpayer Relief Act of 1997, as amended by the Internal
Revenue Service Restructuring and Reform Act of 1998.
DA TES: Effective Date: These regulations are effective December 24, 2002.
Applicability Date: For dates of applicability, see §§ 1.121-1 (t), 1.121-2( c),
1.121-3(1),1.121-4(1), and 1.1398-3(d).
FOR FURTHER IN FORMA TION CONTACT: Sara Paige Shepherd, (202) 622-4960
(not a toll- free number).
SUPPLEMENTARY INFORMATION:
Background
On October 10, 2000, the IRS and the Treasury Department published in the
Federal Register (65 FR 60136) a notice of proposed rulemaking (REG-I05235-99)
under section 121 of the Internal Revenue Code. Comments were specifically requested
regarding what circumstances should qualify as unforeseen for purposes of the reduced
maximum exclusion under section 121 (c). Written and electronic comments responding
to the notice of proposed rulemaking were received. A public hearing was held on
January 26, 2001.
After considering all of the comments, the proposed regulations are adopted as
amended by this Treasury decision. Proposed and temporary regulations regarding the
reduced maximum exclusion are also published in this issue of the Federal Register.
On September 9,2002, the IRS published Notice 2002-60 (2002-36 I.R.B. 482),
which provides that certain taxpayers affected by the September II, 200 I, terrorist
attacks may claim a reduced maximum exclusion for a sale or exchange of the taxpayer's
principal residence by reason of unforeseen circumstances.
Explanation and Summary of Comments
1. Exclusion of Gain from the Sale or Exchange of a Principal Residence
Under section 121 and the proposed regulations, a taxpayer may exclude up to
$250,000 ($500,000 for certain joint returns) of gain realized on the sale or exchange of
the taxpayer's principal residence if the taxpayer owned and used the property as the
taxpayer's principal residence for at least two years during the five- year period ending on
the date of the sale or exchange.
a. Principal residence
The proposed regulations provide that whether property is used by the taxpayer as
the taxpayer's residence, and whether the property is used as the taxpayer's principal
residence, depends upon all the facts and circumstances. The proposed regulations
further provide that if a taxpayer alternates between two properties, the property that the
taxpayer uses a majority of the time during the year will ordinarily be considered the
taxpayer's principal residence.
Commentators requested a bright line test or a list of factors to identify a property
as the taxpayer's principal residence in the case of a taxpayer with multiple residences.
Other commentators questioned whether the property that a taxpayer uses a majority of
the time during the year should generally be considered the taxpayer's principal
residence, arguing that the determination of the taxpayer's principal residence should be
judged on a day-by-day, rather than a year-by-year, basis.
The final regulations continue to provide that the residence that the taxpayer uses
a majority of the time during the year will ordinarily be considered the taxpayer's
principal residence. However, this test is not dispositive. The final regulations also
include a nonexclusive list of factors that are relevant in identifying a property as a
taxpayer's principal residence.
b. Vacant land
Commentators requested clarification of the circumstances in which vacant land
surrounding a residential structure would be treated as part of the residence for purposes
of section 121. Several commentators maintained that a taxpayer who sells vacant land
should be entitled to the section 121 exclusion if the taxpayer used the vacant land in
conjunction with a dwelling unit as the taxpayer's principal residence for at least two
years.
Under section 1034 and former section 121, a sale of vacant land that did not
include a dwelling unit did not qualify as a sale of the taxpayer's residence. See Rev.
Rul. 56-420 (1956-2 CB. 519); Rev. Rul. 83-50 (1983-1 CB. 41); O'Barr v.
Commissioner, 44 T.C 501 (1965); Roy v. Commissioner, T.C Memo. 1995-23; Hale v.
Commissioner, T.C Memo. 1982-527. However, if the sale of vacant land was one of a
series of transactions that included the sale of the house, and the series of transactions all
occurred during the replacement period provided by section 1034 (two years before or
after the date of the taxpayer's purchase of a replacement residence), the sale of vacant
land and the sale of the house were treated as one sale. See Bogley v. Commissioner, 263
F.2d 746 (4th Cir. 1959); Rev. Rul. 76-541 (1976-2 CB. 246).
Consequently, the final regulations provide that section 121 applies to the sale or
exchange of vacant land that the taxpayer has owned and used as part of the taxpayer's
principal residence if the sale or exchange of the dwelling unit occurs within two years
before or after the sale or exchange of the vacant land. The vacant land must be adjacent
to land containing the dwelling unit and the sale or exchange of the vacant land must
otherwise satisfy the requirements of section 121.
For purposes of section 121 (b)( I) and (2 ) (regarding the maximum limitation
amount of the section 121 exclusion), sales or exchanges of the dwelling unit and vacant
land are treated as one sale or exchange. Therefore, only one maximum limitation
amount of $250,000 ($500,000 for certain joint returns) applies to the combined sales or
exchanges of the vacant land and dwelling unit. In applying the maximum limitation
amount to sales or exchanges that occur in different taxable years, gain from the sale or
exchange of the dwelling unit, ll' to the maximum limitation amount under section
121(b)(1) or (2), is excluded first, and each spouse is treated as excluding one-halfofthe
gain from a sale or exchange to which section 12 I (b)(2)(A) and §1.121-2(a)(3)(i)(relating
to the limitation for certain joint returns) apply. Sales or exchanges of the dwelling unit
and adjacent vacant land in separate transactions are disregarded in applying section
121(b)(3) (restricting the application of section 121 to only I sale or exchange every 2
years) to each other but are taken into account as a sale or exchange of a principal
residence on the date of each transaction in applying section 121 (b )(3) to that transaction
and the sale or exchange of any other principal residence.
2. Use as a Principal Residence
a. Occupancy requirement
Numerous commentators asserted that the two -year use requirement of section
121 should not require actual occupancy. Instead, they argued for a facts and
circumstances test similar to the test employed under section 1034. Under that test, a
taxpayer's non-occupancy of a residence would count as use if the taxpayer did not intend
to abandon the property as the taxpayer's principal residence. The final regulations do
not adopt this suggestion because it is inconsistent with the statutory approach under
section 121 of aggregating periods of use over a five-year period, and with the legislative
history that provides that "a taxpayer must have owned the residence and occupied it as a
principal residence for at least two of the five years prior to the sale or exchange." See
H.R. Rep. No. 148, 105th Cong., 1st Sess. 348 (1997),1997-4 (Vol. I) CB. 319, 670; S.
Rep. No. 33, 105th Cong., 1st Sess. 37 (1997),1997-4 (Vol. 2) CB. 1067, 1117; H.R.
Conf. Rep. No. 220, 105th Cong., 1st Sess. 386 (1997),1997-4 (Vol. 2) CB. 1457,1856.
Commentators proposed a special exception to the occupancy requirement for
taxpayers who are absent from the home for an extended period of time due to
employment but have not purchased a replacement residence. Other commentators
suggested that members of the uniformed services and the United States Foreign Service
should be accorded a special exception because they are often away from home for
extended periods of time. A commentator also requested that the home daycare industry
be exempted from the occupancy requirement because calculating the days of actual
occupancy presents a particular difficulty for home daycare providers who often use the
same space for residential and business purposes.
The final regulations do not adopt these comments because there is no specific
authority under section 121 to provide exceptions to the use requirement except in the
cases of property ofa deceased spouse (section 121(d)(2)), property ofa former spouse
(section 121(d)(3)(B)), and out-of-residence care (section 121(d)(7)). Moreover, section
1034 contained a special rule for members of the Armed Forces, which Congress did not
include in enacting section 121.
b. Short temporary absences
Commentators requested that the regulations specify a maximum period of time
that would constitute a short temporary absence from the residence and be considered use
for purposes of satisfying the two-year use requirement. One commentator suggested
that periods of up to five years away from home due to international employment
assignments should be considered short temporary absences.
Because the determination of whether an absence is short and temporary depends
on the facts and circumstances, the final regulations do not adopt trese suggestions.
c. Property used in part as a principal residence
The proposed regulations provide that if a taxpayer satisfies the use requirement
with respect to only a portion of the property sold or exchanged, section 121 will apply
only to the gain allocable to that portion. Thus, if the residence was used partially for
residential purposes and partially for business purposes (mixed- use property), only that
part of the gain allocable to the residential portion is excludable under section 121.
Under section 121(d)(6), the exclusion does not apply to so much of the gain from
the sale of the property as does not exceed depreciation attributable to periods after May
6, 1997. Commentators suggested that the enactment of section 121 (d)( 6) illustrates
legislative intent to eliminate the allocation requirement for mixed-use property that
existed under prior law.
The IRS and Treasury Department have reconsidered the allocation rules of the
proposed regulations. The final regulations provide that section 121 will not apply to the
gain allocable to any portion of property sold or exchanged with respect to which a
taxpayer does not satisfy the use requirement if the non-residential portion is separate
from the dwelling unit. Additionally, if the depreciatnn for periods after May 6, 1997,
attributable to the non-residential portion of the property exceeds the gain allocable to the
non-residential portion of the property, the excess will not reduce the section 121
exclusion applicable to gain allocable to tre residential portion of the property. No
allocation of gain is required if both the residential and non-residential portions of the
property are within the same dwelling unit, however, section 121 will not apply to the
gain to the extent of any post-May 6, 1997, depreciation adjustments. The final
regulations provide that the term dwelling unit has the same meaning as in section
280A(f)(l), but does not include appurtenant structures or other property.
A commentator asked for clarification regarding how to allocate the basis and the
amount realized under the allocation rules between the portions of the property used for
business and residential purposes. The commentator suggested that the regulations
should require allocation on the same basis used to determine previous depreciation
deductions. The regulations adopt this comment and provide that the taxpayer must use
the same method to allocate the basis and the amount realized between the business and
residential portions of the property as the taxpayer used to allocate the basis for purposes
of depreciation, if applicable.
3. Ownership by Trusts
Commentators suggested that the regulations adopt the holdings of Rev. Rul. 66159 (1966-1 e.B. 162) and Rev. Rul. 85-45 (1985-1 e.B. 183) regarding treatment of
sales of property by certain trusts. Rev. Rul. 66-159 holds that, in cases in which the
grantor is treated as the owner of the entire trust under sections 676 and 671, gain
realized from the sale of trust property used by the grantor as the grantor's principal
residence qualifies under section 1034 for the rollover of gain into a replacement
residence. Because the grantor is treated as the owner of the entire trust, the sale by the
trust will be treated for federal income tax purposes as if made by the grantor.
Rev. Rul. 85-45 holds that, in cases in which the beneficiary of a trust is treated as
the owner of the entire trust under sections 678 and 671, gain realized from the sale of
trust property used by the beneficiary as the beneficiary's princ ipal residence qualifies for
the one-time exclusion of gain from the sale of a residence under former section 121. For
the period that the beneficiary is treated as the owner of the entire trust, the beneficiary
will be treated as owning the property for section 121 purposes, and the sale by the trust
will be treated for federal income tax purposes as if made by the beneficiary.
The final regulations adopt these suggestions and provide that, if a residence is
held by a trust, a taxpayer is treated as tre owner and the seller of the residence during
the period that the taxpayer is treated as the owner of the trust or the portion of the trust
that includes the residence under sections 671 through 679. The regulations provide
similar treatment for certain single-owner entities.
4. Dollar Limitations Applicable to Jointly Owned Property
Commentators requested further clarification of the application of the dollar
limitations of section 121 (b) to nor~ married taxpayers who are joint owners of a
residence. In response, the final regulations provide that each unmarried taxpayer who
jointly owns a principal residence may be eligible to exclude from gross income up to
$250,000 of gain that is attributable to each taxpayer's interest in the property.
5. Reduced Maximum Exclusion
Section 121 (c) provides an exclusion of gain in a reduced maximum amount for
taxpayers who have owned or used a principal residence for less than two of the five
years preceding the sale or exchange or who have excluded gain from anotrer sale or
exchange during the last two years. Taxpayers who fail to meet any of these conditions
may qualify for the reduced maximum exclusion if the sale or exchange is by reason of a
change in place of employment, health, or unforeseen circumstances.
The proposed regulations explain the general rule and the computation of the
reduced maximum exclusion but do not provide rules clarifying what is a sale or
exchange by reason of a change in place of employment, health, or unforeseen
circumstances. Comments were requested regarding what circumstances should qualify
as unforeseen. Because the rules formulated in response to the comments are extensive,
the IRS and Treasury Department have concluded that it is appropriate to publish
proposed and temporary regulations to provide the public with adequate notice and
opportunity to comment. These proposed and temporary regulations are published
elsewhere in this issue of the Federal Register. The final regulations provide guidance
regarding the computation of the reduced maximum exclusion.
6. Property of Deceased Spouse
Commentators suggested that the regulations allow a surviving spouse to exclude
up to $500,000 of gain if the sale or exchange of the marital home occurs within one year
of the death of the decedent spouse and the requirements of section 121 are otherwise
met. Under section 121 (b )(2), the $500,000 exclusion is only available to spouses who
file a joint return. A surviving spouse is eligible to file a joint return with the decedent
spouse only for the year of the decedent spouse's death. Therefore, the final regulations
do not adopt this suggestion.
Commentators also requested clarification regarding the computation of basis and
gain for surviving spouses. They asked for guidance regarding the advantages of titling
the marital home in the names of both spouses so that a surviving spouse can obtain a
step-up in basis and, consequently, realize less gain from the disposition of the marital
home. Because the rules regarding the computation of basis and gain are outside the
scope of these regulations, the final regulations do not address these issues.
7. Partial Interests
Commentators suggested that the regulations clarify that a taxpayer who sells a
partial interest in the taxpayer's principal residence and more than two years later sells the
remaining interest in the same property is entitled to use up to the full exclusion for each
sale.
The final regulations provide that a taxpayer may exclude gain from the sale or
exchange of partial interests (other than interests remaining after the sale or exchange of a
remainder interest) in the taxpayer's principal residence if the interest sold or exchanged
includes an interest in the dwelling unit.
However, the IRS and Treasury Department
believe that allowing more than the maximum limitation amount with respect to the same
principal residence is contrary to the language and intent of section 121. Therefore, only
one maximum limitation amount of $250,000 ($500,000 for certain joint returns) applies
to the combined sales or exchanges of partial interests.
In this regard, for purposes of determining the maximum limitation amount under
section 121 (b)(1) and (2), the sales or exchanges of partial interests in the same principal
residence are treated as one sale or exchange. In applying the maximum limitation
amount to sales or exchanges that occur in different taxable years, a taxpayer may
exclude gain from the first sale or exchange of a partial interest up to the taxpayer's full
maximum limitation amount and may exclude gain from the sale or exchange of any
other partial interest in the same principal residence to the extent of any remaining
maximum limitation amount, and each spouse is treated as excluding one-half of the gain
from a sale or exchange to which section l21(b)(2)(A) and §1.121-2(a)(3)(i)(relating to
the limitation for certain joint returns) apply.
For purposes of applying section 121 (b )(3) (restricting the application of section
121 to only 1 sale or exchange every 2 years), each sale or exchange of a partial interest
is disregarded with respect to other sales or exchanges of partial interests in the same
principal residence, but is taken into account as of the date of the sale or exchange in
applying section 121 (b )(3) to that sale or exchange and the sale or exchange of any other
principal residence.
8. Elections Under Sections 121 (d)(8) and (f)
Commentators asked for clarification regarding when a taxpayer may make or
revoke an election under section 121 (d)(8)( election to have the section 121 exclusion
apply to a sale or exchange of a remainder interest in the taxpayer's principal residence)
or section 121 (f)( election to have the section 121 exclusion not apply to a sale or
exchange of the taxpayer's principal residence). The final regulations adopt and clarify
the provisions of the proposed regulations and provide that a taxpayer may make or
revoke either election at any time before the expiration of a three-year period beginning
on the last date prescribed by law (determined without regard to extensions) for the filing
of the return for the taxable year in which the sale or exchange occurred.
9. Reporting Sales or Exchanges
Commentators recommended the creation of a form for taxpayers to use to report
the sale or exchange ofa principal residence even if the gain is entirely excludable under
section 121. The final regulations do not adopt this suggestion because, unlike sales or
exchanges under section 1034, no tax attributes of the sold residence carry over to a new
resideoce. Therefore the reporting of excluded gain is unnecessary and would be unduly
burdensome for taxpayers.
10. Election to Apply Regulations Retroactively
The regulations provide that taxpayers who would otherwise qualify under the
provisions of §§ 1.121-1 through 1.121-4 of the final regulations to exclude gain from a
sale or exchange before the effective date of the regulations but on or after May 7, 1997,
may elect to apply the provisions of the final regulations for any years for which the
period of limitation under section 6511 has not expired. A taxpayer may make the
election by filing a return for the taxable year of the sale or exchange that does not
include the gain from the sale or exchange of the taxpayer's principal residence in the
taxpayer's gross income. Taxpayers who have filed a return for the taxable year of the
sale or exchange may elect to apply the provisions of the final regulations for any years
for which the period of limitation under section 6511 has not expired by filing an
amended return.
11. Audit Protection
The regulations provide that the IRS will not challenge a taxpayer's position that a
sale or exchange before the effective date of these regulations but on or after May 7,
1997, qualifies for the section 121 exclusion if the taxpayer has made a reasonable, good
faith effort to comply with the requirements of section 121. Compliance with the
provisions of the proposed regulations that preceded these final regulations generally will
be considered a reasonable, good faith effort.
12. Section 121 Exclusion in Individuals' Title 11 Cases
The regulations provide that the bankruptcy estate of an individual in a chapter 7
or 11 bankruptcy case under title 11 of the United States Code succeeds to and takes into
account the individual's section 121 exclusion if the individual satisfies the requirements
of section 121. Although the effective date for this provision is on or after publication of
final regulations in the Federal Register, in view of the IRS's acquiescence in the case of
Internal Revenue Service v. Waldschmidt (In re Bradley), 222 B.R. 313 (M.D. Tenn.
1998), AOD CC-1999-009 (August 30, 1999), and Chief Counsel Notice (35)000-162
(August 10, 1999), the IRS will not challenge a position taken prior to the effective date
of these regulations that a bankruptcy estate may use the section 121 exclusion if the
debtor would otherwise satisfy the section 121 requirements.
13. Effective Date
These regulations apply to sales or exchanges on or after December 24, 2002.
Special Analyses
It has been detennined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been detennined that section 553(b) of the Administrative Procedure
Act (5 U.S.c. chapter 5) does not apply to these regulations, and because these
regulations do not impose a collection of infonnation on small entities, the Regulatory
Flexibility Act (5 U.S.c. chapter 6) does not apply. Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of proposed rulemaking preceding these regulations
was submitted to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business.
Drafting Infonnation
The principal author of these regulations is Sara Paige Shepherd, Office of
Associate Chief Counsel (Income Tax and Accounting). However, other personnel from
the IRS and the Treasury Department participated in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART l--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.c. 7805 * * *
Section 1.1398-3 also issued under 26 U.s.c. 1398(g) * * *
Par. 2. Sections 1.121-1, 1.121-2, 1.121-3 and 1.121-4 are revised to read as
follows:
§ 1.121-1 Exclusion 0 f gain from sale or exchange of a principal residence.
(a) In general. Section 121 provides that, under certain circumstances, gross
income does not include gain realized on the sale or exchange of property that was owned
and used by a taxpayer as the taxpayer's principal residence. Subject to the other
provisions of section 121, a taxpayer may exclude gain only if, during the 5-year period
ending on the date of the sale or exchange, the taxpayer owned and used the property as
the taxpayer's principal residence for periods aggregating 2 years or more.
(b) Residence--(1) In general. Whether property is used by the taxpayer as the
taxpayer's residence depends upon all the facts and circumstances. A property used by
the taxpayer as the taxpayer's residence may include a houseboat, a house trailer, or the
house or apartment that the taxpayer is entitled to occupy as a tenant-stockholder in a
cooperative housing corporation (as those tenns are defined in section 216(b)(1) and (2)).
Property used by the taxpayer as the taxpayer's residence does not include personal
property that is not a fixture under local law.
(2) Principal residence. In the case of a taxpayer using more than one property as
a residence, whether property is used by the taxpayer as the taxpayer's principal residence
depends upon all the facts and circumstances. If a taxpayer alternates between 2
properties, using each as a residence for successive periods of time, the property that the
taxpayer uses a majority of the time during the year ordinarily will be considered the
taxpayer's principal residence. In addition to the taxpayer's use of the property, relevant
factors in detennining a taxpayer's principal residence, include, but are not limited to--
(i) The taxpayer's place of emplo yment;
(ii) The principal place of abode of the taxpayer's family members;
(iii) The address listed on the taxpayer's federal and state tax returns, driver's
license, automobile registration, and voter registration card;
(iv) The taxpayer's mailing address for bills and correspondence;
(v) The location of the taxpayer's banks; and
(vi) The location of religious organizations and recreational clubs with which the
taxpayer is affiliated.
(3) Vacant land--(i) In general. The sale or exchange of vacant land is not a sale
or exchange of the taxpayer's principal residence unless-(A) The vacant land is adjacent to land containing the dwelling unit of the
taxpayer's principal residence;
(8) The taxpayer owned and used the vacant land as part of the taxpayer's
principal residence;
(C) The taxpayer sells or exchanges the dwelling unit in a sale or exchange that
meets the requirements of section 121 within 2 years before or 2 years after the date of
the sale or exchange of the vacant land; and
(D) The requirements of section 121 have otherwise been met with respect to the
vacant land.
(ii) Limitations--(A) Maximum limitation amount. For purposes of section
121 (b)( 1) and (2) (relating to the maximum limitation amount of the section 121
exclusion), the sale or exchange of the dwelling unit and the vacant land are treated as
one sale or exchange. Therefore, only one maximum limitation amount of $250,000
($500,000 for certain joint returns) applies to the combined sales or exchanges of vacant
land and the dwelling unit. In applying the maximum limitation amount to sales or
exchanges that occur in different taxable years, gain from the sale or exchange of the
dwelling unit, up to the maximum limitation amount under section 121 (b)( 1) or (2), is
excluded first and each spouse is treated as excluding one- half of the gain from a sale or
exchange to which section 121(b)(2)(A) and § 1.121-2(a)(3)(i) (relating to the limitation
for certain joint returns) apply.
(8) Sale or exchange of more than one principal residence in 2-year period. Ifa
dwelling unit and vacant land are sold or exchanged in separate transactions that qualify
for the section 121 exclusion under this paragraph (b )(3), each of the transactions is
disregarded in applying section 121 (b )(3) (restricting the application of section 121 to
only 1 sale or exchange every 2 years) to the other transactions but is taken into account
as a sale or exchange of a principal residence on the date of the transaction in applying
section 121 (b )(3) to that transaction and the sale or exchange of any other principal
residence.
(C) Sale or exchange of vacant land before dwelling unit. If the sale or exchange
of the dwelling unit occurs in a later taxable year than the sale or exchange of the vacant
land and after the date prescribed by law (including extensions) for the filing of the return
for the taxable year of the sale or exchange of the vacant land, any gain from the sale or
exchange of the vacant land must be treated as taxable on the taxpayer's return for the
taxable year of the sale or exchange of the vacant land. If the taxpayer has reported gain
from the sale or exchange of the vacant land as taxable, after satisfying the requirements
of this paragraph (b )(3) the taxpayer may claim the section 121 exclusion with regard to
the sale or exchange of the vacant land (for any period for which the period of limitation
under section 6511 has not expired) by filing an amended return.
(4) Examples. The provisions of this paragraph (b) are illustrated by the
following examples:
Example I. Taxpayer A owns 2 residences, one in New York and one in Florida.
From 1999 through 2004, he lives in the New York residence for 7 months and the
Florida residence for 5 months of each year. In the absence of facts and circumstances
indicating otherwise, the New York residence is A's principal residence. A would be
eligible for the section 121 exclusion of gain from the sale or exchange of the New York
residence, but not the Florida residence.
Example 2. Taxpayer B owns 2 residences, one in Virginia and one in Maine.
During 1999 and 2000, she lives in the Virginia residence. During 2001 and 2002, she
lives in the Maine residence. During 2003, she lives in the Virginia residence. B's
principal residence during 1999, 2000, and 2003 is the Virginia residence. B's principal
residence during 200 I and 2002 is the Maine residence. B would be eligible for the 121
exclusion of gain from the sale or exchange of either residence (but not both) during
2003.
Example 3. In 1991 Taxpayer C buys property consisting ofa house and 10 acres
that she uses as her principal residence. In May 2005 C sells 8 acres of the land and
realizes a gain of $11 0,000. C does not sell the dwelling unit before the due date for
filing C's 2005 return, therefore C is not eligible to exclude the $110,000 of gain. In
March 2007 C sells the house and remaining 2 acres realizing a gain of $180,000 from
the sale of the house. C may exclude the $180,000 of gain. Because the sale of the 8
acres occurred within 2 years from the date of the sale of the dwelling unit, the sale of the
8 acres is treated as a sale of the taxpayer's principal residence under paragraph (b)(3) of
this section. C may file an amended return for 2005 to claim an exclusion for $70,000
($250,000 - $180,000 gain previously excluded) of the $110,000 gain from the sale of the
8 acres.
Example 4. In 1998 Taxpayer D buys a house and I acre that he uses as his
principal residence. In 1999 D buys 29 acres adjacent to his house and uses the vacant
land as part of his principal residence. In 2003 D sells the house and I acre and the 29
acres in 2 separate transactions. D sells the house and I acre at a loss of $25,000. D
realizes $270,000 of gain from the sale of the 29 acres. D may exclude the $245,000 gain
from the 2 sales.
(c) Ownership and use requirements--( I) In general. The requirements of
ownership and use for periods aggregating 2 years or more may be satisfied by
establishing ownership and use for 24 full morths or for 730 days (365 x 2). The
requirements of ownership and use may be satisfied during nonconcurrent periods if both
the ownership and use tests are met during the 5-year period ending on the date of the
sale or exchange.
(2) Use. (i) In establishing whether a taxpayer has satisfied the 2-year use
requirement, occupancy of the residence is required. However, short temporary
absences, such as for vacation or other seasonal absence (although accompanied with
rental of the residence), are counted as periods of use.
(ii) Determination of use during periods of out-of-residence care. If a taxpayer
has become physically or mentally incapable of self-care and the taxpayer sells or
exchanges property that the taxpayer owned and used as the taxpayer's principal
residence for periods aggregating at least I year during the 5-year period preceding the
sale or exchange, the taxpayer is treated as using the property as the taxpayer's principal
residence for any period of time during the 5- year period in which the taxpayer owns the
property and resides in any facility (including a nursing home) licensed by a State or
political subdivision to care for an individual in the taxpayer's condition.
(3) Ownership--(i) Trusts. If a residence is owned by a trust, for the period that a
taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors
and others as substantial owners) as the owner of the trust or the portion of the trust that
includes the residence, the taxpayer will be treated as owning the residence for purposes
of satisfying the 2-year ownership requirement of section 121, and the sale or exchange
by the trust will be treated as if made by the taxpayer.
(ii) Certain single owner entities. If a residence is owned by an eligible entity
(within the meaning of
§30 1. 770 1-3(a) of this chapter) that has a single owner and is disregarded for federal tax
purposes as an entity separate from its owner under §301.7701-3 of this chapter, the
owner will be treated as owning the residence for purposes of satisfying the 2-year
ownership requirement of section 121, and the sale or exchange by the entity will be
treated as if made by the owner.
(4) Examples. The provisions of this paragraph (c) are illustrated by the
following examples. The examples assume that §1.121-3 (relating to the reduced
maximum exclusion) does not apply to the sale of the property. The examples are as
follows:
Example I. Taxpayer A has owned and used his house as his principal residence
since 1986. On January 31, 1998, A moves to another state. A rents his house to tenants
from that date until April 18, 2000, when he sells it. A is eligible for the section 121
exclusion because he has owned and used the house as his principal residence for at least
2 of the 5 years preceding the sale.
Example 2. Taxpayer B owns and uses a house as her principal residence from
1986 to the end of 1997. On January 4, 1998, B moves to another state and ceases to use
the house. B's son moves into the house in March 1999 am uses the residence until it is
sold on July I, 2001. B may not exclude gain from the sale under section 121 because
she did not use the property as her principal residence for at least 2 years out of the 5
years preceding the sale.
Example 3. Taxpayer C lives in a townhouse that he rents from 1993 through
1996. On January 18, 1997, he purchases the townhouse. On February I, 1998, C moves
into his daughter's home. On May 25, 2000, while still living in his daughter's home, C
sells his townhouse. The section 121 exclusion will apply to gain from the sale because
C owned the townhouse for at least 2 years out of the 5 years preceding the sale (from
January 19, 1997 until May 25, 2000) and he used the townhouse as his principal
residence for at least 2 years during the 5-year period preceding the sale (from May 25,
1995 until February 1, 1998).
Example 4. Taxpayer D, a college professor, purchases and moves into a house
on May 1, 1997. He uses the house as his principal residence continuously until
September 1, 1998, when he goes abroad for a I-year sabbatical leave. On October I,
1999, 1 month after returning from the leave, D sells the house. Because his leave is not
considered to be a short temporary absence under paragraph (c)(2) of this sectKm, the
period of the sabbatical leave may not be included in determining whether D used the
house for periods aggregating 2 years during the 5-year period ending on the date of the
sale. Consequently, D is not entitled to exclude gain under section 121 because he did
not use the residence for the requisite period.
Example 5. Taxpayer E purchases a house on February 1, 1998, that he uses as
his principal residence. During 1998 and 1999, E leaves his residence for a 2- month
summer vacation. E sells the house on March 1, 2000. Although, in the 5- year period
preceding the date of sale, the total time E used his residence is less than 2 years (21
months), the section 121 exclusion will apply to gain from the sale of the residence
because, under paragraph (c )(2) of this section, the 2- month vacations are short
temporary absences and are counted as periods of use in determining whether E used the
residence for the requisite period.
(d) Depreciation taken after May 6, 1997--(1) In general. The section 121
exclusion does not apply to so much of the gain from the sale or exchange of property as
does not exceed the portion of the depreciation adjustments (as defined in section
1250(b)(3)) attributable to the property for periods after May 6, 1997. Depreciation
adjustments allocable to any portion of the property to which the section 121 exclusion
does not apply under paragraph (e) of this section are not taken into account for this
purpose.
(2) Example. The provisions of this paragraph (d) are illustrated by the following
example:
Example. On July 1, 1999, Taxpayer A moves into a house that he owns and had
rented to tenants since July 1, 1997. A took depreciation deductions totaling $14,000 for
the period that he rented the property. After using the residence as his principal residence
for 2 full years, A sells the property on August 1, 200 I. A's gain realized from the sale is
$40,000. A has no other section 1231 or capital gains or losses for 2001. Only $26,000
($40,000 gain realized - $14,000 depreciation deductions) may be excluded under section
121. Under section 121 (d)(6) and paragraph (d)(I) of this section, A must recognize
$14,000 of the gain as unrecaptured section 1250 gain within the meaning of section l(h).
(e) Property used in part as a principal residence--( 1) Allocation required.
Section 121 will not apply to the gain allocable to any portion (separate from the
dwelling unit) of property sold or exchanged with respect to which a taxpayer does not
satisfy the use requirement. Thus, if a portion of the property was used for residential
purposes and a portion of the property (separate from the dwelling unit) was used for
non-residential purposes, only the gain allocable to the residential portion is excludable
under section 121. No allocation is required if both the residential and non-residential
portions of the property are within the same dwelling unit. However, section 121 does
not apply to the gain allocable to the residential portion of the property to the extent
provided by paragraph (d) of this section.
(2) Dwelling unit. For purposes of this paragraph (e), the term dwelling unit has
the same meaning as in section 280A(f)(l), but does not include appurtenant structures or
other property.
(3) Method of allocation. For purposes of determining the amount of gain
allocable to the residential and non-residential portions of the property, the taxpayer must
allocate the basis and the amount realized between the residential and the non-residential
portions of the property using the same method of allocation that the taxpayer used to
determine depreciation adjustments (as defined in section 1250(b)(3», if applicable.
(4) Examples. The provisions of this paragraph (e) are illustrated by the
following examples:
Example 1. Non-residential use of property not within the dwelling unit. (i)
Taxpayer A owns a property that consists of a house, a stable and 35 acres. A uses the
stable and 28 acres for non-residential purposes for more than 3 years during the 5- year
period preceding the sale. A uses the entire house and the remaining 7 acres as his
principal residence for at least 2 years during the 5-year period preceding the sale. For
periods after May 6, 1997, A claims depreciation deductions of$9,000 for the nonresidential use of the stable. A sells the entire property in 2004, realizing a gain of
$24,000. A has no other section 1231 or capital gains or losses for 2004.
(ii) Because the stable and the 28 acres used in the business are separate from the
dwelling unit, the allocation rules under this paragraph (e) apply and A must allocate the
basis and amount realized between the portion of the property that he used as his
principal residence and the portion of the property that he used for non-residential
purposes. A determines that $14,000 of the gain is allocable to the non-residential- use
portion of the property and that $10,000 of the gain is allocable to the portion of the
property used as his residence. A must recognize the $14,000 of gain allocable to the
non-residential-use portion of the property ($9,000 of which is unrecaptured section 1250
gain within the meaning of section 1(h), and $5,000 of which is adjusted net capital gain).
A may exclude $10,000 of the gain from the sale of the property.
Example 2. Non-residential use of property not within the dwelling unit and
rental of the entire property. (i) In 1998 Taxpayer B buys a property that includes a
house, a barn, and 2 acres. B uses the house and 2 acres as her principal residence and
the barn for an antiques business. In 2002, B moves out of the house and rents it to
tenants. B sells the property in 2004, realizing a gain of $21 ,000. Between 1998 and
2004 B claims depreciation deductions of $4,800 attributable to the antiques business.
Between 2002 and 2004 B claims depreciation deductions of $3,000 attributable to the
house. B has no other section 1231 or capital gains or losses for 2004.
(ii) Because the portion of the property used in the antiques business is separate
from the dwelling unit, the allocation rules under this paragraph (e) apply. B must
allocate basis and amount realized between the portion of the property that she used as
her principal residence and the portion of the property that she used for non-residential
purposes. B determines that $4,000 of the gain is allocable to the non-residential portion
of the property and that $17,000 of the gain is allocable to the portion of the property that
she used as her principal residence.
(iii) B must recognize the $4,000 of gain allocable to the non-residential portion
of the property (all of which is unrecaptured section 1250 gain within the meaning of
section 1(h)). In addition, the section 121 exclusion does not apply to the gain allocable
to the residential portion of the property to the extent of the depreciation adjustments
attributable to the residential portion of the property for periods after May 6, 1997
($3,000). Therefore, B may exclude $14,000 of the gain from the sale of the property.
Example 3. Non-residential use of a separate dwelling unit. (i) In 2002 Taxpayer
C buys a 3-story townhouse and converts the basement level, which has a separate
entrance, into a separate apartment by installing a kitchen and bathroom and removing
the interior stairway that leads from the basement to the upper floors. After the
conversion, the property constitutes 2 dwelling units within the meaning of paragraph
(e)(2) of this section. C uses the first and second floors of the townhouse as his principal
residence and rents the basement level to tenants from 2003 to 2007. C claims
depreciation deductions of $2,000 for that period with respect to the basement apartment.
C sells the entire property in 2007, realizing gain of $18,000. C has no other section
1231 or capital ga ins or losses for 2007.
(ii) Because the basement apartment and the upper floors of the townhouse are
separate dwelling units, C must allocate the gain between the portion of the property that
he used as his principal residence and the portion of the property that he used for nonresidential purposes under paragraph (e) of this section. After allocating the basis and the
amount realized between the residential and non-residential portions of the property, C
determines that $6,000 of the gain is allocab Ie to the non-residential portion of the
property and that $12,000 of the gain is allocable to the portion of the property used as
his residence. C must recognize the $6,000 of gain allocable to the non-residential
portion of the property ($2,000 of which is unrecaptured section 1250 gain within the
meaning of section 1(h), and $4,000 of which is adjusted net capital gain). C may
exclude $12,000 of the gain from the sale of the property.
Example 4. Separate dwelling unit converted to residential use. The facts are the
same as in Example 3 except that in 2007 C incorporates the basement of the townhouse
into his principal residence by eliminating the kitchen and building a new interior
stairway to the upper floors. C uses all 3 floors of the townhouse as his principal
residence for 2 full years and sells the townhouse in 2010, realizing a gain of $20,000.
Under section 121 (d)( 6) and paragraph (d) of this section, C must recognize $2,000 of the
gain as unrecaptured section 1250 gain within the meaning of section 1(h). Because C
used the entire 3 floors of the townhouse as his principal residence for 2 of the 5 years
preceding the sale of the property, C may exclude the remaining $18,000 of the gain from
the sale of the house.
Example 5. Non-residential use within the dwelling unit, property depreciated.
Taxpayer D, an attorney, buys a house in 2003. The house constitutes a single dwelling
unit but D uses a portion of the house as a law office. D claims depreciation deductions
of $2,000 during tre period that she owns the house. D sells the house in 2006, realizing
a gain of $13,000. D has no other section 1231 or capital gains or losses for 2006. Under
section 121(d)(6) and paragraph (d) of this section, D must recognize $2,000 of the gain
as unrecaptured section 1250 gain within the meaning of section 1(h). D may exclude the
remaining $11,000 of the gain from the sale of her house because, under paragraph (e)( 1)
of this section, she is not required to allocate gain to the business use within the dwelling
unit.
Example 6. Non-residential use within the dwelling unit, property not
depreciated. The facts are the same as in Example 5, except that D is not entitled to claim
any depreciation deductions with respect to her business use of the horne. D may
exclude $13,000 of the gain from the sale of her house because, under paragraph (e)(1) of
this section, she is not required to allocate gain to the business use within the dwelling
unit.
(t) Effective date. This section is applicable for sales and exchanges on or after
December 24,2002. For rules on electing to apply the provisions of this section
retroactively, see § 1.121-4(j).
§ 1.121-2 Limitations.
(a) Dollar limitations--(1) In general. A taxpayer may exclude from gross
income up to $250,000 of gain from the sale or exchange of the taxpayer's principal
residence. A taxpayer is eligible for only one maximum exclusion per principal
residence.
(2) Joint owners. If taxpayers jointly own a principal residence but file separate
returns, each taxpayer may exclude from gross income up to $250,000 of gain that is
attributable to each taxpayer's interest in the property, if the requirements of section 121
have otherwise been met.
(3) Special rules for joint returns--(i) In general. A husband and wife who make
a joint return for the year of the sale or exchange of a principal residence may exclude up
to $500,000 of gain if-(A) Either spouse meets the 2-year ownership requirements of § 1.121-1 (a) and
(c);
(B) Both spouses meet the 2-year use requirements of
§ 1.121-l(a) and (c); and
(C) Neither spouse excluded gain from a prior sale or exchange of property under
section 121 within the last 2 years (as determined under paragraph (b) of this section).
(ii) Other joint returns. For taxpayers filing jointly, if either spouse fails to meet
the requirements of paragraph (a)(3)(i) of this section, the maximum limitation amount to
be claimed by the couple is the sum of each spouse's limitation amount determined on a
separate basis as if they had not been married. For this purpose, each spouse is treated as
owning the property during the period that either spouse owned the property.
(4) Examples. The provisions of this paragraph (a) are illustrated by the
following examples. The examp les assume that § 1.121-3 (relating to the reduced
maximum exclusion) does not apply to the sale of the property. The examples are as
follows:
Example 1. Unmarried Taxpayers A and B own a house as joint owners, each
owning a 50 percent interest in the ho use. They sell the house after owning and using it
as their principal residence for 2 full years. The gain realized from the sale is $256,000.
A and B are each eligible to exclude $128,000 of gain because the amount of realized
gain allocable to each ofthem from the sale does not exceed each taxpayer's available
limitation amount of $250,000.
Example 2. The facts are the same as in Example 1, except that A and Bare
married taxpayers who file a joint return for the taxable year of the sale. A and Bare
eligible to exclude the entire amount of realized gain ($256,000) from gross income
because the gain realized from the sale does not exceed the limitation amount of
$500,000 available to A and B as taxpayers filing a joint return.
Example 3. During 1999, married Taxpayers Hand W each sell a residence that
each had separately owned and used as a principal residence before their marriage. Each
spouse meets the ownership and use tests for his or her respective residence. Neither
spouse meets the use requirement for the other spouse's residence. Hand W file a joint
return for the year of the sales. The gain realized from the sale of H's residence is
$200,000. The gain realized from the sale of W's residence is $300,000. Because the
ownership and use requirements are met for each residence by each respective spouse, H
and Ware each eligible to exclude up to $250,000 of gain from the sale of their
individual residences. However, W may not use H's unused exclusion to exclude gain in
excess of her limitation amount. Therefore, Hand W must recognize $50,000 of the gain
realized on the sale of W's residence.
Example 4. Married Taxpayers Hand W sell their residence and file a joint return
for the year of the sale. W, but not H, satisfies the requirements of section 121. They are
eligible to exclude up to $250,000 of the gain from the sale of the residence because that
is the sum of each spouse's dollar limitation amount determined on a separate basis as if
they had not been married ($0 for H, $250,000 for W).
Example 5. Married Taxpayers Hand W have owned and used their principal
residence since 1998. On February 16, 2001, H dies. On September 24, 2001, W sells
the residence and realizes a gain of $350,000. Pursuant to section 6013(a)(3), Wand H's
executor make a joint return for 2001. All $350,000 of the gain from the sale of the
residence may be excluded.
Example 6. Assume the same facts as Example 5, except that W does not sell the
residence until January 31, 2002. Because W's filing status for the taxable year of the
sale is single, the special rules for joint returns under paragraph (a)(3) of this section do
not apply and W may exclude only $250,000 of the gain.
(b) Application of section 121 to only 1 sale or exchange every 2 years--(l) In
general. Except as otherwise provided in §1.121-3 (relating to the reduced maximum
exclusion), a taxpayer may not exclude from gross income gain from the sale or exchange
of a principal residence if, during the 2-year period ending on the date of the sale or
exchange, the taxpayer sold or exchanged other property for which gain was excluded
under section 121. For purposes of this paragraph (b)(1), any sale or exchange before
May 7, 1997, is disregarded.
(2) Example. The following examp Ie illustrates the rules of this paragraph (b).
The example assumes that § 1.121-3 (relating to the reduced maximum exclusion) does
not apply to the sale of the property. The example is as follows:
Example. Taxpayer A owns a townhouse that he uses as his principal residence
for 2 full years, 1998 and 1999. A buys a house in 2000 that he owns and uses as his
principal residence. A sells the townhouse in 2002 and excludes gain realized on its sale
under section 121. A sells the house in 2003. Although A meets the 2-year ownership
and use requirements of section 121, A is not eligible to exclude gain from the sale of the
house because A excluded gain within the last 2 years under section 121 from the sale of
the townhouse.
(c) Effective date. This section is applicable for sales and exchanges on or after
December 24,2002. For rules on electing to apply the provisions of this section
retroactively, see § 1.121-4(j).
§ 1.121-3 Reduced maximum exclusion for taxpayers failing to meet certain
requirements.
(a) In general. In lieu of the limitation under section 121(b) and §1.121-2, a
reduced maximum exclusion limitation may be available for a taxpayer who sells or
exchanges property used as the taxpayer's principal residence but fails to satisfy the
ownership and use requirements described in § 1.121-1 (a) and (c) or the 2- year limitation
described in § 1.121-2(b).
(b) through (t) [Reserved]. For further guidance, see §1.121-3T(b) through (t).
(g) Computation of reduced maximum exclusion ..(1) The reduced maximum
exclusion is computed by multiplying the maximum dollar limitation of $250,000
($500,000 for certain joint filers) by a fraction. The numerator of the fraction is the
shortest of the period of time that the taxpayer owned the property dtring the 5-year
period ending on the date of the sale or exchange; the period of time that the taxpayer
used the property as the taxpayer's principal residence during the 5-year period ending on
the date of the sale or exchange; or the period of time between the date of a prior sale or
exchange of property for which the taxpayer excluded gain under section 121 and the
date of the current sale or exchange. The numerator of the fraction may be expressed in
days or months. The denominator of the fraction is 730 days or 24 months (depending on
the measure of time used in the numerator).
(2) Examples. The following examples illustrate the rules of this paragraph (g):
Example 1. Taxpayer A purchases a house that she uses as her principal
residence. Twelve months after the purchase, A sells the house due to a change in place
of her employment. A has not excluded gain under section 121 on a prior sale or
exchange of property within the last 2 years. A is eligible to exclude up to $125,000 of
the gain from the sale of her house (12/24 x $250,000).
Example 2. (i) Taxpayer H owns a house that he has used as his principal
residence since 1996. On January 15, 1999, Hand W marry and W begins to use H's
house as her principal residence. On January 15, 2000, H sells the house due to a change
in W's place of employment. Neither H nor W has excluded gain under section 121 on a
prior sale or exchange of property within the last 2 years.
(ii) Because Hand W have not each used the house as their principal residence
for at least 2 years during the 5-year period preceding its sale, the maximum dollar
limitation amount that may be claimed by Hand W will not be $500,000, but the sum of
each spouse's limitation amount determined on a separate basis as if they had not been
married. (See § 1. 121-2(a)(3)(ii).)
(iii) H is eligible to exclude up to $250,000 of gain because he meets the
requirements of section 121. W is not eligible to exclude the maximum dollar limitation
amount. Instead, because the sale of the muse is due to a change in place of
employment, W is eligible to claim a reduced maximum exclusion of up to $125,000 of
the gain (365/730 x $250,000). Therefore, Hand Ware eligible to exclude up to
$375,000 of gain ($250,000 + $125,000) from the sale of the house.
(h) [Reserved]. For further guidance, see §1.121-3T(h).
(i) through (k) [Reserved].
(I) Effective date. This section is applicable for sales and exchanges on or after
December 24,2002. For rules on electing to apply the provisions of this section
retroactively, see § 1.121-4U).
§ 1.121-4 Special rules.
(a) Property of deceased spouse--(1) In general. For purposes of satisfying the
ownership and use requirements of section 121, a taxpayer is treated as owning and using
property as the taxpayer's principal residence during any period that the taxpayer's
deceased spouse owned and used the property as a principal residence before death if-(i) The taxpayer's spouse is deceased on the date of the sale or exchange of the
property; and
(ii) The taxpayer has not remarried at the time of the sale or exchange of the
property.
(2) Example. The provisions of this paragraph (a) are illustrated by the following
example. The example assumes that §1.121-3 (relating to the reduced maximum
exclusion) does not apply to the sale of the property. The example is as follows:
Example. Taxpayer H has owned and used a house as his principal residence
since 1987. Hand W marry on July 1, 1999 and from that date they use H's house as
their principal residence. H dies on August 15,2000, and W inherits the property. W
sells the property on September 1, 2000, at which time she has not remarried. Although
W has owned and used the house for less than 2 years, W will be considered to have
satisfied the ownership and use requirements of section 121 because W's period of
ownership and use includes the period that H owned and used the property before death.
(b) Property owned by spouse or fonner spouse--( 1) Property transferred to
individual from spouse or fonner spouse. If a taxpayer obtains property from a spouse or
fonner spouse in
a transaction described in section 1041 (a), the period that the taxpayer owns the property
will include the period that the spouse or fonner spouse owned the property.
(2) Property used by spouse or fonner spouse. A taxpayer is treated as using
property as the taxpayer's principal residence for any period that the taxpayer has an
ownership interest in the property and the taxpayer's spouse or fonner spouse is granted
use of the property under a divorce or separation instrument (as defined in section
71 (b)(2)), provided that the spouse or fonner spouse uses the property as his or her
principal residence.
(c) Tenant-stockholder in cooperative housing corporation. A taxpayer who
holds stock as a tenant-stockholder in a cooperative housing corporation (as those tenns
are defined in section 216(b)(1) and (2)) may be eligible to exclude gain under section
121 on the sale or exchange of the stock. In determining whether the taxpayer meets the
requirements of section 121, the ownership requirements are applied to the holding of the
stock and the use requirements are applied to the house or apartment that the taxpayer is
entitled to occupy by reason of the taxpayer's stock ownership.
(d) Involuntary conversions--(1) In general. For purposes of section 121, the
destruction, theft, seizure, requisition, or condemnation of property is treated as a sale of
the property.
(2) Application of section 1033. In applying section 1033 (relating to involuntary
conversions), the amount realized from the sale or exchange of property used as the
taxpayer's principal residence is treated as being the amount detennined without regard to
section 121, reduced by the amount of gain excluded from the taxpayer's gross income
under section 121.
(3) Property acquired after involuntary conversion. If the basis of the property
acquired as a result of an involuntary conversion is detennined (in whole or in part) under
section 1033(b) (relating to the basis of property acquired through an involuntary
conversion), then for purposes of satisfying the requirements of section 121, the taxpayer
will be treated as owning and using the acquired property as the taxpayer's principal
residence during any period of time that the taxpayer owned and used the converted
property as the taxpayer's principal residence.
(4) Example. The provisions of this paragraph (d) are illustrated by the following
example:
Example. (i) On February 18, 1999, fire destroys Taxpayer A's house which has
an adjusted basis of $80,000. A had owned and used this property as her principal
residence for 20 years prior to its destruction. A's insurance company pays A $400,000
for the house. A realizes a gain of $320,000 ($400,000 - $80,000). On August 27, 1999,
A purchases a new house at a cost of $100,000.
(ii) Because the destruction of the house is treated as a sale for purposes of
section 121, A will exclude $250,000 of the realized gain from A's gross income. For
purposes of section 1033, the amount realized is then treated as being $150,000
($400,000 - $250,000) and the gain realized is $70,000 ($150,000 amount realized $80,000 basis). A elects under section 1033 to recognize only $50,000 of the gain
($150,000 amount realized - $100,000 cost of new house). The remaining $20,000 of
gain is deferred and A's basis in the new house is $80,000 ($100,000 cost - $20,000 gain
not recognized).
(iii) A will be treated as owning and using the new house as A's principal
residence during the 20-year period that A owned and used the destroyed house.
(e) Sales or exchanges of partial interests--( 1) Partial interests other than
remainder interests--(i) In general. Except as provided in paragraph (e )(2) of this section
(relating to sales or exchanges of remainder interests), a taxpayer may apply the section
121 exclusion to gain from the sale or exchange of an interest in the taxpayer's principal
residence that is less than the taxpayer's entire interest if tre interest sold or exchanged
includes an interest in the dwelling unit. For rules relating to the sale or exchange of
vacant land, see § 1.121-1 (b )(3).
(ii) Limitations--(A) Maximum limitation amount. For purposes of section
121 (b)(1) and (2) (relating to the maximum limitation amount of the section 121
exclusion), sales or exchanges of partial interests in the same principal residence are
treated as one sale or exchange. Therefore, only one maximum limitation amount of
$250,000 ($500,000 for certain joint returns) applies to the combined sales or exchanges
of the partial interests. In applying the maximum limitation amount to sales or exchanges
that occur in different taxable years, a taxpayer may exclude gain from the first sale or
exchange of a partial interest up to the taxpayer's full maximum limitation amount and
may exclude gain from the sale or exchange of any other partial interest in the same
principal residence to the extent of any remaining maximum limitation amount, and each
spouse is treated as excluding one- half of the gain from a sale or exchange to which
section 121 (b )(2)(A) and § 1. 121-2(a)(3)(i)(relating to the limitation for certain joint
returns) apply.
(B) Sale or exchange of more than one principal residence in 2-year period. For
purposes of applying section 121(b)(3) (restricting the application of section 121 to only
1 sale or exchange every 2 years), each sale or exchange of a partial interest is
disregarded with respect to other sales or exchanges of partial interests in the same
principal residence, but is taken into account as of the date of the sale or exchange in
applying section 121 (b )(3) to that sale or exchange and the sale or exchange of any other
principal residence.
(2) Sales or exchanges of remainder interests--(i) In general. A taxpayer may
elect to apply the section 121 exclusion to gain from the sale or exchange of a remainder
interest in the taxpayer's principal residence.
(ii) Limitations--(A) Sale or exchange of any other interest. If a taxpayer elects
to exclude gain from the sale or exchange of a remainder interest in the taxpayer's
principal residence, the section 121 exclusion will not apply to a sale or exchange of any
other interest in the residence that is sold or exchanged separately.
(B) Sales or exchanges to related parties. This paragraph (e )(2) will not apply to
a sale or exchange to any person that bears a relationship to the taxpayer that is described
in section 267(b) or 707(b).
(iii) Election. The taxpayer makes the election under this paragraph (e)(2) by
filing a return for the taxable year of the sale or exchange that does not include the gain
from the sale or exchange of the remainder interest in the taxpayer's gross income. A
taxpayer may make or revoke the election at any time before the expiration of a 3- year
period beginning on the last date prescribed by law (determined without regard to
extensions) for the filing of the return for the taxable year in which the sale or exchange
occurred.
(4) Example. The provisions of this paragraph (e) are illustrated by the following
example:
Example. In 1991 Taxpayer A buys a house that A uses as his principal
residence. In 2004 A's friend B moves into A's house and A sells B a 50% interest in the
house realizing a gain of$136,000. A may exclude the $136,000 of gain. In 2005 A sells
his remaining 50% interest in the home to B realizing a gain of $138,000. A may exclude
$114,000 ($250,000 - $136,000 gain previously excluded) of the $138,000 gain from the
sale of the remaining interest.
(f) No exclusion for expatriates. The section 121 exclusion will not apply to any
sale or exchange by an individual if the provisions of section 877(a) (relating to the
treatment of expatriates) applies to the individual.
(g) Election to have section not apply. A taxpayer may elect to have the section
121 exclusion not apply to a sale or exchange of property. The taxpayer makes the
election by filing a return for the taxable year of the sale or exchange that includes the
gain from the sale or exchange of the taxpayer's principal residence in the taxpayer's
gross income. A taxpayer may make an election under this paragraph (g) to have section
121 not apply (or revoke an election to have section 121 not apply) at any time before the
expiration ofa 3-year period beginning on the last date prescribed by law (determined
without regard to extensions) for the filing of the return for the taxable year in which the
sale or exchange occurred.
(h) Residences acquired in rollovers under section 1034. If a taxpayer acquires
property in a transaction that qualifies under section 1034 (section 1034 property) for the
nonrecognition of gain realized on the sale or exchange of another property and later sells
or exchanges such property, in determining the period of the taxpayer's ownership and
use of the property under section 121 the taxpayer may include the periods that the
taxpayer owned and used the section 1034 property as the taxpayer's principal residence
(and each prior residence taken into account under section 1223(7) in determining the
holding period of the section 1034 property).
(i) [Reserved].
U) Election to apply regulations retroactively. Taxpayers who would otherwise
qualify under §§ 1.121-1 through 1.121-4 to exclude gain from a sale or exchange of a
principal residence before December 24,2002 but on or after May 7, 1997, may elect to
apply §§ 1.121-1 through 1.121-4 for any years for which the period of limitation under
section 6511 has not expired. The taxpayer makes the election under this paragraph U)
by filing a return for the taxable year of the sale or exchange that does not include the
gain from the sale or exchange of the taxpayer's principal residence in the taxpayer's
gross income. Taxpayers who have filed a return for the taxable year of the sale or
exchange may elect to apply the provisions of these regulations for any years for which
the period of limitation under section 6511 has not expired by filing an amended return.
(k) Audit protection. The Internal Revenue Service will not challenge a
taxpayer's position that a sale or exchange of a principal residence occurring before
December 24,2002 but on or after May 7, 1997, qualifies for the section 121 exclusion if
the taxpayer has made a reasonable, good faith effort to comply with the requirements of
section 121. Compliance with the provisions of the regulations project under section 121
(REG-105235-99 (2000-2 C.B. 447)) generally will be considered a reasonable, good
faith effort to comply with the requirements of section 121.
(1) Effective date. This section is applicable for sales and exchanges on or after
December 24,2002. For rules on electing to apply the provisions retroactively, see
paragraph U) of this section.
§ 1.121-5 [Removed]
Par. 3. Section 1.121-5 is removed.
Par. 4. Section 1.1398-3 is added to read as follows:
§ 1.1398-3 Treatment of section 121 exclusion in individuals' title 11 cases.
(a) Scope. This section applies to cases under chapter 7 or chapter 11 of title 11
of the United States Code, but only if the debtor is an individual.
(b) Definition and rules of general application. For purposes of this section,
section 121 exclusion means the exclusion of gain from the sale or exchange of a debtor's
principal residence available under section 121.
(c) Estate succeeds to exclusion upon commencement of case. The bankruptcy
estate succeeds to and takes into account the section 121 exclusion with respect to the
property transferred into the estate.
(d) Effective date. This section is applicable for sales or exchanges on or after
December 24, 2002.
Robert E. Wenzel,
Assistant Deputy Commissioner of Internal Revenue.
Approved:
December 11, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
:!
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TO 9031]
RIN 1545-BB02
Reduced Maximum Exclusion of Gain from Sale or Exchange of Principal Residence
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations relating to the exclusion of
gain from the sale or exchange of a taxpayer's principal residence in the case of a
taxpayer who has not owned and used the property as the taxpayer's principal residence
for two of the preceding five years or who has excluded gain from the sale or exchange of
a principal residence within the preceding two years. The text of these temporary
regulations also serves as the text of the proposed regulations set forth in the notice of
proposed rulemaking on this subject in the Proposed Rules section in this issue of the
Federal Register.
DATES: Effective Date: These regulations are effective December 24, 2002.
Applicability Date: For dates of applicability, see § 1.121-3T(l).
FOR FURTHER INFORM A nON CONTACT: Sara Paige Shepherd, (202) 622-4960
(not a to11- free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26 CFR part
1) under section 121 (c) relating to the exclusion of gain from the sale or exchange of the
principal residence of a taxpayer who has not owned and used the property as the
taxpayer's principal residence for two of the preceding five years or who has excluded
gain on the sale or exchange of a principal residence within the preceding two years.
Under section 121(a), a taxpayer may exclude up to $250,000 ($500,000 for
certain joint returns) of gain realized on the sale or exchange of the taxpayer's principal
residence if the taxpayer owned and used the property as the taxpayer's principal
residence for at least two years during the five- year period ending on the date of the sale
or exchange. Section 121 (b )(3) allows the taxpayer to apply the maximum exclusion to
only one sale or exchange during the two-year period ending on the date of the sale or
exchange. Section 121 (c) provides that a taxpayer who fails to meet any of these
conditions by reason of a change in place of employment, health, or, to the extent
provided in regulations, unforeseen circumstances, may be entitled to an exclusion in a
reduced maximum amount.
On October 10, 2000, a notice of proposed rulemaking (REG-l 05235-99) under
section 121 was published in the Federal Register (65 FR 60136). The proposed
regulations did not define change in place of employment, health, or unforeseen
circumstances for purposes of the reduced maximum exclusion. Comments were
specifically requested regarding what circumstances should qualify as unforeseen. A
public hearing was held on January 26, 2001.
The IRS and Treasury Department received numerous comments regarding the
reduced maximum exclusion and have concluded that many of these comments should be
adopted. However, because the rules formulated in response to these comments are
extensive, the IRS and Treasury Department have concluded that the rules relating to the
reduced maximum exclusion should be issued as proposed and temporary regulations to
provide the public with adequate notice and opportunity to comment. Final regulations
under section 121 addressing provisions other than the reduced maximum exclusion are
set forth elsewhere in this edition of the Federal Register.
Explanation of Provisions
1. General Provisions
Under the temporary regulations, a reduced maximum exclusion limitation is
available to a taxpayer who has sold or exchanged property owned and used as the
taxpayer's principal residence for less than two of the preceding five years or who has
excluded gain on the sale or exchange of a principal residence within the preceding two
years. This reduced maximum exclusion applies only if the sale or exchange is by reason
of a change in place of employment, health, or unforeseen circumstances. A sale or
exchange is by reason of a change in place of employment, health, or unforeseen
circumstances only if the taxpayer's primary reason for the sale or exchange is a change
in place of employment, health, or unforeseen circumstances. The taxpayer's primary
reason for the sale or exchange is determined based on the facts and circumstances. The
temporary regulations provide a list of factors that may be relevant in determining the
taxpayer's primary reason. These factors are suggestive only. No single fact or particular
combinatio n of facts is determinative of the taxpayer's entitlement to the reduced
maximum exclusion.
In addition, for each of the three grounds for claiming a reduced maximum
exclusion, the temporary regulations provide a general definition and one or more safe
harbors. If a safe harbor applies, the taxpayer's primary reason for the sale or exchange is
deemed to be a change in place of employment, health, or unforeseen circumstances.
2. Change in Place of Employment
The temporary regulations provide that a sale or exchange is by reason of a
change in place of employment if the taxpayer's primary reason for the sale or exchange
is a change in the location of the employment of a qualified individual. Employment is
defined as the commencement of employment with a new employer, the continuation of
employment with the same employer, or the commencement or continuation of selfemployment. A qualified individual is defined as the taxpayer, the taxpayer's spouse, a
co-owner of the residence, or a person whose principal place of abode is in the same
household as the taxpayer.
The temporary regulations adopt a safe harbor, suggested by commentators, that
provides that the primary reason for the sale or exchange is deemed to be a change in
place of employment if the new place of employment of a qualified individual is at least
fifty miles farther from the residence sold or exchanged than was the fonner place of
employment. If the individual was unemployed, the distance between the new place of
employment and the residence sold or exchanged must be at least fifty miles. This
standard is derived from section 217( c)( I) relating to the moving expense deduction. The
safe harbor applies only if the change in place of employment occurs during the period of
the taxpayer's ownership and use of the property as the taxpayer's principal residence. If
a sale or exchange does not satisfy this safe harbor, a taxpayer may still qualify for the
reduced maximum exclusion by reason of a change in place of employment if the facts
and circumstances indicate that a change in place of employment is the primary reason
for the sale or exchange.
3. Sale or Exchange by Reason of Health
Commentators proposed that, for purposes of detennining whether a sale or
exchange is by reason of health, the regulations adopt standards similar to those for the
deductibility of medical expenses under section 213( a). Commentators also suggested
that the regulations provide that the reduced maximum exclusion by reason of health
apply to sales and exchanges due to (1) advanced age-related infinnities, (2) the
taxpayer's need to move in order to care for a family member, (3) severe allergies, and (4)
emotional problems.
In response to these comments, the temporary regulations provide the general rule
that a sale or exchange is by reason of health if the taxpayer's primary reason for the sale
or exchange is (I) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or
treatment of disease, illness, or injury of a qualified individual, or (2) to obtain or provide
medical or personal care for a qualified individual suffering from a disease, illness, or
injury. A sale or exchange that is merely beneficial to the general health or well-being of
the individual is not a sale or exchange by reason of health
One commentator suggested that the regulations establish a safe harbor allowing a
taxpayer to claim a reduced maximum exclusion if the taxpayer obtains documentation of
a specific medical condition from a licensed physician. The temporary regulations
provide a safe harbor that the primary reason for the sale or exchange is deemed to be
health if a physician (as defined in section 213(d)(4)) recommends a change of residence
for reasons of health.
For purposes of the reduced maximum exclusion by reason of health, the tenn
qualified individual includes the taxpayer, the taxpayer's spouse, a co-owner of the
residence, a person whose principal place of abode is in the same household as the
taxpayer, and certain family members of these individuals. The definition of qualified
individual in the case of health is broader than the definition that applies to the exclusions
by reason of change in place of employment and unforeseen circumstances to encompass
taxpayers who sell or exchange their residence in order to care for sick family
members.4. Sale or Exchange by Reason of Unforeseen Circumstances
The temporary regulations provide that a sale or exchange is by reason of
unforeseen circumstances if the primary reason for the sale or exchange is the occurrence
of an event that the taxpayer does not anticipate before purchasing and occupying the
residence.
Many commentators provided suggestions regarding circumstances that should
qualify as unforeseen. A large number of commentators suggested that unforeseen
circumstances should encompass divorce or the termination of a permanent residential
relationship. Others suggested that unforeseen circumstances should include death, birth,
marriage, bankruptcy, the loss of employment, incarceration, admission to an ins titution
of higher learning, natural and ma~ made disasters, involuntary conversions, and a
substantial increase in medical or living expenses leading to a significant change in
economic circumstances. One commentator suggested that any delay of over three years
in selling the residence due to a decline in the real estate market should be deemed an
unforeseen circumstance. A few commentators suggested that unforeseen circumstances
should include unfavorable changes affecting the desirability of the property, such as
environmental problems, zoning-law changes, slovenly neighbors, and serious nuisance
or safety concerns.
The temporary regulations adopt many of these suggestions as safe harbors. A
taxpayer's primary reason for the sale or exchange is deemed to be unforeseen
circumstances if one of the safe harbor events occurs during the taxpayer's ownership and
use of the property. The safe harbor events include the involuntary conversion of the
residence, a natural or ma~ made disaster or act of war or terrorism resulting in a casualty
to the residence, and, in the case of a qualified individual: (1) death, (2) the cessation of
employment as a result of which the individual is eligible for unemployment
compensation, (3) a change in employment or self-employment status that results in the
taxpayer's inability to pay housing costs and reasonable basic living expenses for the
taxpayer's household, (4) divorce or legal separation under a decree of divorce or separate
maintenance, and (5) multiple births resulting from the same pregnancy. The
Commissioner may designate other events or situations as unforeseen circumstances in
published guidance of general applicability or in a ruling directed to a specific taxpayer.
A taxpayer who does not qualify for a safe harbor may demonstrate that the primary
reason for the sale or exchange is unforeseen circumstances, under a facts and
circumstances test.
For purposes of the reduced maximum exclusion by reason of unforeseen
circumstances, a qualified individual includes the taxpayer, the taxpayer's spouse, a coowner of the residence, and a person whose principal place of abode is in the same
household as the taxpayer.
The regulations include examples illustrating the application of the safe harbors
and the facts and circumstances test.
5. Election to Apply Regulations Retroactively
The regulations provide that taxpayers who would otherwise qualify under these
temporary regulations to exclude gain from a sale or exchange that occurred before the
effective date of the regulations but on or after May 7, 1997, may elect to apply all of the
provisions of the temporary regulations to the sale or exchange. A taxpayer may make
the election by filing a return for the taxable year of the sale or exchange that does not
include the gain from the sale or exchange of the taxpayer's principal residence in the
taxpayer's gross income. Taxpayers who have filed a return for the taxable year of the
sale or exchange may elect to apply all of the provisions of these regulations for any
years for which the period of limitations under section 6511 has not expired by filing an
amended return.
6. Audit Protection
The temporary regulations provide that the IRS will not challenge a taxpayer's
position that a sale or exchange before the effective date of these regulations but on or
after May 7, 1997, qualifies for the reduced maximum exclusion under section 121 (c) if
the taxpayer has made a reasonable, good faith effort to comply with the requirements of
section 121 (c) and if the sale or exchange otherwise qualifies under section 121.
7. Effective Date
These temporary regulations apply to sales and exchanges on or after December
24,2002.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses section of
the preamble to the cross-reference notice of proposed rulemaking published in the
Proposed Rules section in this issue of the Federal Register. Pursuant to section 7805(t)
of the Internal Revenue Code, these temporary regulations will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment on their impact
on small business.
Drafting Information
The principal author of these regulations is Sara Paige Shepherd, Office of
Associate Chief Counsel (Income Tax and Accounting). However, other personnel from
the IRS and the Treasury Department participated in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART l--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.c. 7805 * * *
Par. 2. Section 1.121-3 T is added to read as follows:
§1.121-3T Reduced maximum exclusion for taxpayers failing to meet certain
requirements (temporary).
(a) [Reserved] For further guidance, see §1.121-3(a).
(b) Primary reason for sale or exchange. In order for a taxpayer to claim a
reduced maximum exclusion under section 121 (c), the sale or exchange must be by
reason of a change in place of employment, health, or unforeseen circumstances. A sale
or exchange is by reason of a change in place of employment, health, or unforeseen
circumstances only if the primary reason for the sale or exchange is a change in place of
employment (within the meaning of paragraph (c) of this section), health (within the
meaning of paragraph (d) of this section), or unforeseen circumstances (within the
meaning of paragraph (e) of this section). Whether the requirements of this section are
satisfied depends upon all the facts and circumstances. If the taxpayer qualifies for a safe
harbor described in this section, the taxpayer's primary reason is deemed to be a change
in place of employment, health, or unforeseen circumstances. If the taxpayer does not
qualify for a safe harbor, factors that may be relevant in determining the taxpayer's
primary reason for the sale or exchange incl ude (but are not limited to) the extent to
which-(I) The sale or exchange and the circumstances giving rise to the sale or
exchange are proximate in time;
(2) The suitability of the property as the taxpayer's principal residence materially
changes;
(3) The taxpayer's financial ability to maintain the property materially changes;
(4) The taxpayer uses the property as the taxpayer's residence during the period
of the taxpayer's ownership of the property;
(5) The circumstances giving rise to the sale or exchange are not reasonably
foreseeable when the taxpayer begins using the property as the taxpayer's principal
residence; and
(6) The circumstances giving rise to the sale or exchange occur during the period
of the taxpayer's ownership and use of the property as the taxpayer's principal residence.
(c) Sale or exchange by reason of a change in place of employment--(l) In
general. A sale or exchange is by reason of a change in place of employment if, in the
case of a qualified individual described in paragraph (f) of this section, the primary
reason for the sale or exchange is a change in the location of the individual's
employment.
(2) Distance safe harbor. The primary reason for the sale or exchange is deemed
to be a change in place of employment (within the meaning of paragraph (c)(l) of this
section) if-(i) The change in place of employment occurs during the period of the taxpayer's
ownership and use of the property as the taxpayer's principal residen:e; and
(ii) The individual's new place of employment is at least 50 miles farther from the
residence sold or exchanged than was the former place of employment, or, if there was no
former place of employment, the distance between the individual's new place of
employment and the residence sold or exchanged is at least 50 miles.
(3) Employment. For purposes of this paragraph (c), employment includes the
commencement of employment with a new employer, the continuation of employment
with the same employer, and the commencement or continuation of self-employment.
(4) Examples. The following examples illustrate the rules of this paragraph (c):
Example I. A is unemployed and owns a townhouse that she has owned and used
as her principal residence since 2002. In 2003 A obtains a job that is 54 miles from her
townhouse, and she sells the townhouse. Because the distance between A's new place of
employment and the townhouse is at least 50 miles, the sale is within the safe harbor of
paragraph (c)(2) of this section and A is entitled to claim a reduced maximum exclusion
under section 12 1(c)(2).
Example 2. B is an officer in the United States Air Force stationed in Florida. B
purchases a house in Florida in 2001. In May 2002 B moves out of his house to take a 3year assignment in Germany. B sells his house in January 2003. Because B's new place
of employment in Germany is at least 50 miles farther from the residence sold than is B's
former place of employment in Florida, the sale is within the safe harbor of paragraph
(c)(2) of this section and B is entitled to claim a reduced maximum exclusion under
section 121(c)(2).
Example 3. C is employed by Employer R at R's Philadelphia office. C
purchases a house in February 2001 that is 35 miles from R's Philadelphia office. In May
2002 C begins a temporary assignment at R's Wilmington office that is 72 miles from C's
house, and moves out of the house. In June 2004 C is assigned to work in R's London
office, and as a result, sells her house in August 2004. The sale of the house is not within
the safe harbor of paragraph (c)(2) of this section by reason of the change in place of
employment from Philadelphia to Wilmington because the Wilmington office is not 50
miles farther from C's house than is the Philadelphia office. Furthermore, the sale is not
within the safe harbor by reason of the change in place of employment to London
because C is not using the house as her principal residence when she moves to London.
However, C is entitled to claim a reduced maximum exclusion under section 121 (c )(2)
because, under the facts and circumstances, the primary reason for the sale is the change
in C's place of employment.
Example 4. In July 2002 D buys a condominium that is 5 miles from her place of
employment and uses it as her principal residence. In February 2003 D, who works as an
emergency medicine physician, obtains a job that is located 51 miles from D's
condominium. D may be called in to work unscheduled hours and, when called, must be
able to arrive at work quickly. Therefore, D sells her condominium and buys a
townhouse that is 4 miles from her new place of employment. Because D's new place of
employment is only 46 miles farther from the condominium than is D's former place of
employment, the sale is not within the safe harbor of paragraph (c )(2) of this section.
However, D is entitled to claim a reduced maximum exclusion under section 121(c)(2)
because, under the facts and circumstances, the primary reason for the sale is the change
in D's place of employment.
(d) Sale or exchange by reason ofhealth--(l) In general. A sale or exchange is
by reason of health if the primary reason for the sale or exchange is to obtain, provide, or
facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a
qualified individual described in paragraph (f) of this section, or to obtain or provide
medical or personal care for a qualified individual suffering from a disease, illness, or
injury. A sale or exchange that is merely beneficial to the general health or well-being of
the individual is not a sale or exchange by reason of health.
(2) Physician'S recommendation safe harbor. The primary reason for the sale or
exchange is deemed to be health if a physician (as defined in section 213( d)( 4))
recommends a change of residence for reasons of health (as defined in paragraph (d)(I)
of this section).
(3) Examples. The following examples illustrate the rules of this paragraph (d):
Example I. In 2002 A buys a house that she uses as her princ ipal residence. A is
injured in an accident and is unable to care for herself. As a result, A sells her house in
2003 and moves in with her daughter so that the daughter can provide the care that A
requires as a result of her injury. Because, under the facts and circumstances, the primary
reason for the sale of A's house is A's health, A is entitled to claim a reduced maximum
exclusion under section 121 (c )(2).
Example 2. H's father has a chronic disease. In 2002 Hand W purchase a house
that they use as their principal residence. In 2003 Hand W sell their house in order to
move into the house of H's father so that they can provide the care he requires as a result
of his disease. Because, under the facts and circumstances, the primary reason for the
sale of their house is the health of H's father, Hand Ware entitled to claim a reduced
maximum exclusion under section 121 (c )(2).
Example 3. Hand W purchase a house in 2002 that they use as their principal
residence. Their son suffers from a chronic illness that requires regular medical care.
Later that year their doctor recommends that their son begin a new treatment that is
available at a medical facility 100 miles away from their residence. In 2003 Hand W sell
their house to be closer to the medical facility. Because, under the facts and
circumstances, the primary reason for the sale is to facilitate the treatment of their son's
chronic illness, Hand Ware entitled to claim a reduced maximum exclusion under
section 121 (c )(2).
Example 4. B, who has chronic asthma, purchases a house in Minnesota in 2002
that he uses as his principal residence. B's doctor tells B that moving to a warm, dry
climate would mitigate B's asthma symptoms. In 2003 B sells his house and moves to
Arizona to relieve his asthma symptoms. The sale is within the safe harbor of paragraph
(d)(2) of this section and B is entitled to claim a reduced maximum exclusion under
section 121(c)(2).
Example 5. In 2002 Hand W purchase a house in Michigan that they use as their
principal residence. H's doctor tells H that he should get more exercise, but H is not
suffering from any disease that can be treated or mitigated by exercise. In 2003 Hand W
sell their house and move to Florida so that H can increase his general leve I of exercise
by playing golf year-round. Because the sale of the house is merely beneficial to H's
general health, the sale of the house is not by reason of H's health. Hand Ware not
entitled to claim a reduced maximum exclusion under section 121(c)(2).
(e) Sale or exchange by reason of unforeseen circumstances
--(1) In general. A sale or exchange is by reason of unforeseen circumstances if the
primary reason for the sale or exchange is the occurrence of an event that the taxpayer
does not anticipate before purchasing and occupying the residence.
(2) Specific event safe harbors. The primary reason for the sale or exchange is
deemed to be unforeseen circumstances (within the meaning of paragraph (e)(1) of this
section) if any of the events specified in paragraphs (e )(2)(i) through (iii) of this section
occur during the period of the taxpayer's ownership and use of the residence as the
taxpayer's principal residence-(i) The involuntary conversion of the residence;
(ii) Natural or man-made disasters or acts of war or terrorism resulting in a
casualty to the residence (without regard to deductibility under section 165(h»;
(iii) In the case of a qualified individual described in paragraph (t) of this section(A) Death;
(B) The cessation of employment as a result of which the individual is eligible
for unemployment compensation (as defined in section 85(b»;
(C) A change in employment or self-employment status that results in the
taxpayer's inability to pay housing costs and reasonable basic living expenses for the
taxpayer's household (including amounts for food, clothing, medical expenses, taxes,
transportation, court-ordered payments, and expenses reasonably necessary to the
production of income, but not for the maintenance of an affluent or luxurious standard of
living);
(D) Divorce or legal separation under a decree of divorce or separate
maintenance; or
(E) Multiple births resulting from the same pregnancy; or
(iv) An event determined by the Commissioner to be an unforeseen circumstance
to the extent provided in published guidance of general applicability or in a ruling
directed to a specific taxpayer.
(3) Examples. The following examples illustrate the rules of this paragraph (e):
Example 1. In 2003 A buys a house in California. After A begins to use the
house as her principal residence, an earthquake causes damage to A's house. A sells the
house in 2004. The sale is within the safe harbor of paragraph (e )(2)(ii) of this section
and A is entitled to claim a reduced maximum exclusion under section 121 (c )(2).
Example 2. H works as a teacher and W works as a pilot. In 2003 Hand W buy
a house that they use as their principal residence. Later that year W is furloughed from
her job for six months. Hand Ware unable to pay their mortgage during the period W is
furloughed. Hand W sell their house in 2004. The sale is within the safe harbor of
paragraph (e)(2)(iii)(C) of this section and Hand Ware entitled to claim a reduced
maximum exclusion under section 121(c)(2).
Example 3. In 2003 Hand W buy a two-bedroom condominium that they use as
their principal residence. In 2004 W gives birth to twins and Hand W sell their
condominium and buy a four-bedroom house. The sale is within the safe harbor of
paragraph (e)(2)(iii)(E) of this section, and Hand Ware entitled to claim a reduced
maximum exclusion under section 121(c)(2).
Example 4. B buys a condominium in 2003 and uses it as his principal residence.
B's monthly condominium fee is $X. Three months after B moves into the condominium,
the condominium association decides to replace the building's roof and heating system.
Six months later, B's monthly condominium fee doubles. B sells the condominium in
2004 because B is unable to pay the new condominium fee along with the monthly
mortgage payment. The safe harbors of paragraph (e)(2) of this section do not apply.
However, under the facts and circumstances, the primary reason for the sale is unforeseen
circumstances, and B is entitled to claim a reduced maximum exclusion under section
121(c)(2).
Example 5. In 2003 C buys a house that he uses as his principal residence. The
property is located on a heavily trafficked road. C sells the property in 2004 because the
traffic is more disturbing than he expected. C is not entitled to claim a reduced maximum
exclusion under section 121 (c )(2) because the safe harbors of paragraph (e )(2) of this
section do not apply and, under the facts and circumstances, the traffic is not an
unforeseen circumstance.
Example 6. In 2003 D and her fiance E buy a house and live in it as their
principal residence. In 2004 D and E cancel their wedding plans and E moves out of the
house. Because D cannot afford to make the monthly mortgage payments alone, D and E
sell the house in 2004. The safe harbors of paragraph (e)(2) of this section do not apply.
However, under the facts and circumstances, the primary reason for the sale is unforeseen
circumstances, and D and E are each entitled to claim a reduced maximum exclusion
under section 121(c)(2).
(f) Qualified individual. For purposes of this section, qualified individual means-
(1) The taxpayer;
(2) The taxpayer's spouse;
(3) A co-owner of the residence;
(4) A person whose principal place of abode is in the same household as the
taxpayer; or
(5) For purposes of paragraph (d) of this section, a person bearing a relationship
specified in sections 152(a)(1) through 152(a)(8) (without regard to qualification as a
dependent) to a qualified individual described in paragraphs (f)(1) through (4) of this
section, or a descendant of the taxpayer's grandparent.
(g) [Reserved]. For further guidance, see § 1.121-3(g).
(h) Election to apply regulations retroactively. Taxpayers who would otherwise
qualify under this section to exclude gain from a sale or exchange before December 24,
2002 but on or after May 7, 1997, may elect to apply all of the provisions of this section
for any years for which the period of limitations under section 6511 has not expired. The
taxpayer makes the election under this paragraph (h) by filing a return for the taxable
year of the sale or exchange that does not include the gain from the sale or exchange of
the taxpayer's principal residence in the taxpayer's gross income. Taxpayers who have
filed a return for the taxable year of the sale or exchange may elect to apply all the
provisions of this section for any years for which the period of limitations under section
6511 has not expired by filing an amended return.
(i) through (j) [Reserved]. See §1.121-3(i) through (j).
(k) Audit protection. The Internal Revenue Service will not challenge a
taxpayer's position that a sale or exchange of a principal residence that occurred before
December 24, 2002 but on or after May 7, 1997, qualifies for the reduced maximum
exclusion under section 121 (c) if the taxpayer has made a reasonable, good faith effort to
comply with the requirements of section 121 (c) and if the sale or exchange otherwise
qualifies under section 121.
(1) Effective date. For the applicability of this
section, see § 1.121-3(1).
Robert E. Wenzel
Deputy Commissioner of Internal Revenue.
Approved:
December 11, 2002.
Pamela F. Olson
Assistant Secretary of the Treasury.
PO-3 7~ 7: Air Transportation Staq.:.iization Board Issues Federal Guarantee On Behalf of ...
Page 1 of 1
PRESS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 23, 2002
PO-3717
Air Transportation Stabilization Board Issues Federal Guarantee
On Behalf of Aloha Airlines
The Air Transportation Stabilization Board today announced it has closed on a $45
million loan on behalf of Aloha Airlines. The loan is backed by a $40.5 million
federal guarantee issued under the Air Transportation Safety and System
Stabilization Act and implementing regulations promulgated by the Office of
Management and Budget.
http://wwv.treas.gov/press/release~!Do3717.htm
1113/2003
PO-37i~:
Treasury Letter to
Con~'ess
on the Debt Ceiling
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 24,2002
PO-3718
Treasury Letter to Congress on the Debt Ceiling
December 24, 2002
The Honorable J. Dennis Hastert
Speaker
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
Due to the ongoing response to the September 11, 2001, terrorist attack and the
economic slowdown which began in the summer of 2000, the Administration now
projects that debt subject to limit may reach the statutory ceiling in the latter half of
February 2003. This is consistent with estimates made when the statutory ceiling
was raised earlier this year.
The federal government's debt subject to limit continues to be driven largely by
required investments of government trust fund balances. The remainder reflects
the impact of waging the war on terrorism and restoring economic performance.
Accordingly, I am writing to request that Congress act promptly next year to ensure
the government's ability to finance its operations. This action is necessary to
ensure success in our efforts to combat terrorism, continue the economic recovery
and create jobs, and maintain the soundness of federal government securities. The
Department of the Treasury stands ready to work with Congress to make this
possible. Thank you for your attention to this matter.
Yours sincerely,
Kenneth Dam
Deputy Secretary
http://wwv.lreas.goy/press/releases/oo3718.htm
1113/2003
[SS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 24, 2002
p03719
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $76,967 million as of the end of that week, compared to $75,943 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US million.s)
December 13, 2002
December 20, 2002
77,044
77,258
TOTAL
1. Foreign CUITency Reserves
I
a. Securities
Euro
Yen
TOTAL
Euro
Yen
TOTAL
6,625
13,031
19,656
6,660
13,052
19,712
o
o
Of 'which, issuer headquartered in the Us.
b. Total deposits with:
b.i. Other central banks and BIS
10,905
2,616
us
13,521
10,956
2,620
13,576
0
0
b.ii. Of which, banks located abroad
0
0
b.W. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
20,820
20,885
12,004
12,042
11,042
11,042
0
0
b.ii. Banks headquartered in the
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 13, 2002
Euro
1. Foreign currency loans and securities
Yen
TOTAL
December 20, 2002
Euro
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
o
2.a. Short positions
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 13, 2002
Euro
1. Contingent liabilities in foreign currency
Yen
TOTAL
December 20, 2002
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
l.a. Collateral guarantees on debt due within I
year
l.b. Other contingent liabilities
2. Foreign cun'ency securities with embedded
options
3. Undrawn. unconditional credit lines
3.a. With other central banks
3.b. With banks alld other/inancia/ institutions
Headquartered in the
u.s.
3.c. With banks and otherfinancial institutions
Headquartered outside the
u.s.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values. and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week may be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
PO-3 no: Treasury Issues Propos:..:d Regulations Regarding Penalty Defenses
Page 1 of 1
PHLSS H(:OCoM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free At/ni)(}
AcI(,lliI!"
1{('dO' 'I' .
December 30, 2002
PO-3720
TREASURY ISSUES PROPOSED REGULATIONS
REGARDING PENALTY DEFENSES
Today the Treasury Department issued proposed rules limiting the penalty
defenses for transactions that taxpayers do not disclose on their returns.
"We are raising the stakes for taxpayers who fail to disclose potentially abusive
transactions to the IRS. Taxpayers who choose to hide their transactions from the
IRS will lose their ability to rely on a tax opinion as a penalty defense," stated
Treasury Assistant Secretary for Tax Policy Pam Olson. "This regulatory change is
necessitated by the fact that too many tax advisors have counseled clients against
disclosing their transactions with the expectation that the advisors' opinions will
allow the clients to avoid penalties. With this change and the regulatory changes
aimed at increasing disclosure to the IRS, we believe we will alter taxpayers'
risk/reward calculations and reduce the use of inappropriate tax avoidance
transactions," Olson added.
These proposed regulations prohibit taxpayers from relying upon an opinion or
advice from a tax practitioner as a defense to the accuracy-related penalty for
potentially abusive transactions that are not disclosed. Under these proposed
regulations, taxpayers will not be allowed to rely upon a tax opinion as a penalty
defense if they fail to disclose transactions that are based on a position that a
regulation is invalid.
These proposed regulations carry out two of the administrative actions announced
in the Treasury Department's Enforcement Proposals for Abusive Tax Avoidance
Transactions, issued on March 20, 2002. The Treasury Department already has
issued regulations that provide revised rules for identifying transactions that must
be disclosed on a tax return. These proposed changes to the penalty regulations
will reinforce the disclosure rules, allowing the IRS and the Treasury Department to
respond quickly to abusive transactions
Related Documents:
•
The text of the final regulations is attached
http://wwv.. treas.goy/press/releases/oo3720.htm
1/13/2003
:!
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-1260 16-0 I]
RIN 1545-A Y97
Establishing Defenses to the Imposition of the Accuracy- Related Penalty
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulernaking.
SUMMARY: This docwnent contains proposed regulations that limit the defenses available to the
imposition of the accuracy-related penalty when taxpayers fail to disclose reportable transactions or fail
to disclose that they have taken a position on a retwn based upon a regulation being invalid. By limiting
a taxpayer's ability to use an opinion or advice from a tax professional as a basis for a defense, the
proposed regulations are intended to promote the disclosure of reportable transactions and positions by
taxpayers that conflict with regulations issued by the Secretary. The proposed regulations also clarifY
the existing regulations with respect to the facts and circumstances that the IRS will consider in
determining whether a taxpayer acted with reasonable cause and in good faith in relying on an opinion or
advice.
DATES: Written or electronically generated comments and requests for a public hearing must be
received by March 31,2003.
ADDRESSES: Send submissions to CCIT&A:RU (REG-126016-01), room 5226, Internal Revenue
Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand
delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CCIT&A:RU (REG126016-01), Courier's Desk, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers may submit comments electronically directly to the IRS
Internet site at:
II II II .ih.cc(ll r,-'cc.~.
- - -----
~---~-
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Jamie G.
Bernstein or Heather L. Dostaler at (202)622-4940; concerning submissions of comments and requests
for a public hearing, Ms. LaNita Van Dyke of the Regulations Unit at (202)622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMA nON:
Background
This document contains proposed regulations amending the regulations promulgated pursuant to
sections 6662 and 6664, relating to the accuracy-related penalty. Section 6662 provides for the
imposition of an accuracy- related penalty for underpayments of tax, including underpayments due to
negligence or disregard of rules or regulations and understatements that are substantial within the
meaning of the statute. Taxpayers, however, can avoid the accuracy-related penalty if they can
establish, among other things, that there was reasonable cause for the underpayment and that they acted
in good faith within the meaning of section 6664(c).
-3Temporary regulations issued under section 6011 require taxpayers to disclose reportable
transactions on their returns within the meaning of those temporary regulations. Treas. Reg. § 1.60114T. Reportable transactions may be abusive tax avoidance transactions. The early identification of
potentially abusive tax avoidance transactions is a high priority for the IRS and Treasury. On October
22, 2002, the IRS and Treasury published proposed and temporary regulations that significantly revise
the definition of certain types of reportable transactions. See Tax Shelter Disclosure Statements, [67
FR 64799 and 67 FR 64840 (October 22, 2002)] (to be codified in 26 CFR parts 1,20,25, 31, 53,
54, 56, and 301). The proposed amendments to the disclosure rules under section 6011 generally will
apply to transactions entered into on or after January 1,2003.
The IRS and Treasury believe that taxpayers have improperly relied on opinions or advice
issued by tax advisors to establish reasonable cause and good faith as a basis for avoiding the accuracyrelated penalty, even when the opinion or advice relates to a reportable transaction that the taxpayer
should have, but did not, disclose pursuant to § 1.60 11-4T. The IRS and Treasury also believe that
taxpayers have improperly relied upon opinions or advice that a regulation is invalid without disclosing
on their returns their position that the regulation is invalid.
Accordingly, the IRS and Treasury have concluded that the regulations under sections 6662 and
6664 should be amended and clarified so that (1) a taxpayer who takes a position that a regulation is
invalid cannot rely on an opinion or advice to satisfy the reasonable cause and good faith exception
under section 6664(c) with respect to any underpayment attributable to such position if the position was
not disclosed on a return; and (2) a taxpayer who engages in a reportable transaction cannot rely on an
opinion or advice to satisfy the reasonable cause and good faith exception under section 6664( c) with
-4respect to any underpayment attributable to the transaction if the transaction was not disclosed pursuant
to the regulations promulgated under section 60 II. Further, a taxpayer who engages in a reportable
transaction cannot rely on the realistic possibility standard under section 6662 to avoid the accuracyrelated penalty for negligence or disregard of rules or regulations if the position regarding the reportable
transaction is contrary to a revenue ruling or notice.
Explanation of Provisions
These proposed regulations amend 26 CFR part I relating to the defenses available to the
imposition of the accuracy-related penalty under section 6662(b)(l) (underpayments of tax attributable
to negligence or disregard of rules or regulations) and the general exception to the accuracy- related
penalty under section 6664( c).
Under these proposed regulations, the adequate disclosure exception to the accuracy-related
penalty for underpayments of tax attributable to negligence or disregard of rules or regulations (see
§ 1.6662-3(a)) will not apply to underpayments relating to a reportable transaction unless the reportable
transaction also is disclosed under § 1.60 11-4T. In addition, if a position relates to a reportable
transaction and is contrary to a revenue ruling or notice (other than a notice of proposed rulemaking), a
taxpayer may not rely upon the fact that the position has a realistic possibility of being sustained on the
merits as a defense to the penalty imposed under section 6662(b)( 1). The taxpayer instead would be
required to satisfy the adequate disclosure exception under § 1.6662-3(c)( I), including the disclosure of
the reportable transaction under § 1.6011-4T.
The proposed regulations also clarify and modify the standards for, and limits on, the use of
opinions and advice to satisfy the reasonable cause and good faith exception under section 6664( c) as a
-5defense to the imposition of the accuracy-related penalty under section 6662. The proposed
regulations, for instance, clarity that a taxpayer's education, sophistication and business experience will
be relevant in determining whether the taxpayer's reliance on the opinion or advice was reasonable and
made in good faith. The IRS currently takes these facts and circumstances into account in detennining
whether a taxpayer has satisfied the reasonable cause and good faith exception under section 6664( c).
These proposed regulations amend § 1.6664-4(c) to specity when a taxpayer cannot rely upon
an opinion or advice to satisty the reasonable cause and good faith exception. Taxpayers who do not
disclose positions based upon a regulation being invalid (see §1.6662-3(c)(2)) cannot use an opinion or
advice concerning the invalidity of the regulation as a basis for satistying the reasonable cause and good
faith exception under section 6664(c). Similarly, the proposed regulations prohibit taxpayers from using
an opinion or advice as a basis for satistying the reasonable cause and good faith exception under
section 6664(c) with respect to a reportable transaction that the taxpayer did not disclose in accordance
with § 1.60 11-4T.
Under these proposed regulations, a taxpayer, in order to properly disclose a transaction, may
be required to file with the taxpayer's return more than one disclosure form for the same transaction in
order to satisty the requirements in the regulations under sections 6662 and 6664 (as modified by these
proposed regulations), and section 60 II. The IRS and Treasury may consider permitting taxpayers to
use a single disclosure document to satisty those regulations, provided that all required information is
provided by the taxpayer and provided that the taxpayer files a copy of the document with the Office of
Tax Shelter Analysis as required under § 1.60 11-4T (or as may be otherwise provided in any successor
regulations).
-6Proposed Effective Date
These regulations are proposed to apply to returns filed after December 30,2002, with respect
to transactions entered into on or after January 1,2003, to coincide with the temporary regulations
relating to disclosure, promulgated under section 60 II and applicable for transactions entered into on or
after January 1,2003. The IRS, however, cautions taxpayers and tax practitioners that it will rigorously
apply the existing facts and circumstances standard under § I.6664-4(c) regarding a taxpayer's
reasonable reliance in good faith on advice from a tax professional, as well as the other provisions of the
regulations under sections 6662 and 6664, including § I.6664-4(c) relating to special rules for the
substantial understatement penalty attributable to tax shelter items of a corporation. In addition to the
modifications contained in these proposed regulations, and regardless of when a transaction was entered
into, the IRS, in appropriate circumstances, may consider a taxpayer's failure to disclose a reportable
transaction or failure to disclose a position that a regulation is invalid as a factor in determining whether
the taxpayer has satisfied the reasonable cause and good faith exception under section 6664(c) to the
accuracy-related penalty.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has
also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the regulation does not
impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of
-7proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small businesses.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations, consideration will be given
to any written (a signed original and 8 copies) or electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department request comments on the clarity of the proposed regulations
and how they can be made easier to understand. All comments will be available for public inspection
and copying. A public hearing may be scheduled if requested in writing by any person that timely
submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the
public hearing will be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Jamie G. Bernstein and Heather L. Dostaler of the
Office of Associate of Chief Counsel (Procedure and Administration), Administrative Provisions and
Judicial Practice Division.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part I is proposed to be amended as follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.c. 7805
***
-8Par. 2. Section 1.6662-3 is amended by:
I. Revising paragraph (a).
2. Revising the last sentence of paragraph (b)(2)
3. Revising the first sentence of paragraph (c)(1).
The revisions read as follows:
§ 1.6662-3 Negligence or disregard of rules or regulations.
(a) In general If any portion of an underpayment, as defined in section 6664(a) and §1.66642, of any income tax imposed under subtitle A of the Internal Revenue Code that is required to be
shown on a return is attributable to negligence or disregard of rules or regulations, there is added to the
tax an amount equal to 20 percent of such portion. The penalty for disregarding rules or regulations
does not apply, however, if the requirements of paragraph (c)(l) of this section are satisfied and the
position in question is adequately disclosed as provided in paragraph (c)(2) of this section (and, if the
position relates to a reportable transaction as defined in § 1.60 11-4T(b), the transaction is disclosed in
accordance with § 1.60 11-4T), or to the extent that the reasonable cause and good faith exception to
this penalty set forth in § 1.6664-4 applies. In addition, if a position with respect to an item (other than
with respect to a reportable transaction, as defined in § 1.60 11-4T(b» is contrary to a revenue ruling or
notice (other than a notice of proposed rulemaking) issued by the Internal Revenue Service and
published in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter), this penalty does not
apply if the position has a realistic possibility of being sustained on its merits. See § 1.6694-2(b) of the
income tax return preparer penalty regulations for a description of the realistic possibility standard.
(b)
***
-9(2)
* * * Nevertheless, a taxpayer who takes a position (other than with respect to a reportable
transaction, as defined in § 1.60 11-4T(b)) contrary to a revenue ruling or a notice has not disregarded
the ruling or notice if the contrary position has a realistic possibility of being sustained on its merits.
*****
(c)
* * * (I) * * * No penalty under section 6662(b)(l) may be imposed on any portion of an
underpayment that is attributable to a position contrary to a rule or regulation if the position is disclosed
in accordance with the rules of paragraph (c)(2) of this section (and, if the position relates to a
reportable transaction as defined in § 1.60 11-4T(b), the transaction is disclosed in accordance with
§ 1.60 11-4T) and, in case of a position contrary to a regulation, the position represents a good faith
chaIlenge to the validity of the regulation.
Par. 3. Section 1.6664-0 is amended by:
1. Adding an entry for § 1.6664-4(c)( 1)(iii).
2. Redesignating the entries for §1.6664-4(c)(2) and (c)(3) as § 1.6664-4(c)(3) and (c)(4),
respectively.
3. Adding a new entry for § 1.6664-4(c)(2).
The additions read as follows:
§ 1.6664-0 Table of contents.
*****
§ 1.6664-4 Reasonable cause and good faith exception to section 6662 penalties.
*****
(c) * * *
(1) * * *
(iii) Reliance on the invalidity of a regulation.
-10(2) Opinions or advice relating to reportable transactions.
*****
Par. 4. Section 1.6664-4 is amended by:
I. Revising paragraph (c)( I) introductory text.
2. Revising the last sentence of paragraph (c)(1 )(i).
3. Adding paragraph (c)( 1)(iii).
4. Redesignating paragraphs (c)(2) and (c)(3) as paragraphs (c)(3) and (c)(4), respectively.
5. Adding a new paragraph (c)(2).
The revision and additions read as follows:
§ 1.6664-4 Reasonable cause and good faith exception to section 6662 penalties.
(c) Reliance on opinion or advice
n
(I) Facts and circumstances; minimum requirements. All
facts and circumstances must be taken into account in determining whether a taxpayer has reasonably
relied in good faith on advice (including the opinion of a professional tax advisor) as to the treatment of
the taxpayer (or any entity, plan, or arrangement) under Federal tax law. For example, the taxpayer's
education, sophistication and business experience will be relevant in determining whether the taxpayer's
reliance on the advice was reasonable and made in good faith. In no event will a taxpayer be
considered to have reasonably relied in good faith on advice (including an opinion) unless the
requirements of this paragraph (c)( I) are satisfied and the advice is not disqualified under paragraph
(c)(2) of this section. The fact that these requirements are satisfied, however, will not necessarily
establish that the taxpayer reasonably relied on the advice (including the opinion of a professional tax
advisor) in good faith. For example, reliance may not be reasonable or in good faith if the taxpayer
-11knew, or reasonably should have known, that the advisor lacked knowledge in the relevant aspects of
Federal tax law.
(i)
* * * In addition, the requirements of this paragraph (c)(1) are not satisfied if the taxpayer
fails to disclose a fact that it knows, or reasonably should know, to be relevant to the proper tax
treatment of an item.
*****
(iii) Reliance on the invalidity of a regulation A taxpayer may not rely on an opinion or advice
that a regulation is invalid to establish that the taxpayer acted with reasonable cause and good faith
unless the taxpayer adequately disclosed, in accordance with § 1.6662-3(c)(2), including the disclosure
of the position that the regulation in question is invalid, and, if the position relates to a reportable
transaction as defined in § 1.60 11-4T(b), the transaction is disclosed in accordance with § 1.60 11-4T.
(2) Opinions or advice relating to reportable transactions. Taxpayers may not reasonably rely
on an opinion or advice of a tax advisor if the opinion or advice is disqualified under this
PO-J.J2l: Treasury, SEC and h
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Ivestment companies.
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listered with the SEC and those that are not,
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3tions applicable to mutual funds and certain
uch as hedge funds. Such regulations are
tions consistent with the report's
1113/2003
United States Department of the Treasury
Board of Governors of the Federal Reserve System
Securities and Exchange Commission
The Honorable Michael G. Oxley
Chainnan
Committee on Financial Services
U.S. House of Representatives
Washington, DC 20515
Dear Chainnan Oxley:
As directed by section 356(c) of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT ACT) Act of2001 (Public Law 107-56), we enclose a report containing
recommendations for effective regulations to apply the requirements of the Bank Secrecy
Act to investment companies. The report first outlines the development of anti-money
laundering controls under the Bank Secrecy Act as well as the ways in which investment
companies can be used to launder money. The report then analyzes the various fonns of
investment companies, including those not registered with the SEC, identifying their
characteristics and any limitations on their operation. Finally, the report contains
recommendations for applying BSA regulations to these various fonns of investment
compames.
Sincerely,
I.
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Paul H. O'Neill
Enclosure
Harveypitt
United States Department of the Treasury
Board of Governors of the Federal Reserve System
Securities and Exchange Commission
The Honorable John J. LaFalce
Ranking Member
Committee on Financial Services
U. S. House of Representati ves
Washington, DC 20515
Dear Congressman LaFalce:
As directed by section 356(c) of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT ACT) Act of2001 (Public Law 107-56), we enclose a report containing
recommendations for effective regulations to apply the requirements of the Bank Secrecy
Act to investment companies. The report first outlines the development of anti-money
laundering controls under the Bank Secrecy Act as well as the ways in which investment
companies can be used to launder money. The report then analyzes the various forms of
investment companies, including those not registered with the SEC, identifying their
characteristics and any limitations on their operation. Finally, the report contains
recommendations for applying BSA regulations to these various forms of investment
companIes.
Sincerely,
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Paul H. O'Neill
Enclosure
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Harve
. Pitt
United States Department of the Treasury
Board of Governors of the Federal Reserve System
Securities and Exchange Commission
The Honorable Paul S. Sarbanes
Chairman
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, DC 20510
Dear Chairman Sarbanes:
As directed by section 356(c) of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT ACT) Act of2001 (Public Law 107-56), we enclose a report containing
recommendations for effective regulations to apply the requirements of the Bank Secrecy
Act to investment companies. The report first outlines the development of anti-money
laundering controls under the Bank Secrecy Act as well as the ways in which investment
companies can be used to launder money. The report then analyzes the various forms of
investment companies, including those not registered with the SEC, identifying their
characteristics and any limitations on their operation. Finally, the report contains
recommendations for applying BSA regulations to these various forms of investment
compames.
Sincerely,
r~'N~
Paul H. O'Neill
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Alan Greenspan
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,
Enclosure
narveyj2'Pitt
United States Department of the Treasury
Board of Governors of the Federal Reserve System
Securities and Exchange Commission
The Honorable Phil Gramm
Ranking Member
Committee on Banking, Housing,
and Urban Affairs
United States 'Senate
Washington, DC 20510
Dear Senator Gramm:
As directed by section 356(c) of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT ACT) Act of2001 (Public Law 107-56), we enclose a report containing
recommendations for effective regulations to apply the requirements of the Bank Secrecy
Act to investment companies. The report first outlines the development of anti-money
laundering controls under the Bank Secrecy Act as well as the ways in which investment
companies can be used to launder money. The report then analyzes the various forms of
investment companies, including those not registered with the SEC, identifying their
characteristics and any limitations on their operation. Finally, the report contains
recommendations for applying BSA regulations to these various forms of investment
compames.
Sincerely,
f~'NG2k
Paul H. O'Neill
Enclosure
V/:fy:
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Harveyce.Pitt
A REPORT TO CONGRESS
IN ACCORDANCE WITH § 356(c)
OF THE
UNITING AND STRENGTHENING AMERICA BY PROVIDING APPROPRIATE
TOOLS REQUIRED TO INTERCEPT AND OBSTRUCT TERRORISM ACT OF 2001
(USA PATRIOT ACT)
SUBMITTED BY
THE SECRETARY OF THE TREASURY,
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
THE SECURITIES AND EXCHANGE COMMISSION
The staff of the Commodity Futures Trading Commission also assisted in the preparation
of this Report.
December 31, 2002
A REPORT TO CONGRESS
IN ACCORDANCE WITH § 356(c) OF THE USA PATRIOT ACT
TABLE OF CONTENTS
I.
II.
III.
IV.
V.
Introduction .............................................................................................................. 1
Background .............................................................................................................. 2
A.
Evolution of the Bank Secrecy Act as a Tool to Combat Money
Laundering and Terrorist Financing ............................................................ 2
B.
The Crimes of Money Laundering and Terrorist Financing ........................ 5
1.
Codification as Federal Crimes ....................................................... 5
2.
Stages of the Money Laundering Process ........................................ 7
3.
Use of Investment Companies in Money Laundering ..................... 7
Effective Regulations to Apply the BSA to Investment Companies ..................... 10
A.
Registered Investment Companies ............................................................ 11
1.
Mutual Funds ................................................................................. 12
2.
Closed-End Funds .......................................................................... 15
3.
Unit Investment Trusts .................................................................. 17
B.
Unregistered Investment Companies ......................................................... 19
1.
Hedge Funds .................................................................................. 19
2.
Commodity Pools .......................................................................... 24
3.
Private Equity and Venture Capital Funds .................................... 26
4.
Real Estate Investment Trusts ("REITs") ...................................... 29
5.
Proposed Rule for the Application of the BSA to Unregistered
Investment Companies ................................................................... 31
Personal Holding Companies ................................................................................ 35
Recommendations .................................................................................................. 36
I.
Introduction
On October 26, 200 I, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
(USA PATRIOT Act) of2001, Pub. L. No. 107-56 ("USA Patriot Act"). Section 356(c) of the
USA Patriot Act calls for a report to Congress ("Report") within one year from the date of
enactment containing recommendations for effective regulations to apply the record keeping and
reporting requirements of the Bank Secrecy Act, Titles I and II of Pub.L. 91-508, (the "BSA") to
investment companies and personal holding companies. I
Section 356(c) of the USA Patriot Act provides:
Section 356 - Reporting of Suspicious Activities by Securities Brokers and Dealers;
Investment Company Study
*
(c)
*
*
REpORT ON INVESTMENT COMPANIES.(1)
IN GENERAL. - Not later than I year after the date of enactment of this Act, the
Secretary, the Board of Govemors of the Federal Reserve System, and the Securities and
Exchange Commission shall jointly submit a report to the Congress on recommendations
for effective regulations to apply the requirements of subchapter II of chapter 53 of title
31, United States Code, to investment companies pursuant to section 5312(a)(2)(I) of title
31, United States Code.
(2)
DEFINITION.- For purposes of this subsection, the term "investment company"(A) has the same meaning as in section 3 of the Investment Company Act of
1940 (15 U.S.c. 80a-3); and
(B) includes any person that, but for the exceptions provided for in paragraph (1)
or (7) of section 3( c) of the Investment Company Act of 1940 (15 U.s.c. 80a3(c», would be an investment company.
(3)
ADDITIONAL RECOMMENDATIONS. - The report required by paragraph (1) may
make different recommendations for different types of entities covered by this
subsection.
(4)
BENEFICIAL OWNERSHIP OF PERSONAL HOLDING COMPANIES. - The report
described in paragraph (1) shall also include recommendations as to whether the
Secretary should promulgate regulations to treat any corporation or business or
other grantor trust whose assets are predominantly securities, bank certificates of
deposit, or other securities or investment instruments (other than such as relate to
operating subsidiaries of such corporation or trust) and that has 5 or fewer
common shareholders or holders of beneficial or other equity interest, as a
financial institution within the meaning of that phrase in section 5312(a)(2)(1)
and whether to require such corporations or trusts to disclose their beneficial
owners when opening accounts or initiating funds transfers at any domestic
financial institution.
2
In accordance with section 356( c) of the USA Patriot Act, the Secretary of the Treasury
(the "Treasury"), the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), and the Securities and Exchange Commission (the "SEC") submit this Report. The
staff of the Financial Crimes Enforcement Network ("FinCEN") and the Commodity Futures
Trading Commission (the "CFTC") also assisted in the preparation of this Report. Specifically,
we address three questions raised by section 356( c) of the USA Patriot Act: (I) what are the
appropriate "effective regulations" to apply the requirements of the BSA to investment
companies; (2) which of those regulations should be applied to investment companies to best
achieve the goals of the BSA; and (3) what investment companies should be subject to the BSA
regulatory scheme?
II.
Background
A.
Evolution of the Bank Secrecy Act as a Tool to Combat
Money Laundering and Terrorist Financing
Congress passed the BSA in 1970 to prevent the use of cash payrolls for tax evasion and
to provide tools to fight organized crime. Until last year, the stated purpose of the BSA was "to
require certain reports or records where they have a high degree of usefulness in criminal, tax, or
regulatory investigations or proceedings.,,2 The original focus of the BSA was on banks, which
are the main financial institutions that deal in cash.
As the nature and sophistication of financial institutions have grown, new and creative
ways to hide sources of illegally obtained profits have been devised. To protect the U.S.
financial system from criminal activity and to promote the detection and prosecution of financial
crimes, Congress added anti- money laundering provisions to the BSA in 1992, which authorized
31 U.s.c. 5311. Language expanding the scope of the BSA to intelligence or counterintelligence activities to protect against international terrorism was added by section 358 of the
USA Patriot Act.
3
Treasury to apply the law to many different types of financial institutions. 3 Prior to the passage
of the USA Patriot Act, regulations applying the anti- money laundering provisions of the BSA
were issued only for banks and certain other institutions that offer bank-like services or that
regularly deal in cash. These regulations require such financial institutions to take the following
actions:
•
Keep records related to certain monetary instrument purchases and funds transfers;4
•
Report currency transactions of more than $10,000 by, through, or to the financial
institution; 5
•
Report the transport of currency across U.S. borders;6
•
Report certain accounts that United States citizens and residents hold at foreign financial
institutions; 7 and
•
Report suspicious transactions relevant to possible violations of the law. 8
Title III of the USA Patriot Act amends the BSA to make it easier to prevent, detect, and
prosecute international money laundering and the financing of terrorism by:
•
Requiring that every financial institution establish an anti- money laundering program that
includes, at a minimum, (i) the development of internal policies, procedures, and
controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training
program; and (iv) an independent audit function to test the program; 9
31 U.S.c. 5312(a)(2). Treasury also has broad authority to adopt rules requiring other types of
businesses to adopt anti-money laundering programs if those businesses deal in cash (31 U.s.c.
5312(a)(2)(Z» or engage in activities that Treasury determines to be "similar to, related to, or a
substitute for" activities engaged in by one of the listed businesses. 31 U.S.c. 5312(a)(2)(Y).
See 31 CFR 103.29, 103.33.
See 31 CFR 103.22.
See 31 CFR 103.23.
See 31 CFR 103.24 and 103.25.
See 31 CFR 103.18, 103.19, 103.20, and 103.2l.
9
See section 352 of the USA Patriot Act.
4
•
Requiring Treasury to prescribe, jointly with the federal functional regulators, regulations
setting forth minimum standards regarding the verification of the identity of any person
seeking to open an account; 10
•
Requiring each U.S. financial institution that establishes, maintains, administers, or
manages a private banking account or correspondent account in the United States for a
non-U.S. person to take certain anti-money laundering measures with respect to such
accounts; 1 1
•
Prohibiting certain financial institutions from establishing, maintaining, administering, or
managing a correspondent account in the U.S. for a foreign shell bank (other than certain
foreign shell banks with regulated affiliates); 12 and
•
Permitting financial institutions, their regulatory authorities, and law enforcement
authorities to share information regarding persons engaged or reasonably suspected,
based on credible evidence, of engaging in terrorist acts or money laundering activities. 13
The USA Patriot Act required the extension of the anti- money laundering requirements to
financial institutions, such as investment companies, that had not previously been subjected to
BSA regulations. 14 The USA Patriot Act also added new ent ities to the statutory definition of
financial institution, such as futures commission merchants, commodity trading advisors
("CTAs"), and commodity pool operators ("CPOs"). 15
In accordance with the USA Patriot Act, FinCEN, in conjunction with other federal
financial regulators, has adopted or has proposed for adoption rules to implement the
amendments to the BSA. These rules prescribe anti- money laundering program requirements for
certain financial institutions 16 and require certain financial institutions to implement reasonable
10
See section 326 of the USA Patriot Act.
II
See section 312 of the USA Patriot Act.
12
See section 313 of the USA Patriot Act.
13
See section 314 of the USA Patriot Act.
14
See section 352 of the USA Patriot Act.
15
See section 321 of the USA Patriot Act.
16
See. e.g.. Anti-Money Laundering Programs for Financial Institutions, 67 FR 21110 (April 29,
2002); Anti-Money Laundering Programs for Money Services Businesses, 67 FR 21114 (April
29,2002); Anti-Money Laundering Programs for Mutual Funds, 67 FR 21117 (April 29, 2002);
5
procedures to verify the identity of persons seeking to open accounts. 17 The regulations also
prohibit certain financial institutions from establishing, maintaining, administering, or managing
a correspondent account in the U.S. fo r a foreign shell bank (other than certain foreign shell
banks with regulated affiliates)18 and require certain financial institutions to implement due
diligence programs for certain correspondent as well as private banking accounts. 19 In addition,
FinCEN promulgated a rule that sets forth procedures for information sharing between federal
law enforcement agencies and financial institutions and voluntary information sharing among
financial institutions. 20
B.
The Crimes of Money Laundering and Terrorist Financing
1.
Codification as Federal Crimes
In 1984, Congress passed the Money Laundering Control Act ("MLCA"), which made
money laundering a federal crime. 21 The financing of terrorist activities or of designated foreign
Anti-Money Laundering Programs for Operators of a Credit Card System, 67 FR 21121 (April
29,2002); Anti-Money Laundering Programs for Unregistered Investment Companies, 67 FR
60617 (September 26, 2002); Anti-Money Laundering Programs for Insurance Companies, 67 FR
60625 (September 26, 2002).
17
18
19
See Customer Identification Programs for Banks, Savings Associations, and Credit Unions, 67 FR
48290 (July 23, 2002); Customer Identification Programs for Certain Banks (Credit Unions,
Private Banks and Trust Companies) That Do Not Have a Federal Functional Regulator, 67 FR
48299 (July 23, 2002); Customer Identification Programs for Broker-Dealers, 67 FR 48306 (July
23, 2002); Customer Identification Programs for Mutual Funds, 67 FR 48318 (July 23, 2002);
Customer Identification Programs for Futures Commission Merchants and Introducing Brokers,
67 FR 48328 (July 23, 2002).
See Anti-Money Laundering Requirements -- Correspondent Accounts for Foreign Shell Banks:
Recordkeeping and Termination of Correspondent Accounts for Foreign Banks, 67 FR 60562
(September 26, 2002).
See Anti-Money Laundering Programs; Special Due Diligence Programs for Certain Foreign
Accounts, 67 FR 48348 (July 23, 2002).
20
See Special Information Sharing Procedures to Deter Money Laundering & Terrorist Activity, 67
FR 60579 (September 26, 2002).
21
18 U.S.c. 1956 and 1957.
6
terrorist organizations is also a federal crime. 22 These crimes, like the vast majority of federal
white-collar crimes and offenses traditionally associated with organized crime, also serve as
predicate acts for the crime of money laundering.
One section of the MLCA criminalized the conduct of a "financial transaction" involving
proceeds that are known to derive from some "specified unlawful activity.''23 A transaction is a
"financial transaction" under the statute if it involves monetary instruments, the movement of
funds, the transfer of title to property, or the use of a financial institution. 24 To be guilty of
money laundering under this section of the MLCA, the defendant must act with the intent to
(l) promote the carrying on of a specified unlawful activity, (2) engage in tax fraud, (3) conceal
or disguise the nature, location, source, ownership or control of the property, or (4) avoid a
transaction reporting requirement. 25 Thus, this section criminalized "smurfing" - the practice of
intentionally structuring transactions to avoid reporting requirements by splitting the total
amount of funds available for deposit into amounts below the $10,000 reporting threshold.
Another section of the MLCA criminalized the engagement in a "monetary transaction"
involving property of a value greater than $10,000 that is known to derive from a criminal
offense, and that is actually derived from a "specified unlawful activity. "26 The term monetary
transaction is defined broadly to cover almost any transaction by, through, or to a financial
institution, including tre deposit, withdrawal, transfer, or exchange of funds or a monetary
instrument. 27 Unlike the section of the MLCA discussed in the paragraph above, this section
22
18 U.S.c. 2339A and 2339B.
23
18 U.S.c. 1956.
24
18 U.S.C. 1956(c)(4).
25
18 U.S.c. 1956(a)(1).
26
18 U.S.c. 1957.
27
18 U.S.c. 1957(f)(1).
7
does not require the defendant to know that the property was derived from a specified unlawful
activity. Rather, this section requires the defendant to know only that the property was derived
from some criminal offense. Therefore, a defendant cannot rely on willful blindness to avoid
liability under this section of the MLCA.
2.
Stages of the Money Laundering Process
The process of money laundering is accomplished in three stages. The first stage in the
process is placement. The placement stage involves the physical movement of currency or other
funds derived from illegal activities to a place or into a form that is less suspicious to law
enforcement authorities and more convenient to the criminal. The proceeds are introduced into
traditional or nontraditional financial institutions or into the retail economy. The second stage is
layering. The layering stage involves the separation of proceeds from their illegal source by
using multiple complex financial transactions (e.g., wire transfers, monetary instruments) to
obscure the audit trail and hide the proceeds. The third stage in the money laundering process is
integration. During the integration stage, illegal proceeds are converted into apparently
legitimate business earnings through normal financial or commercial operations.
3.
Use of Investment Companies in Money Laundering
For purposes of the Report, an investment company is defined broadly to include those
entities listed in the definition of the term in the 1940 Act, entities that would be investment
companies under the 1940 Act but for the exceptions provided in certain sections of the 1940
Act, and certain other pooled investment vehicles that are not subject to the 1940 Act because
they do not invest primarily in securities. The money laundering risks associated with
investment companies generally are discussed below.
8
a.
Placement Stage
Investment companies can be used by criminals at every stage of the money laundering
process. Investment companies are less likely than other types of financial institutions (e.g.,
banks) to be used during the placement stage because they rarely receive from or disburse to
investors significant amounts of currency. However, money launderers appear to have used
investment companies at this initial stage. FinCEN has received a number of reports concerning
the use of a stolen, altered check to establish an account with an investment company. Other
suspicious activity observed in the purchase of investment company interests includes the use of
money orders and travelers checks in structured amounts to avoid currency reporting by the
financial institution issuing su.:h instruments. Similarly, money launderers have purchased an
initial interest in an investment company with several wire transfers, each in an amount under
$10,000 and from different banks and brokerage firms.
b.
Layering Stage
Money launderers are most likely to use investment companies in the layering stage of
the money laundering process. Money launderers can use investment company accounts to layer
their assets by sending and receiving money and rapidly wiring it through several accounts and
multiple institutions, or by redeeming an interest in a company originally purchased with illegal
proceeds and then reinvesting the proceeds received in another investment company. In fact, a
number of reports have described the use of wire transfers, checks, cash, and money orders to
deposit money into an investment company account, followed by withdrawals from the account
on the same day or during the same week. 28
28
Cf Correspondent Services Corp. v. 1. V. W. Investments Ltd., 120 F. Supp. 2d 401 (S.D.N.Y.
2000) (noting that account was frozen by financial services firm due to concerns with possible
money laundering involving purchases of mutual funds and other investments).
9
Layering may also entail the purchase of an interest in an investment company in the
name of a fictitious corporation or an entity designed to conceal the true owner. Beyond that,
criminals themselves may even create investment companies to conceal further the source and
ownership of illicit proceeds. For example, the facts of a case decided by the Court of Appeals
for the Eleventh Circuit in 200 I demonstrate how drug smugglers created an elaborate money
laundering operation utilizing three different investment companies to launder funds. 29 The
defendants in this case converted cash obtained from drug sales into cashier's checks. They then
deposited the cashier's checks in a shell company located in Liechtenstein. Through a web of
other sham investment companies, the defendants were able to move the funds to the United
States and "loan" it back to themselves. The deposit of the cashier's checks in Liechtenstein
prevented authorities from tracing the drug proceeds to their final destination. Similarly, any
attempt to trace the source of the loan in the United States would reveal only that the loan was
from a foreign entity protected by bank secrecy laws.
c.
Integration Stage
Finally, investment companies may be used in the last stage of the money laundering
process: the integration of illicit income into legitimate assets. For example, if an individual
redeems an interest in an investment company that was purchased with illegal proceeds and
directs the investment company to wire the cash from the redemption to a bank account in the
individual's own name, the wire transfer would appear legitimate to the receiving bank.
Moreover, money launderers sometimes organize a sham investment company to defraud
investors or clients and to make payments from the company's account to their personal accounts
appear legitimate. For example, in one case a defendant organized a venture capital firm to
29
u.s. v. Gilbert, 244 F.3d 888, 893-897 (11
th
Cir. 2001).
10
defraud clients seeking capital for business ventures. 30 He used the venture capital firm to
operate an advance-fee scheme by which he would agree to obtain funding for a client within a
certain time frame in exchange for a sizable up- front fee. Never intending to fund the business
projects or return the advance fees, the defendant deposited the money in the firm's account and
then proceeded to write large checks on the account made out to third parties and himself. 31
III.
Effective Regulations to Apply the BSA to Investment Companies
Different types of investment companies have different susceptibilities to money
laundering, requiring variations in the regulatory approaches to them. To be effective,
regulations applying the requirements of the BSA to investment companies must reflect the
particular investment company's structure and vulnerability to being used in one or more stages
of the money laundering process. In this section of the Report, we provide a description of tre
types of investment companies that currently exist, any special vulnerabilities that a certain type
of investment company may have to being used for money laundering or terrorist financing, and
the action taken or recommended to apply the provisions of the BSA to these companies.
The first step in drafting the regulations that would apply the requirements of the BSA to
investment companies is to define the term "investment companies." A broad definition of
"investment company" could include a large range of entities from small investment clubs to
large corporate holding companies and, in between, an array of financing vehicles many of
which are unlikely to be used for money laundering purposes. The discussion below reviews the
various types of investment companies within two categories-those registered with the SEC
under the 1940 Act and all others.
30
31
u.s. v. Davis, 226 F.3d 346, 348-349 (5 Cir. 2000).
See also u.s. v. Mullens, 65 F.3d 1560 (11 Cir. 1995) (using an investment company to operate
th
th
a Ponzi scheme).
11
A.
Registered Investment Companies
Section 356(c)(2) of the USA Patriot Act indicated that the definition of "investment
company" provided in the 1940 Act should be the starting point in crafting an appropriate
definition. The 1940 Act defines "investment company" to include any issuer of securities that
is, or holds itself out as being, engaged primarily in the business of investing, reinvesting, or
trading in securities.
32
Most investment companies offered to the public are registered with the
SEC under the 1940 Act, which subjects them to a comprehensive scheme of regulation.
The 1940 Act classifies almost all registered investment companies as either
"management companies" or "unit investment trustS.,,33 Management companies, which often
adjust (or "manage") their portfolios in an active manner, are subclassified as "open-end" and
32
Section 3(a)(1) of the 1940 Act defines "investment company" as any issuer that (A) is or holds
itself out as being engaged primarily, or proposes to engage primarily, in the business of
investing, reinvesting or trading in securities; (8) is engaged or proposes to engage in the
business of issuing face-amount certificates of the installment type, or has been engaged in such
business and has any such certificate outstanding; or (C) is engaged or proposes to engage in the
business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes
to acquire investment securities having a value exceeding 40 per centum of the value of such
issuer's total assets (exclusive of Govemment securities and cash items) on an unconsolidated
basis. 15 U.S.c. 80a-3(a)(I).
33
A "management company" is any investment company other than a unit investment trust or a
face-amount certificate company. 15 U.S.c. 80a-4(3). A "unit investment trust" is an
"investment company which (A) is organized under a trust indenture, contract of custodianship or
agency, or similar instrument, (8) does not have a board of directors, and (C) issues only
redeemable securities, each of which represents an undivided interest in a unit of specified
securities, but does not include a voting trust." 15 U.S.c. 80a-4(2). A "face-amount certificate
company" is "an investment company which is engaged or proposes to engage in the business of
issuing face-amount certificates of the installment type, or which has been engaged in such
business and has any such certificate outstanding." 15 U.S.c. 80a-4(1). A "face amount
certificate" is "any certificate, investment contract, or other security which represents an
obligation on the part of its issuer to pay a stated or determinable sum or sums at a fixed or
determinable date or dates more than twenty-four months after the date or issuance, in
consideration of the payment of periodic installments or a stated or determinable amount" or
"any security which represents a similar obligation on the part of a face-amount certificate
company, the consideration for which is the payment of a single lump sum." 15 U.S.c.
80a-2(a)( 15).
12
"closed-end" companies. An open-end investment company is a management convany that is
offering or has outstanding any redeemable securities that it issued. 34 Open-end investment
companies, which are more commonly called "mutual funds," are by far the most prevalent type
of registered investment company and may be the most susceptible to being used for money
laundering. 35
1.
Mutual Funds
Mutual funds are today one of the most popular ways individual investors participate in
the securities markets. In 2001, more than 8,300 active mutual funds, with approximately $7
trillion in assets, were registered with the SEC. 36 Mutual funds are held by more than half of
U.S. households. 37 A mutual fund, like any other investment company, is a trust, partnership, or
corporation whose assets consist of a portfolio of securities, interests in which are represented by
the shares that the fund issues. A mutual fund raises money from shareholders and invests it in
accordance with the fund's stated objectives. Mutual funds are generally grouped into stock
34
15 U.S.c. 80a-5(a)(1).
35
The staff of the SEC estimates, based on filings with the SEC, that as of December 2001,
approximately $6.97 trillion was invested in U.S. mutual funds (including $741 billion invested
in open-end management companies that fund variable life insurance and variable annuity
contracts, and $23 billion invested in open-end management companies that are exchange-traded
funds), $130 billion was invested in closed-end funds, and $121 billion was invested in unit
investment trusts other than insurance company separate accounts (including $59.5 billion
invested in unit investment trusts that are exchange-traded funds). As to investment companies
that fund variable life insurance and variable annuity contracts, see infra pp. 20-21. As to
investment companies that are exchange-traded funds, see infra note 50.
36
Investment Company Institute, Mutual Fund Fact Book (2002) ("ICI Fact Book") 7. The SEC
staff estimates that as of December 2001, there were approximately 3000 registered investment
companies that were open-end management companies. The staff further estimates that 1400 of
these investment companies are "series companies" with an aggregate 7200 portfolios. A "series
company" is a registered investment company that issues two or more classes or series of
preferred or special stock, each of which is preferred over all other classes or serie s with respect
to assets specifically allocated to that class or series. 17 CFR 270. 18f-2. The assets allocated to
such a class or series are commonly known as a "portfolio." The series or portfolios of a series
company operate, for many purposes, as separate investment companies.
37
See ICI Fact Book, supra note 36, at 24.
13
funds, bond funds, and money market funds. 38 In addition, like most investment companies,
mutual funds usually do not have their own employees. One or more third-party service
providers (which mayor may not be affiliated with the mutual fund) conduct all of a mutual
fund's operations. 39
Unlike other investment companies, a mutual fund typically offers its shares continuously
to the public, and redeems its shares on demand by investors, at a price based on the fund's net
asset value.
4o
A mutual fund usually offers its shares to the public through a principal
underwriter, which is a registered broker-dealer. 41 Shares also may be purchased directly from
some funds (called "direct-sold funds"). In addition, they may be purchased through a variety of
alternative distribution channels, such as fund "supermarkets" (through which investors may
purchase shares of several different mutual funds), insurance agents, financial planners, and
banks. 42 Mutual funds employ transfer agents to conduct recordkeeping and related functions. 43
38
Mutual funds also may specialize their investment objectives in certain ways, such as by
geographic location, industry sector, or the type of security in which they invest.
39
A mutual fund may be organized or sponsored by an entity such as an investment adviser that
provides other financial services. Thus, a mutual fund's investment adviser may simultaneously
provide investment advice to individual clients, act as the investment adviser for other registered
investment companies, and provide investment advice to unregistered pooled investment vehicles
such as hedge funds. Mutual funds may also be part of larger complexes of entities that provide
financial services. Other entities in the complex (e.g.. broker-dealers and investment advisers)
will, of course, have employees.
40
Mutual funds issue "redeemable securities," which entitle the holder to receive, upon presentation
to the fund, the holder's approximate proportionate share of the issuer's current net assets, or the
cash such share represents. 15 U.S.c. 80a-2(a)(32).
41
On April 22, 2002, the SEC approved NASD Regulation Rule 3011 and New York Stock
Exchange rule 445, which require their member broker-dealers to develop, and a member of the
firm's senior management to approve, programs designed to achieve and monitor compliance
with the BSA and related regulations. See Order Approving Proposed Rule Changes Relating
to Anti-Money Laundering Compliance Programs, Securities Exchange Act Release No. 45798
(April 22, 2002) [67 FR 20854 (April 26, 2002)].
42
Generally, insurance agents, financial planners, and banks that sell mutual fund shares must also
be registered as broker-dealers. The alternative distribution channels for mutual funds usually
maintain omnibus accounts with the mutual fund whose shares they distribute. In such case,
14
Because mutual funds typically offer and redeem their shares continuously, money
launderers may invest in mutual funds due to the ability to obtain access to their money. To
ensure that mutual funds take adequate precautions against such risks, FinCEN issued an interim
final rule on April 29, 2002 that requires mutual funds to develop and implement an anti-money
laundering program ("AML") reasonably designed to prevent them from being used to launder
money or finance terrorist activities.
44
In addition, FinCEN and the SEC jointly published in
July 2002 a notice of proposed rulemaking that would require mutual funds to establish customer
identification programs ("CIPs,,).45
These rules, in mandating mutual funds' BSA obligations, recognize the particular way in
which mutual funds are organized. They permit mutual funds to delegate responsibilities for
implementation of an anti- money laundering program to one or more service providers or
neither the fund nor its transfer agent typically knows the identities of the individual investors.
See note 43 infra, discussing the duties of transfer agents.
43
Transfer agents maintain records of shareholder accounts, calculate and disburse dividends, and
prepare and mail shareholder account statements, federal income tax information, and other
shareholder notices. Some transfer agents prepare and mail statements confirming shareholder
transactions and account balances, and maintain customer service departments to respond to
shareholder inquiries.
44
See 67 FR 21117, supra note 16. The program must meet four minimum standards. First, it must
establish and implement policies, procedures, and internal controls reasonably designed to
prevent the mutual fund from being used to launder money or finance terrorist activities,
including, but not limited to, achieving compliance with the applicable provisions of the BSA and
the implementing regulations thereunder. Second, the mutual fund must provide for independent
testing by fund personnel or by a qualified outside party of its program to ensure compliance with
the applicable portions of the BSA and implementing regulations. Third, the mutual fund must
designate a person or persons responsible for implementing and monitoring the operations and
internal controls of the program. Fourth, the fund must provide ongoing training to appropriate
persons regarding the BSA requirements relevant to their functions and the recognition of
possible signs of money laundering that could arise in the course of their duties.
45
See 67 FR 48318, supra note 17. The proposed regulation would require mutual funds to
implement reasonable procedures to (1) verify the identity of any person seeking to open an
account, to the extent reasonable and practicable, (2) maintain records of the information used to
verify the person's identity, and (3) determine whether the person appears on any lists of known
or suspected terrorists or terrorist organizations provided to investment companies by any
government agency. The comment period for the proposed rule ended on September 6,2002.
15
intermediaries. These intermediaries, through which investors purchase interests in mutual
funds, include broker-dealers and banks, which are required to have their own anti- money
laundering and customer identification programs. 46
2.
Closed-End Funds
A closed-end investment company (or "closed-end fund") is a management company
other than an open-end investment company. 47 Like a mutual fund, a closed-end fund is a trust,
partnership, or corporation whose assets consist of a portfolio of securities, interests in which are
represented by the shares that the fund issues. 48 Closed-end funds differ from mutual funds in
that they do not offer their shares continuously, nor do they redeem their shares on demand. 49
Instead, a closed-end fund issues a fixed number of shares, which typically trade on a stock
exchange or in the over-the-counter market. so Investors seeking to buy or sell these shares must
46
Virtually all intermediaries that can hold mutual fund shares in an omnibus account are or may be
subject to various anti-money laundering or SAR requirements. For example, a broker-dealer or
investment adviser can hold shares for customers in omnibus accounts. Broker-dealers are
already covered by the BSA's anti-money laundering provisions (including SAR reporting), and
Treasury may extend these provisions to investment advisers.
47
15 U.S.C. 80a-5(a)(2). The staff of the SEC estimates, based on filings with the SEC, that as of
December 2001 there were 632 registered closed-end funds, with aggregate assets of
approximately $130 billion. The majority of these funds are publicly traded. The SEC staff
estimates that as of December 2001 there were 54 closed-end funds, with assets of approximately
$11.4 billion, that were not publicly traded. These funds are registered with the SEC solely under
the 1940 Act.
48
Recently some closed-end funds have registered with the SEC that invest predominantly in
securities issued by hedge funds. See Robert H. Rosenblum & Leigh M.P. Freund, A Primer on
Structuring Registered Funds of Hedge Funds, 9 Inv. Law 4 (Apr. 2002). As to hedge funds
generally, see section III.B.l. infra.
49
Section 23(c) of the 1940 Act [15 U.S.c. 80a-23(c)] generally prohibits a registered closed-end
investment company from purchasing any security of which it is the issuer except on a securities
exchange, pursuant to a tender, or under such other circumstances as the SEC may permit by
rules, regulations, or orders designed to ensure that the purchases are made in a manner or on a
basis which does not unfairly discriminate against any holders of the securities to be purchased
See infra notes 54 - 57 and accompanying text.
so
Other types of registered investment companies may also be traded on a stock exchange. These
"exchange-traded funds" or "ETFs" are registered with the SEC as open-end funds or unit
investment trusts ("UITs"). Unlike typical open-end funds or UITs, ETFs do not sell or redeem
16
buy or sell them through a broker-dealer on the exchange. Like other publicly traded securities
(and unlike the shares of a typical mutual fund), shares of a closed-end fund trade at a market
price that fluctuates am is determined by supply and demand in the marketplace. 51
Closed-end funds typically do not have an account relationship with their investors. As a
result, those funds (and their service providers) are not in a position to detect and prevent money
laundering. Purchases and sales of closed-end fund shares are effected through broker-dealers or
banks, and these entities are already subject to anti- money laundering regulation. 52 For these
reasons, closed-end funds do not appear to present a risk of money laundering that would be
effectively addressed by subjecting them to additional regulation, and Treasury has not extended
BSA regulatory requirements to closed-end funds.
53
Although most closed-end funds do not redeem their shares, a category of closed-end
funds - "interval funds" - do have limited redemption features. Interval funds rely on rule 23c-3
their individual shares at net asset value. Instead, ETFs sell and redeem ETF shares at net asset
value only in large blocks (e.g .. 50,000 ETF shares). National securities exchanges list ETF
shares for trading, which allows investors to purchase and sell individual ETF shares at market
prices throughout the day. ETFs therefore possess characteristics of traditional open-end funds
and UITs, which issue redeemable shares, and of closed-end funds, which generally issue shares
that trade at negotiated prices on national securities exchanges and are not redeemable. The SEC
staff estimates, based on filings with the SEC, that as of December 2001, there were nine
separately registered investment companies, four UITs and five open-end funds, offering such
securities. The SEC staff further estimates that as of December 2001, the five open-end funds
offered 98 series with aggregate assets of approximately $23 billion, and the UITs had aggregate
assets of approximately $59.5 billion. The separate series of a registered investment company
that is a series company operate, for many purposes, as separate investment companies. See
supra note 36 (discussing registered investment companies that are series companies).
51
The price of closed-end fund shares may be above or below the fund's net asset value per share.
This price differential is commonly referred to as a premium or discount, and reflects the
market's assessment of the value and liquidity of the fund's portfolio assets, among other things.
52
See 67 FR 21110, supra note 16.
53
In April 2002, Treasury temporarily exempted iwestment companies other than mutual funds
from the requirement that they establish anti-money laundering ("AML") programs. !d. Treasury
stated its intention to continue to consider the type of AML program that would be appropriate for
these companies, including the extent to which they pose a money laundering risk that is not more
17
under the 1940 Act to periodically offer to repurchase from shareholders a limited number of
fund shares at net asset value. 54 Rule 23c-3 describes the intervals at which such repurchase
offers may be made (three, six or twelve months)55 and the amount of stock that may be the
subject of a repurchase offer (not less than five percent nor more than twenty- five percent of the
fund's outstanding stock).56 There are currently an estimated 30 interval funds. 57
Because investors in an interval fund control neither the timing nor the amount of the
issuer's repurchase offer, the redemption features of interval funds do not appear to present
significant money laundering risks. Accordingly, Treasury has not extended BSA regulatory
requirements to interval funds, but it may reconsider this issue if the SEC were to liberalize the
circumstances in which interval funds may make repurchase offers.
3.
Unit Investment Trusts
A unit investment trust ("UIT") is a registered investment company that buys and holds a
generally fixed, unmanaged 58 portfolio of securities and then sells redeemable shares (called
"units") in the trust to investors. UIT investors receive a proportionate share of dividends or
interest paid by the investments. 59
effectively covered by the AML program of another financial institution through which investors
purchase and sell their interests (e.g., a broker-dealer or insurance company). !d. at 21117-21118.
54
55
17 CFR 270.23c-3.
17 CFR 270.23c-3(a)(l).
56
17 CFR 270.23c-3(a)(3).
57
This estimate is based on filings with the SEC on Fonn N-23C-3 [17 CFR 274.221] during 2001.
58
A UIT has no investment adviser and no board of directors.
59
The 1940 Act defines a "unit investment trust" as an investment company that (i) is organized
under a trust indenture, contract or similar instrument, (ii) does not have a board of directors, and
(iii) issues only redeemable securities that represent undivided interests in a unit of specified
securities. See note 33 supra. As discussed above, in April 2002, FinCEN temporarily exempted
investment companies other than mutual funds from the requirement that they establish AML
programs. See 67 FR 211 10, supra note 16. Therefore, UITs currently are not subject to BSA
regulatory requirements.
18
There are two types of UITs. The "traditional" UIT is sponsored by a broker-dealer,
which deposits securities into a trust and offers interests ("units") in the trust to brokerage
customers. Although these units can be redeemed, sponsors typically support a secondary
market into which redeeming shareholders sell. These traditional UITs have many of the same
characteristics of mutual funds that can make them attractive to persons seeking to launder
money. However, they are entirely creatures of their sponsoring brokerage firms, which are
already required by the BSA to establish AML programs and report suspicious transactions in
connection with such entities. 60 It does not appear that applying anti- money laundering rules to
this type of UIT would appreciably decrease the UIT's risk of being used for money laundering,
and thus such application has not been made.
The second type of UIT is an insurance company separate account. 61 These separate
accounts issue variable annuity contracts and variable life insurance policies, and invest the
premiums received by the insurance company in one or more mutual funds. In this arrangement,
the UIT separate account functions as a conduit to the underlying mutual funds. These UITs are
sponsored by insurance companies, which are likely to be required to establish anti- money
laundering programs in accordance with the BSA once a proposed rule is finalized.
62
Applying
60
See Amendment to Bank Secrecy Act Regulations; Requirement that Brokers or Dealers in
Securities Report Suspicious Transactions, 67 FR 44048 (July 1, 2002); 67 FR 21110, supra note
16. Treasury and the SEC have jointly proposed a rule that would require broker-dealers to
establish and implement customer identification programs. See 67 FR 48306, supra note 17.
61
Based on filings with the SEC, the SEC staff estimates that as of December 2001 there were
approximately 683 unit investment trusts that were insurance company separate accounts, with
aggregate assets of $650.5 billion.
62
Insurance companies have long been defined as financial institutions for purposes of the BSA.
See 15 U.S.c. 5312(a)(2)(M). In April 2002, Treasury temporarily deferred the anti-money
laundering program requirement contained in section 352 of the USA Patriot Act that would have
applied to insurance companies, to enable it to consider how anti-money laundering controls
could best be applied to that industry, taking into account differences in size, location, and
services within the industry. See 67 FR 21110, supra note 16. On September 26,2002, Treasury
19
another set of anti- money laundering rules to such separate accounts appears unlikely to increase
protection against money laundering.
B.
Unregistered Investment Companies
In addition to "investment companies" that are required to be registered under the 1940
Act, there are similar pooled investment vehicles that are not "investment companies" for
purposes of the 1940 Act that should be considered to be "investment companies" for purposes
of the BSA. Such entities may include (i) privately offered funds that have a limited number of
investors that rely on the exc eption in section 3( c)(1) of the 1940 Act; (ii) funds that are privately
offered to qualified purchasers that rely on the exception in section 3(c )(7) of the 1940 Act; and
(iii) entities that are not subject to the 1940 Act because they do not invest primarily in securities.
These types of investment vehicles would include hedge funds, private equity funds, venture
capital funds, commodity pools, and real estate investment trusts. 63
1.
Hedge Funds
The term "hedge fund" refers generally to a privately offered investment vehicle that
pools the contributions of its investors in order to invest in a variety of asset classes, such as
securities, futures contracts, options, bonds, and currencies. 64 A precise figure for the size of the
proposed a new rule that would prescribe minimum standards applicable to insurance companies
pursuant to the BSA requirement that financial institutions establish anti-money laundering
programs. See 67 FR 60625, supra note 16. The comment period on the proposed rule ends on
November 25, 2002. Id
63
As described in detail below, on September 26, 2002, FinCEN published a Notice of Proposed
Rulemaking that would require many of these entities to establish anti-money laundering
programs. 67 FR 60617, supra note 16, discussed at section IILBA. of this report.
64
The President's Working Group on Financial Markets describes a "hedge fund" as "any pooled
investment vehicle that is privately organized, administered by professional investment managers,
and not widely available to the public." Report of the President's Working Group on Financial
Markets, "Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management," at 1
(1999) ("Working Group Report"). It remains a matter of debate whether the term "hedge fund"
refers only to funds that provide performance-based compensation for their managers, funds that
actually hedge their exposure to the market, funds that engage in any investment strategy that is
20
hedge fund industry, in terms of the number of funds and the total value of assets managed, is
unavailable because no official reporting organization exists for hedge funds. As of the last
quarter of 2001, however, it was estimated that there were between 4,000 and 5,000 hedge funds
worldwide that managed between $400 and $500 billion in capital. 65 Although the hedge fund
industry remains small in relation to the mutual fund industry,66 investment in hedge funds is
growmg.
Hedge funds domiciled in the United States are usually organized as limited partnerships
or limited liability companies. The sponsor/general partner/manager usually holds an interest in
the fund along with investors/limited partners/members,67 who are, in most circumstances, either
wealthy individuals or institutions such as savings associations, broker-dealers, investment
companies, and employee benefit plans. 68 Further, hedge funds do not engage in "public
offerings" of the interests in the funds. The sponsor often handles marketing and investor
intended to be non-correlated with the overall securities markets, funds that are not required to be
registered, or some combination of the foregoing.
65
See The Financial Stability Forum ("FSF") Recommendations and Concerns Raised by Highly
Leveraged Institutions ("HLIs"): An Assessment, March 2002, at 1-2
(http://www.(s(orum.orgiReports/HLIreviewMar02.pd{). The FSF is a 40-member organization
convened in April 1999 by the Finance Ministers and Central Bank Governors of the G-7
countries.
66
As discussed previously, as of December 2001, there were an estimated 8300 mutual funds with
approximately $7 trillion in assets. See note 36 infra and accompanying text.
67
The investors purchase interests in the hedge fund. These interests, whether denominated as
units, shares or limited partnership interests, are securities. The Securities Act of 1933, however,
provides an exemption from registration for securities that are not publicly offered. IS U.S.c.
77d(2).
68
Generally, hedge funds offer and sell interests to persons who qualifY as "accredited investors,"
"qualified purchasers," or "qualifed clients" as those terms are defined respectively for purposes
of the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers
Act of 1940. See lSU.S.C. 77b(a)(l5), 17CFR230.215,and 17CFR230.S01 (defining
"accredited investor"), IS U.S.c. 80a-2(a)(Sl) (defining "qualified purchaser") and 17 CFR
27S.20S-3(d) (defining "qualified client"). Limiting investors in this way enables a fund to avoid
registering the securities issued by the fund under the Securities Act of 1933, avoid registering the
21
services, and often serves as the fund manager with responsibility for making decisions regarding
operations and investment strategy. A hedge fund also may retain an investment adviser or
multiple advisers. It is not uncommon, however, for the sponsor, manager, and investment
adviser(s) to be either the same legal entity or separate legal entities that might be owned by the
sponsor. A typical hedge fund is similar to a mutual fund in that it maintains several contractual
relationships that are integral to the operation of the hedge fund, including relationships with
prime brokers, executing brokers, custodians, administrators, placement agents, registrars and
transfer agents. 69
For various reasons arising from tax, administrative, and regulatory concerns, hedge
funds often are established under
u.s. law as partnerships ("U.S. domestic hedge funds") or as
corporations in a foreign jurisdiction ("U.S. hedge funds with an offshore related fund"). 70
Hedge funds that are offered to U.S. investors tend to be structured in ways to address the needs
of either tax-exempt investors or taxable investors. U.S. domestic hedge funds are usually in the
form of limited partnerships to accommodate taxable U.S. investors. Partnerships provide
favorable tax treatment for individual investors because the partnership's income is taxed only at
the level of the individual investors in the partnership, as opposed to a corporation's income that
is taxed at both the entity and individual investors' levels. 7 ) In contrast, some U.S. hedge funds
fund itself under the Investment Company Act of 1940, and enables the fund to pay its investment
adviser a performance-based fee, even if the adviser is registered with the SEC.
69
Matthias Bekier, Marketing of Hedge Funds (1996), excerpts available at
http://209.130.127.8/aimasite/research/bekierh(!h(stru23.htm.
70
In addition, any of the persons contractually affiliated with a hedge fund (e.g. , prime broker,
administrator, custodian, adviser, or distributor) may be located offshore.
7)
Some domestic hedge funds are organized as limited liability companies, which provide their
investors with tax benefits identical to those of a limited partnership.
22
with an offshore related fund accommodate tax-exempt U.S. investors, such as pension funds and
university endowments, and non-U.S. investors. 72
Generally, all hedge funds require investors to complete sUbscription agreements that
detail the investors' identity, domicile, and net worth, among other information. 73 The investor
then returns the subscription agreement to the hedge fund manager or administrator and forwards
his initial investment to the hedge fund's account with its custodian or its prime broker. 74 For the
redemption of investment assets, U.S. domestic hedge funds usually rely on their custodian or
prime broker to forward assets from the hedge fund's account to the investor's account. A U.S.
hedge fund with an offshore related fund generally processes a redemption through its fund
administrator, which sends the redeemed investment to the investor's bank account identified in
the subscription documents.
A typical hedge fund often has a one-year "lock-up" period from the date of investment,
during which tre investor cannot redeem his investment. 75 Once the initial lock-up period is
over, the right of an investor to redeem is governed by the partnership agreement. Most
investors may demand a redemption during a set period that occurs on a quarterly, semi-annual,
72
U.S. tax-exempt entities, such as university endowments and pension funds, are taxable on
unrelated business taxable income ("UBIT") and therefore may seek to avoid the generation of
income that the IRS may consider subject to UBIT by investing in an offshore fund that is a
corporate entity.
73
A subscription agreement is an agreement to buy shares or interests in a hedge fund. It also
outlines the terms and conditions of redemptions and transfers of such shares or interests.
74
Hedge funds rarely, if ever, receive or disburse currency to investors. Most investments are made
by wire transfers from a financial institution, such as a bank, to the hedge fund's custodian or
prime broker. When investors redeem their investments, most hedge funds forward the
redemption proceeds to the account at the financial institution from which the initial investment
was made.
75
See Lori R. Runquist, Hedge Funds: Alternative Investment Choices, Market Signals
Supplement, The Northern Trust Co., (Feb. 2002), at
www.northernfunds.com/library/pcrsonal/mrkt newsletters/money matters/020200.pdf
23
or annual basis. There is no formal domestic secondary market for hedge fund shares.
Of the unregistered investment companies, hedge funds may be the most susceptible to
abuse by money launderers because of the liquidity of their interests and their structure.
Compared to the lock- up period imposed upon an investment by other unregistered investment
companies, the lock-up period imposed upon an investment by a hedge fund is relatively short.
Because money laundering has become such an expensive activity (estimated to cost 8%-10% of
the amount of the money laundered), money launderers may be willing to invest their assets for a
limited period to launder them in a manner that generates a return rather than a loss.
The structure of hedge funds also makes them vulnerable to money laundering. A U.S.
domestic hedge fund is comprised of a general partner and a limited partner that form a U.S.
limited partnership to hold a portfolio of liquid securities. A limited partner, either an individual
or a corporate limited partner, could easily transfer the proceeds of crime into the hedge fund.
Without anti- money laundering compliance responsibilities, a hedge fund has no responsibility to
determine the source of an investor's funds or to analyze whether the sOll'ce of those funds is
questionable.
The U.S. hedge fund with an offshore related fund has a complex structure that begins
with a general partner and limited partners in a U.S. limited partnership. The limited partnership
often provides funds to an offsoore corporate master, which invests the funds in a portfolio of
liquid securities. The corporate master has an investment manager and an offshore
administrator. The offshore corporate master also receives funds to invest from an offshore
corporate feeder. The beneficial owners of the offshore corporate feeder may be composed of
offshore investors and U.S. tax-exempt entities that invest offshore for tax purposes.
Depending on the jurisdiction in which the offshore corporate feeder is organized, it may
24
be impossible to identify the beneficial owners of the money invested in the fund through the
offshore corporate feeder or the source of the money being invested. The potential availability of
"anonymous" investment and the inability of law enforcement to obtain information about the
beneficial ownership of corporate entities in certain jurisdictions make this type of hedge fund
particularly attractive to money launderers. 76 In fact, the Report of the President's Working
Group on Financial Markets notes tmt a significant number of hedge funds have been
established in offshore financial centers that are tax havens and may be engaged in or facilitating
illegal tax avoidance and other inappropriate purposes. 77
2.
Commodity Pools
A commodity pool is an investment trust, syndicate or similar form of enterprise operated
for trading commodity interests. 78 Commodity pool operators ("CPOs") are required to register
with the CFTC as CPOs, and are subject to comprehensive regulation and oversight by the
CFTC. 79 As of September 30, 2001, approximately 1,700 CPOs registered with the CFTC 80
operated an estimated 2,558 active commodity pools with $346 billion in assets.81
76
See Gilbert, supra note 29.
77
See Working Group Report, app. B at B-3.
78
A "pool" is defined in 17 CFR 4.1 O( d), a rule promulgated by the CFTC under the Commodity
Exchange Act ("CEA"), as "any investment trust, syndicate or similar form of enterprise operated
for the purpose of trading commodity interests." As a general matter, there are two types of
commodity pools: public pools and private pools. Securities issued by public pools (i.e., pools
offered through public offerings) are registered with the SEC under the Securities Act of 1933
and the Securities Exchange Act of 1934. If those public pools are investment companies, they
also are registered with the SEC under the 1940 Act. Private pools (i.e., pools that are offered
through private placements) also may register with the SEC under the 1940 Act as investment
companies.
79
The CEA defines the term "commodity pool operator" as "any person engaged in a business that
is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in
connection therewith, solicits, accepts, or receives from others, funds, securities, or property,
either directly or through capital contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in any commodity for future delivery on or subject to the
rules of any contract market or derivatives transaction execution facilit y, except that the term
25
Pursuant to the CFTC's rules and depending upon the amount of assets in the pool, a
CPO must provide investors and the CFTC with monthly or quarterly financial statements, 82
distribute and file an annual report for each pool that it operates,83 and maintain and make
available for CFTC inspection certain books and records. 84 CPOs also are subject to the general
and specific anti- fraud provisions of the CEA and CFTC regulations. 85 The CFTC and the
National Futures Association ("NFA"), the futures industry's self-regulatory organization,
review all of the commodity pools' annual financial statements. Further, each CPO must
complete an annual self-audit questionnaire and undergo an onsite examination by NF A
approximately once every 2.5 years. That examination covers the CPO itself and every
commodity pool operated by the CPO. NF A maintains a publicly available database that can be
used by both regulators and investors and contains the names, addresses, NF A identification
numbers, regulatory history, and other pertinent information regarding the CPOs and commodity
pools.86
does not include such persons not within the intent of the definition of the tenn as the
Commission may specify by rule, regulation, or order." 7 U.S.c. la(S).
80
CFTC 200 I Annual Report, "Futures Industry Registrants by Location as of September 30,
2001," at 150.
81
This infonnation is based on estimates supplied to the staff of the CFTC by the National Futures
Association.
82
17 CFR 4.22.
83
17 CFR 4.22(c). Before a commodity pool can accept funds or other property from investors in
the pool, the CPO must distribute and file a disclosure document with the CFTC and National
Futures Association. 17 CFR 4.21, 4.24-4.26.
84
17 CFR 4.23.
85
7 V.S.c. 6b prohibits fraudulent activity in or in connection with a futures contract. 7 V.S.c. 60
prohibits fraudulent transactions by CPOs and CT As. 17 CFR 32.9 and 33.10 bar fraud by any
person in connection with commodity option transactions.
86
The National Futures Association database can be searched on the Internet at
http://www.nfa.futures.org/basic. As described in detail below, on September 26, 2002, FinCEN
26
3.
Private Equity and Venture Capital Funds
Private equity funds are vehicles in which investors pool money to invest in unregistered
securities of public or private companies that have been in existence for several years and have
established products, customers, and operating records. A venture capital fund is a type of
private equity fund
87
in which participants pool capital to invest in the seed, start-up or early
stages of companies. These funds 88 do not engage in public offerings and generally have a small
number of institutional and wealthy individual investors. 89
There is little information on the number of private equity funds and the total value of
assets managed by such funds because, like hedge funds, there is no official reporting
organization that exists for private equity funds. However, in 2001, an estimated 1,627 venture
capital funds were in existence with $250 billion in capital under management. 90
Private equity funds are sponsored by private equity firms, which typically sponsor more
than one fund. Each fund, however, is organized as a separate legal entity. Most private equity
funds are structured as limited partnerships with the general partner being the private equity firm
published a notice or proposed rulemaking that would require commodity pools, and therefore,
CPOs indirectly, to establish anti-money laundering programs. 67 FR 60617, supra note 16,
discussed at section III.B.4. of this report.
87
There are other types of private equity funds including leveraged buyout funds, which finance the
purchase of established companies; mezzanine funds, which are used to purchase and recapitalize
private companies; and opportunity funds, which invest in distressed companies. However, most
of the details and descriptions in this report focus on the practices of private equity funds
generaIly and venture capital funds which are a subset of private equity funds.
88
For purposes of this report, both types of funds will be referred to generally as "private equity
funds."
89
See supra note 77 regarding "accredited investors," "qualified purchasers," and "qualified
clients. "
90
The NVCA 2002 Yearbook, National Venture Capital Association ("NVCA"), ("The NVCA
2002 Yearbook"), at 11111' II 1\ \ \ III ( <I iii';.
27
and the investors serving as limited partners. 9 I Typically, the general partner serves as the fund's
manager and is responsible for researching the companies in which the fund might invest. 92 In
some instances, particularly in venture capital funds, the general partner plays an active role in
the companies in which the fund invests, either by sitting on the board of directors or becoming
involved in day-to-day management. The general partner establishes a management company to
handle routine administrative matters such as administering payroll and benefits for the fund's
employees, leasing office space, and recording the limited partners' investments in the fund.
Many private equity funds establish offshore mirror funds. These offshore funds have
separate limited partners from the domestic fund, but the funds invest in the same or similar
companies. Funds with an offshore element can be structured in a number of ways, but the
general partner of the companion U.S. fund generally manages them. 93 As with hedge funds, the
investors in offshore private equity funds are typically U.S. tax-exempt organizations and foreign
persons or institutions.
The general partner of a private equity fund "solicits" investors directly-there is no
general advertisement or public offering of the fund's securities.
94
Investors typically include
91
Some private equity funds are organized as limited liability companies and, occasionally,
corporations.
92
Depending on the size of the fund and the types of investors, the manager may be required to
register as an investment adviser under the 1940 Act, 15 U.S.c. 80b-1 et seq. But, generally,
private equity funds are subject to limited government regulation.
93
Regardless of the structure of the onshore/offshore arrangement, the general partner's
management company in the U.S. typically has custody of the records of all of the investors,
although there is often a copy of the records for the offshore investors kept in the jurisdiction of
the offshore fund. In the case of a fund that has some u.s. investors but is strictly an offshore
fund (i.e., organized by non-U.S. general partners), such records typically will be kept offshore.
94
Private equity funds are not required to provide disclosure information to investors. Nonetheless,
they typically provide offering memoranda to prospective investors. The general partners of
private equity funds usually collect a large amount of information about prospective limited
28
high net worth individuals and families, pension funds, endowment organizations, banks and
insurance companies. 95
In most cases, private equity funds have a lifespan of 10 to 12 years, although the
investment in each portfolio company usually lasts for a shorter period, such as 3 to 7 years. 96
Investors commit to invest a certain amount of money with the fund over the life of the fund.
Investors make their contributions to the fund in response to "capital calls" from the general
partner. Capital calls are made when the general partner has ident ified a portfolio company in
which the private equity fund will invest and needs access to capital to make the investment.
Once an investor meets the capital caIl, the private equity fund invests the new capital in the
portfolio company almost immediately. The private equity fund typicaIly does not retain a pool
of uninvested capital. 97
Private equity funds are long-term investments and provide little, if any, opportunity for
investors to redeem their investments. 98 There is no formal secondary market for shares in a
partners to confirm that the limited partners will be able to meet their capital commitments when
required by the private equity fund.
95
Industry sources estimate that individuals and families account for less than 10% of the assets
invested in private equity funds, pension funds account for about 30%, endowments account for
about 20%, and banks and insurance companies account for about 40%. The NVCA estimates
that individuals and families account for approximately 10% of the invested assets in venture
capital funds, pension funds account for 40%, endowments account for 20%; and banks,
insurance companies and corporations account for about 30%. The NVCA 2002 Yearbook, supra
note 90
96
The term of existence of each private equity fund is found in the fund's partnership agreement.
97
Investors' contributions are wired to the private equity fund's bank account from which they are
routed to the portfolio company. The administrative arm of the private equity fund is responsible
for keeping records of investors' contributions and distributions.
98
Although a private equity fund rarely redeems its investors' shares in the fund, the fund may pay
its investors dividends. A private equity fund may distribute a cash dividend to its investors when
it profits from the sale of a particular portfolio investment or may distribute a stock dividend to its
investors when it receives shares in a particular portfolio company after the company has
29
private equity fund, although there is a small informal secondary market that is comprised of
private equity funds specializing in buying interests in established funds. 99
4.
Real Estate Investment Trusts ("REITs")
A REIT is an investment vehicle that allows investors to own interests in incomeproducing real estate properties or participate in mortgage financing. 100 There are three basic
types of REITs: equity REITS, mortgage REITs and hybrid REITS. Equity REITs, which own
and operate income-producing real estate, account for 96.1 % of REITS. Mortgage REITs, which
lend money directly to real estate owners and operators or extend credit indirectly through the
acquisition of loan interests, account for 1.6% of REITS. Hybrid REITs, which both own
properties and make loans to real estate owners and operators, account for 2.3% of REITS. 101
The structure of a typical REIT is dictated by certain provisions of the Internal Revenue
Code ("IRC"). 102 A REIT must be organized as a corporation, trust or associa tion that would be
subject to U.S. corporate income taxation but for the REIT provisions of the IRC. lo3 The IRC
also requires that a REIT be managed by a board of directors or trustees, have shares that are
fully transferable, have a minimum of 100 shareholders, have no more than 50% of its shares
undergone an initial public offering. To facilitate the transfer of shares from the fund to its
investors in the case of a stock dividend, the fund usually retains the services of a transfer agent.
99
In 1999, five private equity funds raised $1.6 billion for purchases of secondary interests in other
private equity funds. See David M. Toll, "Private Equity Primer," in Galante's Venture Capital
& Private Equity Directory.
100
A REIT is not an investment company under the 1940 Act. See 15 U.S.c. 80a-3(a)(l)(A)
(defining investment companies to be in the business of investing, reinvesting, or trading in
securities) and 15 U.S.c. 80a-3(c)(5)(C) (excluding from the definition of investment companies
certain issuers that are engaged primarily in the business of purchasing or otherwise acquiring
mortgages or other liens on an interests in real estate.)
10 I
These statistics are available from the National Association of Real Estate Investment Trusts
("NAREIT"), at www.nareit.com.
102
Subchapter M of the Internal Revenue Code, 26 U.S.C. 851 et seq.
103
26 U.S.c. 856.
30
held by five or fewer individuals during the last half of each taxable year, invest at least 75% of
its total assets in real estate assets, derive at least 75% of its gross income from rents from real
property or interest on mortgages on real property, have no more than 20% of its assets consist of
stocks in taxable REIT subsidiaries, and pay at least 90% of its taxable income to investors in the
form of dividends. 104
According to industry sources, as of March 2001 there were approximately 300 REITs
operating in the U.S. with assets totaling over $300 billion.
105
Currently, approximately 190
large REITs are registered with the SEC as public companies under the Securities Exchange Act
of 1934 and trade on the national stock exchanges. 106 The securities of REITs registered with the
SEC are traded through broker-dealers, which are already subject to anti- money laundering
regulations promulgated under the BSA. Approximately 100 private REITs, entities whose
securities are not listed on a securities exchange, are in existence. The typical life span of a
private REIT is 10 to 15 years. They are similar to the publicly listed and traded REITS in terms
of structure due to the requirements of the IRC. The securities of the private REIT may be
registered with the SEC under the Securities Act of 1933 or may be private placements. In most
cases, investors purchase private REIT securities through an SEC-registered broker-dealer. Most
private REITs provide investors with the opportunity to purchase additional shares through a
dividend reinvestment program. An investment in a private REIT tends to be illiquid because the
104
!d.
105
See \\ \\ \\ .111\ L·~llllrL·lh.Ullll
106
According to NAREIT, there are approximately 149 REITs listed on the New York Stock
Exchange, 27 REITs listed on the American Stock Exchange, and 12 REITs listed on the
NASDAQ National Market System. See "Frequently Asked Questions about REITs," at
I!.!!i~~I_~.!'-'-i/~!L-,,-,,-,-'--!.Ij), 1/ illJ.' I !".J''-ij 11',-1 ,jill
1~1l\ll'\ILllll 'Jlll\\
%20many
31
investors usually have no right to redeem their interests and the REIT often restricts the transfer
of interests to comply with other IRC requirements.
5.
Proposed Rule for the Application of the BSA to Unregistered
Investment Companies
The rule that temporarily exempts investment companies other than mutual funds from
the BSA requirement that investment companies implement anti-money laundering programs,
applies to all unregistered investment companies. 107 However, in that rule, FinCEN observed that
a number of unregistered entities such as hedge funds are excluded from the 1940 Act definition
of "investment company" and that those entities would likely be required to establish anti- money
laundering programs under section 352 of the USA Patriot Act in the future. 108
With respect to investment companies not registered under the 1940 Act, Treasury
considered two different approaches in creating an appropriate definition. Treasury could have
defined, to the extent possible, the various sub-categories of unregistered investment companies
(such as hedge funds, private equity funds, and venture capital funds) and then could have
fashioned regulations for each sub-category based on the extent to which that sub-category is
vulnerable to money laundering. One disadvantage of such an approach is that the labels for
many of these entities are somewhat colloquial in nature and are not susceptible to precise
definition. Thus, this approach risked failing to capture companies that have characteristics that
would enable them to be used for money laundering. At the other extreme, including every
perceivable sub-category of entities 'M)uld unnecessarily burden businesses that money
launderers are unlikely to use. Moreover, an overly inclusive definition would bring within the
scope of the BSA's anti-money laundering requirements so many entities as to tax resources of
107
67 FR 21117, supra note 16.
108
/d. at n.S.
32
the federal regulatory agencies charged with oversight of financial institutions and, thus,
diminish the effectiveness of that oversight.
Treasury proposed an alternative approach in defining unregistered investment
companies: consider the group as a whole and define the characteristics of such entities that
present money laundering risks. This approach subjects entities to regulation under the BSA
only if they possess those characteristics that present cognizable risks of money laundering.
On September 26, 2002, FinCEN issued a proposed rule that would require certain
"unregistered investment companies," including certain entities that rely on the exceptions in
sections 3( c)( 1) and 3( c )(7) of the Investment Company Act, commodity pools, and REITs, to
develop and implement anti-money laundering programs reasonably designed to prevent them
from being used to launder money or finance terrorist activities. 109 The proposed rule was
carefully designed to balance the need for a comprehensive national program to prevent money
laundering against the burdens imposed by the BSA on businesses, including small businesses.
Under the proposed rule, an "unregistered investment company" is an issuer of securities
that (i) would be an investment company under the 1940 Act, but for the exclusions provided in
sections 3(c)(1) and 3(c)(7) of that Act; (ii) is a commodity pool; or (iii) invests primarily in real
estate and/or interests therein. 110 Because of the broad scope of the type and nature of businesses
that fall within these categories, FinCEN proposed to further narrow the definition of
109
See 67 FR 60617, 60618, supra note 16.
110
This definition thus would include entities consisting of pools of three asset classes: securities,
commodity futures contracts, and real estate. The notice of proposed rulemaking requests
comment whether there are other entities, not covered by other rules requiring anti-money
laundering programs, that pool assets and provide a similar opportunity for money laundering or
terrorist financing, and whether such entities should be required by the final rule to establish antimoney laundering programs.
33
unregistered investment company by several limitations and exceptions from the definition, as
described below.
Redemption Rights. FinCEN proposed to define "unregistered investment company" to
include only those companies that permit an investor to redeem a portion of his or her investment
within two years after that investment was made. Investment companies rarely receive from or
disburse to investors significant amounts of currency. Therefore, if these companies are used to
launder money, they are more likely to be used as a transition method of investment, in order to
obscure the source and eventual use of tainted proceeds. The use of financial institutions at this
stage of the process generally requires that the money launderer be able to redeem his or her
interests in the company within a relatively short period. Conversely, companies whose shares
are not redeemable, or whose shares are redeemable only after a lengthy holding (or "lock- up")
period, generally lack the liquidity that makes them attractive to money launderers. The
proposed rule's "redeemability" requirement will likely have the effect of excluding from the
rule publicly traded REITs, a large number of special purpose financing vehicles, and many
private equity and venture capital funds.
Minimum Asset Size. Some entities, such as small businesses and investment clubs, are
so small that they are unlikely to be used for money laundering. III Therefore, the Proposed Rule
would exclude from its coverage companies with less than $1,000,000 in assets as of the end of
the most recent calendar quarter.
Offshore Funds. Because many unregistered investment companies operate "offshore"
and offer interests to both u.S. and foreign persons, the rule would extend to funds that (i) are
III
FinCEN believes that entities with less than $1,000,000 in assets pose significantly lower money
laundering risks than larger entities. See also section 312(a)(4)(b) of the USA Patriot Act
(defining "private banking account" to include accounts of not less than $1,000,000).
34
organized in the United States; (ii) are organized or sponsored by a U.S. person; or (iii) sell
ownership interests to U.S. persons. 112 Treasury proposed the rule having a long jurisdictional
reach to prevent circumvention of the rule by money launderers who could easily shift operations
to a hedge fund organized offshore in a jurisdiction that did not have adequate laws prohibiting
money laundering. The proposed rule reflects Treasury's determination that it is appropriate and
reasonable to require issuers that benefit from the financial and legal systems of the United
States to establish anti- money laundering programs to prevent, detect, and facilitate the
prosecution of international money laundering and terrorist financ ing.
Exceptions. FinCEN proposed to except from the rule investment companies that are
(i) family companies, (ii) employee securities companies, and (iii) employee benefit plans that
are not construed to be pools in CFTC Rule 4.5(a)(4).113 These types of companies are unlikely
to be used for money laundering purposes by third parties given their size, structure and purpose.
The proposed rule also excepts other types of financial institutions under the BSA to prevent
duplicative application of the BSA anti-money laundering rules to the same financial institution.
Notice. The proposed rule would require a company falling within the definition to file a
brief notice with FinCEN containing basic information about the company, such as its legal
name and address, the name and contact information of its anti- money laundering program
compliance officer, the dollar amount of the assets under its management, and the number of
investors in the company.
The notice will enable Treasury or its designee to identify
unregistered investment companies subject to the rule and to monitor their compliance.
112
The rule would not apply, however, to an unregistered fund that is merely advised by a U.S.
person because such a person would be unlikely to be in a position to administer the rule.
113
17 CFR 4.5. CFTC Rule 4.5(a)(4) sets forth the employee benefit plans that are not construed to
be pools.
35
IV.
Personal Holding Companies
Section 356 also requires that the report include recommendations on whether the
Secretary should promulgate regulations requiring "personal holding companies" to disclose
their beneficial owners when opening accounts or initiating transfers at any domestic financial
institution.
The USA Patriot Act defines a personal holding company as a business, including a
corporation or business or other grantor trust whose assets are predominantly securities, bank
certificates of deposit, or other securities or investment instruments (other than those relating to
operating subsidiaries of the corporation or trust) and that has 5 or fewer common shareholders
or holders of beneficial or other equity interest. 114
Personal holding companies may be located anywhere in the world and can be defined in
several ways. In the United States, the Internal Revenue Code defines a personal holding
companyll5 and a foreign personal holding companyll6 by reference to the amount of passive
income it earns and whether it is closely held. Moreover, certain foreign jurisdictions offer asset
management vehicles that they describe as personal holding companies, which are often intended
for use by high net worth individuals as a means of managing wealth.
Personal holding companies, which are also known as personal investment companies,
may be used by individuals as vehicles for managing their personal finances, estate planning, and
114
In the event that a personal holding company benefic ally owned by a non-U.S. person establishes
or maintains a "private banking account" (as defined in section 312 of the USA PATRIOT Act)
with a U.S. financial institution, the institution would be required by Section 312 to identify, and
perform other due diligence with respect to, such beneficial owner and account.
liS
26 U.S.c. 542
116
26 U.S.c. 552
36
other purposes. In addition, entrepreneurs may use personal holding companies to better
diversify their investment risk, or manage their personal finances.
The issue of whether and to what extent additional anti-money laundering controls may
be needed for a variety of different types of asset management vehicles and products is one that
Treasury continues to study, drawing on the knowledge and expertise of others within the
Federal regulatory community and within law enforcement. It is important to ensure that a
balance is struck between the potential for abuse of asset management vehicles, such as trusts,
personal holding companies, and other vehicles, and the limitation and costs resulting from
regulatory requirements. Regulatory requirements may have the unintended economic effect of
limiting access to such asset management vehicles. At this time, no additional recommendations
regarding anti- money laundering controls for personal holding companies are being made.
V.
Recommendations
Treasury and the federal functional regulators have greatly expanded the scope and reach of
regulations under the BSA since Congress passed the USA Patriot Act approximately one year
ago. This report has described regulations, some final, some proposed, that have been
promulgated to deter criminals and terrorists from laundering money through the various entities
defined as financial institutions under the BSA. Some of these regulations apply to various types
of investment companies, both registered and unregistered. This section of the report will briefly
summarize the regulations promulgated to date, the regulations that are still under consideration,
and the recommendations for regulatory action by the Treasury, the SEC and the Federal Reserve
Board.
37
REGISTERED INVESTM ENT COMPANIES:
Mutual Funds:
•
•
•
•
•
Interim Final Regulation requiring the establishment of an anti-money
laundering program (issued April 26, 2002). [67 FR 21117]
Proposed Regulation requiring establishment of customer identification
programs (issued July 23, 2002). [67 FR 48318]
Proposed Regulation requiring implementation of due diligence programs for
correspondent and private banking accounts (issued May 30,2002). [67 FR
37736]
Final Regulation setting forth procedures for information sharing between
federal law enforcement agencies and financial institutions and permitting
voluntary information sharing among financial institutions (issued September
26,2002) [67 FR 48348]
Treasury recommends requiring mutual funds to file suspicious activity
reports.
Closed-End Funds:
•
•
No regulations are recommended for these investment companies. Because
these funds' securities operate much like securities issued by a corporation,
these funds do not appear to present a money laundering risk sufficient to
warrant regulation at this time.
In an interval fund (a type of closed-end fund with limited repurchase rights),
investors do not control either the timing or the amount of a repurchase offer.
As a result, it does not appear that these funds present a money laundering
risk sufficient to warrant regulation at this time.
Unit Investment Trusts (UITs):
•
These funds' securities are available only through broker-dealers or life
insurance companies. Registered broker-dealers are subject to both antimoney laundering and (as of January 1,2003) SAR reporting regulations
(issued April 29, 2002 and July 1,2002). [67 FR 21110; 67 FR 44048]
Treasury and the SEC have jointly proposed to require registered brokerdealers to adopt and implement customer identification programs (issued July
23,2002). [67 FR 48306] Treasury has proposed regulations requiring life
insurance companies to implement anti- money laundering compliance
programs and to file SARs (issued September 26,2002 and October 17,
2002) [67 FR 60625; 67 FR 64067]. No new regulations are recommended
for these investment companies.
38
UNREGISTERED INVESTMENT COMPANIES:
•
•
Proposed regulation requiring certain unregistered investment companies to
establish anti-money laundering programs (issued September 26,2002). [67
FR 60617]
Treasury recommends requiring unregistered investment companies to
establish customer identification and verification programs.
PERSONAL HOLDING COMPANIES
•
No regulations are recommended for personal holding companies.
DEPARTMENT
OF
THE
TREASURY ({~Y~
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TREASURY
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EMBARGOED UNTIL 11:00 A.M.
December 23, 2002
Contact:
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[, ~! ~'H,II
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $16,000 million to
refund an estimated $22,000 million of publicly held 4-week Treasury bills maturing
December 26, 2002, and to pay down approximately $6,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,604 million of the Treasury bills maturing
on December 26, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
Note: The closing times for receipt of noncompetitive and competitive tenders
will be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
000
Attachment
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED DECEMBER 26, 2002
December 23, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) ...
Maximum Recognized Bid at a Single Rate ..
NLP Reporting Threshold . . . . . . . . . . . . . . . . . .
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . .
$16,000
$ 5,600
$ 5,600
$ 5,600
$11,900
million
million
million
million
million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 LV 1
Auction date . . . . . . . . . . . . . . . . . . . . . . . . December 24, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . December 26, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . January 23, 2003
Original issue date . . . . . . . . . . . . . . . . . July 25, 2002
Currently outstanding . . . . . . . . . . . . . . . $45,821 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts.
Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 11:00 a.m. eastern standard time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
December 23, 2002
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
1 3/4%
V-2004
912828AR1
Issue Date:
Dated Date:
Maturity Date:
High Yield:
1.820%
Price:
December 31, 2002
December 31, 2002
December 31, 2004
99.863
All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted 60.06%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
50,219,115
784,268
$
o
o
27,000,360 1/
51,003,383
SUBTOTAL
6,194,733
6,194,733
Federal Reserve
$
TOTAL
57,198,116
26,216,092
784,268
$
33,195,093
Median yield
1.790%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
1.769%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 51,003,383 / 27,000,360 = 1.89
1/ Awards to TREASURY DIRECT
=
$624,654,000
http://www.publicdebt.treas.gov
po
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
December 23, 2002
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
December 26, 2002
June 26, 2003
912795MT5
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.240%
Investment Rate 1/:
Price:
1.265%
99.373
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 75.62%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
27,383,844
819,841
$
°
°
16,000,135 2/
28,203,685
SUBTOTAL
5,881,636
5,881,636
Federal Reserve
$
TOTAL
15,180,294
819,841
34,085,321
$
21,881,771
Median rate
1.225%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.190%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
28,203,685 / 16,000,135
=
1.76
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $627,493,000
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
December 23, 2002
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
91-Day Bill
December 26, 2002
March 27, 2003
912795ME8
High Rate:
1.185%
Investment Rate 1/:
1.207%
Price:
99.700
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted
8.10%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
29,658,712
1,377,092
155,000
Accepted
$
14,000,204 2/
31,190,804
SUBTOTAL
TOTAL
4,908,929
4,908,929
Federal Reserve
$
36,099,733
12,468,112
1,377,092
155,000
$
18,909,133
Median rate
1.170%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
31,190,804 / 14,000,204
=
2.23
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,076,643,000
http://www.publicdebt.treas.gov
DEPARTMENT
TREASURY
01 1-1\ I- CJI I"
HI I (
OF
THE
TREASURY
¥"i NEW S
\I I- \llh • I=' nil 1'1' , \ ~ \ I. \ \ ' I , \\ I· ' I I . ,_ II .• \I \ ~ III \ L I ()'. I U .• ~Il! 211 • I ~ I)!; II ~! ~ %11
EMBARGOED UNTIL 11:00 A.M.
December 26, 2002
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $30,000
million to refund an estimated $30,961 million of publicly held 13-week and 26-week
Treasury bills maturing January 2, 2003, and to pay down approximately $961 million.
Also maturing is an estimated $21,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced December 30, 2002.
The Federal Reserve System holds $13,872 million of the Treasury bills maturing
on January 2, 2003, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held December 31, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,067 million into the 13-week bill and $795 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
000
Attachment
po
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JANUARY 2, 2003
December 26, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) ....
Maximum Recognized Bid at a Single Rate ...
NLP Reporting Threshold . . . . . . . . . . . . . . . . . . .
NLP Exclusion 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 and multiples ...........
$14,000
$ 4,900
$ 4,900
$ 4,900
$ 4,900
million
million
million
million
million
91-day bill
912795 MF 5
December 30, 2002
January 2, 2003
April 3, 2003
October 3, 2002
$19,204 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
182-day bill
912795 NB 3
December 30, 2002
January 2, 2003
July 3, 2003
January 2, 2003
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders ........ Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender.
TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
DEPARTMENT
OF
THE
TREASURY
TREASURY ~. ~y~
NEW
S
..................:~\;~.. ,~.y..................
EMBARGOED UNTIL 11:00 A.M.
December 30, 2002
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $16,000 million to
refund an estimated $21,000 million of publicly held 4-week Treasury bills maturing
January 2, 2003, and to pay down approximately $5,000 million.
Teriders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,872 million of the Treasury bills maturing
on January 2, 2003, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions.
Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
Note: The closing times for receipt of noncompetitive and competitive tenders
will be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
000
Attachment
37J~
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JANUARY 2, 2003
December 30, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Award (35% of Offering Amount) ...
Maximum Recognized Bid at a Single Rate ..
NLP Reporting Threshold . . . . . . . . . . . . . . . . . .
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . .
$16,000
$ 5,600
$ 5,600
$ 5,600
$11,900
million
million
million
million
million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 LW 9
Auction date . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . January 2, 2003
Maturity date . . . . . . . . . . . . . . . . . . . . . . . January 30, 2003
Original issue date . . . . . . . . . . . . . . . . . August 1, 2002
Currently outstanding ............... $45,887 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receiet of Tenders:
Noncompetitive tenders:
Prior to 11:00 a.m. eastern standard time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.
@FedFRASER