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Treas.
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10
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v.406

Department of the Treasury

PRESS R E L E A S E S

The following numbers were not used:
JS-628, 632, 661, 663 and 677

JS-626: Presentation of Terrorism Risk Insurance Program by Director Jeffrey Bragg

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1

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
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August 1, 2003
JS-626
Presentation of Terrorism Risk Insurance Program Executive Director Jeffrey
Bragg to the Ohio Insurance Institute Columbus, O H
Slide 1: Introduction
Slide 2:
Good morning and thank you for the opportunity to speak to you this morning on
Treasury's progress and plans for implementing the Terrorism Risk Insurance Act of
2002, otherwise referred to as TRIA.
On November 26, 2002, President Bush signed TRIA into law.
With an estimated $40B in insured loss as a result of the events of 9/11 the market
for terrorism coverage became severely disrupted.
However in addition to wanting to address Insurance industry disruptions, the
Congress and the President recognized that such wide spread dislocations in
insurance markets also had a negative impact on business' ability to finance
economic activity and recovery.
TRIA was therefore enacted to stabilize insurance protection by assuring the
availability of protection as well as to stabilize the overall economy.
Slide 3:
TRIA effectively places the Federal Government temporarily in the terrorism risk
reinsurance business:
• Providing coverage for commercial lines P&C losses including workers'
compensation.
• Coverage is triggered when the Secretary of the Treasury in consultation with the
Secretary of State and the Attorney General certifies that an act of terrorism carried
out by on behalf of a foreign interest has occurred:
• This terrorism generated loss must be greater than $5M
And the event must have taken place in the US, or a US foreign mission, or on a
U S air carrier or vessel.
Slide 4:
One of the first things that had to be defined under the act was what constitutes a
P & C insurer.

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JS-626: Presentation of Terrorism Risk Insurance Program by Director Jeffrey Bragg

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Although this w a s task more difficult than it first appeared to be "Insurer" for
purposes of the act is any entity that is:
Licensed or admitted for primary or excess insurance in any state
A surplus lines carrier on the quarterly NAIC listing of alien insurers
Approved by a federal agency in connection with maritime, energy, or aviation
activity
A State residual market or workers compensation fund
Altogether well over 2000 insurance companies are participating in the program.
But understandably programs with current federal exposure like the National Flood
Insurance program are not included.
Also insurance products including assumed reinsurance, health and life insurance
and for now group life insurance are excluded from the program.
Slide 5:
Like any program there are restrictions.
• Deductibles increase over the 3 year term of the program and are expressed as a
percent of an insurer's direct earned premium.
• The Federal Governments share under the program is equal to 90% of that
portion of insured losses that exceed the insurer deductible.
• While there is a cap on total insured losses: if total losses exceed the cap
Congress will determine the procedures for and source of payments for those
excess losses.
• The program is scheduled to end on December 31, 2005
(Cite Riot Reinsurance Crime Insurance experience)
Slide 6:
There are provisions under the act whereby the Secretary can recoup certain
government payments
Mandatory recoupment is triggered whenever there is a loss and the insurance
industry paid losses are less than that year's industry retention.
The annual industry retention is equal to the lesser of a fixed dollar amount or the
aggregate insured losses which is defined as all losses associated with an act of
terrorism that are within an insurer's deductible and the 1 0 % of insured loss quota
share.
Under mandatory recoupment The Secretary will establish Terrorism Loss Risk
Sharing Premiums of up to a 3 % surcharge on all commercial policy premiums
In addition The Secretary can depending on economic conditions impose an
additional discretionary recoupment program whereby additional surcharges on
insurance premiums can be collected.
Slide 7:

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JS-626: Presentation of Terrorism Risk Insurance Program by Director Jeffrey Bragg

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To illustrate lets assume a loss covered by the program during the third year of the
program of $20B. This Loss is greater than the insurance industry's m a x i m u m
aggregate retention that year of $15B.
Further assume that 100 insurance companies were exposed to that loss and that
their collective direct earned premiums totaled $20B.
The third year deductible of 15% equals $3B for these 100 companies and their
1 0 % quota share equals another $1.7B making the insurer's share of the total paid
losses for the companies involved $4.7B
Under this example Treasury would require all companies covered under the
program to impose up to a 3 % premium surcharge on all policy holders until an
additional $10.3B had been recouped. This spreading of the risk allows The
Treasury Department to recover government losses paid up to the insurance
industry's m a x i m u m aggregate retention.
Additionally depending on economic considerations the Secretary of the Treasury
has discretionary authority to impose additional recoupment surcharges and could
recoup up to the entire $20B loss.
Slide 8:
The Terrorism Risk Insurance Program or T.R.I.P. is itself under Treasury's
Department for Domestic Finance (headed by Under Secretary Peter Fisher) and
the Office of Financial Institutions (headed by Assistant Secretary W a y n e
Abemathy).
TRIP'S responsibilities include all of the operational functions necessary to
effectively implement and manage the program, including all claims management
and processing functions, as well as all auditing functions
TRIP is in essence the insurance company created by the new law.
However 2 additional Treasury offices play an important part in the program.
Treasury's Office of Economic Policy will be conducting studies associated with
coverage issue under TRIA and the overall effectiveness of the program.
The office of Financial Institutions Policy will take the lead in promulgating rules and
regulations.
TRIP will work closely with both offices as we coordinate our activities
Slide 9:
Already substantial progress has been made in implementing the program
The Office of Financial Institutions Policy has been extremely active in
implementing the regulations necessary to support the new act
• They
•
•
•
•

have issued
4 interim guidance notices
2 interim final rules
1 notice of proposed rulemaking
A final rule.

Slide 10:
The final rule published in the federal register on July 11 set forth key definitions

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JS-626: Presentation of Terrorism Risk Insurance Program by Director Jeffrey Bragg

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that Treasury will use in implementing the program.
Among other things this rule addresses:
• Guidance on the Lines of Insurance covered under the act
• Which entities are eligible for participation
• Control and affiliation issues
The Insurance industry generally and the Oil specifically have been very helpful in
representing your views to the Treasury Department on these and other issues.
However I urge all of you to review these regulations closely to m a k e certain you
are in compliance with the act and can take advantage of this important federal
protection.
Slide 11:
One of the most debated issues in the new regulations was the definitions of
affiliate and what constitutes control. The issue is important w h e n it c o m e s to
determining the appropriate deductible for any affiliated insurance group.
Conclusive Control Exists
• if an insurer has power to vote 25% or more of any class of voting securities of the
other insurer.
• if an insurer controls the election of a majority of the Directors or Trustees of the
other insurer.
Presumptive Control Exists
• If the Secretary of the Treasury determines that an insurer exercises a controlling
influence over another insurer.
• In determining presumptive control The Secretary will consider approximately 11
other factors outlined in the regulations the presence of any 2 leading to a
determination of presumptive control
Slide 12:
We can however gain some comfort in the fact that these rules envision that there
will be s o m e confusion over issues like the definition of an insurer or what
constitutes controlling interest.
We have received many questions on these and many other topics. So if after
reviewing these regulations in s o m e detail you still have questions you m a y request
an interpretation of the regulations as they apply to your specific situation.
In submitting your request it is not necessary to compose a lengthy dissertation and
w e will m a k e every effort to respond to your issues in a timely manner
Slide 13:
The ink is not yet dry on there final rules and we are already working to finalize a
second set of rules which will address such issues as:
• Make available requirements
• Disclosure requirements
• State residual markets
Unfortunately this process is really never ending. Thousands of pages of rules,

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JS-626: Presentation of Terrorism Risk Insurance Program by Director Jeffrey Bragg

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definitions, procedures, and regulations will be drafted, debated, and finalized over
the next 3 years. And believe m e there are still many issues to deal with.
Slide 14:
Even though much has been accomplished, considerable, considerable work
remains. Many in the industry have expressed concerns over such program issues
as:
• Adverse selection
• Continued lack of reinsurance availability
• Huge exposures particularly in worker's compensation
• Availability/Affordability
In fact most of these issues have been volatile at various and numerous times in
the past. And TRIA w a s passed in part to address them. These issues are in fact
characteristic of other past Federal Insurance programs.
I believe that over time the free market will help solve these problems while TRIA
contributes overtime to help build capacity and stabilize the market.
Slide 15:
Right now, what keeps me awake at night are operational issues. We have a huge
amount of work ahead of us and not very much time to accomplish it.
In addition to having a tremendous amount to accomplish to get our program up
and running w e have also had to put emergency procedures in place so that should
there be a loss before w e are fully operational w e will be able to respond to that
loss.
In essence this means working on a duel approach to make certain we are
prepared.
So as we go about implementing all of issues you see before you and more let me
describe the last bullet on the slide in more detail.
Through out my career both in the private sector (with PMSC, IMSG and REM) and
with m y government service I have been a strong advocate of outsourcing functions
that can be better handled by others with more experience and expertise.
I have also where possible created partnerships between the government and
private sector insurance industry which draws on the strengths of both entities to
create a more successful program. That was why w e created the Write Your O w n
program for the National Flood Insurance Program many years ago.
Therefore it should come as no surprise that in implementing this program we will
not be creating a huge infrastructure.
Rather we will establish a virtual company that permits us to form new partnerships
with the private insurance sector, harnessing that Insurance Industry's talents and
skills to make this an effective streamlined operation.
Slide 16
In addition to the overall operational issues we just discussed we also know there
are many specific claims issues to deal with including the speed with which w e will
be able to reimburse insures all the way down the list to the mechanisms by which
w e will audit our own payments.

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JS-626: Presentation of Terrorism Risk Insurance Program by Director Jeffrey Bragg

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Hopefully it will come as good news to you that w e intend that claims m a d e under
the program will be processed and paid in manner highly consistent with what you
now experience with the reinsurance industry.
In implementing all of the requirements necessary to pass our own audits, as well
as the as sure as you are sitting here expected G A O audits, w e will be mindful of
current insurance industry practices standards and needs. W e will do our best to
meet those needs and protect the people's assets without overreaching.
Conclusion:
Ladies and gentlemen like all of you I sincerely hope and pray that this program will
never be tested. But with your help w e can at least try to be prepared should our
nation ever again be required to call upon our industry to respond to the needs of
our insured's
Once again I look forward to working with you on this new venture and in closing
thank you for future support and your time today
Related Documents:
• Terrorism Risk Insurance Program Slides

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4/28/2005

Terrorism Risk Insurance Program
Jeffrey S. Bragg
Executive Director

1

Terrorism Risk Insurance Program
Purpose
• Address Insurance Market Disruptions
• Ensure Availability and Affordability of Commercial P&C
Terrorism Coverage
• Provide Transition Period
• Stabilize and Build Capacity in Private Market
• Strengthen Overall Economy
2

Terrorism Risk Insurance Program
Summary of Program
Certifies Act of Foreign Terrorism
Resulting in D a m a g e > 5 M
IN
United States
U.S. Missions
U.S. Air Carriers
U.S. Vessels
FOR
Commercial Lines P & C
Workers Compensation

Terrorism Risk Insurance Program
Property & Casualty Insurance
Means commercial lines including excess, workers'
compensation, and surety
NAIC Annual statement of Premiums + Losses (Statutory
Page 14)
Does not mean:
Federal crop insurance
Private mortgage insurance
Financial guaranty insurance
Medical malpractice insurance
Health or life insurance, including group life
Flood insurance
Reinsurance or retrocessional insurance
4

Terrorism Risk Insurance Program
Restrictions
Temporary Program
Expires 2005
Company Deductible
2003
7%
2004
10% y + 10% Insured Loss (after the deductible)
2005
15%
$100 Billion Annual Cap on Insured Losses

5

Terrorism Risk Insurance Program
Recoupment
• The Secretary will establish "Terrorism Loss Risk-Spreading
Premium" (TLRS Premiums) to recoup federal TRIP assistance.
• TLRS Premiums will be imposed on policies, collected by
insures, and remitted to the Treasury.
• Mandatory TLRS Premiums up to 3% of policy premiums for any
policy.
• The Secretary may make adjustments for:
- Urban & Smaller Commercial & Rural Areas, and
- Different lines of insurance.
• Discretionary Recoupment

6

Terrorism Risk Insurance Program
Recoupment Example
$20 B Insured Loss

Discretionary
Recoupment
$5B

100 Insurers Impacted

DEP 100 Insures = $20 B
$15 B 3rd Year

Trip
Pays $15.3 B

Mandatory
Recoupment
$10.3 B

15% deductible = $3 B

Industry Aggregate Retention
10% quota share = $1.7 B
100 Companies Pay $4.7 B

$4.7 B Paid by 100 companies

Terrorism Risk Insurance Program
Treasury Offices
T.R.I.P.

O.E.P
Group Life
Individual Life
Personal Lines
2005 m a k e available extension

Implementation
Program Management
Program Operations
Claims Management/
Processing
Financial/Operational
Efficiency

F.I.P
Interim Rules
Program
Regulations

8

• 4 Interim Guidance Notices
• 2 Interim Final Rule
• Proposed Rule
- State residual markets
- State Worker's C o m p Fund
-••Hire Executive Director
9

Terrorism Risk Insurance Program
First Final Rule
• Published July 11,2003
• Provides key definitions, such as "Act of Terrorism," "Insurer,"
and "Affiliate"
• Identifies lines of Commercial Property & Casualty Insurance
included in the Program
• Addresses Direct Earned Premium and calculation between
personal and commercial lines
• Establishes process for insurers to request interpretations from
TRIP
10

Terrorism Risk Insurance Program
Final Rule: Definition of "Affiliate"
& "Control"
Section 102(6) of the Act defines an "insurer" to include "any affiliate thereof."
"Affiliate" means "with respect to any insurer, an entity that controls, is controlled
by or is under c o m m o n control with the insurer."
What is Control?
"Control" exists:
• (1) if an insurer directly or indirectly or acting through 1 or more other persons
owns, controls, or has power to vote 25 percent or more of any class of voting
securities of the other insurer (this is conclusive of control);
• (2) if an insurer controls in any manner the election of a majority of the directors
or trustees of the other insurer (this is conclusive of control);
• (3) if the Secretary determines, after notice and opportunity for hearing, that the
insurer directly or indirectly exercises a controlling influence over the
m a n a g e m e n t or policies of the other insurer (this is presumptive of control).

Terrorism Risk Insurance Program
Final Rule: Requests
Insurers can request a determination of "controlling influence"
of affiliates
- Written submission to TRIP
- Treasury can ask for more information or for an informal oral
hearing
- Determination generally within 60 days
Insurers can request a general interpretation of statute
- Written submission to TRIP
12

Terrorism Risk Insurance Program
Pending Rulemaking
Treasury is in the process of finalizing an interim final rule and a
notice of proposed rule, which will next address
- Make available requirements
- Disclosure requirements
- State residual market mechanisms

13

Terrorism Risk Insurance Program
Program Issues

• Adverse selection
• Availability/Afordability
• Huge Exposure (ESP Workers Compensation)
• State Exemptions

14

Terrorism Risk Insurance Program
Operational Issues
Recruit/Hire TRIP Staff
Establish Emergency Implementation Plan
Establish/Implement Claims Procedures
Establish Audit/Enforcement Procedures
Policy Surcharge Recoupment Procedures
Final Rules
Establish "Virtual" Company

15

Speed with which TRIP will act on a request for reimbursement.
Payment of allocated loss adjustment expenses.
Level of documentation required to support a claim.
Unique data elements required in reporting.
Selection of vendor to administer reimbursement process.
Treasury selection of Audit Vender
Partial Payments 16

JS-627: Treasury A n d I R S Issue Final Regulations For Golden Parachute Payments

Page 1 of 1

PR CSS R O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
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August 1, 2003
JS-627
Treasury And IRS Issue Final Regulations For Golden Parachute Payments
Today, the Treasury Department and the IRS issued final regulations for
"golden parachute payments." Treasury and IRS also issued a new
revenue procedure for valuing stock options that are treated as golden
parachute payments.
Under the Internal Revenue Code, a company cannot deduct "excess"
golden parachute payments, and an executive has to pay a 20-percent
excise tax on the payments. A golden parachute payment is a payment
m a d e in connection with a change in ownership or control of a company.
The final regulations generally follow the proposed regulations that were
published in February of 2002. As under the proposed regulations, stock
options granted or vested as part of a change of control are parachute
payments. The new revenue procedure revises an earlier valuation
method for stock options. The valuation method continues to allow the use
of Black-Scholes and certain other option valuation methods, but it
provides new flexibility to m a k e certain adjustments for early termination of
employment or changes in volatility of stock price.
The final regulations are effective for payments made in connection with a
change of ownership or control occurring on or after January 1, 2004.
Taxpayers cannot rely on the 2002 proposed regulations after that date.
The final regulations and the revenue procedure are attached.
-30-

Related Documents:
• Final Regulations
• Revenue Procedures

hrrn://www.rreas._?ov/r)ress/releases/is627.htm

V7/?0flS

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1
[TD 9083]
RIN: 1545-AH49
Golden Parachute Payments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations relating to golden parachute
payments under section 280G of the Internal Revenue Code. These regulations
incorporate changes and clarifications to reflect comments received concerning the
proposed regulations primarily concerning the small corporation exemption, prepayment
of the excise tax, and the definition of change in ownership or control.
DATES: Effective Date: August 4, 2003. These regulations apply to any payment that
is contingent on a change in ownership or control if the change in ownership or control
occurs on or after January 1, 2004.
Comments on the collection of information in §1.280G-1, Q/A-7(a) should be
received by October 3, 2003.
ADDRESSES: Comments on the collection of information should be sent to the Office
of Management and Budget, Attn: Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP,

Washington, D C 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Erinn
Madden at (202) 622-6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT
The collection of information in this final rule has been reviewed and, pending
receipt and evaluation of public comments, approved by the Office of Management and
Budget (OMB) under 44 U.S.C. 3507 and assigned control number 1545-1851.
The collection of information in this regulation is in §1.280G-1, Q/A-7(a). This

information is a brief description of all material facts concerning all payments whic
would be parachute payments (but for §1.280G-1, Q/A-6). This information may be
used by certain corporations with no readily tradeable stock (assuming certain
shareholder approval requirements are also met) to determine if the payments to a
disqualified individual are exempt from the definition of parachute payments. The
collection of information is voluntary. The likely respondents are business or other
profit institutions.
Comments on the collection of information should be sent to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office
of Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the collection of information in §1.280G-1, Q/A7(a) should be received by October 3, 2003. Comments are specifically requested
2

concerning:
Whether the collection^] of information is necessary for the proper performance
of the functions of the Internal Revenue Service, including whether the information will
have practical utility;
The accuracy of the estimated burden associated with the collection of
information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the collection of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of service to provide information.
Estimated total annual reporting and/or recordkeeping burden: 12,000 hours.
Estimated average annual burden hours per respondent: 15 hours.
Estimated number of respondents and/or recordkeepers: 800
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a valid control number assigned by the
Office of Management and Budget.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue
3

law. Generally, tax returns and tax return information are confidential, as required by 26
U.S.C. 6103.
Background
This document contains amendments to 26 CFR part 1 under section 280G of
the Internal Revenue Code (Code). Sections 280G and 4999 of the Code were added
to the Code by section 67 of the Deficit Reduction Act of 1984, Public Law 98-369 (98
Stat. 585). Section 280G was amended by section 1804(j) of the Tax Reform Act of
1986, Public Law 99-514 (100 Stat. 2807), section 1018(d) of the Technical and
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3581) and section
1421 of the Small Business Job Protection Act of 1996, Public Law 104-188 (110 Stat.
1755).
Section 280G denies a deduction to a corporation for any excess parachute
payment. Section 4999 imposes a 20-percent excise tax on the recipient of any excess
parachute payment. Related provisions include section 275(a)(6), which denies the
recipient a deduction for the section 4999 excise tax, and section 3121(v)(2)(A), which
relates to the Federal Insurance Contributions Act.
On February 20, 2002, a notice of proposed rulemaking (REG-209114-90, 20022 I.R.B. 576), was published in the Federal Register at 67 FR 7630 (the 2002 proposed
regulations) and corrected in the Federal Register at 67 FR 42210 on June 21, 2002.
No hearing was requested or held. The IRS received written and electronic comments
responding to the notice of proposed rulemaking. After consideration of the comments,
the 2002 proposed regulations are adopted as amended by this Treasury decision. The
4

significant revisions are discussed below.
Explanation of Provisions and Summary of Comments
Overview
Section 280G(b)(2)(A) defines a parachute payment as any payment that meets
all of the following four conditions: (a) the payment is in the nature of compensation; (b)
the payment is to, or for the benefit of, a disqualified individual; (c) the payment is
contingent on a change in the ownership of a corporation, the effective control of a
corporation, or the ownership of a substantial portion of the assets of a corporation (a
change in ownership or control); and (d) the payment has (together with other payments
described in (a), (b), and (c) of this paragraph with respect to the same individual) an
aggregate present value of at least 3 times the individual's base amount. Section
280G(b)(2)(B) provides that the term parachute payment also includes any payment in
the nature of compensation to, or for the benefit of, a disqualified individual if the
payment is pursuant to an agreement that violates any generally enforced securities
laws or regulations (securities violation parachute payment).
Section 280G(b)(1) defines the term excess parachute payment as an amount
equal to the excess of any parachute payment over the portion of the disqualified
individual's base amount that is allocated to such payment. For this purpose, the
portion of the base amount allocated to a parachute payment is the amount that bears
the same ratio to the base amount as the present value of the parachute payment bears
to the aggregate present value of all such payments to the same disqualified individual.
Generally, excess parachute payments may be reduced by certain amounts of

5

reasonable compensation. Section 280G(b)(4)(B) provides that, except in the case of
securities violation parachute payments, the amount of an excess parachute payment is
reduced by any portion of the payment that the taxpayer establishes by clear and
convincing evidence is reasonable compensation for personal services actually
rendered by the disqualified individual before the date of the change in ownership or
control. Such reasonable compensation is first offset against the portion of the base
amount allocated to the payment.
Exempt Payments
Section 280G specifically exempts from the definition of the term parachute
payment several types of payments that would otherwise constitute parachute
payments. Deductions for payments exempt from the definition of parachute payment
are not disallowed by section 280G, and such exempt payments are not subject to the
20-percent excise tax of section 4999. In addition, such exempt payments are not taken
into account in applying the 3-times-base-amount test of section 280G(b)(2)(A)(ii).
1. Tax-Exempt Entities
Q/A-6 of the 2002 proposed regulations provides that a payment with respect to
a tax-exempt entity that would otherwise constitute a parachute payment is exempt from
the definition of the term parachute payment if certain conditions are satisfied. First, the
payment must be made by a corporation undergoing a change in ownership or control
that is a tax-exempt organization. As defined in the 2002 proposed regulations, a taxexempt organization is any organization described in section 501(c) that is subject to
any express statutory prohibition against inurement of net earnings to the benefit of any

6

private shareholder or individual, an organization described in sections 501(c)(1) or
501(c)(21), any religious or apostolic organization described in section 501(d), or any
qualified tuition program described in section 529. Second, the organization must meet
the definition of tax-exempt organization, as defined in the 2002 proposed regulations,
both immediately before and immediately after the change in ownership or control.
One commentator requested the elimination of the requirement that the
payment must be made by a tax-exempt organization. Instead, the commentator
suggested that the regulations require only that the payment be approved by the taxexempt organization. The exemption included in Q/A-6 of the 2002 proposed
regulations for certain tax-exempt entities described in section 501(c) is premised on the
fact that those entities are subject to a statutory prohibition on private inurement.
Requiring merely the approval of a tax-exempt organization would allow corporations
not subject to the inurement prohibition to make the payments and, thus, to avoid the
application of section 280G. Thus, these regulations retain the requirements contained
in the 2002 proposed regulations.
2. Small Corporation Exemption
Under section 280G and the 2002 proposed regulations, the term parachute
payment does not include any payment to a disqualified individual with respect to a
corporation which (immediately before the change in ownership or control) was a small
business corporation (as defined in section 1361(b) but without regard to section
1361 (b)(1 )(C) thereof). See also, Q/A-6(a)(1).
Commentators indicated that the 2002 proposed regulations do not clearly

7

address whether a corporation that does not elect to be treated as an S Corporation, but
could make the election (because aside from the election the corporation otherwise
meets the requirements to be treated as an S corporation), may use the exemption
under Q/A-6(a)(1). These regulations clarify that a corporation that could elect to be
treated as an S Corporation under the Code, but does not do so, may nevertheless use
the exemption of Q/A-6(a)(1) for any payments to a disqualified individual.
In addition, commentators recommended that the final regulations provide that a
corporation domiciled outside the United States can qualify for both the small business
corporation exception and the shareholder approval exception. With respect to the
small business corporation exception, Treasury and the IRS do not have the authority to
expand this exception to include foreign corporations. Section 280G(b)(5)(A)(i) refers to
"a small business corporation (as defined in section 1361(b) but without regard to
paragraph (1)(C) thereof)." A small business corporation as defined in section 1361(b)
must be a domestic corporation, and section 1361(b)(1)(C) merely addresses the
existence of a nonresident alien as a shareholder. It is clear from the statute that the
small business corporation exception cannot apply to a foreign corporation.
On the other hand, Treasury and the IRS believe that a foreign corporation may
qualify for the shareholder approval exception, discussed below, if all of the applicable
requirements are satisfied. Because the statute and regulations permit this result, it is
not necessary to specify the treatment in the final regulations.
3. Shareholder Approval
Additionally, under section 280G and the 2002 proposed regulations, the term

8

parachute payment does not include any payment to a disqualified individual with
respect to a corporation if (i) immediately before the change in ownership or control, no
stock in such corporation was readily tradeable on an established securities market or
otherwise, and (ii) certain shareholder approval requirements are met.
Section 280G(b)(5)(B) provides that the shareholder approval requirements are
met if two conditions are satisfied. First, the payment is approved by a vote of the
persons who owned, immediately before the change in ownership or control, more than
75 percent of the voting power of all outstanding stock of the corporation. Second,
there is adequate disclosure to shareholders of all material facts concerning all
payments which (but for this rule) would be parachute payments with respect to a
disqualified individual.
Q/A-7(b) of the 2002 proposed regulations provides rules to determine the
shareholders who are entitled to vote. In response to comments, Q/A-7(b)(1) is revised
to clarify that only stock that would otherwise be entitled to vote is considered
outstanding and is entitled to vote for purposes of Q/A-7(b). Thus, for example,
because an individual who only holds options generally would not be entitled to vote,
such individual will not be considered to hold outstanding stock entitled to vote for
purposes of Q/A-7.
Q/A-7(b)(2) of the 2002 proposed regulations includes a rule of administrative
convenience allowing the corporation to identify shareholders eligible to vote for this
purpose using the shareholders of record at the time of any vote taken in connection
with a transaction or event giving rise to the change in ownership or control within the
9

three-month period ending on the date of the change in ownership or control.
Several commentators suggested that the final regulations permit corporations to
determine the shareholders of record at any time during the three months prior to the
change in ownership or control. Other commentators requested that the time be
expanded in the final regulations. In response to these comments, these regulations
expand this rule to allow corporations to determine the shareholders of record on any
day during the six-month period ending on the date of the change in ownership or
control, regardless of whether there was a vote on that day.
Q/A-7(b)(4) is revised to clarify that stock held (directly or indirectly) by a
disqualified individual who would receive a parachute payment if the shareholder
approval requirements of Q/A-7 are not met is not entitled to vote with respect to a
payment to be made to any disqualified individual. For example, assume E is a
disqualified individual with respect to Corporation X. E's base amount is $100,000, and
on a change in ownership or control of X, E will receive contingent payments of
$295,000. Corporation X undergoes a change in ownership or control. In determining
the persons who are entitled to vote under Q/A-7(b), any stock held by E is considered
outstanding and E is entitled to vote. If E would receive contingent payments of
$305,000 on the change in ownership or control, any stock held by E is not considered
outstanding and is not entitled to vote under Q/A-7 with respect to payments to any
disqualified individual.
An entity shareholder is not entitled to vote stock that it holds that is
constructively owned by a disqualified person who would receive a parachute payment

10

if the shareholder approval requirements of Q/A-7 are not met. Additionally, these
regulations provide in Q/A-7(b)(4) that if the person authorized to vote the stock of an
entity shareholder is a disqualified individual who would receive a parachute payment if
the requirements of Q/A-7 are not met, such person is not permitted to vote any of the
shares held by the entity shareholder. However, the entity shareholder is permitted to
authorize another equity interest holder in the entity shareholder to vote the otherwise
eligible shares or, in the case of a trust, another person eligible to vote on behalf of the
trust. Thus, for example, assume a partner owns one-third of a partnership; the partner
is authorized to vote on behalf of the partnership; the partnership owns stock in a
corporation; the partner is a disqualified individual with respect to the corporation; and
the corporation undergoes a change in ownership or control. Under these
circumstances, none of the stock held by the partnership is entitled to vote under Q/A-7.
However, the partnership is permitted to appoint an equity interest holder in the entity
shareholder (who is not a disqualified individual who would receive parachute payments
if the shareholder approval requirements of Q/A-7 are not met) to vote two-thirds of the
stock.
More generally, several commentators requested significant revisions to Q/A-7 to
reflect certain business practices. The revisions suggested by commentators include,
among other things, treating approval of a compensation agreement when the
agreement is executed as sufficient for Q/A-7 or deeming shareholders who acquire
stock after approval of any compensation agreements to consent to any parachute
payments contained in these agreements. While the Treasury Department and IRS

11

understand that the requirements of Q/A-7 m a y not coincide with certain business
practices, the requirements of Q/A-7 are based on the statutory framework provided by
Congress. The golden parachute provisions are intended to protect equity shareholders
whose interest in the corporation could be impaired by parachute payments to
disqualified individuals by discouraging these types of payments. The basic structure of
section 280G does not permit any approval or shareholder vote for a publicly traded
corporation. The exception for corporations that are not publicly traded is based on a
vote of those persons who hold shares immediately before the change in ownership or
control after adequate disclosure. The suggested revisions to the shareholder approval
requirements are inconsistent with these requirements and, accordingly, no changes
are made in these regulations.
Payment of the Excise Tax under section 4999
Q/A-11(c) of the 2002 proposed regulations provided a mechanism to allow a
disqualified individual to prepay the excise tax under section 4999 in certain
circumstances. Thus, the requirements of section 4999 may be satisfied in the year of
the change in ownership or control (or the first year for which a payment contingent on a
change in ownership or control is certain to be made) even though the payment is not
yet includible in income (or otherwise received).
These regulations continue to allow the prepayment of the excise tax in the year
of the change in ownership or control. These regulations also provide that a taxpayer
may prepay the excise tax in a later year. For purposes of prepayment, these
regulations require the payor and disqualified individual to treat the payment of the

12

excise tax consistently and require the payor to satisfy its obligations under section
4999. These regulations clarify that the prepayment of the excise tax is based on the
present value of the excise tax that would be due in the year the excess parachute
payment would actually be paid. For purposes of determining the present value of the
excise tax due, the discount rate is determined in accordance with Q/A-32.
Thus, for example, assume that E is a disqualified individual with respect to
Corporation X, that X undergoes a change in ownership or control, and that E receives
parachute payments, including a series of annual payments to be made for the next 10
years. Assume further that all other parachute payments to E are made in the year of
the change in ownership or control (with payment of the excise tax and compliance by X
with section 4999(c)). Under these regulations, if three years after a change in
ownership or control, X and E agree that E will prepay the excise tax related to the
remaining annual payments, and that X will satisfy its obligations under section 4999(c)
related to these payments, E is permitted to prepay the excise tax with respect to the
remaining payments.
The 2002 proposed regulations provided that the prepayment of the excise tax
would not be available with respect to certain payments, including payments related to
health benefits or coverage. Commenters requested that the prepayment option be
expanded to include health benefits or coverage. Treasury and the IRS do not consider
the available valuation methods sufficient to allow projections of individual payments
related to health coverage or health benefits for this purpose. In the event that valuation
methods change or there is otherwise greater certainty with respect to the valuation of

13

such benefits, Treasury and the IRS m a y consider additional guidance that would m a k e
prepayment of the excise tax with respect to such benefits available.
Treatment of Options
Q/A-13 of the 2002 proposed regulations provides that the transfer of an option is
treated as a payment when the option becomes substantially vested without regard to
whether the option has an ascertainable fair market value under §1.83-7(b) of the
regulations. Thus, the vesting of an option is treated as a payment in the nature of
compensation for purposes of section 280G. Vested is defined in these regulations as
substantially vested within the meaning of §1.83-3(b) and (j) or the right to the payment
is not otherwise subject to a substantial risk of forfeiture within the meaning of section
83(c).
The 2002 proposed regulations, and the 1989 proposed regulations, provided
that options must be valued under the facts and circumstances of a particular case.
Factors relevant to the determination include, but are not limited to: the difference
between the option's exercise price and the value of the option property, the probability
of the value of the option property increasing or decreasing, and the length of the period
during which the option can be exercised.
In coordination with the issuance of the 2002 proposed regulations, the
Commissioner issued two revenue procedures under section 280G providing additional
guidance on the valuation of options, Rev. Proc. 2002-13, 2002-8 I.R.B. 549, and Rev.
Proc. 2002-45, 2002-27 I.R.B. 40. These revenue procedures provide guidance on the
use of option valuation methods, and provide that using only the spread between the
14

exercise price and the value of the option property is not an adequate method for
valuing an option. The revenue procedures also provide a safe harbor method of
valuation based on a table. Comments received in response to these revenue
procedures raised issues related to the difficulty of valuing options in the context of a
change in ownership or control, particularly with respect to assumptions regarding the
term of the option and the volatility. In coordination with the issuance of these
regulations, the IRS is issuing a revenue procedure restating the previous revenue
procedures and addressing these comments.
Disgualified Individuals
The 2002 proposed regulations provide that an individual is a disqualified
individual if, at any time during the disqualified individual determination period, the
individual is an employee or independent contractor of the corporation and is, with
respect to the corporation, a shareholder (see Q/A-17), an officer (see Q/A-18), or (3) a
highly-compensated individual (see Q/A-19). The 2002 proposed regulations provide
that whether an individual is an officer with respect to a corporation is determined based
on all the facts and circumstances in the particular case (such as the source of the
individual's authority, the term for which the individual is elected or appointed, and the
nature and extent of the individual's duties).
These regulations retain this rule concerning officers. However, under Q/A-18 of
these regulations any individual who has the title of officer is presumed to be an officer
unless the facts and circumstances demonstrate that the individual does not have the
authority of an officer. However, an individual who does not have the title of officer may
15

nevertheless be considered an officer if the facts and circumstances demonstrate that
the individual should be considered to be an officer.
N on vested Payments under Q/A-24
Under Q/A-24(c) of the 2002 proposed regulations, only a portion of certain
nonvested payments is treated as contingent on a change in ownership or control.
Specifically, Q/A-24(c) applies to a payment that becomes vested as a result of a
change in ownership or control to the extent that (i) without regard to the change in
ownership or control, the payment was contingent only on the continued performance of
services for the corporation for a specified period of time; and (ii) the payment is
attributable, at least in part, to the performance of services before the date the payment
is made or becomes certain to be made.
These regulations retain these rules regarding the calculation of the amount of
the payment that is considered contingent on a change in ownership or control, with one
revision. Under the 2002 proposed regulations, the payment calculation under Q/A24(c) could not exceed the amount of the accelerated payment. A portion of a payment
is contingent on a change in ownership or control if there is accelerated vesting, even if
there is no accelerated payment. In that case, the amount attributable to the lapse of
the obligation to perform services is 1 percent of the present value of the future payment
multiplied by the number of full months between the date that the individual's right to
receive the payment is vested and the date that, absent the acceleration, the payment
would have been vested. Under these final regulations, the total portion of such
payment treated as contingent on the change in ownership or control cannot exceed the
16

present value of the accelerated payment.
Change in Ownership or Control
A change in ownership or control is defined in Q/A-27, 28, and 29 of the 2002
proposed regulations. Under Q/A-27 of the 2002 proposed regulations, a change in
control of a corporation occurs on the date that any one person (or persons acting as a
group) acquires ownership or stock of the corporation that, together with stock held by
such person or group, has more than 50 percent of the total fair market value or total
voting power of the corporation.
Under Q/A-28 of the 2002 proposed regulations, a change in the effective control
of a corporation is presumed to occur on the date that either (1) any one person (or
more than one person acting as a group) acquires (or has acquired during the 12-month
period ending on the date of the most recent acquisition by such person or persons)
ownership of stock of the corporation possessing 20 percent or more of the total voting
power of the stock of such corporation, or (2) a majority of members of the corporation's
board of directors is replaced during any 12-month period by directors whose
appointment or election is not endorsed by a majority of the members of the
corporation's board of directors prior to the date of the appointment or election.
Under Q/A-29 of the 2002 proposed regulations, a change in the ownership of a
substantial portion of a corporation's assets occurs on the date that any one person (or
more than one person acting as a group) acquires (or has acquired during the 12-month
period ending on the date of the most recent acquisition by such person) assets from
the corporation that have a total gross fair market value equal to or more than one third

17

of the total gross fair market value of all of the assets of the corporation immediately
prior to such acquisition.
These regulations generally follow the same approach as the 2002 proposed
regulations. Some commenters suggested that these three provisions explicitly address
whether more than one change in ownership or control can occur in a single
transaction. In response to these comments, these regulations explicitly adopt the "one
change" rule that historically has been applied by the IRS. These regulations provide
that if a corporation undergoes a change in ownership or control as described in either
Q/A-27 or Q/A-29, the other corporation involved in the transaction does not undergo a
change in ownership or control.1 As these regulations apply, in any transaction
involving two corporations, if one has a change in ownership or control under Q/A-27 or
29, the other corporation does not also have a change in ownership or control, under
either Q/A-27 or 29. Under these regulations, Q/A-28, which relates to effective control,
provides that there is no change in effective control of a corporation in a transaction in
which the other corporation has a change of control under Q/A-27 or 29.
Commentators also requested that the final regulations define gross fair market
value for purposes of Q/A-29. Under Q/A-29 of these regulations, gross fair market
value is defined as the value of the assets of the corporation, or the value of the assets
being disposed of, determined without regard to any liabilities associated with such
assets. This definition is used throughout these regulations.

1

Because Q/A-46 provides that all m e m b e r s of an affiliated group are treated as one
corporation, even transactions involving multiple entities generally are treated as only
two corporations for purposes of section 280G.
18

For purposes of determining whether there is a change in ownership or control
under

QLI/K-21

through Q/A-29 of the 2002 proposed regulations, two or more persons

may be considered as acting as a group. The 2002 proposed regulations provide that,
for purposes of determining whether two or more persons are acting as a group, a
person who owns stock in both corporations involved in a transaction (an overlapping
shareholder) is treated as acting as a group with respect to the other shareholders in a
corporation only to the extent of such person's ownership of stock in that corporation
prior to the transaction, and not with respect to his or her ownership in the other
corporation. This rule is consistent with the interpretation of the 1989 proposed
regulations by the IRS.
Commentators suggested different alternatives to the overlapping shareholder
rule of Q/A-27 through Q/A-29 of the 2002 proposed regulations. One commentator
suggested eliminating the overlapping shareholder rule and instead relying on the
presumption of Q/A-28 for all transactions. Under this approach it would be possible for
a transaction to result in one, two, or no change in ownership or control. Other
commentators suggested replacing the overlapping shareholder rule of the 2002
proposed regulations with a new rule based on section 355 or 382. Finally, another
commentator requested clarification of the application of the overlapping shareholder
rule of the 2002 proposed regulations under the 1989 proposed regulations.
These regulations retain the overlapping shareholder rule of the 2002 proposed
regulations. The group concepts in section 355 or 382 do not fit well with the overall
purpose of section 280G. Finally, these regulations are effective with respect to
19

changes in ownership or control that occur after January 1, 2004, and to payments that
are contingent on such changes. These regulations do not provide any transitional
rules for the application of the overlapping shareholder rules for prior periods both
because these regulations are not effective for prior periods and because the positions
set forth in 2002 proposed regulations are merely clarifications of the positions taken by
the IRS under section 280G (illustrated by the 1989 proposed regulations).
International Issues
Commentators recommended that the final regulations provide that a disqualified
individual who, during the disqualified individual determination period, was a
nonresident alien and was not subject to income tax in the United States on wages
earned from the affiliated group, not be subject to the excise tax. Treasury and the IRS
do not believe that they have the authority to preclude application of the excise tax to a
nonresident alien under these circumstances. Accordingly, the final regulations do not
include any special rules for excess parachute payments received by nonresident
aliens.
Commentators also requested clarification that, even though parachute
payments made by a foreign subsidiary of a U.S. corporation may not be deductible,
such payments reduce the foreign subsidiary's earnings and profits. Because this issue
has implications beyond section 280G and foreign subsidiaries, it is not addressed in
these regulations.
Effective Date and Reliance
These regulations apply to any payments that are contingent on a change in
20

ownership or control if the change of ownership or control occurs on or after January 1,
2004.
Under the 2002 proposed regulations, taxpayers are permitted to rely on the
2002 proposed regulations until the effective date of the final regulations. Taxpayers
are permitted to rely on the 1989 proposed regulations with respect to payments
contingent on a change in ownership or control if that change occurs before January 1,
2004. A clarification in the 2002 proposed regulations does not support reliance on the
1989 proposed regulations for a position contrary to the provisions of the 1989
proposed regulations.
Taxpayers are permitted to rely on the 2002 proposed regulations, including for
purposes of amended returns with respect to the following: (1) that a shareholder who
owns stock with a fair market value of $1 million is not a disqualified individual and (2)
that the base amount includes the amount of compensation included in gross income
under section 83(b).
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. Section 1.280G-1 of these proposed regulations provides

for the collection of information. It is hereby certified that the collection of information i
these regulations will not have a significant economic impact on a substantial number of
small entities. This certification is based on the fact that, as indicated in the Paperwork
Reduction Act section earlier in the preamble, only 800 small entities are expected to be
21

affected by the regulations annually, and it is unlikely that any small entity would be

affected by these regulations more than once or twice in its existence. Therefore, an
analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding
these regulations was submitted to the Small Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regulations is Erinn Madden, Office of
the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the IRS and Treasury Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR is amended as follows:
PART I - INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31,
1986.
Paragraph 1. The authority citation for part 1 is amended by adding the following
entry in numerical order to read in part as follows:

22

Authority: 26 U.S.C. 7805 * * *
Section 1.280G-1 also issued under 26 U.S.C. 280G (b) and (e). * * *
Par. 2. Section §1.280G-1 is added to read as follows:
51.280G-1 Golden parachute payments.
The following questions and answers relate to the treatment of golden parachute
payments under section 280G of the Internal Revenue Code of 1986, as added by
section 67 of the Tax Reform Act of 1984 (Public Law No. 98-369; 98 Stat. 585) and
amended by section 1804(j) of the Tax Reform Act of 1986 (Public Law No. 99-514; 100
Stat. 2807), section 1018(d)(6)-(8) of the Technical and Miscellaneous Revenue Act of
1988 (Public Law No. 100-647; 102 Stat. 3581), and section 1421 of the Small Business
Job Protection Act of 1996 (Public Law No. 104-188; 110 Stat. 1755). The following is a
table of contents of subjects in this section:
Overview
Effect of section 280G . . . Q/A-1
Meaning of "parachute payment". . . Q/A-2
Meaning of "excess parachute payment". . . Q/A-3
Effective date of section 280G . . . Q/A-4
Exempt Payments
Exempt payments generally . . . Q/A-5
Exempt payments with respect to certain corporations . . . Q/A-6
Shareholder approval requirements . . . Q/A-7
Exempt payments under a qualified plan . . . Q/A-8
Exempt payments of reasonable compensation . . . Q/A-9
Payor of Parachute Payments . . . Q/A-10
Payments in the Nature of Compensation
The nature of compensation . . . Q/A-11
Property transfers . . . Q/A-12
Stock options . . . Q/A-13
Reduction of amount of payment by consideration paid . . . Q/A-14
Disgualified Individuals
Meaning of "disqualified individual". . . Q/A-15
Personal service corporation treated as individual. . . Q/A-16
23

Meaning of "shareholder". . . Q/A-17
Meaning of "officer". . . Q/A-18
Meaning of "highly-compensated individual". . . Q/A-19
Meaning of "disqualified individual determination period". . . Q/A-20
Meaning of "compensation". . . Q/A-21
Contingent on Change in Ownership or Control
General rules for determining payments contingent on change . . . Q/A-22
Payments under agreement entered into after change . . . Q/A-23
Amount of payment contingent on change . . . Q/A-24
Presumption that payment is contingent on change . . . Q/A-25, 26
Change in ownership or control. . . Q/A-27, 28, 29
Three-Times-Base-Amount Test for Parachute Payments
Three-times-base-amount test. . . Q/A-30
Determination of present value . . . Q/A-31,32, 33
Meaning of "base amount". . . Q/A-34
Meaning of "base period". . . Q/A-35
Special rule for determining base amount. . . Q/A-36
Securities Violation Parachute Payments . . . Q/A-37
Computation and Reduction of Excess Parachute Payments
Computation of excess parachute payments . . . Q/A-38
Reduction by reasonable compensation . . . Q/A-39
Determination of Reasonable Compensation
General criteria for determining reasonable compensation . . . Q/A-40
Types of payments generally considered reasonable compensation . . . Q/A-41, 42, 43
Treatment of severance payments . . . Q/A-44
Miscellaneous rules
Definition of corporation . . . Q/A-45
Treatment of affiliated group as one corporation . . . Q/A-46
Effective date
General effective date of section 280G. . . Q/A-47
Effective date of regulations. . . Q/A-48
Overview
Q-1: What is the effect of Internal Revenue Code section 280G?
A-1: (a) Section 280G disallows a deduction for any excess parachute payment
paid or accrued. For rules relating to the imposition of a nondeductible 20-percent
excise tax on the recipient of any excess parachute payment, see Internal Revenue
Code sections 4999, 275(a)(6), and 3121(v)(2)(A).

24

(b) The disallowance of a deduction under section 2 8 0 G is not contingent on the
imposition of the excise tax under section 4999. The imposition of the excise tax under
section 4999 is not contingent on the disallowance of a deduction under section 280G.
Thus, for example, because the imposition of the excise tax under section 4999 is not
contingent on the disallowance of a deduction under section 280G, a payee may be
subject to the 20-percent excise tax under section 4999 even though the disallowance
of the deduction for the excess parachute payment may not directly affect the federal
taxable income of the payor.
Q-2: What is a parachute payment for purposes of section 280G?
A-2: (a) The term parachute payment means any payment (other than an
exempt payment described in Q/A-5) that -(1) Is in the nature of compensation;
(2) Is made or is to be made to (or for the benefit of) a disqualified individual;
(3) Is contingent on a change -(i) In the ownership of a corporation;
(ii) In the effective control of a corporation; or
(iii) In the ownership of a substantial portion of the assets of a corporation; and
(4) Has (together with other payments described in paragraphs (a)(1), (2), and
(3) of this A-2 with respect to the same disqualified individual) an aggregate present
value of at least 3 times the individual's base amount.
(b) Hereinafter, a change referred to in paragraph (a)(3) of this A-2 is generally
referred to as a change in ownership or control. For a discussion of the application of
25

paragraph (a)(1), see Q/A-11 through Q/A-14; paragraph (a)(2), Q/A-15 through Q/A-21;
paragraph (a)(3), Q/A-22 through Q/A-29; and paragraph (a)(4), Q/A-30 through Q/A36.
(c) The term parachute payment also includes any payment in the nature of
compensation to (or for the benefit of) a disqualified individual that is pursuant to an
agreement that violates a generally enforced securities law or regulation. This type of
parachute payment is referred to in this section as a securities violation parachute
payment. See Q/A-37 for the definition and treatment of securities violation parachute
payments.
Q-3: What is an excess parachute payment for purposes of section 280G?
A-3: The term excess parachute payment means an amount equal to the excess
of any parachute payment over the portion of the base amount allocated to such
payment. Subject to certain exceptions and limitations, an excess parachute payment
is reduced by any portion of the payment which the taxpayer establishes by clear and
convincing evidence is reasonable compensation for personal services actually
rendered by the disqualified individual before the date of the change in ownership or
control. For a discussion of the nonreduction of a securities violation parachute
payment by reasonable compensation, see Q/A-37. For a discussion of the
computation of excess parachute payments and their reduction by reasonable
compensation, see Q/A-38 through Q/A-44.
Q-4: What is the effective date of section 280G and this section?
A-4: In general, section 280G applies to payments under agreements entered

26

into or renewed after June 14, 1984. Section 2 8 0 G also applies to certain payments
under agreements entered into on or before June 14, 1984, and amended or
supplemented in significant relevant respect after that date. This section applies to any
payment that is contingent on a change in ownership or control and the change in
ownership or control occurs on or after January 1, 2004. For a discussion of the
application of the effective date, see Q/A-47 and Q/A-48.
Exempt Payments
Q-5: Are some types of payments exempt from the definition of the term
parachute payment?
A-5: (a) Yes, the following five types of payments are exempt from the definition
of parachute payment -(1) Payments with respect to a small business corporation (described in Q/A-6 of
this section);
(2) Certain payments with respect to a corporation no stock in which is readily
tradeable on an established securities market (or otherwise) (described in Q/A-6 of this
section);
(3) Payments to or from a qualified plan (described in Q/A-8 of this section);
(4) Certain payments made by a corporation undergoing a change in ownership
or control that is described in any of the following sections of the Internal Revenue
Code: section 501(c) (but only if such organization is subject to an express statutory
prohibition against inurement of net earnings to the benefit of any private shareholder or
individual, or if the organization is described in section 501(c)(1) or section 501(c)(21)),
27

section 501(d), or section 529, collectively referred to as tax-exempt organizations
(described in Q/A-6 of this section); and
(5) Certain payments of reasonable compensation for services to be rendered
on or after the change in ownership or control (described in Q/A-9 of this section).
(b) Deductions for payments exempt from the definition of parachute payment
are not disallowed by section 280G, and such exempt payments are not subject to the
20-percent excise tax of section 4999. In addition, such exempt payments are not taken
into account in applying the 3-times-base-amount test of Q/A-30 of this section.
Q-6: Which payments with respect to a corporation referred to in paragraph
(a)(1), (a)(2), or (a)(4) of Q/A-5 of this section are exempt from the definition of
parachute payment?
A-6: (a) The term parachute payment does not include (1) Any payment to a disqualified individual with respect to a corporation which
(immediately before the change in ownership or control) would qualify as a small
business corporation (as defined in section 1361(b) but without regard to section
1361(b)(1)(C) thereof), without regard to whether the corporation had an election to be
treated as a corporation under section 1361 in effect on the date of the change in
ownership or control;
(2) Any payment to a disqualified individual with respect to a corporation (other
than a small business corporation described in paragraph (a)(1) of this A-6) if-(i) Immediately before the change in ownership or control, no stock in such
corporation was readily tradeable on an established securities market or otherwise; and

28

(ii) The shareholder approval requirements described in Q/A-7 of this section are
met with respect to such payment; or
(3) Any payment to a disqualified individual made by a corporation which is a
tax-exempt organization (as defined in paragraph (a)(4) of Q/A-5 of this section), but
only if the corporation meets the definition of a tax-exempt organization both
immediately before and immediately after the change in ownership or control.
(b) For purposes of paragraph (a)(1) of this A-6, the members of an affiliated
group are not treated as one corporation.
(c) The requirements of paragraph (a)(2)(i) of this A-6 are not met with respect to
a corporation if a substantial portion of the assets of any entity consists (directly or
indirectly) of stock in such corporation and any ownership interest in such entity is
readily tradeable on an established securities market or otherwise. For this purpose,
such stock constitutes a substantial portion of the assets of an entity if the total fair
market value of the stock is equal to or exceeds one third of the total gross fair market
value of all of the assets of the entity. For this purpose, gross fair market value means
the value of the assets of the entity, determined without regard to any liabilities
associated with such assets. If a corporation is a member of an affiliated group (which
group is treated as one corporation under A-46 of this section), the requirements of
paragraph (a)(2)(i) of this A-6 are not met if any stock in any member of such group is
readily tradeable on an established securities market or otherwise.
(d) For purposes of paragraph (a)(2)(i) of this A-6, the term stock does not
include stock described in section 1504(a)(4) if the payment does not adversely affect
29

the redemption and liquidation rights of any shareholder owning such stock.
(e) For purposes of paragraph (a)(2)(i) of this A-6, stock is treated as readily
tradeable if it is regularly quoted by brokers or dealers making a market in such stock.
(f) For purposes of paragraph (a)(2)(i) of this A-6, the term established securities
market means an established securities market as defined in §1.897-1 (m).
(g) The following examples illustrate the application of this exemption:
Example 1. A small business corporation (within the meaning of paragraph (a)(1)
of this A-6) operates two businesses. The corporation sells the assets of one of its
businesses, and these assets represent a substantial portion of the assets of the
corporation. Because of the sale, the corporation terminates its employment
relationship with persons employed in the business the assets of which are sold.
Several of these employees are highly-compensated individuals to w h o m the owners of
the corporation m a k e severance payments in excess of 3 times each employee's base
amount. Since the corporation is a small business corporation immediately before the
change in ownership or control, the payments are not parachute payments.
Example 2. Assume the same facts as in Example 1, except that the corporation
is not a small business corporation within the meaning of paragraph (a)(1) of this A-6. If
no stock in the corporation is readily tradeable on an established securities market (or
otherwise) immediately before the change in ownership or control and the shareholder
approval requirements described in Q/A-7 of this section are met, the payments are not
parachute payments.
Example 3. Stock of Corporation S is owned by Corporation P, stock in which is
readily tradeable on an established securities market. The Corporation S stock equals
or exceeds one third of the total gross fair market value of the assets of Corporation P,
and thus, represents a substantial portion of the assets of Corporation P. Corporation S
makes severance payments to several of its highly-compensated individuals that are
parachute payments under section 280G and Q/A-2 of this section. Because stock in
Corporation P is readily tradeable on an established securities market, the payments
are not exempt from the definition of parachute payments under this A-6.
Example 4. A is a corporation described in section 501(c)(3), and accordingly, its
net earnings are prohibited from inuring to the benefit of any private shareholder or
individual. A transfers substantially all of its assets to another corporation resulting in a
change in ownership or control. Contingent on the change in ownership or control, A
makes a payment that, but for the potential application of the exemption described in A5(a)(4), would constitute a parachute payment. However, one or more aspects of the

30

transaction that constitutes the change in ownership or control causes A to fail to be
described in section 501(c)(3). Accordingly, A fails to meet the definition of a taxexempt organization both immediately before and immediately after the change in
ownership or control, as required by this A-6. A s a result, the payment m a d e by A that
w a s contingent on the change in ownership or control is not exempt from the definition
of parachute payment under this A-6.
Example 5. B is a corporation described in section 501 (c)(15). B does not meet
the definition of a tax-exempt organization because section 501(c)(15) does not
expressly prohibit inurement of B's net earnings to the benefit of any private shareholder
or individual. Accordingly, if B has a change in ownership or control and m a k e s a
payment that would otherwise meet the definition of a parachute payment, such
payment is not exempt from the definition of the term parachute payment for purposes
of this A-6.
Q-7: How are the shareholder approval requirements referred to in paragraph
(a)(2)(H) of Q/A-6 of this section met?
A-7: (a) General rule. The shareholder approval requirements referred to in
paragraph (a)(2)(ii) of Q/A-6 of this section are met with respect to any payment if —
(1) Such payment is approved by more than 75 percent of the voting power of all
outstanding stock of the corporation entitled to vote (as described in this A-7)
immediately before the change in ownership or control; and
(2) Before the vote, there was adequate disclosure to all persons entitled to vote
(as described in this A-7) of all material facts concerning all material payments which
(but for Q/A-6 of this section) would be parachute payments with respect to a
disqualified individual.
(b) Voting reguirements - (1) General rule. The vote described in paragraph
(a)(1) of this A-7 must determine the right of the disqualified individual to receive the
payment, or, in the case of a payment made before the vote, the right of the disqualified
individual to retain the payment. Except as otherwise provided in this A-7, the normal
31

voting rules of the corporation are applicable. Thus, for example, an optionholder is
generally not permitted to vote for purposes of this A-7. For purposes of this A-7, the
vote can be on less than the full amount of the payment(s) to be made. Shareholder
approval can be a single vote on all payments to any one disqualified individual, or on
all payments to more than one disqualified individual. The total payment(s) submitted
for shareholder approval, however, must be separately approved by the shareholders.
The requirements of this paragraph (b)(1) are not satisfied if approval of the change in
ownership or control is contingent, or otherwise conditioned, on the approval of any
payment to a disqualified individual that would be a parachute payment but for Q/A-6 of
this section.
(2) Special rule. A vote to approve the payment does not fail to be a vote of the
outstanding stock of the corporation entitled to vote immediately before the change in
ownership or control merely because the determination of the shareholders entitled to
vote on the payment is based on the shareholders of record as of any day within the sixmonth period immediately prior to and ending on date of the change in ownership or
control, provided the disclosure requirements described in paragraph (c) of this A-7 are
met.
(3) Entity shareholder, (i) Approval of a payment by any shareholder that is not
an individual (an entity shareholder) generally must be made by the person authorized
by the entity shareholder to approve the payment. See paragraph (b)(4) of this A-7 if
the person so authorized by the entity shareholder is a disqualified individual who would
receive a parachute payment if the shareholder approval requirements of this A-7 are
32

not met.
(ii) However, if a substantial portion of the assets of an entity shareholder
consists (directly or indirectly) of stock in the corporation undergoing the change in
ownership or control, approval of the payment by that entity shareholder must be made
by a separate vote of the persons who hold, immediately before the change in
ownership or control, more than 75 percent of the voting power of the entity shareholder
entitled to vote. The preceding sentence does not apply if the value of the stock of the
corporation owned, directly or indirectly, by or for the entity shareholder does not
exceed 1 percent of the total value of the outstanding stock of the corporation
undergoing a change in ownership or control. Where approval of a payment by an
entity shareholder must be made by a separate vote of the owners of the entity
shareholder, the normal voting rights of the entity shareholder determine which owners
shall vote. For purposes of this (b)(3)(ii), stock represents a substantial portion of the
assets of an entity shareholder if the total fair market value of the stock held by the
entity shareholder in the corporation undergoing the change in ownership or control is
equal to or exceeds one third of the total gross fair market value of all of the assets of
the entity shareholder. For this purpose, gross fair market value means the value of
the assets of the entity, determined without regard to any liabilities associated with such
assets.
(4) Disgualified individuals and attribution of stock ownership. In determining the
persons entitled to vote referred to in paragraph (a)(1) or (b)(3) of this A-7, stock that
would otherwise be entitled to vote is not counted as outstanding stock and is not

33

considered in determining whether the more than 75 percent vote has been obtained
under this A-7 if the stock is actually owned or constructively owned under section
318(a) by or for a disqualified individual who receives (or is to receive) payments that
would be parachute payments if the shareholder approval requirements described in
paragraph (a) of this A-7 are not met. Likewise, stock is not counted as outstanding
stock if the owner is considered under section 318(a) to own any part of the stock
owned directly or indirectly by or for a disqualified individual described in the preceding
sentence. In addition, if the person authorized to vote the stock of an entity shareholder
is a disqualified individual who would receive a parachute payment if the shareholder
approval requirements described in this A-7 are not met, such person is not permitted to
vote such shares, but the entity shareholder is permitted to appoint an equity interest
holder in the entity shareholder, or in the case of a trust another person eligible to vote
on behalf of the trust, to vote the otherwise eligible shares. However, if all persons who
hold voting power in the corporation undergoing the change in ownership or control are
disqualified individuals or related persons described in this paragraph (b)(4), then such
stock is counted as outstanding stock and votes by such persons are considered in
determining whether the more than 75 percent vote has been obtained.
(c) Adeguate disclosure. To be adequate disclosure for purposes of paragraph
(a)(2) of this A-7, disclosure must be full and truthful disclosure of the material facts and
such additional information as is necessary to make the disclosure not materially
misleading at the time the disclosure is made. Disclosure of such information must be
made to every shareholder of the corporation entitled to vote under this A-7. For each
34

disqualified individual, material facts that must be disclosed include, but are not limited
to, the event triggering the payment or payments, the total amount of the payments that
would be parachute payments if the shareholder approval requirements described in
paragraph (a) of this A-7 are not met, and a brief description of each payment (e.g.,
accelerated vesting of options, bonus, or salary). An omitted fact is considered a
material fact if there is a substantial likelihood that a reasonable shareholder would
consider it important.
(d) Corporation without shareholders. If a corporation does not have
shareholders, the exemption described in Q/A-6(a)(2) of this section and the
shareholder approval requirements described in this A-7 do not apply. Solely for
purposes of this paragraph (d), a shareholder does not include a member in an
association, joint stock company, or insurance company.
(e) Examples. The following examples illustrate the application of this A-7:
Example 1. Corporation S has two shareholders - Corporation P, which owns
76 percent of the stock of Corporation S, and A, a disqualified individual w h o would
receive a parachute payment if the shareholder approval requirements of this A-7 are
not met. N o stock of Corporation P or S is readily tradeable on an established
securities market (or otherwise). The value of the stock of Corporation S equals or
exceeds one third of the gross fair market value of the assets of Corporation P, and
thus, represents a substantial portion of the assets of Corporation P. All of the stock of
Corporation S is sold to Corporation M. Contingent on the change in ownership of
Corporation S, severance payments are m a d e to certain officers of Corporation S in
excess of 3 times each officer's base amount. If the payments are approved by a
separate vote of the persons w h o hold, immediately before the sale, more than 75
percent of the voting power of the outstanding stock entitled to vote of Corporation P
and the disclosure rules of paragraph (a)(2) of this A-7 are complied with, the
shareholder approval requirements of this A-7 are met, and the payments are exempt
from the definition of parachute payment pursuant to A-6 of this section.
Example 2. (i) Stock of Corporation X, none of which is traded on an
established market, is acquired by Corporation Y. In the voting ballot concerning the

35

sale, the Corporation X shareholders are asked to vote either "yes" on the sale and
"yes" to paying parachute payments to A, a disqualified individual with respect to
Corporation A, or "no" on the sale and "no" to paying parachute payments to A.
(ii) Because the approval of the change in ownership or control is conditioned on
the approval of the payments to A, the shareholder approval requirements of this A-7
are not satisfied. If the payments are m a d e to A, the payments are not exempt from the
definition of parachute payment pursuant to Q/A-6 of this section.
(iii) Assume the same facts as in paragraph (i) of this Example 2, except that the
acquisition agreement between Corporation X and Corporation Y states that the
acquisition is approved only if there are no parachute payments m a d e to A. If the
shareholder approval and the disclosure requirements described in this A-7 are met, the
payments will not be parachute payments. Alternatively, if the shareholders do not
approve the payments, the payments can not be m a d e (or retained). Thus, the
transaction is not conditioned on the approval of the parachute payments. If the
payments are m a d e and the requirements of this A-7 are met, the payments are exempt
from the definition of parachute payment pursuant to Q/A-6 of this section.
Example 3. Corporation M is wholly owned by Partnership P. No interest in
either M or P is readily tradeable on an established securities market (or otherwise).
The value of the stock of Corporation M equals or exceeds one third of the gross fair
market value of the assets of Partnership P, and thus, represents a substantial portion
of the assets of Partnership P. Corporation M undergoes a change in ownership or
control. Partnership P has one general partner and 200 limited partners. The general
partner is not a disqualified individual. None of the limited partners are entitled to vote
on issues involving the management of the partnership investments. If the payments
that would be parachute payments if the shareholder approval requirements of this A-7
are not met are approved by the general partner and the disclosure rules of paragraph
(a)(2) of this A-7 are complied with, the shareholder approval requirements of this A-7
are met, and the payments are exempt from the definition of parachute payment
pursuant to A-6 of this section.
Example 4. Corporation A has several shareholders including X and Y, who are
disqualified individuals with respect to Corporation A and would receive parachute
payments if the shareholder approval requirements of this A-7 are not met. N o stock of
Corporation A is readily tradeable on an established securities market (or otherwise).
Corporation A undergoes a change in ownership or control. Contingent on the change
in ownership or control, severance payments are payable to X and Y that are in excess
of 3 times each individual's base amount. To determine whether the shareholder
approval requirements of paragraph (a)(1) of this A-7 are satisfied regarding the
payments to X and Y, the stock of X and Y is not considered outstanding, and X and Y
are not entitled to vote.

36

Example 5. A s s u m e the s a m e facts as in Example 4, except that after adequate
disclosure of all material facts (within the meaning of paragraph (a)(2) of this A-7) to all
shareholders entitled to vote, 60 percent of the shareholders w h o are entitled to vote
approve the payments to X and Y. Because more than 75 percent of the shareholders
holding outstanding stock w h o were entitled to vote did not approve the payments to X
and Y, the payments cannot be made.
Example 6. Assume the same facts as in Example 4 except that disclosure of all
the material facts (within the meaning of paragraph (a)(2) of this A-7) regarding the
payments to X and Y is m a d e to two of Corporation A's shareholders, w h o collectively
own 80 percent of Corporation A's stock entitled to vote and approve the payment. Both
shareholders approve the payments. A s s u m e further that no adequate disclosure of the
material facts regarding the payments to X and Y is m a d e to other Corporation A
shareholders w h o are entitled to vote within the meaning of this A-7. Notwithstanding
that 80 percent of the shareholders entitled to vote approve the payments, because
disclosure regarding the payments to X and Y is not m a d e to all of Corporation A's
shareholders w h o were entitled to vote, the disclosure requirements of paragraph (a)(2)
of this A-7 are not met, and the payments are not exempt from the definition of
parachute payment pursuant to Q/A-6.
Example 7. Corporation C has three shareholders - Partnership, which owns 20
percent of the stock of Corporation C; A, an individual w h o owns 60 percent of the stock
of Corporation C; and B, an individual w h o owns 20 percent of Corporation C. Stock of
Corporation C does not represent a substantial portion of the assets of Partnership. N o
interest in either Partnership or Corporation C is readily tradeable on an established
securities market (or otherwise). P, a one-third partner in Partnership, is a disqualified
individual with respect to Corporation C. Corporation C undergoes a change in
ownership or control. Contingent on the change, a severance payment is payable to P
in excess of 3 times P's base amount. To determine the persons w h o are entitled to
vote referred to in paragraph (a)(1) of this A-7, one-third of the stock held by Partnership
is not considered outstanding stock. If P is the person authorized by Partnership to
approve the payment, none of the shares of Partnership are considered outstanding
stock. However, Partnership is permitted to appoint an equity interest holder in
Partnership (who is not a disqualified individual w h o would receive a parachute payment
if the requirements of this A-7 are not met), to vote the two-thirds of the shares held by
Partnership that are otherwise entitled to be voted.
Example 8. X, Y, and Z are all employees and disqualified individuals with
respect to Corporation E. N o stock in Corporation E is readily tradeable on an
established securities market (or otherwise). Each individual has a base amount of
$100,000. Corporation E undergoes a change in ownership or control. Contingent on
the change, a severance payment of $400,000 is payable to X; $600,000 is payable to
Y; and $1,000,000 is payable to Z. Corporation E provides each Corporation E
shareholder entitled to vote (as determined under this A-7) with a ballot listing and

37

describing the payments of $400,000 to X; $600,000 to Y; and $1,000,000 to Z and the
triggering event that generated the payments. Next to each n a m e and corresponding
amount on the ballot, Corporation E requests approval (with a "yes" and "no" box) of
each total payment to be m a d e to each individual and states that if the payment is not
approved the payment will not be made. Adequate disclosure, within the meaning of
this A-7 is m a d e to each shareholder entitled to vote under this A-7. More than 75
percent of the Corporation E shareholders w h o are entitled to vote under paragraph
(a)(1) of this A-7 approve each payment to each individual. The shareholder approval
requirements of this A-7 are met, and the payments are exempt from the definition of
parachute payment pursuant to A-6 of this section.
Example 9. Assume the same facts as in Example 8 except that the ballot does
not request approval of each total payment to each individual separately. Instead, the
ballot states that $2,000,000 in payments will be m a d e to X, Y, and Z and requests
approval of the $2,000,000 payments. Assuming the triggering event and amount of the
payments to X, Y, and Z are separately described to the shareholders entitled to vote
under this A-7, the shareholder approval requirements of paragraph (a)(1) of this A-7
are met, and the payments are exempt from the definition of parachute payment
pursuant to A-6 of this section.
Example 10. B, an employee of Corporation X, is a disqualified individual with
respect to Corporation X. Stock of Corporation X is not readily tradeable on an
established securities market (or otherwise). Corporation X undergoes a change in
ownership or control. B's base amount is $205,000. Under B's employment agreement
with Corporation X, in the event of a change in ownership or control, B's stock options
will vest and B will receive severance and bonus payments. Contingent on the change
in ownership or control, B's stock options with a fair market value of $500,000
immediately vest, $200,000 of which is contingent on the change, and B will receive a
$200,000 bonus payment and a $400,000 severance payment. Corporation X
distributes a ballot to every shareholder of Corporation X w h o immediately before the
change is entitled to vote as described in this A-7. The ballot contains adequate
disclosure of all material facts and lists the following payments to be m a d e to B: the
contingent payment of $200,000 attributable to options, a $200,000 bonus payment,
and a $400,000 severance payment. The ballot requests shareholder approval of the
$200,000 bonus payment to B and states that whether or not the $200,000 bonus
payment is approved, B will receive $200,000 attributable to options and a $400,000
severance payment. More than 75 percent of the shareholders entitled to vote as
described by this A-7 approve the $200,000 bonus payment to B. The shareholder
approval requirements of this A-7 are met, and the $200,000 payment is exempt from
the definition of parachute payment pursuant to A-6 of this section.
Q-8: Which payments under a qualified plan are exempt from the definition of
parachute payment?

38

A-8: The term parachute payment does not include any payment to or from (a) A plan described in section 401(a) which includes a trust exempt from tax
under section 501(a);
(b) An annuity plan described in section 403(a);
(c) A simplified employee pension (as defined in section 408(k)); or
(d) A simple retirement account (as defined in section 408(p)).
Q-9: Which payments of reasonable compensation are exempt from the
definition of parachute payment?
A-9: Except in the case of securities violation parachute payments, the term
parachute payment does not include any payment (or portion thereof) which the
taxpayer establishes by clear and convincing evidence is reasonable compensation for
personal services to be rendered by the disqualified individual on or after the date of the
change in ownership or control. See Q/A-37 of this section for the definition and
treatment of securities violation parachute payments. See Q/A-40 through Q/A-44 of
this section for rules on determining amounts of reasonable compensation.
Payor of Parachute Payments
Q-10: Who may be the payor of parachute payments?
A-10: Parachute payments within the meaning of Q/A-2 of this section may be
paid, directly or indirectly, by(i) The corporation referred to in paragraph (a)(3) of Q/A-2 of this section;
(ii) A person acquiring ownership or effective control of that corporation or
ownership of a substantial portion of that corporation's assets; or
39

(iii) Any person whose relationship to such corporation or other person is such as
to require attribution of stock ownership between the parties under section 318(a).
Payments in the Nature of Compensation
Q-11: What types of payments are in the nature of compensation?
A-11: (a) General rule. For purposes of this section, all payments - in whatever
form - are payments in the nature of compensation if they arise out of an employment
relationship or are associated with the performance of services. For this purpose, the
performance of services includes holding oneself out as available to perform services
and refraining from performing services (such as under a covenant not to compete or
similar arrangement). Payments in the nature of compensation include (but are not
limited to) wages and salary, bonuses, severance pay, fringe benefits, life insurance,
pension benefits, and other deferred compensation (including any amount characterized
by the parties as interest thereon). A payment in the nature of compensation also
includes cash when paid, the value of the right to receive cash, or a transfer of property.
However, payments in the nature of compensation do not include attorney's fees or
court costs paid or incurred in connection with the payment of any amount described in
paragraphs (a)(1), (2), and (3) of Q/A-2 of this section or a reasonable rate of interest
accrued on any amount during the period the parties contest whether a payment will be
made.
(b) When payment is considered to be made. Except as otherwise provided in A11 through Q/A-13 of this section, a payment in the nature of compensation is
considered made (and is subject to the excise tax under section 4999) in the taxable
40

year in which it is includible in the disqualified individual's gross income or, in the case
of fringe benefits and other benefits excludible from income, in the taxable year the
benefits are received.
(c) Prepayment rule. Notwithstanding the general rule described in paragraph (b)
of this A-11, a disqualified individual may, in the year of the change in ownership or
control, or any later year, prepay the excise tax under section 4999, provided that the
payor and disqualified individual treat the payment of the excise tax consistently and the
payor satisfies its obligations under section 4999(c) in the year of prepayment. The
prepayment of the excise tax for purposes of section 4999 must be based on the
present value of the excise tax that would be due in the year the excess parachute
payment would actually be paid (calculated using the discount rate equal to 120 percent
of the applicable Federal rate (determined under section 1274(d) and regulations
thereunder; see Q/A-32)). For purposes of projecting the future value of a payment that
provides for interest to be credited at a variable interest rate, it is permissible to make a
reasonable assumption regarding this variable rate. A disqualified individual is not
required to adjust the excise tax paid under this paragraph (c) merely because the
interest rates in the future are not the same as the rate used for purposes of projecting
the future value of the payment. However, a disqualified individual may not apply this
paragraph (c) of this A-11 to a payment to be made in cash if the present value of the
payment would be considered not reasonably ascertainable under section 3121(v) and
§31.3121 (v)(2)-1 (e)(4) of this Chapter or to a payment related to health benefits or
coverage. The Commissioner may provide additional guidance regarding the
41

applicability of this paragraph (c) to certain payments in published guidance of general
applicability under §601.601 (d)(2) of this Chapter.
(d) Transfers of property. Transfers of property are treated as payments for
purposes of this A-11. See Q/A-12 of this section for rules on determining when such
payments are considered made and the amount of such payments. See Q/A-13 of this
section for special rules on transfers of stock options.
(e) The following example illustrates the principles of this A-11:
Example. D is a disqualified individual with respect to Corporation X. D has a
base amount of $100,000 and is entitled to receive two parachute payments, one of
$200,000 and the other of $400,000. A change in ownership or control of Corporation X
occurs on M a y 1, 2005, and the $200,000 payment is m a d e to D at the time of the
change in ownership or control. The $400,000 payment is to be m a d e on October 1,
2010. Corporation X and D agree that D will prepay the excise tax and X will satisfy its
obligations under section 4999(c) with respect to the $400,000 payment. Using
discount rate determined under Q/A-32, Corporation X and D determine that the present
value of the $400,000 payment is $300,000 on the date of the change in ownership or
control. The portions of the base amount allocated to these payments are $40,000
(($200,000/$500,000) x $100,000) and $60,000 (($300,000/$500,000 x $100,000),
respectively. Thus, the amount of the first excess parachute payment is $160,000
($200,000 - $40,000) and that of the second excess parachute payment is $340,000
($400,000 - $60,000). The excise tax on the $400,000 payment is $68,000 ($340,000 x
20 percent). A s s u m e the present value (calculated in accordance with paragraph (c) of
this A-11) of $68,000 is $50,000. To prepay the excise tax due on the $400,000
payment, Corporation X must satisfy its obligations under section 4999 with respect to
the $50,000, in addition to the $32,000 withholding required with respect to the
$200,000 payment.
Q-12: If a property transfer to a disqualified individual is a payment in the nature
of compensation, when is the payment considered made (or to be made), and how is
the amount of the payment determined?
A-12: (a) Except as provided in this A-12 and Q/A-13 of this section, a transfer
of property is considered a payment made (or to be made) in the taxable year in which

42

the property transferred is includible in the gross income of the disqualified individual
under section 83 and the regulations thereunder. Thus, in general, such a payment is
considered made (or to be made) when the property is transferred (as defined in §1.833(a)) to the disqualified individual and becomes substantially vested (as defined in
§1.83-3(b) and (j)) in such individual. The amount of the payment is determined under
section 83 and the regulations thereunder. Thus, in general, the amount of the payment
is equal to the excess of the fair market value of the transferred property (determined
without regard to any lapse restriction, as defined in §1.83-3(i)) at the time that the
property becomes substantially vested, over the amount (if any) paid for the property.
(b) An election made by a disqualified individual under section 83(b) with respect
to transferred property will not apply for purposes of this A-12. Thus, even if such an
election is made with respect to a property transfer that is a payment in the nature of
compensation, for purposes of this section, the payment is generally considered made
(or to be made) when the property is transferred to and becomes substantially vested in
such individual.
(c) See Q/A-13 of this section for rules on applying this A-12 to transfers of stock
options.
(d) The following example illustrates the principles of this A-12:
Example. On January 1, 2006, Corporation M gives to A, a disqualified
individual, a bonus of 100 shares of Corporation M stock in connection with the
performance of services to Corporation M. Under the terms of the bonus arrangement
A is obligated to return the Corporation M stock to Corporation M unless the earnings of
Corporation M double by January 1, 2009, or there is a change in ownership or control
of Corporation M before that date. A's rights in the stock are treated as substantially
nonvested (within the meaning of §1.83-3(b)) during that period because A's rights in
the stock are subject to a substantial risk of forfeiture (within the meaning of §1.83-3(c))
43

and are nontransferable (within the meaning of §1.83-3(d)). O n January 1, 2008, a
change in ownership or control of Corporation M occurs. O n that day, the fair market
value of the Corporation M stock is $250 per share. Because A's rights in the
Corporation M stock b e c o m e substantially vested (within the meaning of §1.83-3(b)) on
that day, the payment is considered m a d e on that day, and the amount of the payment
for purposes of this section is equal to $25,000 (100 x $250). S e e Q/A-38 through 41
for rules relating to the reduction of the excess parachute payment by the portion of the
payment which is established to be reasonable compensation for personal services
actually rendered before the date of a change in ownership or control.
Q-13: How are transfers of statutory and nonstatutory stock options treated?
A-13: (a) For purposes of this section, an option (including an option to which
section 421 applies) is treated as property that is transferred when the option becomes
vested (regardless of whether the option has a readily ascertainable fair market value
as defined in §1.83-7(b)). For purposes of this A-13, vested means substantially vested
within the meaning of §1.83-3(b) and (j) or the right to the payment is not otherwise
subject to a substantial risk of forfeiture within the meaning of section 83(c). Thus, for
purposes of this section, the vesting of such an option is treated as a payment in the
nature of compensation. The value of an option at the time the option vests is
determined under all the facts and circumstances in the particular case. Factors
relevant to such a determination include, but are not limited to: the difference between
the option's exercise price and the value of the property subject to the option at the time
of vesting; the probability of the value of such property increasing or decreasing; and
the length of the period during which the option can be exercised. Thus, an option is
treated as a payment in the nature of compensation on the date of grant or vesting, as
applicable, without regard to whether such option has an ascertainable fair market
value. For purposes of this A-13, valuation may be determined by any method

44

prescribed by the Commissioner in published guidance of general applicability under
§601.601 (d)(2) of this Chapter.
(b) Any money or other property transferred to the disqualified individual on the
exercise, or as consideration on the sale or other disposition, of an option described in
paragraph (a) of this A-13 after the time such option vests is not treated as a payment in
the nature of compensation to the disqualified individual under Q/A-11 of this section.
Nonetheless, the amount of the otherwise allowable deduction under section 162 or 212
with respect to such transfer is reduced by the amount of the payment described in
paragraph (a) of this A-13 treated as an excess parachute payment.
Q-14: Are payments in the nature of compensation reduced by consideration
paid by the disqualified individual?
A-14: Yes, to the extent not otherwise taken into account under Q/A-12 and Q/A13 of this section, the amount of any payment in the nature of compensation is reduced
by the amount of any money or the fair market value of any property (owned by the
disqualified individual without restriction) that is (or will be) transferred by the
disqualified individual in exchange for the payment. For purposes of the preceding
sentence, the fair market value of property is determined as of the date the property is
transferred by the disqualified individual.
Disgualified Individuals
Q-15: Who is a disqualified individual?
A-15: (a) For purposes of this section, an individual is a disqualified individual
with respect to a corporation if, at any time during the disgualified individual
45

determination period (as defined in Q/A-20 of this section), the individual is an employee
or independent contractor of the corporation and is, with respect to the corporation (1) A shareholder (but see Q/A-17 of this section);
(2) An officer (see Q/A-18 of this section); or
(3) A highly-compensated individual (see Q/A-19 of this section).
(b) For purposes of this A-15, a director is a disqualified individual with respect to
a corporation if, at any time during the disgualified individual determination period, the
director is, with respect to the corporation, a shareholder (see Q/A -17 of this section),
an officer (see Q/A-18 of this section), or a highly-compensated individual (see Q/A -19
of this section).
(c) For purposes of this A-15, an individual who is an employee or independent
contractor of a corporation other than the corporation undergoing a change in ownership
or control is disregarded for purposes of determining who is a disqualified individual if
such individual is employed by the corporation undergoing the change in ownership or
control only on the last day of the disqualified individual determination period. Thus, for
example, assume that E is an employee of Corporation X, that Y is acquired by
Corporation X, and that Y undergoes a change in ownership or control. If E becomes
an employee of Y on the date of the acquisition, in determining the disqualified
individuals with respect to Y, E is disregarded under this paragraph (c).
Q-16: Is a personal service corporation treated as an individual?
A-16: (a) Yes. For purposes of this section, a personal service corporation (as
defined in section 269A(b)(1)), or a noncorporate entity that would be a personal service

46

corporation if it were a corporation, is treated as an individual.
(b) The following example illustrates the principles of this A-16:
Example. Corporation N, a personal service corporation (as defined in section
269A(b)(1)), has a single individual as its sole shareholder and employee. Corporation
N performs personal services for Corporation M. The compensation paid to Corporation
N by Corporation M puts Corporation N within the group of highly-compensated
individuals of Corporation M as determined under A-19 of this section. Thus,
Corporation N is treated as a highly-compensated individual with respect to Corporation
M.
Q-17: Are all shareholders of a corporation considered shareholders for
purposes of paragraphs (a)(1) and (b) of Q/A-15 of this section?
A-17: (a) No. Only an individual who owns stock of a corporation with a fair
market value that exceeds 1 percent of the fair market value of the outstanding shares
of all classes of the corporation's stock is treated as a disqualified individual with respect
to the corporation by reason of stock ownership. An individual who owns a lesser
amount of stock may, however, be a disqualified individual with respect to the
corporation if such individual is an officer (see Q/A-18) or highly-compensated individual
(see Q/A-19) with respect to the corporation.
(b) For purposes of determining the amount of stock owned by an individual for
purposes of paragraph (a) of this A-17, the constructive ownership rules of section
318(a) apply. Stock underlying a vested option is considered owned by an individual
who holds the vested option (and the stock underlying an unvested option is not
considered owned by an individual who holds the unvested option). For purposes of the
preceding sentence, however, if the option is exercisable for stock that is not
substantially vested (as defined by §§ 1.83-3(b) and (j)), the stock underlying the option

47

is not treated as owned by the individual w h o holds the option. Solely for purposes of
determining the amount of stock owned by an individual for purposes of this A-17,
mutual and cooperative corporations are treated as having stock.
(c) The following examples illustrates the principles of this A-17:
Example 1. E, an employee of Corporation A, received options under
Corporation A's Stock Option Plan. E's stock options vest three years after the date of
grant. E is not an officer or highly compensated individual during the disqualified
individual determination period. E does not own, and is not considered to o w n under
section 318, any other Corporation A stock. T w o years after the options are granted to
E, all of Corporation A's stock is acquired by Corporation B. Under Corporation A's
Stock Option Plan, E's options are converted to Corporation B options and the vesting
schedule remains the same. Under paragraph (b) of this A-17, the stock underlying the
unvested options held by E on the date of the change in ownership or control is not
considered owned by E. Because E is not considered to o w n Corporation A stock with
a fair market value exceeding 1 percent of the total fair market value of all of the
outstanding shares of all classes of Corporation A and E is not an officer or highlycompensated individual during the disqualified individual determination period, E is not
a disqualified individual within the meaning of Q & A - 1 5 of this section with respect to
Corporation A.
Example 2. Assume the same facts as in Example 1, except that Corporation A's
Stock Option Plan provides that all unvested options will vest immediately on a change
in ownership or control. Under paragraph (b) of this A-17, the stock underlying the
options that vest on the change in ownership or control is considered owned by E. If the
stock considered owned by E exceeds 1 percent of the total fair market value of all of
the outstanding shares of all classes of Corporation A stock (including for this purpose,
all stock owned or constructively owned by all shareholders, provided that no share of
stock is counted more than once), E is a disqualified individual within the meaning of
Q/A-15 of this section with respect to Corporation A.
Example 3. Assume the same facts as in Example 1 except that E received
nonstatutory stock options that are exercisable for stock subject to a substantial risk of
forfeiture under section 83. A s s u m e further that under Corporation A's Stock Option
Plan, the nonstatutory options will vest on a change in ownership or control. Under
paragraph (b) of this A-17, E is not considered to own the stock underlying the options
that vest on the change in ownership or control because the options are exercisable for
stock subject to a substantial risk of forfeiture within the meaning of section 83.
Because E is not considered to own Corporation A stock with a fair market value
exceeding 1 percent of the total fair market value of all of the outstanding shares of all
classes of Corporation A stock and E is not an officer or highly compensated individual

48

during the disqualified individual determination period, E is not a disqualified individual
within the meaning of Q/A-15 of this section with respect to Corporation A.
Q-18: Who is an officer?
A-18: (a) For purposes of this section, whether an individual is an officer with
respect to a corporation is determined on the basis of all the facts and circumstances in
the particular case (such as the source of the individual's authority, the term for which
the individual is elected or appointed, and the nature and extent of the individual's
duties). Any individual who has the title of officer is presumed to be an officer unless
the facts and circumstances demonstrate that the individual does not have the authority
of an officer. However, an individual who does not have the title of officer may
nevertheless be considered an officer if the facts and circumstances demonstrate that
the individual has the authority of an officer. Generally, the term officer means an
administrative executive who is in regular and continued service. The term officer
implies continuity of service and excludes those employed for a special and single
transaction.
(b) An individual who is an officer with respect to any member of an affiliated
group that is treated as one corporation pursuant to Q/A-46 of this section is treated as
an officer of such one corporation.
(c) No more than 50 employees (or, if less, the greater of 3 employees, or 10
percent of the employees (rounded up to the nearest integer)) of the corporation (in the
case of an affiliated group treated as one corporation, each member of the affiliated
group) are treated as disqualified individuals with respect to a corporation by reason of
being an officer of the corporation. For purposes of the preceding sentence, the
49

number of employees of the corporation is the greatest number of employees the
corporation has during the disqualified individual determination period (as defined in
Q/A-20 of this section). If the number of officers of the corporation exceeds the number
of employees who may be treated as officers under the first sentence of this paragraph
(c), then the employees who are treated as officers for purposes of this section are the
highest paid 50 employees (or, if less, the greater of 3 employees, or 10 percent of the
employees (rounded up to the nearest integer)) of the corporation when ranked on the
basis of compensation (as determined under Q/A-21 of this section) paid during the
disqualified individual determination period.
(d) In determining the total number of employees of a corporation for purposes of
this A-18, employees are not counted if they normally work less than 17/4 hours per
week (as defined in section 414(q)(5)(B) and the regulations thereunder) or if they
normally work during not more than 6 months during any year (as defined in section
414(q)(5)(C) and the regulations thereunder). However, an employee who is not
counted for purposes of the preceding sentence may still be an officer.
Q-19: Who is a highly-compensated individual?
A-19: (a) For purposes of this section, a highly-compensated individual with
respect to a corporation is any individual who is, or would be if the individual were an
employee, a member of the group consisting of the lesser of the highest paid 1 percent
of the employees of the corporation (rounded up to the nearest integer), or the highest
paid 250 employees of the corporation, when ranked on the basis of compensation (as
determined under Q/A-21 of this section) earned during the disqualified individual

50

determination period (as defined in Q/A-20 of this section). For purposes of the
preceding sentence, the number of employees of the corporation is the greatest number
of employees the corporation has during the disqualified individual determination period
(as defined in Q/A-20 of this section). However, no individual whose annualized
compensation during the disqualified individual determination period is less than the
amount described in section 414(q)(1)(B)(i) for the year in which the change in
ownership or control occurs will be treated as a highly-compensated individual.
(b) An individual who is not an employee of the corporation is not treated as a
highly-compensated individual with respect to the corporation on account of
compensation received for performing services (such as brokerage, legal, or investment
banking services) in connection with a change in ownership or control of the
corporation, if the services are performed in the ordinary course of the individual's trade
or business and the individual performs similar services for a significant number of
clients unrelated to the corporation.
(c) The total number of employees of a corporation for purposes of this A-19 is
determined in accordance with Q/A-18(d) of this section. However, an employee who is
not counted for purposes of the preceding sentence may still be a highly-compensated
individual.
Q-20: What is the disqualified individual determination period?
A-20: The disqualified individual determination period is the twelve-month period
prior to and ending on the date of the change in ownership or control of the corporation.
Q-21: How is compensation defined for purposes of determining who is a
51

disqualified individual?
A-21: (a) For purposes of determining who is a disqualified individual, the term
compensation means the compensation which was earned by the individual for services
performed for the corporation with respect to which the change in ownership or control
occurs (changed corporation), for a predecessor entity, or for a related entity. Such
compensation is determined without regard to sections 125, 132(f)(4), 402(e)(3), and
402(h)(1)(B). Thus, for example, compensation includes elective or salary reduction
contributions to a cafeteria plan, cash or deferred arrangement or tax-sheltered annuity,
and amounts credited under a nonqualified deferred compensation plan.
(b) For purposes of this A-21, a predecessor entity is any entity which, as a
result of a merger, consolidation, purchase or acquisition of property or stock, corporate
separation, or other similar business transaction transfers some or all of its employees
to the changed corporation or to a related entity or to a predecessor entity of the
changed corporation. The term related entity includes(1) All members of a controlled group of corporations (as defined in section
414(b)) that includes the changed corporation or a predecessor entity;
(2) All trades or businesses (whether or not incorporated) that are under common
control (as defined in section 414(c)) if such group includes the changed corporation or
a predecessor entity;
(3) All members of an affiliated service group (as defined in section 414(m)) that
includes the changed corporation or a predecessor entity; and
(4) Any other entities required to be aggregated with the changed corporation or

52

a predecessor entity pursuant to section 414(o) and the regulations thereunder (except
leasing organizations as defined in section 414(n)).
(c) For purposes of Q/A-18 and Q/A-19 of this section, compensation that was
contingent on the change in ownership or control and that was payable in the year of
the change is not treated as compensation.
Contingent on Change in Ownership or Control
Q-22: When is a payment contingent on a change in ownership or control?
A-22: (a) In general, a payment is treated as contingent on a change in
ownership or control if the payment would not, in fact, have been made had no change
in ownership or control occurred, even if the payment is also conditioned on the
occurrence of another event. A payment generally is treated as one which would not, in
fact, have been made in the absence of a change in ownership or control unless it is
substantially certain, at the time of the change, that the payment would have been made
whether or not the change occurred. (But see Q/A-23 of this section regarding
payments under agreements entered into after a change in ownership or control.) A
payment that becomes vested as a result of a change in ownership or control is not
treated as a payment which was substantially certain to have been made whether or not
the change occurred. For purposes of this A-22, vested means the payment is
substantially vested within the meaning of §1.83-3(b) and (j) or the right to the payment
is not otherwise subject to a substantial risk of forfeiture as defined by section 83(c).
(b)(1) For purposes of paragraph (a), a payment is treated as contingent on a
change in ownership or control if-53

(i) T h e payment is contingent on an event that is closely associated with a
change in ownership or control;
(ii) A change in ownership or control actually occurs; and
(iii) The event is materially related to the change in ownership or control.
(2) For purposes of paragraph (b)(1 )(i) of this A-22, a payment is treated as
contingent on an event that is closely associated with a change in ownership or control
unless it is substantially certain, at the time of the event, that the payment would have
been made whether or not the event occurred. An event is considered closely
associated with a change in ownership or control if the event is of a type often
preliminary or subsequent to, or otherwise closely associated with, a change in
ownership or control. For example, the following events are considered closely
associated with a change in the ownership or control of a corporation: The onset of a
tender offer with respect to the corporation; a substantial increase in the market price of
the corporation's stock that occurs within a short period (but only if such increase occurs
prior to a change in ownership or control); the cessation of the listing of the corporation's
stock on an established securities market; the acquisition of more than 5 percent of the
corporation's stock by a person (or more than one person acting as a group) not in
control of the corporation; the voluntary or involuntary termination of the disqualified
individual's employment; a significant reduction in the disqualified individual's job
responsibilities; and a change in ownership or control as defined in the disqualified
individual's employment agreement (or elsewhere) that does not meet the definition of a
change in ownership or control described in Q/A-27, 28, or 29 of this section. Whether
54

other events are treated as closely associated with a change in ownership or control is
based on all the facts and circumstances of the particular case.
(3) For purposes of determining whether an event (as described in paragraph
(b)(2) of this A-22) is materially related to a change in ownership or control, the event is
presumed to be materially related to a change in ownership or control if such event
occurs within the period beginning one year before and ending one year after the date
of the change in ownership or control. If such event occurs outside of the period
beginning one year before and ending one year after the date of change in ownership or
control, the event is presumed not materially related to the change in ownership or
control. A payment does not fail to be contingent on a change in ownership or control
merely because it is also contingent on the occurrence of a second event (without
regard to whether the second event is closely associated with or materially related to a
change in ownership or control). Similarly, a payment that is treated as contingent on a
change in ownership or control because it is contingent on a closely associated event
does not fail to be treated as contingent on a change in ownership or control merely
because it is also contingent on the occurrence of a second event (without regard to
whether the second event is closely associated with or materially related to a change in
ownership or control).
(c) A payment that would in fact have been made had no change in ownership or
control occurred is treated as contingent on a change in ownership or control if the
change in ownership or control (or the occurrence of an event that is closely associated
with and materially related to a change in ownership or control within the meaning of
55

paragraph (b)(1) of this A-22), accelerates the time at which the payment is made.
Thus, for example, if a change in ownership or control accelerates the time of payment
of deferred compensation that is vested without regard to the change in ownership or
control, the payment may be treated as contingent on the change. See Q/A-24 of this
section regarding the portion of a payment that is so treated. See also Q/A-8 of this
section regarding the exemption for certain payments under qualified plans and Q/A-40
of this section regarding the treatment of a payment as reasonable compensation.
(d) A payment is treated as contingent on a change in ownership or control even
if the employment or independent contractor relationship of the disqualified individual is
not terminated (voluntarily or involuntarily) as a result of the change.
(e) The following examples illustrate the principles of this A-22:
Example 1. A corporation grants a stock appreciation right to a disqualified
individual, A, more than one year before a change in ownership or control. After the
stock appreciation right vests and becomes exercisable, a change in ownership or
control of the corporation occurs, and A exercises the right. Assuming neither the
granting nor the vesting of the stock appreciation right is contingent on a change in
ownership or control, the payment m a d e on exercise is not contingent on the change in
ownership or control.
Example 2. A contract between a corporation and B, a disqualified individual,
provides that a payment will be m a d e to B if the corporation undergoes a change in
ownership or control and B's employment with the corporation is terminated at any time
over the succeeding 5 years. Eighteen months later, a change in the ownership of the
corporation occurs. T w o years after the change in ownership, B's employment is
terminated and the payment is m a d e to B. Because it w a s not substantially certain that
the corporation would have m a d e the payment to B on B's termination of employment if
there had not been a change in ownership, the payment is treated as contingent on the
change in ownership under paragraph (a) of this A-22. This is true even though B's
termination of employment is presumed not to be, and in fact m a y not be, materially
related to the change in ownership or control.
Example 3. A contract between a corporation and C, a disqualified individual,
provides that a payment will be m a d e to C if C's employment is terminated at any time

56

over the succeeding 3 years (without regard to whether or not there is a change in
ownership or control). Eighteen months after the contract is entered into, a change in
the ownership or control of the corporation occurs. Six months after the change in
ownership or control, C's employment is terminated and the payment is m a d e to C.
Termination of employment is considered an event closely associated with a change in
ownership or control. Because the termination occurred within one year after the date
of the change in ownership or control, the termination of C's employment is presumed to
be materially related to the change in ownership or control under paragraph (b)(3) of
this A-22. If this presumption is not successfully rebutted, the payment will be treated
as contingent on the change in ownership or control under paragraph (b) of this A-22.
Example 4. A contract between a corporation and a disqualified individual, D,
provides that a payment will be m a d e to D upon the onset of a tender offer for shares of
the corporation's stock. A tender offer is m a d e on December 1, 2008, and the payment
is m a d e to D. Although the tender offer is unsuccessful, it leads to a negotiated merger
with another entity on June 1, 2009, which results in a change in the ownership or
control of the corporation. It w a s not substantially certain, at the time of the onset of the
tender offer, that the payment would have been m a d e had no tender offer taken place.
The onset of a tender offer is considered closely associated with a change in ownership
or control. Because the tender offer occurred within one year before the date of the
change in ownership or control of the corporation, the onset of the tender offer is
presumed to be materially related to the change in ownership or control. If this
presumption is not rebutted, the payment will be treated as contingent on the change in
ownership or control. If no change in ownership or control had occurred, the payment
would not be treated as contingent on a change in ownership or control; however, the
payment still could be a parachute payment under Q/A-37 of this section if the contract
violated a generally enforced securities law or regulation.
Example 5. A contract between a corporation and a disqualified individual, E,
provides that a payment will be m a d e to E if the corporation's level of product sales or
profits reaches a specified level. At the time the contract w a s entered into, the parties
had no reason to believe that such an increase in the corporation's level of product
sales or profits would be preliminary or subsequent to, or otherwise closely associated
with, a change in ownership or control of the corporation. Eighteen months later, a
change in the ownership or control of the corporation occurs and within one year after
the date of the change of ownership or control, the corporation's level of product sales
or profits reaches the specified level. Under these facts and circumstances (and in the
absence of contradictory evidence), the increase in product sales or profits of the
corporation is not an event closely associated with the change in ownership or control of
the corporation. Accordingly, even if the increase is materially related to the change in
ownership or control, the payment will not be treated as contingent on a change in
ownership or control.
Q-23: May a payment be treated as contingent on a change in ownership or

57

control if the payment is m a d e under an agreement entered into after the change?
A-23: (a) No. Payments are not treated as contingent on a change in ownership
or control if they are made (or are to be made) pursuant to an agreement entered into
after the change (a post-change agreement). For this purpose, an agreement that is
executed after a change in ownership or control pursuant to a legally enforceable
agreement that was entered into before the change is considered to have been entered
into before the change. (See Q/A-9 of this section regarding the exemption for
reasonable compensation for services rendered on or after a change in ownership or
control.) If an individual has a right to receive a payment that would be a parachute
payment if made under an agreement entered into prior to a change in ownership or
control (pre-change agreement) and gives up that right as bargained-for consideration
for benefits under a post-change agreement, the agreement is treated as a post-change
agreement only to the extent the value of the payments under the agreement exceed
the value of the payments under the pre-change agreement. To the extent payments
under the agreement have the same value as the payments under the pre-change
agreement, such payments retain their character as parachute payments subject to this
section.
(b) The following examples illustrate the principles of this A-23:
Example 1. Assume that a disqualified individual is an employee of a
corporation. A change in ownership or control of the corporation occurs, and thereafter
the individual enters into an employment agreement with the acquiring company.
Because the agreement is entered into after the change in ownership or control occurs,
payments to be m a d e under the agreement are not treated as contingent on the
change.
Example 2. Assume the same facts as in Example 1. except that the agreement
58

between the disqualified individual and the acquiring company is executed after the
change in ownership or control, pursuant to a legally enforceable agreement entered
into before the change. Payments to be m a d e under the agreement m a y be treated as
contingent on the change in ownership or control pursuant to Q/A-22 of this section.
However, see Q/A-9 of this section regarding the exemption from the definition of
parachute payment for certain amounts of reasonable compensation.
Example 3. Assume the same facts as in Example 1, except that prior to the
change in ownership or control, the individual and corporation enter into an agreement
under which the individual will receive parachute payments in the event of a change in
ownership or control of the corporation. After the change, the individual agrees to give
up the right to payments under the pre-change agreement that would be parachute
payments if made, in exchange for compensation under a new agreement with the
acquiring corporation. Because the individual gave up the right to parachute payments
under the pre-change agreement in exchange for other payments under the postchange agreement, payments in an amount equal to the parachute payments under the
pre-change agreement are treated as contingent on the change in ownership or control
under this A-23. Because the post-change agreement w a s entered into after the
change, payments in excess of this amount are not treated as parachute payments.
Q-24: If a payment is treated as contingent on a change in ownership or control,
is the full amount of the payment so treated?
A-24: (a)(1) General rule. Yes. If the payment is a transfer of property, the
amount of the payment is determined under Q/A-12 or Q/A-13 of this section. For all
other payments, the amount of the payment is determined under Q/A-11 of this section.
However, in certain circumstances, described in paragraphs (b) and (c) of this A-24,
only a portion of the payment is treated as contingent on the change. Paragraph (b) of
this A-24 applies to a payment that is vested, without regard to the change in ownership
or control, and is treated as contingent on the change in ownership or control because
the change accelerates the time at which the payment is made. Paragraph (c) of this A24 applies to a payment that becomes vested as a result of the change in ownership or
control if, without regard to the change in ownership or control, the payment was

59

contingent only on the continued performance of services for the corporation for a

specified period of time and if the payment is attributable, at least in part, to services
performed before the date the payment becomes vested. Paragraph (b) or (c) does not
apply to any payment (or portion thereof) if the payment is treated as contingent on the
change in ownership or control pursuant to Q/A-25 of this section. For purposes of this
A-24, vested has the same meaning as provided in Q/A-22(a).
(2) Reduction by reasonable compensation. The amount of a payment under
paragraph (a)(1) of this A-24 is reduced by any portion of such payment that the
taxpayer establishes by clear and convincing evidence is reasonable compensation for
personal services rendered by the disqualified individual on or after the date of the
change of control. See Q/A-9 and Q/A-38 through 44 of this section for rules
concerning reasonable compensation. The portion of an amount treated as contingent
under paragraph (b) or (c) of this A-24 may not be reduced by reasonable
compensation.
(b) Vested payments. This paragraph (b) applies if a payment is vested, without
regard to the change in ownership or control, and is treated as contingent on the
change in ownership or control because the change accelerates the time at which the
payment is made. In such a case, the portion of the payment, if any, that is treated as
contingent on the change in ownership or control is the amount by which the amount of
the accelerated payment exceeds the present value of the payment absent the
acceleration. If the value of such a payment absent the acceleration is not reasonably
ascertainable, and the acceleration of the payment does not significantly increase the

60

present value of the payment absent the acceleration, the present value of the payment
absent the acceleration is treated as equal to the amount of the accelerated payment. If
the value of the payment absent the acceleration is not reasonably ascertainable, but
the acceleration significantly increases the present value of the payment, the future
value of such payment is treated as equal to the amount of the accelerated payment.
For rules on determining present value, see paragraph (e) of this A-24, Q/A-32, and
Q/A-33 of this section.
(c)(1) Nonvested payments. This paragraph (c) applies to a payment that
becomes vested as a result of the change in ownership or control to the extent that (i) Without regard to the change in ownership or control, the payment was
contingent only on the continued performance of services for the corporation for a
specified period of time; and
(ii) The payment is attributable, at least in part, to the performance of services
before the date the payment is made or becomes certain to be made.
(2) The portion of the payment subject to paragraph (c) of this A-24 that is treated
as contingent on the change in ownership or control is the amount described in
paragraph (b) of this A-24, plus an amount, as determined in paragraph (c)(4) of this A24, to reflect the lapse of the obligation to continue to perform services. In no event can
the portion of the payment treated as contingent on the change in ownership or control
under this paragraph (c) exceed the amount of the accelerated payment, or, if the
payment is not accelerated, the present value of the payment.
(3) For purposes of this paragraph (c) of this A-24, the acceleration of the
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vesting of a stock option or the lapse of a restriction on restricted stock is considered to
significantly increase the value of a payment.
(4) The amount reflecting the lapse of the obligation to continue to perform
services (described in paragraph (c)(2) of this A-24) is 1 percent of the amount of the
accelerated payment multiplied by the number of full months between the date that the
individual's right to receive the payment is vested and the date that, absent the
acceleration, the payment would have been vested. This paragraph (c)(4) applies to the
accelerated vesting of a payment in the nature of compensation even if the time at
which the payment is made is not accelerated. In such a case, the amount reflecting
the lapse of the obligation to continue to perform services is 1 percent of the present
value of the future payment multiplied by the number of full months between the date
that the individual's right to receive the payment is vested and the date that, absent the
acceleration, the payment would have been vested.
(d) Application of this A-24 to certain payments.-- (1) Benefits under a
nongualified deferred compensation plan. In the case of a payment of benefits under a
nonqualified deferred compensation plan, paragraph (b) of this A-24 applies to the
extent benefits under the plan are vested without regard to the change in ownership or
control. Paragraph (c) of this A-24 applies to the extent benefits under the plan become
vested as a result of the change in ownership or control and are attributable, at least in
part, to the performance of services prior to vesting. Any other payment of benefits
under a nonqualified deferred compensation plan is a payment in the nature of
compensation subject to the general rule of paragraph (a) of this A-24 and the rules in

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Q/A-11 of this section.
(2) Employment agreements. The general rule of paragraph (a) of this A-24 (and
not the rules in paragraphs (b) or (c)) applies to the payment of amounts due under an
employment agreement on a termination of employment or a change in ownership or
control that otherwise would be attributable to the performance of services (or refraining
from the performance of services) during any period that begins after the date of
termination of employment or change in ownership or control, as applicable. For
purposes of this paragraph (d)(2) of this A-24, an employment agreement means an
agreement between an employee or independent contractor and employer or service
recipient which describes, among other things, the amount of compensation or
remuneration payable to the employee or independent contractor. See Q/A-42(b) and
44 of this section for the treatment of the remaining amounts of salary under an
employment agreement.
(3) Vesting due to an event other than services. Neither paragraph (b) nor (c) of
this A-24 applies to a payment if (without regard to the change in ownership or control)
vesting of the payment depends on an event other than the performance of services,
such as the attainment of a performance goal, and the event does not occur prior to the
change in ownership or control. In such circumstances, the full amount of the
accelerated payment is treated as contingent on the change in ownership or control
under paragraph (a) of this A-24. However, see Q/A-39 of this section for rules relating
to the reduction of the excess parachute payment by the portion of the payment which is
established to be reasonable compensation for personal services actually rendered

63

before the date of a change in ownership or control.
(e) Present value. For purposes of this A-24, the present value of a payment is
determined as of the date on which the accelerated payment is made.
(f) Examples. The following examples illustrate the principles of this A-24:
Example 1. (i) Corporation maintains a qualified plan and a nonqualified
supplemental retirement plan (SERP) for its executives. Benefits under the S E R P are
not paid to participants until retirement. E, a disqualified individual with respect to
Corporation, has a vested account balance of $500,000 under the S E R P . A change in
ownership or control of Corporation occurs. The S E R P provides that in the event of a
change in ownership or control, all vested accounts will be paid to S E R P participants.
(ii) Because E was vested in $500,000 of benefits under the SERP prior to the
change in ownership or control and the change merely accelerated the time at which the
payment w a s m a d e to E, only a portion of the payment, as determined under paragraph
(b) of this A-24, is treated as contingent on the change. Thus, the portion of the
payment that is treated as contingent on the change is the amount by which the amount
of the accelerated payment ($500,000) exceeds the present value of the payment
absent the acceleration.
(iii) Assume the same facts as in paragraph (i) of this Example 1, except that E's
account balance of $500,000 is not vested. Instead, assume that E will vest in E's
account balance of $500,000 in 2 years if E continues to perform services for the next 2
years. A s s u m e further that the S E R P provides that all unvested S E R P benefits vest
immediately on a change in ownership or control and are paid to the participants.
Because the vesting of the S E R P payment, without regard to the change, depends only
on the performance of services for a specified period of time and the payment is
attributable, in part, to the performance of services before the change in ownership or
control, only a portion of the $500,000 payment, as determined under paragraph (c) of
this A-24, is treated as contingent on the change. The portion of the payment that is
treated as contingent on the change is the lesser of the amount of the accelerated
payment or the amount by which the accelerated payment exceeds the present value of
the payment absent the acceleration, plus an amount to reflect the lapse of the
obligation to continue to perform services.
(iv) Assume the same facts as in paragraph (i) of this Example 1, except that in
addition to the pay out of the vested account balance of $500,000 on the change in
ownership or control, an additional $70,000 will be credited to E's account and included
in the payment to E. Because the $500,000 w a s vested without regard to the change in
ownership or control, paragraph (b) of this A-24 applies to the $500,000 payment.
Because the $70,000 is not vested, without regard to the change, and is not attributable

64

to the performance of services prior to the change, the entire $70,000 payment is
contingent on the change in ownership or control under paragraph (a) of this A-24.
(v) Assume the same facts as in paragraph (i) of this Example 1, except that the
benefit under the S E R P is calculated using a percentage of final average compensation
multiplied by years of service. If, contingent on the change in ownership or control, E is
credited with additional years of service, an adjustment to final average compensation,
or an increase in the applicable percentage, any increase in the benefit payable under
the S E R P is not attributable to the performance of services prior to the change, and the
entire increase in the benefit is contingent on the change in ownership or control under
paragraph (a) of this A-24.
Example 2. As a result of a change in the effective control of a corporation D, a
disqualified individual with respect to the corporation, receives accelerated payment of
D's vested account balance in a nonqualified deferred compensation account plan.
Actual interest and other earnings on the plan assets are credited to each account as
earned before distribution. Investment of the plan assets is not restricted in such a
manner as would prevent the earning of a market rate of return on the plan assets. The
date on which D would have received D's vested account balance absent the change in
ownership or control is uncertain, and the rate of earnings on the plan assets is not
fixed. Thus, the amount of the payment absent the acceleration is not reasonably
ascertainable. Under these facts, acceleration of the payment does not significantly
increase the present value of the payment absent the acceleration, and the present
value of the payment absent the acceleration is treated as equal to the amount of the
accelerated payment. Accordingly, no portion of the payment is treated as contingent
on the change.
Example 3. (i) On January 15, 2006, a corporation and a disqualified individual,
F, enter into a contract providing for a retention bonus of $500,000 to be paid to F on
January 15, 2011. The payment of the bonus will be forfeited by F if F does not remain
employed by the corporation for the entire 5-year period. However, the contract
provides that the full amount of the payment will be m a d e immediately on a change in
ownership or control of the corporation during the 5-year period. O n January 15, 2009,
a change in ownership or control of the corporation occurs and the full amount of the
payment ($500,000) is m a d e on that date to F. Under these facts, the payment of
$500,000 w a s contingent only on F's performance of services for a specified period and
is attributable, in part, to the performance of services before the change in ownership or
control. Therefore, only a portion of the payment, as determined under paragraph (c) of
this A-24 is treated as contingent on the change. The portion of the payment that is
treated as contingent on the change is the amount by which the amount of the
accelerated payment (i.e., $500,000, the amount paid to the individual because of the
change in ownership) exceeds the present value of the payment that w a s expected to
have been m a d e absent the acceleration (i.e., $406,838, the present value on January
15, 2009, of a $500,000 payment on January 15, 2011), plus $115,000 (1 percent x 23

65

months x $500,000) which is the amount reflecting the lapse of the obligation to
continue to perform services. Accordingly, the amount of the payment treated as
contingent on the change in ownership or control is $208,162, the s u m of $93,162
($500,000 - $406,838) + $115,000). This result does not change if F actually remains
employed until the end of the 5-year period.
(ii) Assume the same facts as in paragraph (i) of this Example 3, except that the
retention bonus will vest on the change in ownership or control, but will not be paid until
January 15, 2011 (the original date in the contract). Because the payment of $500,000
w a s contingent only on F's performance of services for a specified period and is
attributable, in part, to the performance of services before the change in ownership or
control, only a portion of the $500,000 payment is treated as contingent on the change
in ownership or control as determined under paragraph (c) of this A-24. Because there
is accelerated vesting of the bonus, the portion of the payment treated as contingent on
the change is the amount described in paragraph (b) of this A-27, which is $0 under
these facts, plus an amount reflecting the lapse of the obligation to continue to perform
services which is $93,573 (1 percent x 23 months x $406,838 (the present value of a
$500,000 payment).
Example 4. (i) On January 15, 2006, a corporation gives to a disqualified
individual, in connection with her performance of services to the corporation, a bonus of
1,000 shares of the corporation's stock. Under the terms of the bonus arrangement, the
individual is obligated to return the stock to the corporation if she terminates her
employment for any reason prior to January 15, 2011. However, if there is a change in
the ownership or effective control of the corporation prior to January 15, 2011, she
ceases to be obligated to return the stock. The individual's rights in the stock are
treated as substantially nonvested (within the meaning of §1.83-3(b) and (j)) during that
period. O n January 15, 2009, a change in the ownership of the corporation occurs. O n
that day, the fair market value of the stock is $500,000.
(ii) Under these facts, the payment was contingent only on performance of
services for a specified period and is attributable, in part, to the performance of services
before the change in ownership or control. Thus, only a portion of the payment, as
determined under paragraph (c) of this A-24, is treated as contingent on the change in
ownership or control. The portion of the payment that is treated as contingent on the
change is the amount by which the present value of the accelerated payment on
January 15, 2009 ($500,000), exceeds the present value of the payment that w a s
expected to have been m a d e on January 15, 2011, plus an amount reflecting the lapse
of the obligation to continue to perform services. At the time of the change, it cannot be
reasonably ascertained what the value of the stock would have been on January 15,
2011. The acceleration of the lapse of a restriction on stock is treated as significantly
increasing the value of the payment. Therefore, the value of such stock on January 15,
2011, is deemed to be $500,000, the amount of the accelerated payment. The present
value on January 15, 2009, of a $500,000 payment to be m a d e on January 15, 2011, is

66

$406,838. Thus, the portion of the payment treated as contingent on the change is
$208,162, the s u m of $93,162 ($500,000 - $406,838), plus $115,000 (1 percent x 23
months x $500,000), the amount reflecting the lapse of the obligation to continue to
perform services.
Example 5. (i) On January 15, 2006, a corporation grants to a disqualified
individual nonqualified stock options to purchase 30,000 shares of the corporation's
stock. The options will be forfeited by the individual if he fails to perform personal
services for the corporation until January 15, 2009. The options will, however, vest in
the individual at an earlier date if there is a change in ownership or control of the
corporation. O n January 16, 2008, a change in the ownership or control of the
corporation occurs and the options become vested in the individual. The value of the
options on January 16, 2008, determined in accordance with Q/A-13, is $600,000.
(ii) The payment of the options to purchase 30,000 shares was contingent only
on performance of services for the corporation until January 15, 2009, and is
attributable, in part, to the performance of services before the change in ownership or
control. Therefore, only a portion of the payment is treated as contingent on the
change. The portion of the payment that is treated as contingent on the change is the
amount by which the accelerated payment on January 16, 2008 ($600,000) exceeds the
present value on January 16, 2008, of the payment that w a s expected to have been
m a d e on January 15, 2009, absent the acceleration, plus an amount reflecting the lapse
of the obligation to continue to perform services. At the time of the change, it cannot be
reasonably ascertained what the value of the options would have been on January 15,
2009. The acceleration of vesting in the options is treated as significantly increasing the
value of the payment. Therefore, the value of such options on January 15, 2009, is
deemed to be $600,000, the amount of the accelerated payment. The present value on
January 16, 2008, of a $600,000 payment to be m a d e on January 15, 2009, is
$549,964. Thus, the portion of the payment treated as contingent on the change is
$116,036, the sum of $50,036 ($600,000 - $549,964), plus an amount reflecting the
lapse of the obligation to continue to perform services which is $66,000 (1 percent x 11
months x $600,000).
Example 6. (i) Assume the same facts as in Example 5, except that the options
become vested periodically (absent a change in ownership or control), with one-third of
the options vesting on January 15, 2007, 2008, and 2009, respectively. Thus, options
to purchase 20,000 shares vest independently of the January 16, 2008, change in
ownership or control and the options to purchase the remaining 10,000 shares vest as a
result of the change in ownership or control.
(ii) The payment of the options to purchase 10,000 shares was contingent only
on performance of services for the corporation until January 15, 2009, and is
attributable, in part, to the performance of services before the change in ownership or
control. Therefore, only a portion of the payment as determined under paragraph (c) of

67

this A-24 is treated as contingent on the change in ownership or control. The portion of
the payment that is treated as contingent on the change in ownership or control is the
amount by which the accelerated payment on January 16, 2008 ($200,000) exceeds the
present value on January 16, 2008, of the payment that w a s expected to have been
m a d e on January 15, 2009, absent the acceleration, plus an amount reflecting the lapse
of the obligation to perform services. At the time of the change in ownership or control,
it cannot be reasonably ascertained what the value of the options would have been on
January 15, 2009. The acceleration of vesting in the options is treated as significantly
increasing the value of the payment. Therefore, the value of such options on January
15, 2009, is deemed to be $200,000, the amount of the accelerated payment. The
present value on January 16, 2008, of a $200,000 payment to be m a d e on January 15,
2009, is $183,328.38. Thus, the portion of the payment treated as contingent on the
change is $38,671.62, the sum of $16,671.62 ($200,000 - $183,328.38), plus an
amount reflecting the lapse of the obligation to continue to perform services which is
$22,000 (1 percent x 11 months x $200,000).
Example 7. Assume the same facts as in Example 5, except that the option
agreement provides that the options will vest either on the corporation's level of profits
reaching a specified level, or if earlier, on the date on which there is a change in
ownership or control of the corporation. The corporation's level of profits do not reach
the specified level prior to January 16, 2008. In such case, the full amount of the
payment, $600,000, is treated as contingent on the change in ownership or control
under paragraph (a) of this A-24. Because the payment w a s not contingent only on the
performance of services for the corporation for a specified period, the rules of paragraph
(b) and (c) of this A-24 do not apply. See Q/A-39 of this section for rules relating to the
reduction of the excess parachute payment by the portion of the payment which is
established to be reasonable compensation for personal services actually rendered
before the date of a change in ownership or control.
Example 8. On January 1, 2005, E, a disqualified individual with respect to
Corporation X, enters into an employment agreement with Corporation X under which E
will be paid wages of $200,000 each year during the 5-year employment agreement.
The employment agreement provides that if a change in ownership or control of
Corporation X occurs, E will be paid the present value of the remaining salary under the
employment agreement. O n January 1, 2006, a change in ownership or control of
Corporation X occurs, E is terminated, and E receives a payment of the present value of
$200,000 for each of the 4 years remaining under the employment agreement.
Because the payment represents future salary under an employment agreement (i.e.,
amounts otherwise attributable to the performance of services for periods that begin
after the termination of employment), the general rule of paragraph (a) of this A-24
applies to the payment and not the rules of paragraphs (b) and (c) of this A-24. See
Q/A-42(c) and 44 of this section for the treatment of the remaining payments under an
employment agreement.

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Presumption That Payment Is Contingent on Change
Q-25: Is there a presumption that certain payments are contingent on a change
in ownership or control?
A-25: Yes, for purposes of this section, any payment is presumed to be
contingent on such a change unless the contrary is established by clear and convincing
evidence if the payment is made pursuant to -(a) An agreement entered into within one year before the date of a change in
ownership or control; or
(b) An amendment that modifies a previous agreement in any significant respect,
if the amendment is made within one year before the date of a change in ownership or
control. In the case of an amendment described in paragraph (b) of this A-25, only the
portion of any payment that exceeds the amount of such payment that would have been
made in the absence of the amendment is presumed, by reason of the amendment, to
be contingent on the change in ownership or control.
Q-26: How may the presumption described in Q/A-25 of this section be
rebutted?
A-26: (a) To rebut the presumption described in Q/A-25 of this section, the
taxpayer must establish by clear and convincing evidence that the payment is not
contingent on the change in ownership or control. Whether the payment is contingent
on such change is determined on the basis of all the facts and circumstances of the
particular case. Factors relevant to such a determination include, but are not limited to,
the content of the agreement or amendment and the circumstances surrounding the
69

execution of the agreement or amendment, such as whether it w a s entered into at a
time when a takeover attempt had commenced and the degree of likelihood that a
change in ownership or control would actually occur. However, even if the presumption
is rebutted with respect to an agreement, some or all of the payments under the
agreement may still be contingent on the change in ownership or control pursuant to
Q/A-22 of this section.
(b) In the case of an agreement described in Q/A-25 of this section, clear and
convincing evidence that the agreement is one of the three following types will generally
rebut the presumption that payments under the agreement are contingent on the
change in ownership or control (1) A nondiscriminatory employee plan or program as defined in paragraph (c) of
this A-26;
(2) A contract between a corporation and an individual that replaces a prior
contract entered into by the same parties more than one year before the change in
ownership or control, if the new contract does not provide for increased payments (apart
from normal increases attributable to increased responsibilities or cost of living
adjustments), accelerate the payment of amounts due at a future time, or modify (to the
individual's benefit) the terms or conditions under which payments will be made; or
(3) A contract between a corporation and an individual who did not perform
services for the corporation prior to the one year period before the change in ownership
or control occurs, if the contract does not provide for payments that are significantly
different in amount, timing, terms, or conditions from those provided under contracts
70

entered into by the corporation (other than contracts that themselves were entered into
within one year before the change in ownership or control and in contemplation of the
change) with individuals performing comparable services.
(c) For purposes of this section, the term nondiscriminatory employee plan or
program means: a group term life insurance plan that meets the requirements of
section 79(d); a self insured medical reimbursement plan that meets the requirements of
section 105(h); a cafeteria plan (within the meaning of section 125); an educational
assistance program (within the meaning of section 127); a dependent care assistance
program (within the meaning of section 129); a no-additional-cost service (within the
meaning of section 132(b)) or qualified employee discount (within the meaning of
section 132(c)); a qualified retirement planning services program under section 132(m);
an adoption assistance program (within the meaning of section 137); and such other
items as provided by the Commissioner in published guidance of general applicability
under §601.601 (d)(2). Payments under certain other plans are exempt from the
definition of parachute payment under Q/A-8 of this section.
(d) The following examples illustrate the application of the presumption:
Example 1. A corporation and a disqualified individual who is an employee of the
corporation enter into an employment contract. The contract replaces a prior contract
entered into by the s a m e parties more than one year before the change in ownership or
control and the n e w contract does not provide for any increased payments other than a
cost of living adjustment, does not accelerate the payment of amounts due at a future
time, and does not modify (to the individual's benefit) the terms or conditions under
which payments will be made. Clear and convincing evidence of these facts rebuts the
presumption described in A-25 of this section. However, payments under the contract
still m a y be contingent on the change in ownership or control pursuant to Q/A-22 of this
section.
Example 2. Assume the same facts as in Example 1. except that the contract is
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entered into after a tender offer for the corporation's stock had c o m m e n c e d and it w a s
likely that a change in ownership or control would occur and the contract provides for a
substantial bonus payment to the individual upon his signing the contract. The
individual has performed services for the corporation for m a n y years, but previous
employment contracts between the corporation and the individual did not provide for a
similar signing bonus. O n e month after the contract is entered into, a change in the
ownership or control of the corporation occurs. All payments under the contract are
presumed to be contingent on the change in ownership or control even though the
bonus payment would have been legally required even if no change had occurred.
Clear and convincing evidence of these facts rebuts the presumption described in A-25
of this section with respect to all of the payments under the contract with the exception
of the bonus payment (which is treated as contingent on the change). However,
payments other than the bonus under the contract still m a y be contingent on the change
in ownership or control pursuant to Q/A-22 of this section.
Example 3. A corporation and a disqualified individual, who is an employee of
the corporation, enter into an employment contract within one year of a change in
ownership or control of the corporation. Under the contract, in the event of a change in
ownership or control and subsequent termination of employment, certain payments will
be m a d e to the individual. A change in ownership or control occurs, but the individual is
not terminated until 2 years after the change in ownership or control. If clear and
convincing evidence does not rebut the presumption described in A-25 of this section,
because the payment is m a d e pursuant to an agreement entered into within one year of
the date of the change in ownership or control, the payment is presumed contingent on
the change under A-25 of this section. This is true even though A's termination of
employment is presumed not to be materially related to the change in ownership or
control under Q/ A-22 of this section.
Change in Ownership or Control
Q-27: When does a change in the ownership of a corporation occur?
A-27: (a) For purposes of this section, a change in the ownership of a
corporation occurs on the date that any one person, or more than one person acting as
a group (as defined in paragraph (b) of this A-27), acquires ownership of stock of the
corporation that, together with stock held by such person or group, has more than 50
percent of the total fair market value or total voting power of the stock of such
corporation. However, if any one person, or more than one person acting as a group, is

72

considered to o w n more than 50 percent of the total fair market value or total voting
power of the stock of a corporation, the acquisition of additional stock by the same
person or persons is not considered to cause a change in the ownership of the
corporation (or to cause a change in the effective control of the corporation (within the
meaning of Q/A-28 of this section)). An increase in the percentage of stock owned by
any one person, or persons acting as a group, as a result of a transaction in which the
corporation acquires its stock in exchange for property will be treated as an acquisition
of stock for purposes of this section. This A-27 applies only when there is a transfer of
stock of a corporation (or issuance of stock of a corporation) and stock in such
corporation remains outstanding after the transaction. (See Q/A-29 for rules regarding
the transfer of assets of a corporation).
(b) For purposes of paragraph (a) of this A-27, persons will not be considered to
be acting as a group merely because they happen to purchase or own stock of the
same corporation at the same time, or as a result of the same public offering. However,
persons will be considered to be acting as a group if they are owners of a corporation
that enters into a merger, consolidation, purchase or acquisition of stock, or similar
business transaction with the corporation. If a person, including an entity shareholder,
owns stock in both corporations that enter into a merger, consolidation, purchase or
acquisition of stock, or similar transaction, such shareholder is considered to be acting
as a group with other shareholders in a corporation only with respect to the ownership in
that corporation prior to the transaction giving rise to the change and not with respect to
the ownership interest in the other corporation.
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(c) For purposes of this A-27 (and Q/A-28 and 29), section 318(a) applies to
determine stock ownership. Stock underlying a vested option is considered owned by
the individual who holds the vested option (and the stock underlying an unvested option
is not considered owned by the individual who holds the unvested option). For
purposes of the preceding sentence, however, if the option is exercisable for stock that
is not substantially vested (as defined by sections 1.83-3(b) and (j)), the stock
underlying the option is not treated as owned by the individual who holds the option. In
addition, mutual and cooperative corporations are treated as having stock for purposes
of this A-27.
(d) The following examples illustrate the principles of this A-27:
Example 1. Corporation M has owned stock with a fair market value equal to 19
percent of the value of the stock of Corporation N (an otherwise unrelated corporation)
for m a n y years prior to 2006. Corporation M acquires additional stock with a fair market
value equal to 15 percent of the value of the stock of Corporation N on January 1, 2006,
and an additional 18 percent on February 21, 2007. A s of February 21, 2007,
Corporation M has acquired stock with a fair market value greater than 50 percent of the
value of the stock of Corporation N. Thus, a change in the ownership of Corporation N
is considered to occur on February 21, 2007 (assuming that Corporation M did not have
effective control of Corporation N immediately prior to the acquisition on that date).
Example 2. All of the corporation's stock is owned by the founders of the
corporation. The board of directors of the corporation decides to offer shares of the
corporation to the public. After the public offering, the founders of the corporation own a
total of 40 percent of the corporation's stock, and members of the public o w n 60
percent. If no one person (or more than one person acting as a group) owns more than
50 percent of the corporation's stock (by value or voting power) after the public offering,
there is no change in the ownership of the corporation.
Example 3. Corporation P merges into Corporation O (a previously unrelated
corporation). In the merger, the shareholders of Corporation P receive Corporation O
stock in exchange for their Corporation P stock. Immediately after the merger, the
former shareholders of Corporation P o w n stock with a fair market value equal to 60
percent of the value of the stock of Corporation O, and the former shareholders of
Corporation O o w n stock with a fair market value equal to 40 percent of the value of the

74

stock of Corporation O. The former shareholders of Corporation P will be treated as
acting as a group in their acquisition of Corporation O stock. Thus, a change in the
ownership of Corporation O occurs on the date of the merger. See Q/A-29, Example 3,
regarding whether there is a change in ownership or control of P.
Example 4. Assume the same facts as in Example 3, except that immediately
after the change, the former shareholders of Corporation P own stock with a fair market
value of 51 percent of the value of Corporation O stock and the former shareholders of
Corporation O own stock with a fair market value equal to 49 percent of the value of
Corporation O stock. A s s u m e further that prior to the merger several Corporation O
shareholders also owned Corporation P stock (overlapping shareholders). In the
merger, those O shareholders received additional O stock by virtue of their ownership of
P stock with a fair market value of 5 percent of the value of Corporation O stock.
Including the O stock attributable to the P shares, the O shareholders hold 54 percent of
O after the transaction. However, those overlapping shareholders that owned both
Corporation O stock and Corporation P stock prior to the merger are treated as acting
as a group with the Corporation O shareholders only with respect to their ownership
interest in Corporation O prior to the transaction. Therefore, because the Corporation O
shareholders owned 49 percent of the value of Corporation O stock, a change in the
ownership of Corporation O occurs on the date of the merger. See Q/A-29, Example 3,
regarding whether there is a change in ownership or control of P.
Example 5. A, an individual, owns stock with a fair market value equal to 20
percent of the value of the stock of Corporation Q. O n January 1, 2007, Corporation Q
acquires in a redemption for cash all of the stock held by shareholders other than A.
Thus, A is left as the sole shareholder of Corporation O. A change in ownership of
Corporation O is considered to occur on January 1, 2007 (assuming that A did not have
effective control of Corporation Q immediately prior to the redemption).
Example 6. Assume the same facts as in Example 5, except that A owns stock
with a fair market value equal to 51 percent of the value of all the stock of Corporation Q
immediately prior to the redemption. There is no change in the ownership of
Corporation Q as a result of the redemption.
Q-28: When does a change in the effective control of a corporation occur?
A-28: (a) Notwithstanding that a corporation has not undergone a change in
ownership under Q/A-27, for purposes of this section, a change in the effective control
of a corporation is presumed to occur on the date that either (1) Any one person, or more than one person acting as a group (as determined

75

under paragraph (e) of this A-28), acquires (or has acquired during the 12-month period
ending on the date of the most recent acquisition by such person or persons) ownership
of stock of the corporation possessing 20 percent or more of the total voting power of
the stock of such corporation; or
(2) A majority of members of the corporation's board of directors is replaced
during any 12-month period by directors whose appointment or election is not endorsed
by a majority of the members of the corporation's board of directors prior to the date of
the appointment or election.
(b) The presumption of paragraph (a) of this A-28 may be rebutted by
establishing that such acquisition or acquisitions of the corporation's stock, or such
replacement of the majority of the members of the corporation's board of directors, does
not transfer the power to control (directly or indirectly) the management and policies of
the corporation from any one person (or more than one person acting as a group) to
another person (or group). For purposes of this section, in the absence of an event
described in paragraph (a) (1) or (2) of this A-28, a change in the effective control of a
corporation is presumed not to have occurred.
(c) In no event does a change in effective control under this A-28 occur in any
transaction in which either of the two corporations involved in the transaction has a
change in ownership or control under Q/A-27 or 29 of this section. Thus, for example,
assume Corporation P transfers more than one-third of the total gross fair market value
of its assets to Corporation O in exchange for 20 percent of O's stock. Because P has
undergone a change in ownership of a substantial portion of its assets under Q/A-29 of
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this section, O does not have a change in effective control under Q/A-28.
(d) If any one person, or more than one person acting as a group, is considered
to effectively control a corporation (within the meaning of this A-28), the acquisition of
additional control of the corporation by the same person or persons is not considered to
cause a change in the effective control of the corporation (or to cause a change in the
ownership of the corporation within the meaning of Q/A-27 of this section).
(e) For purposes of this A-28, persons will not be considered to be acting as a
group merely because they happen to purchase or own stock of the same corporation at
the same time, or as a result of the same public offering. However, persons will be
considered to be acting as a group if they are owners of a corporation that enters into a
merger, consolidation, purchase or acquisition of stock, or similar business transaction
with the corporation. If a person, including an entity shareholder, owns stock in both
corporations that enter into a merger, consolidation, purchase or acquisition of stock, or
similar transaction, such shareholder is considered to be acting as a group with other
shareholders in a corporation only with respect to the ownership in that corporation prior
to the transaction giving rise to the change and not with respect to the ownership
interest in the other corporation.
(f) For purposes of determining stock ownership, see Q/A-27(c).
(g) The following examples illustrate the principles of this A-28:
Example 1. Shareholder A acquired the following percentages of the voting
stock of Corporation M (an otherwise unrelated corporation) on the following dates: 16
percent on January 1, 2005; 10 percent on January 10, 2006; 8 percent on February 10,
2006; 11 percent on March 1, 2007; and 8 percent on March 10, 2007. Thus, on March
10, 2007, A owns a total of 53 percent of M's voting stock. Because A did not acquire
20 percent or more of M's voting stock during any 12-month period, there is no
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presumption of a change in effective control pursuant to paragraph (a)(1) of this A-28.
In addition, under these facts there is a presumption that no change in the effective
control of Corporation M occurred. If this presumption is not rebutted (and thus no
change in effective control of Corporation M is treated as occurring prior to March 10,
2007), a change in the ownership of Corporation M is treated as having occurred on
March 10, 2007 (pursuant to Q/A-27 of this section) because A had acquired more than
50 percent of Corporation M's voting stock as of that date.
Example 2. A minority group of shareholders of a corporation opposes the
practices and policies of the corporation's current board of directors. A proxy contest
ensues. The minority group presents its o w n slate of candidates for the board at the
next annual meeting of the corporation's shareholders, and candidates of the minority
group are elected to replace a majority of the current m e m b e r s of the board. A change
in the effective control of the corporation is presumed to have occurred on the date the
election of the n e w board of directors becomes effective.
Q-29: When does a change in the ownership of a substantial portion of a
corporation's assets occur?
A-29: (a) For purposes of this section, a change in the ownership of a
substantial portion of a corporation's assets occurs on the date that any one person, or
more than one person acting as a group (as determined in paragraph (c) of this A-29),
acquires (or has acquired during the 12-month period ending on the date of the most
recent acquisition by such person or persons) assets from the corporation that have a
total gross fair market value equal to or more than one-third of the total gross fair market
value of all of the assets of the corporation immediately prior to such acquisition or
acquisitions. For this purpose, gross fair market value means the value of the assets of
the corporation, or the value of the assets being disposed of, determined without regard
to any liabilities associated with such assets. This A-29 applies in any situation other
than one involving the transfer of stock (or issuance of stock) in a parent corporation
and stock in such corporation remains outstanding after the transaction. Thus, this A-

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29 applies to the sale of stock in a subsidiary (when that subsidiary is treated as a
single corporation with the parent pursuant to Q/A-46) and to mergers involving the
creation of a new corporation or with respect to the corporation that is not surviving
entity.
(b) (1) There is no change in ownership or control under this A-29 when there is
a transfer to an entity that is controlled by the shareholders of the transferring
corporation immediately after the transfer, as provided in this paragraph (b). A transfer
of assets by a corporation is not treated as a change in the ownership of such assets if
the assets are transferred to —
(i) A shareholder of the corporation (immediately before the asset transfer) in
exchange for or with respect to its stock;
(ii) An entity, 50 percent or more of the total value or voting power of which is
owned, directly or indirectly, by the corporation;
(iii) A person, or more than one person acting as a group, that owns, directly or
indirectly, 50 percent or more of the total value or voting power of all the outstanding
stock of the corporation; or
(iv) An entity, at least 50 percent of the total value or voting power is owned,
directly or indirectly, by a person described in paragraph (b)(1 )(iii) of this A-29.
(2) For purposes of paragraph (b) and except as otherwise provided, a person's
status is determined immediately after the transfer of the assets. For example, a
transfer to a corporation in which the transferor corporation has no ownership interest in
before the transaction, but which is a majority-owned subsidiary of the transferor
79

corporation after the transaction is not treated as a change in the ownership of the
assets of the transferor corporation.
(c) For purposes of this A-29, persons will not be considered to be acting as a
group merely because they happen to purchase assets of the same corporation at the
same time, or as a result of the same public offering. However, persons will be
considered to be acting as a group if they are owners of a corporation that enters into a
merger, consolidation, purchase or acquisition of assets, or similar business transaction
with the corporation. If a person, including an entity shareholder, owns stock in both
corporations that enter into a merger, consolidation, purchase or acquisition of stock, or
similar transaction, such shareholder is considered to be acting as a group with other
shareholders in a corporation only to the extent of the ownership in that corporation
prior to the transaction giving rise to the change and not with respect to the ownership
interest in the other corporation.
(d) For purposes of determining stock ownership, see Q/A-27(c).
(e) The following examples illustrate the principles of this A-29:
Example 1. Corporation M acquires assets having a gross fair market value of
$500,000 from Corporation N (an unrelated corporation) on January 1, 2006. The total
gross fair market value of Corporation N's assets immediately prior to the acquisition
w a s $3 million. Since the value of the assets acquired by Corporation M is less than
one-third of the total gross fair market value of Corporation N's total assets immediately
prior to the acquisition, the acquisition does not represent a change in the ownership of
a substantial portion of Corporation N's assets.
Example 2. Assume the same facts as in Example 1. Also assume that on
November 1, 2006, Corporation M acquires from Corporation N additional assets having
a fair market value of $700,000. Thus, Corporation M has acquired from Corporation N
assets worth a total of $1.2 million during the 12-month period ending on November 1,
2006. Since $1.2 million is more than one-third of the total gross fair market value of all
of Corporation N's assets immediately prior to the earlier of these acquisitions ($3

80

million), a change in the ownership of a substantial portion of Corporation N's assets is
considered to have occurred on November 1, 2006.
Example 3. (i) All of the assets of Corporation P are transferred to Corporation
O (an unrelated corporation). In exchange, the shareholders of Corporation P receive
Corporation O stock. Immediately after the transfer, the former shareholders of
Corporation P own 60 percent of the fair market value of the outstanding stock of
Corporation O and the former shareholders of Corporation O own 40 percent of the fair
market value of the outstanding stock of Corporation O. Because Corporation O is an
entity more than 50 percent of the fair market value of the outstanding stock of which is
owned by the former shareholders of Corporation P (based on ownership of Corporation
P prior the change), the transfer of assets is not treated as a change in ownership of a
substantial portion of the assets of Corporation P. However, a change in the ownership
(within the meaning of Q/A-27) of Corporation O occurs.
(ii) The result in paragraph (i) would be the same if immediately after the
change, the former shareholders of Corporation P own stock with a fair market value of
51 percent of the value of Corporation O stock because Corporation O is an entity more
than 50 percent of the fair market value of the outstanding stock of which is owned by
the former shareholders of Corporation P. See Q/A-27, Example 4, regarding whether
there is a change in ownership or control of O.
Example 4. Corporation P sells all of the stock of its wholly-owned subsidiary, S,
to Corporation Y. The fair market value of the affiliated group, determined without
regard to its liabilities, is $210 million. The fair market value of S, determined without
regard to its liabilities, is $80 million. Because there is a change in more than one-third
of the gross fair market value of the total assets of the affiliated group, there is a change
in the ownership of a substantial portion of the assets of the affiliated group.
Three-Times-Base-Amount Test for Parachute Payments
Q-30: Are all payments that are in the nature of compensation, are made to a
disqualified individual, and are contingent on a change in ownership or control,
parachute payments?
A-30: (a) No. To determine whether such payments are parachute payments,
they must be tested against the individual's base amount (as defined in Q/A-34 of this
section). To do this, the aggregate present value of all payments in the nature of
compensation that are made or to be made to (or for the benefit of) the same
81

disqualified individual and are contingent on the change in ownership or control must be
determined. If this aggregate present value equals or exceeds the amount equal to 3
times the individual's base amount, the payments are parachute payments. If this
aggregate present value is less than the amount equal to 3 times the individual's base
amount, no portion of the payment is a parachute payment. See Q/A-31, Q/A-32, and
Q/A-33 of this section for rules on determining present value. Parachute payments that
are securities violation parachute payments are not included in the foregoing
computation if they are not contingent on a change in ownership or control. See Q/A-37
of this section for the definition and treatment of securities violation parachute
payments.
(b) The following examples illustrate the principles of this A-30:
Example 1. A is a disqualified individual with respect to Corporation M. A's base
amount is $100,000. Payments in the nature of compensation that are contingent on a
change in the ownership or control of Corporation M totaling $400,000 are m a d e to A on
the date of the change in ownership or control. The payments are parachute payments
because they have an aggregate present value at least equal to 3 times A's base
amount of $100,000 (3 x $100,000 = $300,000).
Example 2. Assume the same facts as in Example 1. except that the payments
contingent on the change in the ownership or control of Corporation M total $290,000.
Because the payments do not have an aggregate present value at least equal to 3 times
A's base amount, no portion of the payments is a parachute payment.
Q-31: As of what date is the present value of a payment determined?
A-31: (a) Except as provided in this section, the present value of a payment is
determined as of the date on which the change in ownership or control occurs, or, if a
payment is made prior to such date, the date on which the payment is made.
(b)(1) For purposes of determining whether a payment is a parachute payment, if

82

a payment in the nature of compensation is the right to receive payments in a year (or
years) subsequent to the year of the change in ownership or control, the value of the
payment is the present value of such payment (or payments) calculated in accordance
with Q/A-32 of this section and based on reasonable actuarial assumptions.
(2) If the payment in the nature of compensation is an obligation to provide health
care, then for purposes of this A-31 and for applying the 3-times-base-amount test
under Q/A-30 of this section, the present value of such obligation should be calculated
in accordance with generally accepted accounting principles. For purposes of Q/A-30
and this A-31, the obligation to provide health care is permitted to be measured by
projecting the cost of premiums for purchased health care insurance, even if no health
care insurance is actually purchased. If the obligation to provide health care is made in
coordination with a health care plan that the corporation makes available to a group,
then the premiums used for this purpose may be group premiums.
Q-32: What discount rate is to be used to determine present value?
A-32: For purposes of this section, present value generally is determined by
using a discount rate equal to 120 percent of the applicable Federal rate (determined
under section 1274(d) and the regulations thereunder) compounded semiannually. The
applicable Federal rate to be used for this purpose is the Federal rate that is in effect on
the date as of which the present value is determined, using the period until the payment
would have been made without regard to the change in ownership or control as the term
of the debt instrument under section 1274(d). See Q/A-24 and 31 of this section.
However, for any payment, the corporation and the disqualified individual may elect to
83

use the applicable Federal rate that is in effect on the date that the contract which
provides for the payment is entered into, if such election is made in the contract.
Q-33: If the present value of a payment to be made in the future is contingent on
an uncertain future event or condition, how is the present value of the payment
determined?
A-33: (a) In certain cases, it may be necessary to apply the 3-times-baseamount test of Q/A-30 of this section, or to allocate a portion of the base amount to a
payment described in paragraphs (a)(1), (2), and (3) of Q/A-2 of this section, at a time
when the aggregate present value of all such payments cannot be determined with
certainty because the time, amount, or right to receive one or more such payments is
contingent on the occurrence of an uncertain future event or condition. For example, a
disqualified individual's right to receive a payment may be contingent on the involuntary
termination of such individual's employment with the corporation. In such a case, it
must be reasonably estimated whether the payment will be made. If it is reasonably
estimated that there is a 50-percent or greater probability that the payment will be
made, the full amount of the payment is considered for purposes of the 3-times-baseamount test and the allocation of the base amount. Conversely, if it is reasonably
estimated that there is a less than 50-percent probability that the payment will be made,
the payment is not considered for either purpose.
(b) If the estimate made under paragraph (a) of this A-33 is later determined to
be incorrect, the 3-times-base-amount test described in Q/A-30 of this section must be
reapplied (and the portion of the base amount allocated to previous payments must be
84

reallocated (if necessary) to such payments) to reflect the actual time and amount of the
payment. Whenever the 3-times-base-amount test is applied (or whenever the base
amount is allocated), the aggregate present value of the payments received or to be
received by the disqualified individual is redetermined as of the date described in A-31
of this section, using the discount rate described in A-32 of this section. This
redetermination may affect the amount of any excess parachute payment for a prior
taxable year. Alternatively, if, based on the application of the 3-times-base-amount test
without regard to the payment described in paragraph (a) of this A-33, a disqualified
individual is determined to have an excess parachute payment or payments, then the 3times-base-amount test does not have to be reapplied when a payment described in
paragraph (a) of this A-33 is made (or becomes certain to be made) if no base amount
is allocated to such payment.
(c) To the extent provided in published guidance of general applicability under
§601.601 (d)(2) of this Chapter, an initial estimate of the value of an option subject to
Q/A-13 of this section is permitted be made, with the valuation subsequently redetermined, and the three-times-base-amount test reapplied.
(d) The following examples illustrate the principles of this A-33:
Example 1. A, a disqualified individual with respect to Corporation M, has a base
amount of $100,000. Under A's employment agreement with Corporation M, A is
entitled to receive a payment in the nature of compensation in the amount of $250,000
contingent on a change in ownership or control of Corporation M. In addition, the
agreement provides that if A's employment is terminated within 1 year after the change
in ownership or control, A will receive an additional payment in the nature of
compensation in the amount of $150,000, payable 1 year after the date of the change in
ownership or control. A change in ownership or control of Corporation M occurs and A
receives the first payment of $250,000. Corporation M reasonably estimates that there
is a 50-percent probability that, as a result of the change, A's employment will be
85

terminated within 1 year of the date of the change. For purposes of applying the 3times-base-amount test (and if the first payment is determined to be a parachute
payment, for purposes of allocating a portion of A's base amount to that payment),
because M reasonably estimates that there is a 50-percent or greater probability that,
as a result of the change, A's employment will be terminated within 1 year of the date of
the change, Corporation M must assume that the $150,000 payment will be m a d e to A
as a result of the change in ownership or control. The present value of the additional
payment is determined under Q/A-31 and Q/A-32 of this section.
Example 2. Assume the same facts as in Example 1, except that Corporation M
reasonably estimates that there is a less than 50-percent probability that, as a result of
the change, A's employment will be terminated within 1 year of the date of the change.
For purposes of applying the 3-times-base-amount test, because Corporation M
reasonably estimates that there is a less than 50-percent probability that, as a result of
the change, A's employment will be terminated within 1 year of the date of the change,
Corporation M must assume that the $150,000 payment will not be m a d e to A as a
result of the change in ownership or control.
Example 3. B, a disqualified individual with respect to Corporation P, has a base
amount of $200,000. Under B's employment agreement with Corporation P, if there is a
change in ownership or control of Corporation P, B will receive a severance payment of
$600,000 and a bonus payment of $400,000. In addition, the agreement provides that if
B's employment is terminated within 1 year after the change, B will receive an additional
payment in the nature of compensation of $500,000. A change in ownership or control
of Corporation P occurs, and B receives the $600,000 and $400,000 payments. At the
time of the change in ownership or control, Corporation P reasonably estimates that
there is a less than 50-percent probability that B's employment will be terminated within
1 year of the change. For purposes of applying the 3-times-base-amount test, because
Corporation P reasonably estimates that there is a less than 50-percent probability that
B's employment will be terminated within 1 year of the date of the change, Corporation
P assumes that the $500,000 payment will not be m a d e to B. Eleven months after the
change in ownership or control, B's employment is terminated, and the $500,000
payment is m a d e to B. Because B was determined to have excess parachute payments
without regard to the $500,000 payment, the 3-times-base-amount test is not reapplied
and the base amount is not reallocated to include the $500,000 payment. The entire
$500,000 payment is treated as an excess parachute payment.
Q-34: What is the base amount?
A-34: (a) The base amount of a disqualified individual is the average annual
compensation for services performed for the corporation with respect to which the
change in ownership or control occurs (or for a predecessor entity or a related entity as

86

defined in Q/A-21 of this section) which w a s includible in the gross income of such
individual for taxable years in the base period (including amounts that were excluded
under section 911), or which would have been includible in such gross income if such
person had been a United States citizen or resident. See Q/A-35 of this section for the
definition of base period and for examples of base amount computations.
(b) If the base period of a disqualified individual includes a short taxable year or
less than all of a taxable year, compensation for such short or incomplete taxable year
must be annualized before determining the average annual compensation for the base
period. In annualizing compensation, the frequency with which payments are expected
to be made over an annual period must be taken into account. Thus, any amount of
compensation for such a short or incomplete taxable year that represents a payment
that will not be made more often than once per year is not annualized.
(c) Because the base amount includes only compensation that is includible in
gross income, the base amount does not include certain items that constitute parachute
payments. For example, payments in the form of excludible fringe benefits are not
included in the base amount but may be treated as parachute payments.
(d) The base amount includes the amount of compensation included in income
under section 83(b) during the base period. See Q/A-35 for the definition of base
period.
(e) The following example illustrates the principles of this A-34:
Example. A disqualified individual, D, receives an annual salary of $500,000 per
year during the 5-year base period. D defers $100,000 of D's salary each year under
the corporation's nonqualified deferred compensation plan. D's base amount is
$400,000 ($400,000 x (5/5)).
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Q-35: What is the base period?
A-35: (a) The base period of a disqualified individual is the most recent 5
taxable years of the individual ending before the date of the change in ownership or
control. For this purpose, the date of the change in ownership or control is the date the
corporation experiences one of the events described in Q/A-27, Q/A-28, or Q/A-29 of
this section. However, if the disqualified individual was not an employee or independent
contractor of the corporation with respect to which the change in ownership or control
occurs (or a predecessor entity or a related entity as defined in Q/A-21 of this section)
for this entire 5-year period, the individual's base period is the portion of such 5-year
period during which the individual performed personal services for the corporation or
predecessor entity or related entity.
(b) The following examples illustrate the principles of Q/A-34 of this section and
this Q/A-35:
Example 1. A disqualified individual, D, was employed by a corporation for 2
years and 4 months preceding the taxable year in which a change in ownership or
control of the corporation occurs. D's includible compensation income from the
corporation w a s $30,000 for the 4-month period, $120,000 for the first full year, and
$150,000 for the second full year. D's base amount is $120,000, ((3 x $30,000) +
$120,000+ $150,000)/3.
Example 2. Assume the same facts as in Example 1, except that D also received
a $60,000 signing bonus when D's employment with the corporation c o m m e n c e d at the
beginning of the 4-month period. D's base amount is $140,000, (($60,000 + (3 x
$30,000)) + $120,000 + $150,000) / 3. Since the bonus will not be paid more often than
once per year, the amount of the bonus is not increased in annualizing D's
compensation for the 4-month period.
Example 3. E is a disqualified individual with respect to Corporation X who was
not an employee or independent contractor for the full 5-year base period. In 2004 and
2005, E is a director of X and receives $30,000 per year for E's services. In 2006, E
88

becomes an officer of X. E's includible compensation from Corporation X is $250,000
for 2006 and 2007, and $300,000 for 2008. In 2008, X undergoes a change in
ownership or control. E's base amount is $140,000 ((2 x $250,000) + (2 x $30,000)/4).
Q-36: How is the base amount determined in the case of a disqualified individual
who did not perform services for the corporation (or a predecessor entity or a related
entity as defined in Q/A-21 of this section), prior to the individual's taxable year in which
the change in ownership or control occurs?
A-36: (a) In such a case, the individual's base amount is the annualized
compensation for services performed for the corporation (or a predecessor entity or
related entity) which —
(1) Was includible in the individual's gross income for that portion, prior to such
change, of the individual's taxable year in which the change occurred (including
amounts that were excluded under section 911), or would have been includible in such
gross income if such person had been a United States citizen or resident;
(2) Was not contingent on the change in ownership or control; and
(3) Was not a securities violation parachute payment.
(b) The following examples illustrate the principles of this A-36:
Example 1. On January 1, 2006, A, an individual whose taxable year is the
calendar year, enters into a 4-year employment contract with Corporation M as an
officer of the corporation. A has not previously performed services for Corporation M (or
any predecessor entity or related entity as defined in Q/A-21 of this section). Under the
employment contract, A is to receive an annual salary of $120,000 for each of the 4
years that he remains employed by Corporation M with any remaining unpaid balance to
be paid immediately in the event that A's employment is terminated without cause. O n
July 1, 2006, after A has received compensation of $60,000, a change in the ownership
or control of Corporation M occurs. Because of the change, A's employment is
terminated without cause, and he receives a payment of $420,000. It is established by
clear and convincing evidence that the $60,000 in compensation is not contingent on
the change in ownership or control, but the presumption that the $420,000 payment is

89

contingent on the change is not rebutted. Thus, the payment of $420,000 is treated as
contingent on the change in ownership or control of Corporation M. In this case, A's
base amount is $120,000 (2 x $60,000). Since the present value of the payment which
is contingent on the change in ownership of Corporation M ($420,000) is more than 3
times A's base amount of $120,000 (3 x $120,000 = $360,000), the payment is a
parachute payment.
Example 2. Assume the same facts as in Example 1, except that A also receives
a signing bonus of $50,000 from Corporation M on January 1, 2006. It is established by
clear and convincing evidence that the bonus is not contingent on the change in
ownership or control. W h e n the change in ownership or control occurs on July 1, 2006,
A has received compensation of $110,000 (the $50,000 bonus plus $60,000 in salary).
In this case, A's base amount is $170,000 ($50,000 + (2 x $60,000)). Because the
$50,000 bonus will not be paid more than once per year, the amount of the bonus is not
increased in annualizing A's compensation. The present value of the potential
parachute payment ($420,000) is less than 3 times A's base amount of $170,000 (3 x
$170,000 = $510,000), and therefore no portion of the payment is a parachute payment.
Securities Violation Parachute Payments
Q-37: Must a payment be contingent on a change in ownership or control in
order to be a parachute payment?
A-37: (a) No, the term parachute payment also includes any payment (other
than a payment exempted under Q/A-6 or Q/A-8 of this section) that is in the nature of
compensation and is to (or for the benefit of) a disqualified individual, if such payment is
a securities violation payment. A securities violation payment is a payment made or to
be made (1) Pursuant to an agreement that violates any generally enforced Federal or
state securities laws or regulations; and
(2) In connection with a potential or actual change in ownership or control.
(b) A violation is not taken into account under paragraph (a)(1) of this A-37 if it is
merely technical in character or is not materially prejudicial to shareholders or potential

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shareholders. Moreover, a violation will be presumed not to exist unless the existence
of the violation has been determined or admitted in a civil or criminal action (or an
administrative action by a regulatory body charged with enforcing the particular
securities law or regulation) which has been resolved by adjudication or consent.
Parachute payments described in this A-37 are referred to in this section as securities
violation payments.
(c) Securities violation parachute payments that are not contingent on a change
in ownership or control within the meaning of Q/A-22 of this section are not taken into
account in applying the 3-times-base-amount test of Q/A-30 of this section. Such
payments are considered parachute payments regardless of whether such test is met
with respect to the disqualified individual (and are included in allocating base amount
under Q/A-38 of this section). Moreover, the amount of a securities violation parachute
payment treated as an excess parachute payment shall not be reduced by the portion of
such payment that is reasonable compensation for personal services actually rendered
before the date of a change in ownership or control if such payment is not contingent on
such change. Likewise, the amount of a securities violation parachute payment
includes the portion of such payment that is reasonable compensation for personal
services to be rendered on or after the date of a change in ownership or control if such
payment is not contingent on such change.
(d) The rules in paragraph (b) of this A-37 also apply to securities violation
parachute payments that are contingent on a change in ownership or control if the
application of these rules results in greater total excess parachute payments with
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respect to the disqualified individual than would result if the payments were treated
simply as payments contingent on a change in ownership or control (and hence were
taken into account in applying the 3-times-base-amount test and were reduced by, or
did not include, any applicable amount of reasonable compensation).
(e) The following examples illustrate the principles of this A-37:
Example 1. A, a disqualified individual with respect to Corporation M, receives
two payments in the nature of compensation that are contingent on a change in the
ownership or control of Corporation M. The present value of the first payment is equal
to A's base amount and is not a securities violation parachute payment. The present
value of the second payment is equal to 1.5 times A's base amount and is a securities
violation parachute payment. Neither payment includes any reasonable compensation.
If the second payment is treated simply as a payment contingent on a change in
ownership or control, the amount of A's total excess parachute payments is zero
because the aggregate present value of the payments does not equal or exceed 3 times
A's base amount. If the second payment is treated as a securities violation parachute
payment subject to the rules of paragraph (b) of this A-37, the amount of A's total
excess parachute payments is 0.5 times A's base amount. Thus, the second payment
is treated as a securities violation parachute payment.
Example 2. Assume the same facts as in Example 1, except that the present
value of the first payment is equal to 2 times A's base amount. If the second payment is
treated simply as a payment contingent on a change in ownership or control, the total
present value of the payments is 3.5 times A's base amount, and the amount of A's total
excess parachute payments is 2.5 times A's base amount. If the second payment is
treated as a securities violation parachute payment, the amount of A's total excess
parachute payments is 0.5 times A's base amount. Thus, the second payment is
treated simply as a payment contingent on a change in ownership or control.
Example 3. B, a disqualified individual with respect to Corporation N, receives
two payments in the nature of compensation that are contingent on a change in the
control of Corporation N. The present value of the first payment is equal to 4 times B's
base amount and is a securities violation parachute payment. The present value of the
second payment is equal to 2 times B's base amount and is not a securities violation
parachute payment. B establishes by clear and convincing evidence that the entire
amount of the first payment is reasonable compensation for personal services to be
rendered after the change in ownership or control. If the first payment is treated simply
as a payment contingent on a change in ownership or control, it is exempt from the
definition of parachute payment pursuant to Q/A-9 of this section. Thus, the amount of
B's total excess parachute payment is zero because the present value of the second

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payment does not equal or exceed three times B's base amount. However, if the first
payment is treated as a securities violation parachute payment, the amount of B's total
excess parachute payments is 3 times B's base amount. Thus, the first payment is
treated as a securities violation parachute payment.
Example 4. Assume the same facts as in Example 3, except that B does not
receive the second payment and B establishes by clear and convincing evidence that
the first payment is reasonable compensation for services actually rendered before the
change in the control of Corporation N. If the payment is treated simply as a payment
contingent on a change in ownership or control, the amount of B's excess parachute
payment is zero because the amount treated as an excess parachute payment is
reduced by the amount that B establishes as reasonable compensation. However, if the
payment is treated as a securities violation parachute payment, the amount of B's
excess parachute payment is 3 times B's base amount. Thus, the payment is treated as
a securities violation parachute payment.
Computation and Reduction of Excess Parachute Payments
Q-38: How is the amount of an excess parachute payment computed?
A-38: (a) The amount of an excess parachute payment is the excess of the
amount of any parachute payment over the portion of the disqualified individual's base
amount that is allocated to such payment. For this purpose, the portion of the base
amount allocated to any parachute payment is the amount that bears the same ratio to
the base amount as the present value of such parachute payment bears to the
aggregate present value of all parachute payments made or to be made to (or for the
benefit of) the same disqualified individual. Thus, the portion of the base amount
allocated to any parachute payment is determined by multiplying the base amount by a
fraction, the numerator of which is the present value of such parachute payment and the
denominator of which is the aggregate present value of all such payments. See Q/A-31,
Q/A-32, and Q/A-33 of this section for rules on determining present value and Q/A-34 of
this section for the definition of base amount.

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(b) The following example illustrates the principles of this A-38:
Example. An individual with a base amount of $100,000 is entitled to receive two
parachute payments, one of $200,000 and the other of $400,000. The $200,000
payment is m a d e at the time of the change in ownership or control, and the $400,000
payment is to be m a d e at a future date. The present value of the $400,000 payment is
$300,000 on the date of the change in ownership or control. The portions of the base
amount allocated to these payments are $40,000 (($200,000/$500,000) x $100,000)
and $60,000 (($300,000/$500,000) x $100,000), respectively. Thus, the amount of the
first excess parachute payment is $160,000 ($200,000 - $40,000) and that of the
second is $340,000 ($400,000 - $60,000).
Q-39: May the amount of an excess parachute payment be reduced by
reasonable compensation for personal services actually rendered before the change in
ownership or control?
A-39: (a) Generally, yes. Except in the case of payments treated as securities
violation parachute payments or when the portion of a payment that is treated as
contingent on the change in ownership or control is determined under paragraph (b) or
(c) of Q/A-24 of this section, the amount of an excess parachute payment is reduced by
any portion of the payment that the taxpayer establishes by clear and convincing
evidence is reasonable compensation for personal services actually rendered by the
disqualified individual before the date of the change in ownership or control. Services
reasonably compensated for by payments that are not parachute payments (for
example, because the payments are not contingent on a change in ownership or control
and are not securities violation parachute payments, or because the payments are
exempt from the definition of parachute payment under Q/A-6 through Q/A-9 of this
section) are not taken into account for this purpose. The portion of any parachute
payment that is established as reasonable compensation is first reduced by the portion

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of the disqualified individual's base amount that is allocated to such parachute payment;
any remaining portion of the parachute payment established as reasonable
compensation then reduces the excess parachute payment.
(b) The following examples illustrate the principles of this A-39:
Example 1. Assume that a parachute payment of $600,000 is made to a
disqualified individual, and the portion of the individual's base amount that is allocated to
the parachute payment is $100,000. Also assume that $300,000 of the $600,000
parachute payment is established as reasonable compensation for personal services
actually rendered by the disqualified individual before the date of the change in
ownership or control. Before the reasonable compensation is taken into account, the
amount of the excess parachute payment is $500,000 ($600,000 - $100,000). In
reducing the excess parachute payment by reasonable compensation, the portion of the
parachute payment that is established as reasonable compensation ($300,000) is first
reduced by the portion of the disqualified individual's base amount that is allocated to
the parachute payment ($100,000), and the remainder ($200,000) then reduces the
excess parachute payment. Thus, in this case, the excess parachute payment of
$500,000 is reduced by $200,000 of reasonable compensation.
Example 2. Assume the same facts as in Example 1, except that the full amount
of the $600,000 parachute payment is established as reasonable compensation. In this
case, the excess parachute payment of $500,000 is reduced to zero by $500,000 of
reasonable compensation. As a result, no portion of any deduction for the payment is
disallowed by section 280G, and no portion of the payment is subject to the 20-percent
excise tax of section 4999.
Determination of Reasonable Compensation
Q-40: How is it determined whether payments are reasonable compensation?
A-40: (a) In general, whether payments are reasonable compensation for
personal services actually rendered, or to be rendered, by the disqualified individual is
determined on the basis of all the facts and circumstances of the particular case.
Factors relevant to such a determination include, but are not limited to, the following(1) The nature of the services rendered or to be rendered;
(2) The individual's historic compensation for performing such services; and
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(3) The compensation of individuals performing comparable services in
situations where the compensation is not contingent on a change in ownership or
control.
(b) For purposes of section 280G, reasonable compensation for personal
services includes reasonable compensation for holding oneself out as available to
perform services and refraining from performing services (such as under a covenant not
to compete).
Q-41: Is any particular type of evidence generally considered clear and
convincing evidence of reasonable compensation for personal services?
A-41: Yes. A showing that payments are made under a nondiscriminatory
employee plan or program (as defined in Q/A-26 of this section) generally is considered
to be clear and convincing evidence that the payments are reasonable compensation.
This is true whether the personal services for which the payments are made are actually
rendered before, or are to be rendered on or after, the date of the change in ownership
or control. Q/A-46 of this section (relating to the treatment of an affiliated group as one
corporation) does not apply for purposes of this A-41. No determination of reasonable
compensation is needed for payments under qualified plans to be exempt from the
definition of parachute payment under Q/A-8 of this section.
Q-42: Is any particular type of evidence generally considered clear and
convincing evidence of reasonable compensation for personal services to be rendered
on or after the date of a change in ownership or control?
A-42: (a) Yes, if payments are made or to be made to (or on behalf of) a
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disqualified individual for personal services to be rendered on or after the date of a
change in ownership or control, a showing of the following generally is considered to be
clear and convincing evidence that the payments are reasonable compensation for
services to be rendered on or after the date of the change in ownership or control (1) The payments were made or are to be made only for the period the individual
actually performs such personal services; and
(2) If the individual's duties and responsibilities are substantially the same after
the change in ownership or control, the individual's annual compensation for such
services is not significantly greater than such individual's annual compensation prior to
the change in ownership or control, apart from normal increases attributable to
increased responsibilities or cost of living adjustments. If the scope of the individual's
duties and responsibilities are not substantially the same, the annual compensation
after the change is not significantly greater than the annual compensation customarily
paid by the employer or by comparable employers to persons performing comparable
services. However, except as provided in paragraph (b) and (c) of this A-42, such clear
and convincing evidence will not exist if the individual does not, in fact, perform the
services contemplated in exchange for the compensation.
(b) Generally, an agreement under which the disqualified individual must refrain
from performing services (e.g., a covenant not to compete) is an agreement for the
performance of personal services for purposes of this A-42 to the extent that it is
demonstrated by clear and convincing evidence that the agreement substantially
constrains the individual's ability to perform services and there is a reasonable

97

likelihood that the agreement will be enforced against the individual. In the absence of
clear and convincing evidence, payments under the agreement are treated as
severance payments under Q/A-44 of this section.
(c) If the employment of a disqualified individual is involuntarily terminated
before the end of a contract term and the individual is paid damages for breach of
contract, a showing of the following factors generally is considered clear and convincing
evidence that the payment is reasonable compensation for personal services to be
rendered on or after the date of change in ownership or control -(1) The contract was not entered into, amended, or renewed in contemplation of
the change in ownership or control;
(2) The compensation the individual would have received under the contract
would have qualified as reasonable compensation under section 162;
(3) The damages do not exceed the present value (determined as of the date of
receipt) of the compensation the individual would have received under the contract if the
individual had continued to perform services for the employer until the end of the
contract term;
(4) The damages are received because an offer to provide personal services
was made by the disqualified individual but was rejected by the employer (including
involuntary termination or constructive discharge); and
(5) The damages are reduced by mitigation. Mitigation will be treated as
occurring when such damages are reduced (or any payment of such damages is
returned) to the extent of the disqualified individual's earned income (within the meaning
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of section 911 (d)(2)(A)) during the remainder of the period in which the contract would
have been in effect. See Q/A-44 of this section for rules regarding damages for a failure
to make severance payments.
(d) The following examples illustrate the principles of this A-42:
Example 1. A, a disqualified individual, has a three-year employment contract
with Corporation M, a publicly traded corporation. Under this contract, A is to receive a
salary for $100,000 for the first year of the contract and, for each succeeding year, an
annual salary that is 10 percent higher than the prior year's salary. During the third year
of the contract, Corporation N acquires all the stock of Corporation M. Prior to the
change in ownership, Corporation N arranges to retain A's services by entering into an
employment contract with A that is essentially the s a m e as A's contract with Corporation
M. Under the new contract, Corporation N is to fulfill Corporation M's obligations for the
third year of the old contract, and, for each of the succeeding years, pay A an annual
salary that is 10 percent higher than A's prior year's salary. Amounts are payable under
the new contract only for the portion of the contract term during which A remains
employed by Corporation N. A showing of the facts described above (and in the
absence of contradictory evidence) is regarded as clear and convincing evidence that
all payments under the n e w contract are reasonable compensation for personal
services to be rendered on or after the date of the change in ownership. Therefore, the
payments under this agreement are exempt from the definition of parachute payment
pursuant to Q/A-9 of this section.
Example 2. Assume the same facts as in Example 1, except that A does not
perform the services described in the new contract, but receives payment under the
new contract. Because services were not rendered after the change, the payments
under this contract are not exempt from the definition of parachute payment pursuant to
Q/A-9 of this section.
Example 3. Assume the same facts as in Example 1, except that under the new
contract A agrees to perform consulting services to Corporation N, w h e n and if
Corporation N requires A's services. A s s u m e further that w h e n Corporation N does not
require A's services, the contract provides that A must not perform services for any
other competing company. Corporation N previously enforced similar contracts against
former employees of Corporation N. Because A is substantially constrained under this
contract and Corporation N is reasonably likely to enforce the contract against A, the
agreement is an agreement for the performance of services under paragraph (b) of this
A-42. Assuming the requirements of paragraph (a) of this A-42 are met and there is
clear and convincing evidence that all payments under the n e w contract are reasonable
compensation for personal services to be rendered on or after the date of the change in
ownership, the payments under this contract are exempt from the definition of parachute

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payment pursuant to Q/A-9 of this section.
Example 4. A s s u m e the s a m e facts as in Example 1, except that instead of
agreeing not to compete with Corporation N, under the new agreement A agrees not to
disparage either Corporation M or Corporation N. Because the nondisparagement
agreement does not substantially constrain A's ability to perform services, no amount of
the payments under this contract are reasonable compensation for the
nondisparagement agreement.
Example 5. Assume the same facts as in Example 1. except that the
employment contract with Corporation N does not provide that amounts are payable
under the contract only for the portion of the term for which A remains employed by
Corporation N. Shortly after the change in ownership, and despite A's request to remain
employed by Corporation N, A's employment with Corporation N is involuntarily
terminated. Shortly thereafter, A obtains employment with Corporation O. A
commences a civil action against Corporation N, alleging breach of the employment
contract. In settlement of the litigation, A receives an amount equal to the present value
of the compensation A would have received under the contract with Corporation N,
reduced by the amount of compensation A otherwise receives from Corporation O
during the period that the contract would have been in effect. A showing of the facts
described above (and in the absence of contradictory evidence) is regarded as clear
and convincing evidence that the amount A receives as damages is reasonable
compensation for personal services to be rendered on or after the date of the change in
ownership. Therefore, the amount received by A is exempt from the definition of
parachute payment pursuant to Q/A-9 of this section.
Q-43: Is any particular type of payment generally considered reasonable
compensation for personal services actually rendered before the date of a change in
ownership or control?
A-43: Yes, payments of compensation earned before the date of a change in
ownership or control generally are considered reasonable compensation for personal
services actually rendered before the date of a change in ownership or control if they
qualify as reasonable compensation under section 162.
Q-44: May severance payments be treated as reasonable compensation?
A-44: (a) No, severance payments are not treated as reasonable compensation

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for personal services actually rendered before, or to be rendered on or after, the date of
a change in ownership or control. Moreover, any damages paid for a failure to make
severance payments are not treated as reasonable compensation for personal services
actually rendered before, or to be rendered on or after, the date of such change. For
purposes of this section, the term severance payment means any payment that is made
to (or for the benefit of) a disqualified individual on account of the termination of such
individual's employment prior to the end of a contract term, but does not include any
payment that otherwise would be made to (or for the benefit of) such individual on the
termination of such individual's employment, whenever occurring.
(b) The following example illustrates the principles of this A-44:
Example. A, a disqualified individual, has a three-year employment contract with
Corporation X. Under the contract, A will receive a salary of $200,000 for the first year
of the contract, and for each succeeding year, an annual salary that is $100,000 higher
than the previous year. In the event of A's termination of employment following a
change in ownership or control, the contract provides that A will receive the remaining
salary due under the employment contract. At the beginning of the second year of the
contract, Corporation Y acquires all of the stock of Corporation X, A's employment is
terminated, and A receives $700,000 ($300,000 for the second year of the contract plus
$400,000 for the third year of the contract) representing the remaining salary due under
the employment contract. Because the $700,000 payment is treated as a severance
payment, it is not reasonable compensation for personal services on or after the date of
the change in ownership or control. Thus, the full amount of the $700,000 is a
parachute payment.
Miscellaneous Rules
Q-45: How is the term corporation defined?
A-45: For purposes of this section, the term corporation has the meaning
prescribed by section 7701(a)(3) and §301.7701-2(b) of this Chapter. For example, a
corporation, for purposes of this section, includes a publicly traded partnership treated

101

as a corporation under section 7704(a); an entity described in §301.7701 -3(c)(1)(v)(A)
of this Chapter; a real estate investment trust under section 856(a); a corporation that
has mutual or cooperative (rather than stock) ownership, such as a mutual insurance
company, a mutual savings bank, or a cooperative bank (as defined in section
7701(a)(32)), and a foreign corporation as defined under section 7701(a)(5).
Q-46: How is an affiliated group treated?
A-46: For purposes of this section, and except as otherwise provided in this
section, all members of the same affiliated group (as defined in section 1504,
determined without regard to section 1504(b)) are treated as one corporation. Rules
affected by this treatment of an affiliated group include (but are not limited to) rules
relating to exempt payments of certain corporations (Q/A-6, Q/A-7 of this section
(except as provided therein)), payor of parachute payments (Q/A-10 of this section),
disqualified individuals (Q/A-15 through Q/A-21 of this section (except as provided
therein)), rebuttal of the presumption that payments are contingent on a change (Q/A-26
of this section (except as provide therein)), change in ownership or control (Q/A-27, 28,
and 29 of this section), and reasonable compensation (Q/A-42, 43, and 44 of this
section).
Effective Date
Q-47: What is the general effective date of section 280G?
A-47: (a) Generally, section 280G applies to payments under agreements
entered into or renewed after June 14, 1984. Any agreement that is entered into before
June 15, 1984, and is renewed after June 14, 1984, is treated as a new contract

102

entered into on the day the renewal takes effect.
(b) For purposes of paragraph (a) of this A-47, a contract that is terminable or
cancellable unconditionally at will by either party to the contract without the consent of
the other, or by both parties to the contract, is treated as a new contract entered into on
the date any such termination or cancellation, if made, would be effective. However, a
contract is not treated as so terminable or cancellable if it can be terminated or
cancelled only by terminating the employment relationship or independent contractor
relationship of the disqualified individual.
(c) Section 280G applies to payments under a contract entered into on or before
June 14, 1984, if the contract is amended or supplemented after June 14, 1984, in
significant relevant respect. For this purpose, a supplement to a contract is defined as a
new contract entered into after June 14, 1984, that affects the trigger, amount, or time of
receipt of a payment under an existing contract.
(d)(1) Except as otherwise provided in paragraph (e) of this A-47, a contract is
considered to be amended or supplemented in significant relevant respect if provisions
for payments contingent on a change in ownership or control (parachute provisions), or
provisions in the nature of parachute provisions, are added to the contract, or are
amended or supplemented to provide significant additional benefits to the disqualified
individual. Thus, for example, a contract generally is treated as amended or
supplemented in significant relevant respect if it is amended or supplemented (i) To add or modify, to the disqualified individual's benefit, a change in
ownership or control trigger;
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(ii) To increase amounts payable that are contingent on a change in ownership
or control (or, where payment is to be made under a formula, to modify the formula to
the disqualified individual's advantage); or
(iii) To accelerate, in the event of a change in ownership or control, the payment
of amounts otherwise payable at a later date.
(2) For purposes of paragraph (a) of this A-47, a payment is not treated as being
accelerated in the event of a change in ownership or control if the acceleration does not
increase the present value of the payment.
(e) A contract entered into on or before June 14, 1984, is not treated as
amended or supplemented in significant relevant respect merely by reason of normal
adjustments in the terms of employment relationship or independent contractor
relationship of the disqualified individual. Whether an adjustment in the terms of such a
relationship is considered normal for this purpose depends on all of the facts and
circumstances of the particular case. Relevant factors include, but are not limited to,
the following(1) The length of time between the adjustment and the change in ownership or
control;
(2) The extent to which the corporation, at the time of the adjustment, viewed
itself as a likely takeover candidate;
(3) A comparison of the adjustment with historical practices of the corporation;
(4) The extent of overlap between the group receiving the benefits of the
adjustment and those members of that group who are the beneficiaries of pre-June 15,
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1984, parachute contracts; and
(5) The size of the adjustment, both in absolute terms and in comparison with
the benefits provided to other members of the group receiving the benefits of the
adjustment.
Q-48: What is the effective date of this section?
A-48: This section applies to any payments that are contingent on a change in
ownership or control if the change in ownership or control occurs on or after January 1,
2004.
Par 3. In §602.101, paragraph (b) is amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****

(b) * * *
CFR part or section where Current OMB
Identified and described

control No.

* * * * *

1.280G-1 1545-1851
* * * * *

Robert E. Wenzel
Deputy Commissioner for Services and Enforcement.
Approved: July 14, 2003
Pamela F. Olson
Assistant Secretary of the Treasury.
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106

Part III
Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also, Part 1, 280G)

Rev. Proc. 2003-68
SECTION 1. PURPOSE
This revenue procedure provides guidance on the valuation of stock options
solely for purposes of §§ 280G and 4999 of the Internal Revenue Code. This revenue
procedure restates and modifies Revenue Procedure 2002-13, 2002-8 I.R.B. 549, as
modified by Revenue Procedure, 2002-45, 2002-27 I.R.B 40.
SECTION 2. BACKGROUND
Section 280G denies a deduction for any excess parachute payment. Section
4999 imposes a nondeductible 20-percent excise tax on the recipient of any excess
parachute payment, within the meaning of § 280G(b).
An excess parachute payment is defined in § 280G(b)(1) as an amount equal to
the excess of any parachute payment over the portion of the disqualified individual's
base amount that is allocated to such payment.
Section 280G(b)(2)(A) defines a parachute payment as any payment in the
nature of compensation to (or for the benefit of) a disqualified individual if (i) such

payment is contingent on a change in the ownership of a corporation, the effective
control of a corporation, or the ownership of a substantial portion of the assets of a
corporation (a change in ownership or control), and (ii) the aggregate present value of
the payments in the nature of compensation which are contingent on such change
equals or exceeds an amount equal to 3 times the base amount. A parachute payment
also includes any payment in the nature of compensation to, or for the benefit of, a
disqualified individual if the payment is pursuant to an agreement that violates any
generally enforced securities laws or regulations.
A payment in the nature of compensation for purposes of § 280G includes the
transfer of an option (including an option to which § 421 applies), without regard to
whether the option has a readily ascertainable fair market value within the meaning of
§ 83. An option is considered transferred when the option becomes substantially vested
(within the meaning of §1.83-3(b) and (j) of the Income Tax Regulations). Thus, for
purposes of § 280G, stock options must be valued when a payment in the nature of
compensation includes the transfer of a stock option, such as the grant or vesting of a
stock option, in connection with a change in ownership or control. This revenue
procedure provides guidance on the valuation of a stock option for this purpose.
However, this revenue procedure does not apply for purposes of valuing a payment in
cash (or property), even though the amount of the payment is determined by reference
to the cancellation of a stock option.
Pursuant to §1.280G-1, Q/A-13, the value of an option is determined under all
the facts and circumstances in the particular case. Factors relevant to such a
determination include, but are not limited to: the difference between the option's

exercise price and the value of the property subject to the option at the time of vesting;
the probability of the value of such property increasing or decreasing; and the length of
the period during which the option can be exercised. For purposes of Q/A-13, valuation
may be determined by any method prescribed by the Commissioner in published
guidance of general applicability.
The determination of when there has been a change in ownership or control for
purposes of section 280G is made under § 1.280G-1, Q/A-27 through Q/A-29.
Section 1.280G-1, Q/A-33, provides that, to the extent provided in published
guidance of general applicability, an initial estimate of the value of an option is permitted
to be made, with the valuation subsequently re-determined, and the base amount
reallocated.
Rev. Proc. 98-34, 1998-1 C.B. 983, provides a methodology for the valuation of
certain stock options for purposes of gift, estate, and generation-skipping transfer taxes.
The methodology described in Rev. Proc. 98-34 is an option pricing model that takes
into account factors similar to those established by the Financial Accounting Standards
Board in Accounting for Stock-Based Compensation, Statement of Financial Accounting
Standards No. 123 (Fin. Accounting Standards Bd. 1995) (FAS 123). The methodology
in Rev. Proc. 98-34 applies only to the valuation of a nonpublicly traded stock option for
stock that, on the valuation date, is publicly traded on an established securities market.
Concurrently with the issuance of proposed regulations under section 280G (see
§ 1.280G-1 of the Proposed Income Tax Regulations at 67 Fed. Reg. 7630), Rev. Proc.
2002-13 was issued concerning the valuation of stock options (including a safe harbor
valuation method) for purposes of §§ 280G and 4999. Rev. Proc. 2002-45 modified

various portions of Rev. Proc. 2002-13.
This revenue procedure restates and further modifies Rev. Proc. 2002-13 and
Rev. Proc. 2002-45 to address additional issues regarding the valuation of stock options
in connection with a change in ownership or control under §§ 280G and 4999.
SECTION 3. STOCK OPTION VALUATION
.01 General rule. A taxpayer may value a stock option, without regard to whether the
option is on publicly or nonpublicly traded stock, using any valuation method that (i) is
consistent with generally accepted accounting principles (such as FAS 123 or a
successor standard) and (ii) takes into account the factors provided in § 1.280G-1, Q&A
13. The safe harbor method provided in section 4 of this revenue procedure and Rev.
Proc. 98-34 are considered consistent with generally accepted accounting principles
and take into account the factors provided in § 1.280G-1, Q&A 13. For purposes of §§
280G and 4999 and this revenue procedure, the value of a stock option will not be
considered properly determined if the option is valued solely by reference to the spread
between the exercise price of the option and the value of the stock at the time of the
change in ownership or control.
.02 Payment date. For purposes of this revenue procedure, the valuation date is
the payment date as determined in accordance with § 280G. Thus, the valuation of a
stock option is determined based on the spread, the volatility of the underlying stock,
the option term, and any other relevant factors as of that date.
.03 Substitution of an option. If, in addition to vesting, there is, contingent on the
change in ownership or control, a substitution of an option on different stock for the
option, the valuation is based on the substituted option.

.04 Recalculation. Pursuant to § 1.280G-1, Q/A-33, for purposes of §§ 2 8 0 G
and 4999, the payor is permitted to re-determine the value of an option, during the 18month period beginning on the date of the change in ownership or control (the redetermination period), in accordance with this revenue procedure. Recalculation is
permitted if, during the re-determination period, either of the following occurs: (1) there
is a change in the term of the option due to a termination of employment, or (2) there is
a change in the volatility of the stock.
Without regard to whether the value of the option will be re-determined, an initial
determination of the value of the option must be made in accordance with this revenue
procedure. This initial valuation is the amount of the payment, subject to adjustment as
otherwise applicable (e.g., pursuant to § 1.280G-1, Q/A-24). This amount is used both
to determine whether there are parachute payments and to calculate excess parachute
payments and any excise tax liability associated with the transfer of the option.
A recalculation under this revenue procedure must be determined as of the date
of payment used in the initial calculation (i.e., the valuation date). Thus, while the term
assumption and the volatility assumption are permitted to be re-determined, the spread
and the interest rate assumptions continue to be determined as of the valuation date.
For purposes of re-determining the value of the option, an employer is permitted
to use a method other than the method used in making the initial determination,
provided that both methods are otherwise permitted under this revenue procedure.
If the value of an option is recalculated under this revenue procedure, parachute
payments and excess parachute payments must be recalculated using the redetermined valuation. However, the base amount does not have to be re-apportioned;

instead, the base amount allocated to the parachute payment is permitted to remain the
same, with any adjustment to the excise tax made with respect to the option. This
adjustment may be claimed only by filing an amended return for the taxable year that
includes the payment date.
SECTION 4. VALUATION SAFE HARBOR
.01 In general. The safe harbor valuation method provided by this revenue
procedure is based on the Black-Scholes model and takes into account, as of the
valuation date, the following factors: (1) the volatility of the underlying stock, (2) the
exercise price of the option, (3) the value of the stock at the time of the valuation (the
"spot price"), and (4) the term of the option on the valuation date. The safe harbor value
of the option equals (i) the number of shares covered by the options multiplied by (ii) the
spot price of the stock, and then multiplied by (iii) a valuation factor determined using
the factors described above and reflected in the Table at the end of this revenue
procedure. Other relevant factors, including risk-free rate of interest and assumptions
related to dividend yields, are included in the Table. To determine the valuation factor,
the taxpayer must determine the volatility, spread, and option term factors, as described
below. To rely on this revenue procedure, assumptions made for purposes of this
revenue procedure and the determination of each factor must be reasonable and
consistent with assumptions made with respect to other options that may be valued in
connection with the change in ownership or control.
.02 Volatility. The taxpayer must determine whether the volatility of the
underlying stock is low, medium, or high. If the valuation is based on a substituted
option pursuant to section 3.03, volatility is determined based on the stock under the

substituted option. For this purpose, a low volatility stock has an annual standard
deviation of 30 percent or less. A medium volatility stock has an annual standard
deviation greater than 30 percent but less than 70 percent. A high volatility stock has
an annual standard deviation of 70 percent or greater. If the stock is publicly traded on
an established securities market (or otherwise), the expected volatility of the underlying
stock used for purposes of volatility under this revenue procedure must be the volatility
for the most recent year disclosed in the most recent financial statements of the
corporation. If the stock is not publicly traded on an established securities market or
otherwise, but the stock is required to be registered under the Securities Exchange Act
of 1934, the volatility for such stock is assumed to be the same as the volatility for a
comparable corporation that is publicly traded. For this purpose, whether a corporation
is considered comparable is determined by comparing relevant characteristics such as
industry, corporate size, earnings, market capitalization, and debt-equity structure. If
the stock is not publicly traded and the corporation is not required to register under the
Securities Exchange Act of 1934, the taxpayer must assume medium volatility. If the
stock is not required to be registered under the Securities Exchange Act of 1934, but
the corporation voluntarily registers its stock and its stock is publicly traded, the
corporation must use the volatility of the underlying stock.
.03 Spread between exercise price and spot price. The factor based on the
spread between the exercise price and the spot price is calculated by dividing the spot
price by the exercise price and subtracting 1. If the stock is not publicly traded, the
determination of the spot price for this purpose must be reasonable and consistent with
the price, if any, otherwise determined for the stock in connection with the transaction

giving rise to the change in ownership or control under § 280G(b)(2)(A). For purposes
of determining the factor based on the spread between the exercise price and the spot
price under the Table, the resulting percentage may be rounded down to the next lowest
interval. If this factor exceeds 220%, this safe harbor valuation method cannot be used
to value the stock option.
.04 Term of the option. The term of the option is the number of full months
between the valuation date and the latest date on which the option will expire. For
purposes of determining the term factor under the table, the number of full months may
be rounded down to the next lowest 12-month interval. If the term of the option exceeds
10 years (120 months), then this safe harbor valuation method cannot be used to value
the stock option. If the remaining term of the option is less than 12 months, the
taxpayer may round down to the 3-month interval. For purposes of this paragraph, the
taxpayer is permitted to use the expected term of the option calculated in accordance
with Rev. Proc. 98-34.
SECTION 5. EXAMPLE
E is an employee of Corporation A, a publicly traded corporation. On September
1, 2004, in connection with E's performance of services, A grants E options to purchase
100,000 shares of A stock at $10 per share. The options are exercisable for 10 years.
The options will vest on September 1, 2007, if E continues to be employed by A through
that date, or on a change in ownership or control, if earlier. Under the terms of the
option, if E's employment is terminated after the option is vested, the option must be
exercised on or before the date that is 3 months after the termination of employment.
On September 15, 2005, Corporation B acquires all of the stock of A, and A is

merged into B. Contingent on the change in ownership, E's options b e c o m e fully vested
and are converted into B options with the same aggregate spread and the same ratio
between the exercise price and the value of the stock (determined immediately before
the conversion). At the time of the vesting, A stock has a fair market value of $20, and
B stock has a fair market value of $50. Thus, in connection with the change in
ownership, E receives fully vested options for 40,000 shares of B stock with an exercise
price of $25. The date of the vesting and substitution is the payment date and,
therefore, the valuation date.
Using a valuation method that complies with this revenue procedure, B
determines that, as of the valuation date, it is reasonable to assume that the volatility of
B stock is .25, that the remaining expected term of the option is 36 months, and that the
risk-free interest rate is 5%. B determines that the value of the option is $1,096,000 (or
$27.40 per share).
Without regard to the change in ownership, this payment was contingent only on
continued performance of services for Corporation A for a specified period of time and
the payment is attributable, in part, to the performance of services before the date the
payment was made. Therefore, the portion of the payment that is contingent on the
change in ownership is determined under § 1.280G-1, Q/A-24(c). The acceleration of
the vesting of a stock option is considered to significantly increase the value of the
payment. Therefore, the future value of the payment is assumed to be equal to the
payment. Under § 1.280G-1, Q/A-31 and 32, the present value of the option is
determined to be $975,000. The vesting of the option has been accelerated by 23 full
months. Therefore, the portion of the payment that is contingent on the change in

ownership is $373,080, the s u m of (1) $121,000 (the amount by which $1,096,000,
exceeds $975,000), and (2) $252,080 (23 months times 1% times $1,096,000).
The value of the payment related to the options, $373,080, is taken into account
for purposes of determining whether A has received parachute payments and, if so, the
portion of the parachute payments that are excess parachute payments. For purposes
of this example, assume E is receiving parachute payments and that $50,000 in base
amount is allocated to this payment. In that case, $323,080 of the payment is an
excess parachute payment, and the excise tax under section 4999 is $64,616. B must
satisfy its obligations under section 4999(c) with respect to this amount, and E is
responsible for the excise tax related to this payment for E's 2005 taxable year. B
cannot claim the amount of the excess parachute payment as a deduction.
On July 1, 2006, E's employment is terminated, shortening the term of the option.
As a result, the actual term of the option, measured from the date of the change in
ownership, is 12 months (the 9 full months that E was employed following the change in
ownership plus the 3 months following a termination of employment during which E can
exercise the option). B decides to recalculate the value of the options as of the
valuation date in accordance with section 3.04 of this revenue procedure, using the
value of B stock at the change of ownership, $50, and the exercise price of $25 a share.
In addition, B uses the same 5% risk-free assumption rate used in the initial valuation.
Finally, B determines that .25 continues to be a reasonable assumption for volatility.
The value of the option, as recalculated, is $1,030,000 (or $25.75 a share).
This value is then used to re-determine the portion of the payment that is
contingent on the change in ownership under § 1.280G-1, Q/A-24(c). This amount is

$350,800, the sum of (1) $113,900 (the amount by which the value of the payment,
$1,030,000, exceeds the present value of the payment, determined to be $916,100),
and (2) $236,900 (23 times 1% times $1,030,000). Using the base amount initially
allocated to this payment, $50,000, the portion of the payment that is an excess
parachute payment is $300,800, and the excise tax is $60,160. E is permitted to file an
amended return for 2005 using the revised calculations as a basis for claiming a refund
of $4,456.
SECTION 6. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-13, 2002-8 I.R.B. 549, and Rev. Proc. 2002-45, 2002-27 I.R.B.
40, are revoked as of January 1, 2004.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective January 1, 2004. Taxpayers are permitted to
apply this revenue procedure with respect a change in ownership or control occurring
prior to such date.
SECTION 8. DRAFTING INFORMATION
The principal author of this revenue procedure is Erinn Madden of the Office of
Chief Counsel of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and Treasury
Department participated in its development. For further information regarding this
revenue procedure, contact Ms. Madden at (202) 622-6030 (not a toll free call).

TABLE

T e r m (months]
Volatility Spread Factor*

3

12

24

36

48

60

72

84

96

108

120

Low

200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%

66.8%
64.5%
61.8%
58.6%
54.9%
50.4%
44.9%
38.0%
29.3%
18.1%
6.4%
0.6%
0%
0%

67.3%
65.0%
62.4%
59.4%
55.8%
51.5%
46.3%
40.0%
32.3%
23.3%
13.6%
5.4%
0.9%
0.0%

67.9%
65.7%
63.3%
60.4%
57.1%
53.2%
48.5%
42.9%
36.3%
28.5%
19.9%
11.2%
4.1%
0.6%

68.4%
66.4%
64.1%
61.5%
58.4%
54.8%
50.6%
45.6%
39.7%
32.7%
24.7%
16.1%
7.9%
2.0%

69.0%
67.1%
65.0%
62.5%
59.7%
56.4%
52.6%
48.0%
42.6%
36.2%
28.8%
20.4%
11.6%
4.0%

69.5%
67.7%
65.8%
63.5%
60.9%
57.9%
54.3%
50.1%
45.2%
39.3%
32.3%
24.2%
15.2%
6.4%

69.9%
68.3%
66.5%
64.4%
62.0%
59.1%
55.9%
52.0%
47.4%
41.9%
35.4%
27.6%
18.5%
9.0%

70.3%
68.8%
67.1%
65.1%
62.9%
60.3%
57.3%
53.7%
49.4%
44.3%
38.1%
30.6%
21.7%
11.6%

70.7%
69.3%
67.7%
65.8%
63.7%
61.3%
58.5%
55.2%
51.2%
46.4%
40.5%
33.4%
24.6%
14.3%

71.0%
69.6%
68.1%
66.4%
64.5%
62.2%
59.6%
56.5%
52.7%
48.2%
42.7%
35.9%
27.3%
16.8%

71.2%
69.9%
68.5%
66.9%
65.1%
63.0%
60.5%
57.6%
54.1%
49.9%
44.7%
38.1%
29.9%
19.3%

Medium

200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%

66.8%
64.5%
61.8%
58.6%
54.9%
50.4%
44.9%
38.2%
30.0%
20.3%
10.4%
3.0%
0.3%
0%

67.4%
65.2%
62.7%
59.8%
56.4%
52.5%
47.9%
42.6%
36.3%
29.1%
21.2%
13.0%
5.7%
1.2%

68.6%
66.7%
64.5%
62.0%
59.2%
55.9%
52.2%
47.8%
42.7%
36.8%
30.0%
22.2%
13.8%
5.9%

69.9%
68.2%
66.3%
64.2%
61.7%
58.9%
55.7%
52.0%
47.6%
42.5%
36.4%
29.2%
20.8%
11.4%

71.1%
69.6%
68.0%
66.1%
63.9%
61.5%
58.7%
55.4%
51.6%
47.0%
41.6%
34.9%
26.8%
16.9%

72.2%
70.9%
69.4%
67.7%
65.8%
63.7%
61.2%
58.3%
54.8%
50.8%
45.8%
39.7%
32.0%
22.1%

73.1%
71.9%
70.6%
69.1%
67.4%
65.5%
63.2%
60.6%
57.6%
53.9%
49.4%
43.7%
36.4%
26.7%

73.9%
72.8%
71.6%
70.3%
68.8%
67.0%
65.0%
62.7%
59.9%
56.5%
52.4%
47.2%
40.4%
31.0%

74.5%
73.5%
72.5%
71.2%
69.9%
68.3%
66.5%
64.3%
61.8%
58.8%
55.0%
50.2%
43.8%
34.8%

75.0%
74.1%
73.2%
72.0%
70.8%
69.4%
67.7%
65.8%
63.5%
60.7%
57.2%
52.8%
46.8%
38.3%

75.4%
74.6%
73.7%
72.7%
71.6%
70.3%
68.8%
67.0%
64.9%
62.3%
59.1%
55.0%
49.5%
41.4%

High

200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%

66.8%
64.5%
61.8%
58.6%
54.9%
50.6%
45.3%
39.1%
31.7%
23.2%
14.3%
6.4%
1.5%
0.1%

68.1%
66.1%
63.8%
61.3%
58.3%
55.0%
51.1%
46.6%
41.4%
35.4%
28.5%
20.8%
12.7%
5.2%

70.7%
69.1%
67.3%
65.3%
63.0%
60.4%
57.4%
54.0%
50.0%
45.3%
39.6%
32.9%
24.8%
15.2%

73.1%
71.7%
70.3%
68.6%
66.8%
64.6%
62.2%
59.4%
56.1%
52.1%
47.4%
41.5%
34.0%
24.3%

75.0%
73.9%
72.7%
71.3%
69.7%
67.9%
65.9%
63.5%
60.7%
57.4%
53.3%
48.1%
41.4%
32.1%

76.6%
75.6%
74.6%
73.4%
72.1%
70.6%
68.8%
66.8%
64.4%
61.5%
57.9%
53.4%
47.3%
38.8%

77.8%
77.0%
76.1%
75.1%
73.9%
72.6%
71.1%
69.4%
67.3%
64.8%
61.6%
57.6%
52.2%
44.4%

78.8%
78.1%
77.3%
76.4%
75.4%
74.3%
73.0%
71.4%
69.6%
67.4%
64.7%
61.1%
56.3%
49.1%

79.5%
78.9%
78.2%
77.4%
76.6%
75.6%
74.4%
73.1%
71.5%
69.6%
67.1%
64.0%
59.7%
53.2%

80.0%
79.5%
78.9%
78.2%
77.4%
76.6%
75.6%
74.4%
73.0%
71.3%
69.1%
66.4%
62.5%
56.6%

80.4%
79.9%
79.4%
78.8%
78.1%
77.3%
76.5%
75.4%
74.2%
72.7%
70.8%
68.3%
64.8%
59.5%

Spot (market) Price/Exercise Price -1 or (S/X-1)

JS-629: Treasury Issues Final Regulations Regarding Prepayments Financed With Tax-E...

Page 1 of 1

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Readei®).
August 1,2003
JS-629
Treasury Issues Final Regulations Regarding Prepayments Financed With
Tax-Exempt Bonds
Today the Treasury Department and the Internal Revenue Service issued final
regulations that specify the types of prepayments for property or services that are
eligible for tax-exempt financing.
Regulations promulgated in 1993 limit the availability of tax-exempt financing for
prepayments. O n April 17, 2002, proposed amendments to the existing regulations
were published in the Federal Register. Under the new final regulations, the
categories of prepayments eligible for tax-exempt financing include not only certain
prepayments for natural gas, as provided in the 2002 proposed regulations, but also
certain prepayments for electricity. The natural gas and electricity prepayment
provisions in the new final regulations generally permit interest exclusion if at least
90 percent of the natural gas or electricity is furnished to retail customers in the
service area of the municipal utility. These new provisions will assist municipal
utilities in securing long-term supplies of natural gas and electricity at reasonable
prices, and will support initiatives to restructure energy markets.
Related Documents:
• The Text of .the Final Regulations

http://www.treas.gov/press/releases/js629.htm

5/2/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9085]
RIN 1545-AY12
Arbitrage and Private Activity Restrictions Applicable to
Tax-exempt Bonds Issued by State and Local Governments;
Investment-type Property (prepayment); Private Loan
(prepayment).
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations on the
arbitrage and private activity restrictions applicable to
tax-exempt bonds issued by State and local governments. These
regulations affect issuers of tax-exempt bonds and provide
guidance on the definitions of investment-type property and
private loan to help issuers comply with the arbitrage and
private activity restrictions.
DATES: Effective Date: These regulations are effective
October 3, 2003.
Applicability Date: For dates of applicability, see
§§1.141-15 (b) (3) and 1.148-ll(j) of these regulations.

FOR FURTHER INFORMATION CONTACT:

Johanna Som de Cerff (2 02)

622-3980 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Income Tax Regulations (2 6 CFR
part 1) under sections 141 and 148 of the Internal Revenue
Code by providing rules for determining whether a prepayment
for property or services results in a private loan or
investment-type property (the final regulations). On April
17, 2002, the IRS published in the Federal Register a notice
of proposed rulemaking (REG-113526-98; REG-105369-00)(67 FR
18835) (the proposed regulations) . The proposed regulations
modify §§1.141-5 (c) (2) and 1.148-l(e) of the Income Tax
Regulations to establish which prepayments for property or
services give rise to a private loan under section 141 (c) or
investment-type property under section 148(b)(2)(D). On
September 25, 2002, the IRS held a public hearing on the
proposed regulations. Written comments responding to the
proposed regulations were also received. After consideration
of all the comments, the proposed regulations are adopted as
amended by this Treasury decision. The revisions are
discussed below.
Explanation of Provisions
2

I.

Investment-type Property

A. Existing- regulations
The existing regulations, at §1.148-1 (e) (2), contain
rules for determining when a prepayment for property or
services results in investment-type property. Under that
provision, a prepayment generally gives rise to
investment-type property if a principal purpose for prepaying
is to receive an investment return from the time the
prepayment is made until the time payment otherwise would be
made. However, a prepayment does not give rise to
investment-type property under the existing regulations if (1)
it is made for a substantial business purpose other than
investment return and the issuer has no commercially
reasonable alternative to the prepayment (the business purpose
exception); or (2) prepayments on substantially the same terms
are made by a substantial percentage of persons who are
similarly situated to the issuer but who are not beneficiaries
of tax-exempt financing (the customary exception).
B. Business purpose exception
The proposed regulations narrow the scope of the business
purpose exception. Under the proposed regulations, a
prepayment meets the business purpose exception only if the
primary purpose for the prepayment is to accomplish one or

more substantial business purposes that (1) are unrelated to
any investment return based on the time value of money and (2)
cannot be accomplished without the prepayment.
Commentators suggested that the business purpose
exception in the proposed regulations would have limited
usefulness and that the language in the existing regulations
is superior. However, as discussed in the preamble to the
proposed regulations, the business purpose exception in the
existing regulations was intended to be a narrow exception and
has raised difficult interpretive guestions. For example, in
many instances it may be unclear whether the alternatives
available to the issuer are "commercially reasonable." The
IRS and Treasury Department have considered all of the
comments relating to the business purpose exception and have
concluded that a standard that considers whether one or more
business purposes and/or commercially reasonable alternatives
exist is not an administrable test for determining whether
prepayments give rise to investment-type property. Therefore,
based on tax administration considerations and the broad scope
of the investment-type property concept, the final regulations
delete the business purpose exception. However, the final
regulations provide that the Commissioner may, by published

4

guidance, set forth additional circumstances in which a
prepayment does not give rise to investment-type property.
C. Customary exception
The proposed regulations retain the customary exception
in its present form. Commentators expressed concern that the
customary exception may be difficult to apply in some cases.
They suggested that the regulations identify examples of
prepayments that satisfy the exception. The final regulations
retain the customary exception and indicate that it generally
applies based on all the facts and circumstances. In
addition, the final regulations contain a safe harbor under
which a prepayment is deemed to satisfy the customary
exception if: (1) the prepayment is made for maintenance,
repair, or an extended warranty with respect to personal
property (for example, automobiles or electronic eguipment),
or updates or maintenance or support services with respect to
computer software; and (2) the same maintenance, repair,
extended warranty, updates or maintenance or support services,
as applicable, are regularly provided to nongovernmental
persons on the same terms.
D. Certain prepayments to acguire a supply of natural gas or
electricity
1. Prepayments for Natural Gas

5

The proposed regulations add an exception to the
definition of investment-type property for certain natural gas
prepayments that are made by or for one or more utilities that
are owned by a governmental person, as defined in §1.141-1(b)
(for example, if a joint action agency acquires a natural gas
supply for one or more municipal gas or electric utilities).
The exception applies only if at least 95 percent of the
natural gas purchased with the prepayment is to be consumed by
retail customers in the service area of a municipal gas
utility, or used to produce electricity that will be furnished
to retail customers that a municipal electric utility is
obligated to serve under state or Federal law (the use
requirement). For this purpose, the service area of a
municipal gas utility is defined as (1) any area throughout
which the municipal utility provided (at all times during the
five-year period ending on the issue date) gas transmission or
distribution service, and any area that is contiguous to such
an area, or (2) any area where the municipal utility is
obligated under state or Federal law to provide gas
distribution services as provided in such law.
Some commentators recommended that the 95 percent
threshold be reduced to 85 percent. These commentators stated
that various factors make it difficult for municipal gas
6

utilities to determine in advance the precise quantity of gas
supplies they will need to serve their customers during a
given period. These factors include a limited capability to
store gas and variations in demand due to circumstances beyond
the utilities' control, such as economic conditions and the
weather. In recognition of these unique factors, the final
regulations reduce the 95 percent threshold to 90 percent.
Some commentators recommended that the use requirement
apply based on the issuer's reasonable expectations as of the
issue date. To ensure that the prepaid gas is consumed by
retail customers in the service area of the municipal utility,
the final regulations retain the requirement that the prepaid
gas supply actually be used for a qualifying purpose.
Some commentators suggested that the use of natural gas
to fuel the transportation of the prepaid gas supply on a
pipeline should be a qualifying use under the natural gas
exception. The final regulations adopt this comment. Under
the final regulations, the use of gas to fuel the pipeline
transportation of the prepaid gas supply is a qualifying use
and is not pro-rated based on the amount of qualified and
nonqualified use of the remaining prepaid gas.
Commentators indicated that most municipal gas and
electric utilities do not have an obligation to serve that
7

arises under state or Federal law.

These commentators

suggested replacing the "obligation to serve" requirement for
municipal electric utilities with a service area rule that is
similar to the rule for municipal gas utilities. The final
regulations adopt this comment. Commentators also recommended
that the definition of service area be expanded to include any
area recognized as the service area of the municipal utility
under state or Federal law. The final regulations adopt this
comment.
Commentators requested clarification that sales to
governmental persons are qualifying sales under the use test.
Commentators also requested clarification that a retail
customer of a municipal utility is a qualifying end-user even
if the prepayment was made by or for another municipal
utility. The final regulations do not provide that all sales
to governmental persons, or to retail customers of a municipal
utility, are qualifying sales. Rather, the final regulations
clarify that, in the case of a natural gas prepayment by or
for one or more municipal utilities (each, the issuing
municipal utility), the use of prepaid gas is a qualifying use
if the gas is: (1) furnished to retail gas customers of the
issuing municipal utility who are located in the natural gas
service area of the issuing municipal utility (other than

sales of gas to produce electricity for sale); (2) used by the
issuing municipal utility to produce electricity that will be
furnished to retail electric customers of the issuing
municipal utility who are located in the electricity service
area of the issuing municipal utility; (3) used by the issuing
municipal utility to produce electricity that will be sold to
a municipal utility and furnished to retail electric customers
of the purchaser who are located in the electricity service
area of the purchaser; (4) sold to a municipal utility if the
requirements of (1), (2) or (3) of this paragraph are
satisfied by the purchaser (treating the purchaser as the
issuing municipal utility); or (5) used to fuel the
transportation of the prepaid gas supply on a pipeline. Thus,
for example, the sale of gas or electricity by the issuing
municipal utility directly to customers of another municipal
utility is not a qualifying use.
Some commentators recommended that the final regulations
define "retail customer" as a customer that is not purchasing
for resale. The final regulations provide that a retail
customer is a customer that purchases natural gas or
electricity, as applicable, other than for resale. The final
regulations also clarify that the consumption of natural gas
by a nongovernmental person to produce electricity for sale is
9

not a qualifying use of natural gas under the 90 percent use
test.
Some commentators requested clarification of which
"contiguous" areas may be treated as part of a municipal
utility's service area. One commentator suggested that
contiguous areas should not be considered part of the service
area. To provide clarity, and in light of the expansion of
the service area definition to include any area recognized as
the service area under state or Federal law, the final
regulations eliminate contiguous areas from the definition of
service area.
Some commentators suggested that the definition of
service area should be expanded to include any area "in which'
(rather than "throughout which") the municipal utility
provided service during the five-year period. To ensure that
the gas or electricity is consumed by customers in an area
recognized as the service area of a municipal utility under
state or Federal law, or throughout which the municipal
utility provided service during the five-year period, the
final regulations do not adopt this comment.
2. Prepayments for Electricity
Some commentators suggested that the natural gas
exception should be expanded to include prepayments for
10

electricity.

These commentators stated that the restructuring

of the electric power industry has affected municipal electric
utilities in a manner that is similar to the effect that
deregulation of the natural gas industry had on municipal gas
utilities. These commentators stated that restructuring has
threatened the ability of municipal electric utilities to
obtain a secure supply of electric power on commercially
reasonable terms, and that electric power prepayment
transactions are necessary to obtain a guaranteed supply of
electric power on favorable terms in light of restructuring.
The final regulations add an exception to the definition
of investment-type property for certain electricity
prepayments that are made by or for one or more municipal
utilities (for example, if a joint action agency acquires
electricity for one or more municipal electric utilities).
The exception applies only if at least 90 percent of the
prepaid electricity financed by the issue is used for a
qualifying use. For this purpose, electricity is used for a
qualifying use if it is to be: (1) furnished to retail
electric customers of the issuing municipal utility who are
located in the electricity service area of the issuing
municipal utility; or (2) sold to a municipal utility and

11

furnished to retail electric customers of the purchaser who
are located in the electricity service area of the purchaser.
3. Remedial Actions
The preamble to the proposed regulations states that
issuers may apply principles similar to the rules of §1.141-12
to cure a violation of the use requirement. Commentators
requested clarification regarding which remedies under
§1.141-12 are available for this purpose. The final
regulations provide that issuers may apply principles similar
to the rules of §1.141-12 to cure a violation of the 90
percent use requirement, and that the "redemption or
defeasance" remedy in §1.141-12(d) and the "alternative use of
disposition proceeds" remedy in §1.141-12 (e) are available for
this purpose.
Some commentators requested clarification of the amount
of nonqualified bonds that must be redeemed or defeased under
the "redemption or defeasance" remedy. Under the final
regulations, the amount of nonqualified bonds is determined in
the same manner as for output contracts taken into account
under the private business tests, including the principles of
§1.141-7 (d), treating nonqualified sales of gas or electricity
as satisfying the benefits and burdens test under §1.1417(c)(1). Commentators also suggested that the definition of
12

"nonqualified bonds" under §1.141-12 may require excessive
amounts of bonds to be retired. The IRS and Treasury
Department are considering this comment in connection with
possible amendments to §1.141-12.
4. Commodity Swap Contracts
The proposed regulations provide that a transaction will
not fail to qualify for the natural gas exception by reason of
any commodity swap contract that may be entered into between
the issuer and an unrelated party (other than the gas
supplier), or between the gas supplier and an unrelated party
(other than the issuer), so long as each swap contract is an
independent contract. For this purpose, the proposed
regulations provide that a swap contract is an independent
contract if the obligation of each party to perform under the
swap contract is not dependent on performance by any person
(other than the other party to the swap contract) under
another contract (for example, a gas supply contract or
another swap contract). Notice 2002-52 (2002-30 I.R.B. 187),
provides that a natural gas commodity swap contract will not
fail to be an independent contract solely because the swap
contract may terminate in the event of a failure of a gas
supplier to deliver gas for which the swap contract is a
hedge.
13

Commentators generally agreed with the provision on swap
contracts in the proposed regulations, as modified by Notice
2002-52. The final regulations retain the provision on
commodity swap contracts for natural gas prepayments, as
modified by Notice 2002-52, and expand it to apply to
electricity prepayments.
E. De minimis prepayments
The proposed regulations add an exception for prepayments
made within 90 days of the date of delivery of all the
property or services to which the prepayment relates.
Commentators recommended that the exception apply based on
reasonable expectations. The final regulations adopt this
comment. This change to a reasonable expectations standard is
intended to permit a prepayment to qualify for the de minimis
exception even if an unexpected event beyond the control of
the issuer causes delivery of the property or services to be
delayed beyond the 90-day period. The reasonable expectations
standard does not, however, apply to any change to the terms
of the prepayment other than an unexpected delay in delivery.
II. Private Loans
The existing regulations, at §1.141-5 (c) (2) (ii), provide
rules for determining whether a prepayment for property or
services is treated as a loan for purposes of the private loan
14

financing test.

The existing regulations for private loans

are similar to the existing regulations in §1.148-1(e)(2) for
determining whether a prepayment gives rise to investment-type
property, except that the private loan regulations focus on
whether the prepayment provides a benefit of tax-exempt
financing to the seller. The final regulations amend the
private loan provisions of §1.141-5(c)(2) to conform to the
amendments to the definition of investment-type property in
the final regulations.
Ill. Tables of Contents
The final regulations amend the tables of contents in
§§1.141-0 and 1.148-0 to reflect the final regulations and
certain previously issued regulations under sections 141 and
148.
Effective Dates
The final regulations apply to bonds sold on or after
October 3, 2003. In addition, issuers may apply the final
regulations to bonds sold before October 3, 2003, that are
subject to §§1.141-5 and 1.148-1.
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.
15

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 rule does not
impose a collection of information on small entities, the
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.) do not apply.
Drafting Information
The principal authors of these regulations are Rebecca L.
Harrigal and Johanna Som de Cerff, Office of Chief Counsel
(TE/GE), IRS, and Stephen J. Watson, Office of Tax Policy,
Treasury Department. However, other personnel from the IRS
and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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 * * *
Par. 2. Section 1.141-0 is amended by revising the entry
for §1.141-15 (b) to read as follows:
§1.141-0 Table of contents.
16

* * * * *

§1.141-15 Effective dates.
* * * * *

(b)
(1)
(2)
(3)

Effective dates.
In general.
Certain short-term arrangements.
Certain prepayments.

* * * * *

Par. 3. In §1.141-5, paragraph (c)(2)(ii) is revised and
paragraphs (c) (2) (iii) and (c) (2) (iv) are added to read as
follows:
§1.141-5 Private loan financing test.
* * * * *

(c) * * *
/2) * * *
(ii) Certain prepayments treated as loans. Except as
otherwise provided, a prepayment for property or services,
including a prepayment for property or services that is made
after the date that the contract to buy the property or
services is entered into, is treated as a loan for purposes of
the private loan financing test if a principal purpose for
prepaying is to provide a benefit of tax-exempt financing to
the seller. A prepayment is not treated as a loan for
purposes of the private loan financing test if--

17

(A) Prepayments on substantially the same terms are made
by a substantial percentage of persons who are similarly
situated to the issuer but who are not beneficiaries of
tax-exempt financing;
(B) The prepayment is made within 90 days of the
reasonably expected date of delivery to the issuer of all of
the property or services for which the prepayment is made; or
(C) The prepayment meets the requirements of §1.1481(e) (2) (iii) (A) or (B) (relating to certain prepayments to
acquire a supply of natural gas or electricity).
(iii) Customary prepayments. The determination of
whether a prepayment satisfies paragraph (c)(2)(ii)(A) of this
section is generally made based on all the facts and
circumstances. In addition, a prepayment is deemed to satisfy
paragraph (c)(2)(ii)(A) of this section if-(A) The prepayment is made for-(1_) Maintenance, repair, or an extended warranty with
respect to personal property (for example, automobiles or
electronic equipment); or
(2.) Updates or maintenance or support services with
respect to computer software; and
(B) The same maintenance, repair, extended warranty,
updates or maintenance or support services, as applicable, are
18

regularly provided to nongovernmental persons on the same
terms.
(iv) Additional prepayments as permitted by the
Commissioner. The Commissioner may, by published guidance,
set forth additional circumstances in which a prepayment is
not treated as a loan for purposes of the private loan
financing test.
*****

Par. 4. Section 1.141-15 is amended by adding paragraph
(b)(3) to read as follows:
§1.141-15 Effective dates.
*****

(b) * * *
(3) Certain prepayments. Except as provided in paragraph
(c) of this section, paragraphs (c) (2) (ii), (c) (2) (iii) and
(c)(2)(iv) of §1.141-5 apply to bonds sold on or after October
3, 2003. Issuers may apply paragraphs (c) (2) (ii), (c) (2) (iii)
and (c)(2)(iv) of §1.141-5, in whole but not in part, to bonds
sold before October 3, 2003, that are subject to §1.141-5.
Par. 5. Section 1.148-0 is amended by:
1. Adding entries in paragraph (c) for §1.148-1,
paragraphs (e)(1) through (e)(3).

19

2. Adding entries in paragraph (c) for §1.148-11,
paragraphs (b)(4), (h), (i) and (j).
The additions read as follows:
§1.148-0 Scope and table of contents.
*****

(c) Table of contents.
*****

§1.148-1 Definitions and elections.
*****
(e) * * *

(1) In general.
(2) Prepayments.
(3) Certain hedges.
*****

§1.148-11 Effective dates.
(b)

* * *

(4) No elective retroactive application for safe harbor for
establishing fair market value for guaranteed investment
contracts and investments purchased for a yield restricted
defeasance escrow.
~k

~k

~k

-k ~k

(h) Safe harbor for establishing fair market value for
guaranteed investment contracts and investments purchased for
a yield restricted defeasance escrow.
(i) Special rule for investments purchased for a yield
restricted defeasance escrow.
(j) Certain prepayments.
Par. 6. In §1.148-1, paragraphs (e)(1) and (2) are
revised to read as follows:
20

§1.148-1

Definitions and elections.

*****

(e) Investment-type property--(1) In general. Investmenttype property includes any property, other than property
described in section 148(b)(2)(A), (B), (C) or (E), that is
held principally as a passive vehicle for the production of
income. For this purpose, production of income includes any
benefit based on the time value of money.
(2) Prepayments--(i) In general--(A) Generally. Except
as otherwise provided in this paragraph (e)(2), a prepayment
for property or services, including a prepayment for property
or services that is made after the date that the contract to
buy the property or services is entered into, also gives rise
to investment-type property if a principal purpose for
prepaying is to receive an investment return from the time the
prepayment is made until the time payment otherwise would be
made. A prepayment does not give rise to investment-type
property if-(1_) Prepayments on substantially the same terms are made
by a substantial percentage of persons who are similarly
situated to the issuer but who are not beneficiaries of
tax-exempt financing;

21

(2_) The prepayment is made within 90 days of the
reasonably expected date of delivery to the issuer of all of
the property or services for which the prepayment is made; or
(_3) The prepayment meets the requirements of paragraph
(e) (2) (iii) (A) or (B) of this section.
(B) Example. The following example illustrates an
application of this paragraph (e) (2) (i) :
Example. Prepayment after contract is executed. In
1998, City A enters into a ten-year contract with Company Y.
Under the contract, Company Y is to provide services to City A
over the term of the contract and in return City A will pay
Company Y for its services as they are provided. In 2004,
City A issues bonds to finance a lump sum payment to Company Y
in satisfaction of City A's obligation to pay for Company Y's
services to be provided over the remaining term of the
contract. The use of bond proceeds to make the lump sum
payment constitutes a prepayment for services under paragraph
(e)(2)(i) of this section, even though the payment is made
after the date that the contract is executed.
(ii) Customary prepayments. The determination of whether
a prepayment satisfies paragraph (e) (2) (i) (A) (_1) of this
section is generally made based on all the facts and

22

circumstances.

In addition, a prepayment is deemed to satisfy

paragraph (e) (2) (i) (A) (1) of this section if-(A) The prepayment is made for-(_1) Maintenance, repair, or an extended warranty with
respect to personal property (for example, automobiles or
electronic equipment); or
(2_) Updates or maintenance or support services with
respect to computer software; and
(B) The same maintenance, repair, extended warranty,
updates or maintenance or support services, as applicable, are
regularly provided to nongovernmental persons on the same
terms.
(iii) Certain prepayments to acquire a supply of natural
gas or electricity--(A) Natural gas prepayments. A prepayment
meets the requirements of this paragraph (e) (2) (iii) (A) if-(_1) It is made by or for one or more utilities that are
owned by a governmental person, as defined in §1.141-1 (b)
(each of which is referred to in this paragraph (e)(2)(iii)(A)
as the issuing municipal utility), to purchase a supply of
natural gas; and
(2) At least 90 percent of the prepaid natural gas
financed by the issue is used for a qualifying use. Natural
gas is used for a qualifying use if it is to be-23

(i_) Furnished to retail gas customers of the issuing
municipal utility who are located in the natural gas service
area of the issuing municipal utility, provided, however, that
gas used to produce electricity for sale shall not be included
under this paragraph (e) (2) (iii) (A) (2) (i);
(ii) Used by the issuing municipal utility to produce
electricity that will be furnished to retail electric
customers of the issuing municipal utility who are located in
the electricity service area of the issuing municipal utility;
(iii) Used by the issuing municipal utility to produce
electricity that will be sold to a utility that is owned by a
governmental person and furnished to retail electric customers
of the purchaser who are located in the electricity service
area of the purchaser;
(iv) Sold to a utility that is owned by a governmental
person if the requirements of paragraph (e)(2)(iii)(A)(2) (i),
(ii) or (iii) of this section are satisfied by the purchaser
(treating the purchaser as the issuing municipal utility); or
(v) Used to fuel the pipeline transportation of the
prepaid gas supply acquired in accordance with this paragraph
(e) (2) (iii) (A) .
(B) Electricity prepayments. A prepayment meets the
requirements of this paragraph (e) (2) (iii) (B) if-24

(_1) It is made by or for one or more utilities that are
owned by a governmental person (each of which is referred to
in this paragraph (e) (2) (iii) (B) as the issuing municipal
utility) to purchase a supply of electricity; and
(2) At least 90 percent of the prepaid electricity
financed by the issue is used for a qualifying use.
Electricity is used for a qualifying use if it is to be-(_i) Furnished to retail electric customers of the issuing
municipal utility who are located in the electricity service
area of the issuing municipal utility; or
(ii) Sold to a utility that is owned by a governmental
person and furnished to retail electric customers of the
purchaser who are located in the electricity service area of
the purchaser.
(C) Service area. For purposes of this paragraph
(e) (2) (iii), the service area of a utility owned by a
governmental person consists of-(1) Any area throughout which the utility provided, at
all times during the 5-year period ending on the issue date-(_i) In the case of a natural gas utility, natural gas
transmission or distribution service; and
(ii) In the case of an electric utility, electricity
distribution service; and
25

(2_) Any area recognized as the service area of the
utility under state or Federal law.
(D) Retail customer. For purposes of this paragraph
(e) (2) (iii), a retail customer is a customer that purchases
natural gas or electricity, as applicable, other than for
resale.
(E) Commodity swaps. A prepayment does not fail to meet
the requirements of this paragraph (e) (2) (iii) by reason of
any commodity swap contract that may be entered into between
the issuer and an unrelated party (other than the gas or
electricity supplier), or between the gas or electricity
supplier and an unrelated party (other than the issuer), so
long as each swap contract is an independent contract. A swap
contract is an independent contract if the obligation of each
party to perform under the swap contract is not dependent on
performance by any person (other than the other party to the
swap contract) under another contract (for example, a gas or
electricity supply contract or another swap contract);
provided, however, that a commodity swap contract will not
fail to be an independent contract solely because the swap
contract may terminate in the event of a failure of a gas or
electricity supplier to deliver gas or electricity for which
the swap contract is a hedge.
26

(F) Remedial action.

Issuers may apply principles

similar to the rules of §1.141-12, including §1.141-12(d)
(relating to redemption or defeasance of nonqualified bonds)
and §1.141-12 (e) (relating to alternative use of disposition
proceeds), to cure a violation of paragraph (e) (2) (iii) (A) (2_)
or (e) (2) (iii) (B) (2) of this section. For this purpose, the
amount of nonqualified bonds is determined in the same manner
as for output contracts taken into account under the private
business tests, including the principles of §1.141-7(d),
treating nonqualified sales of gas or electricity under this
paragraph (e) (2) (iii) as satisfying the benefits and burdens
test under §1.141-7 (c) (1) .
(iv) Additional prepayments as permitted by the
Commissioner. The Commissioner may, by published guidance,
set forth additional circumstances in which a prepayment does
not give rise to investment-type property.
*****

Par. 7. Section 1.148-11 is amended by adding paragraph
(j) to read as follows:

27

§1.148-11

Effective dates.

*****

(j) Certain prepayments. Section 1.148-l(e)(1) and (2)
apply to bonds sold on or after October 3, 2003. Issuers may
apply §1.148-1 (e) (1) and (2), in whole but not in part, to
bonds sold before October 3, 2003, that are subject to §1.1481.
Dale F. Hart,
Acting Deputy Commissioner for Services and Enforcement.

Approved: July 25, 2003.

Pamela F. Olson,
Assistant Secretary of the Treasury.

JS-630: Back from Jobs and Growth Tour, S n o w heads to Hill to discuss ID theft

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 4, 2003
JS-630
Back from Jobs and Growth Tour, Snow heads to Hill to discuss ID theft
Treasury Secretary John Snow, who returned from a two day tour of the Midwest to
discuss President Bush's efforts to create jobs and economic growth, will appear
before the Senate Banking Committee to discuss identity theft and consumer credit
issues.

htto://www.treas. sov/Dress/releases/j s63 0.

5/2/2005

JS-631: Kristin Smith, Director, Office of Financial Education

Page 1 of 4

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
August 4, 2003
JS-631
Remarks by Kristin Smith, Director, Office of Financial Educaiton at the
Wisconsin Institute for Financial and Economic Education Credit and Money
Series in Madison, Wl
I would like to thank Bill Wilcox of the CBM Credit Education Foundation for
inviting the Treasury Department to participate in this morning's welcome
ceremony. I would also like to congratulate Bill, David Mancl, the
Wisconsin JumpStart Coalition, and the Wisconsin Department of Financial
Institutions for organizing this important teacher training event and for all of
the work that they have done to promote financial education in schools in
Wisconsin.
At Treasury, we believe that the first step in improving financial education is
getting the word out; the second step is providing resources that allow
educators to teach the subject of financial education to their students.
Equipping young people with an understanding of basic concepts like
budgeting, saving, investing, and credit management will enable them to
build financial security and m a k e smart financial decisions throughout their
lives. W e applaud the organizers of this event w h o have gone above and
beyond the call of duty to ensure that students in Wisconsin learn the
basics of personal finance in elementary, middle, and high school, rather
than through the school of hard knocks.
While this is my first trip to Wisconsin, the thing that comes to mind
whenever I think of Madison is the fact that m y dad, w h o w a s a banker in
Philadelphia, attended banking school for several s u m m e r s here in
Madison. All of the things that m y father learned as a banker - the
importance of credit history, paying bills on time, living within a budget, etc.
- carried over to his personal life and the way he managed our family
finances. H e taught m y brother and m e at a very early age the importance
of managing our m o n e y well. M y stepmother has pointed out that one of
the things m y father and I still have in c o m m o n is our need to balance our
checkbooks several times a week!
I was very lucky to have parents who taught me good money skills before I
had the opportunity to m a k e serious financial mistakes. By the time I
entered college, I had a savings account, checking account, and A T M card,
and understood h o w to use them. Like most college students, I
immediately began receiving credit card offers and soon had several credit
cards in m y wallet.
Unlike some of my friends, however, I saw my credit cards as a tool to build
a good credit history. I paid for m y books at the campus bookstore,
knowing that I w a s going to pay off the full balance as soon as the bill
arrived. I admit that I used m y credit cards to buy n e w clothes w h e n I didn't
really need them, but I could always here m y dad's voice calculating the
"real" cost of that n e w outfit if I decided to pay only the minimum balance

__ http://www.treas.gov/press/releases/js631 .htm

5/2/2005

JS-631: Kristin Smith, Director, Office of Financial Education

Page 2 o f 4

due on the next bill.
Many kids today are not as lucky as I was. Their parents may not have
good personal finance knowledge or skills to pass along to their children.
They m a y be living paycheck to paycheck or even teetering on the brink of
bankruptcy. Other parents m a y not be comfortable talking about m o n e y
with their kids. Surveys show that parents are more comfortable talking to
their kids about sex than they are talking about money!
Yet it is more important now than ever to make sure that young people
learn about personal finance. In 2001, teenagers spent more that $172
billion. More than twenty percent of teens have their o w n credit card.
Individuals under the age of 25 are the fastest growing group of individuals
filing for bankruptcy. The statistics tell us that w e need to do something so
that young people can begin their adult lives in good financial shape, not
under the burden of unmanageable debt that keeps them from getting an
education, buying a home, or even being hired for a good job.
As educators, you have an opportunity to make a real difference. By
learning the basics of personal finance and passing this knowledge along
to your students, you can help them avoid costly mistakes. The important
role that educators play in improving financial education throughout the
country is something that Treasury's Office of Financial Education has
been thinking about since its creation.
The Department of the Treasury established the Office of Financial
Education in M a y 2002. The Office focuses the Department's financial
education policymaking, raises awareness about the need for and
importance of financial education, and provides information about financial
education resources throughout the Federal government. The O F E
emphasizes four key areas of financial education: savings, credit
management, homeownership, and retirement planning.
Some of the things that the OFE has been doing to fulfill its mission include
chairing the Federal Government Financial Education Coordinating Group,
which coordinates and encourages financial education efforts and expands
cooperation a m o n g Federal agencies; highlighting effective financial
education programs across the country, and co-hosting panel discussions
with other Federal agencies to seek collective solutions to help consumers
deal with specific financial education issues.
Most recently, we co-hosted with the Board of Governors of the Federal
Reserve System a roundtable discussion on credit management. In M a y
2003, sixteen organizations representing credit card companies and the
banking industry, credit and debt counseling services, and community and
consumer groups participated in the event. W e will be releasing shortly a
top five list of credit management fundamentals that w e all agree
consumers can and should do to improve their credit.
Last year, our panel discussion was co-hosted by the Department of
Education and focused on a topic that is very relevant to this week's
program: integrating financial education into core curricula in grades K-12.
W h a t does this m e a n ? It means that w e think the best way for young
people to receive financial education is by including personal finance
concepts, such as the concept of compound interest or h o w to create a
budget, w h e n teaching other subjects, such as math or reading.
There are several advantages to approach. It provides a context for
understanding personal finance concepts. It also enhances the teaching of
these other subjects by providing real life examples that are meaningful to
students. And, it makes financial education less susceptible to elimination
because of budgetary cutbacks or scarce resources.

http://www.treas.gov/press/releases/js631 .htm

5/2/2005

JS-631: Kristin Smith, Director, Office of Financial Education

Page 3 o f 4

Last October, w e released a white paper summarizing the discussion
a m o n g the panel participants and highlighting its conclusions. The white
paper goes into detail regarding the different m e a n s by which financial
education can be incorporated into other subjects and includes the five
access points identified during the discussion. These access points are:
standards, testing, textbooks, financial education materials, and
educators. W e explain in the white paper h o w each of these access points
can be used.
• Standards: In a standards-based education system,
standards have a significant influence on what is taught in the
classroom. Informing the state boards of education, which
generally develop and adopt standards, about the importance
of including financial education in the standards can help
ensure that financial concepts are included in math and
reading curricula.
• Testing: A standards-based education system uses
testing to assess whether students are meeting academic
standards. Because educators generally focus on subject
matter that will be tested, including financial concepts in tests
provides an incentive for teachers to teach the subject in the
classroom.
• Textbooks: Publishers of textbooks and other instructional
materials can be educated about the value of integrating
financial concepts into other subjects, such as math and
reading. Before purchasing instructional materials, states can
impose requirements that publishers demonstrate h o w their
materials incorporate financial concepts into other subjects.
• Financial education materials: There are ample financial
education resources available on the Internet and from groups
that produce or compile such materials. M a n y of these "offthe-shelf materials can be incorporated into math and reading
curricula to provide a financial education component to these
subjects.
• Educators: Educator training and professional
development requirements provide an opportunity to stress the
importance of financial education to those individuals w h o are
directly responsible for conveying such information to students.
We feel strongly that publicizing the process for curriculum development
and providing guidance for utilizing these access points are important steps
for Treasury. W e hope that the white paper will continue to serve as a
source of information and guidance that will influence policymakers,
educators, and individuals to begin the long process of incorporating
financial education into core curricula. And w e believe that w e are already
having an impact.
Several state legislatures have already passed or are considering bills that
would require personal finance be taught in schools. Even better, we've
seen bills that specifically call for personal finance concepts to be
integrated into other core subjects.
At the end of the day, we ask ourselves: can financial education make a
difference? The answer to that question is yes. W e know that individuals
w h o have received financial education participate more frequently in, and
m a k e larger contributions to, employer 401 (k) programs . . . that financial

http://www.treas.gov/press/releases/is631 .htm

5/2/2005

JS-631: Kristin Smith, Director, Office of Financial Education

Page 4 o f 4

education results in higher savings rates . . . and that individuals graduating
from high schools in states that mandate a personal finance education
course have higher savings rates and net worths than individuals in other
states. That is w h y w e continue our work to ensure that all Americans
have access to the financial education programs and resources that they
need to take full advantage of the opportunities offered by this country's
great and diverse economy.
The Treasury Department is not the only federal government agency
working to improve financial education. A wide variety of programs and
resources are offered by entities like the U.S. Mint, the Federal Reserve
System, the Treasury's Bureau of Public Debt, and the FDIC, just to n a m e
a few. These program and resources can help consumers with financial
education issues ranging from opening a bank account to planning for
retirement. The Office of Financial Education has been compiling a
Federal resource directory that will be our website at
www.treas.gov/financialeducation by mid-August.
In conclusion, I would like to thank you for your interest in improving
financial education for students in Wisconsin. Working together, w e can
m a k e a difference and ensure that young people have the knowledge and
skills to effectively m a n a g e their financial lives. Enjoy the rest of the
conference!

Related Documents:
• Powerpoint Presentation
Associated Links:
• Office of Financial Education

http://www.treas.gov/press/releases/js631 .htm

5/2/2005

WELCOME
Wisconsin Institute for Financ
and Economic Education
Credit & Money Series
August 2003

Financial Education <& the
Federal Government
Kristin Smith
Director, Office of Financial Education
U.S. Department of the Treasury
www.treas.gov/financialeducation

W h y Is Financial
Education Important?
Helping people understand basic
concepts such as managing money,
budgeting, h o w to save and invest, and
credit management provides them with
the skills to build financial security and
m a k e good financial decisions
throughout their lives.

W h y Is Financial Education
Important for Young People?
o In 2001 teenagers spent more than
$172 billion.
o More than 1 in 5 youths ages 12 to 19 have
their own credit cards.
o The number of young Americans between
the ages of 18 and 25 who declared
bankruptcy in the 1990s nearly doubled from
60,180 in 1991 to 118,000 in 1999. In 2000,
young people accounted for approximately
7 % of the nation's personal bankruptcies.
**Statistics from different sources

U.S. Treasury Department
Office of Financial Education
m

•i*Established

in Spring 2002.

• Focuses the Treasury Department's
financial education policymaking.
• •Raises awareness about the need for
financial education.
• Provides information about financial
education resources throughout the
federal government.

U.S. Treasury Department
Office of Financial Education
Focuses on four key areas:
^Basic Savings
^Credit Management
^Homeownership
^Retirement Planning

What Is the Office of
Financial Education Doing?
S Chairs the Federal Government Financial
Education Coordinating Group ( F G F E C G )
S Coordinates and encourages financial
education efforts, and expands
cooperation among federal agencies
^Highlights effective financial education
programs across the country according
to criteria established by O F E
7

„^^
=^™=.-

What Is the Office of
Financial Education Doing?
0

^mr.

^Co-hosted panel discussion with the
Department of Education on integrating
financial education into core curricula in
grades K-12 and published an October
2002 white paper on the subject. §^\^

" ^

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— = _

S Co-hosted credit management
roundtable with the Federal Reserve
and developed credit management
fundamentals for consumers.
8

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> T h e best w a y for young people to receive
financial education is by including personal
finance concepts (compounding interest or
budgeting) when teaching math or reading.

J:

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Why Teach Financial
Education in Schools?

•

> It enhances the teaching of these subjects
by providing real life examples that are
m
meaningful to students.
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> When teaching personal finance skills in
schools, w e prepare young people to
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become competent consumers and informed
•s*
managers of household wealth.

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. — —

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Integrating Financial Education
Into Core Curricula
2002 White Paper
Key access points to ensure financial
education is taught in schools:
• Standards Development Process
• Testing
• Text Books
• Financial Education Materials
• Educators
10

I Integrating Financial Education
* Into Core Curricula
* • Standards: Informing the state boards of
»
education about the importance of personal
=*
finance can help ensure financial concepts are
included in math and reading curricula.
- ^

• Testing: Including financial concepts in tests
encourages teachers to teach the subject in the
classroom.

-«•=—

-^

Z+

- — —

-Z*

• Textbooks: Educating publishers about the
value of integrating financial concepts into math
and reading, and requiring them to demonstrate
h o w their materials incorporate financial
concepts into other subjects.
n

Integrating Financial Education
Into Core Curricula
• Financial Education Materials: Incorporating
on-line materials into math and reading
curricula to provide a financial education
component to these subjects.
• Educators: Training and professional
development requirements should stress the
importance of financial education so that
teachers can convey such information to
students.

12

Personal Finance Education
State Legislation
Colorado House Joint Resolution 03-1069:
Concerning the importance of personal financial
literacy.
Montana House Joint Resolution 10: Urging the board
of public education to integrate the principles of
basic personal finance into the content and
performance standards established for Montana's
public schools.
Texas House Concurrent Resolution 15: Directing the
State Board of Education to implement the inclusion
of elements relating to personal finance among the
essential knowledge and skills in the required public
school curriculum

Financial Education
Effectiveness
High school graduates from states that
mandated a personal finance education
course have higher savings rates than
individuals in other states
Individuals w h o have received financial
education participate more frequently
in, and m a k e larger contributions to, ^ _
employer 401(k) programs
|u§

The Need for Financial
Education Today
Americans are presented with complex
financial choices requiring them to select
from a rich diversity of financial products
and services.
All Americans need to be prepared and
financially educated to take full
advantage of these opportunities.
W h e n individuals fulfill their potential,
there is an overall impact on the nation's
economy.

Federal Government
Financial Education Programs
H.LP. Pocket Change
Treasury Department - U.S. Mint
Personal Financial Education
Federal Reserve Bank

=rNANCIAL EDUCATION
RESEARCH CENTER

'7S V

Money Math: Lessons for Life
Treasury Department - BPD
Money Smart
Federal Deposit Insurance Corporation

-5*

Knowledge

GonMeMci

16

Additional Resources
•

www.treas.gov/financialeducation

* www.sec.gov/investor/pubs/roadmap.htm
www.irs.gov/app/understandingTaxes/
m

www.reeusda.gov/ecs/cfe.htm

m

www.ed.gov/index.jsp

m
m

www.pueblo.gsa.gov

•

...Conclusion

2
•
•
•
-

Working together, we can make a
difference and ensure that young
people have the knowledge and
skills to effectively manage their
financial lives.

18

Thank You
^

JS-633: The Honorable John McCain Chairman, Committee on Commerce, Science and ... Page 1 of 2

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 30, 2003
JS-633
The Honorable John McCain Chairman, Committee, Science and
Transportation United States Senate
July 30, 2003

The Honorable John McCain
Chairman, Committee on Commerce, Science and Transportation
United States Senate
253 Senate Russell Office Building
Washington, D C 20510
Dear Chairman McCain:
We are writing to express our strong support for legislation to make permanent the
moratorium on Internet access taxes, regardless of the speed of that access, and
on multiple and discriminatory taxes on electronic commerce. Following the House
Judiciary Committee's swift adoption of H.R. 49 last week, w e encourage you to
take similar action so the President can sign legislation before the current
moratorium expires on November 1 of this year.
The Internet is an innovative force that opens up the vast potential economic and
social benefits of e-commerce and enables such applications as distance learning,
telemedicine, e-business, e-manufacturing, e-govemment, and precision farming.
Government must not slow the rollout of Internet services by creating administrative
barriers or imposing new access taxes. Nor should government stifle e-commerce
through multiple or discriminatory taxes.
We look forward to working with you again on this important issue. If you should
have any further questions or concerns, please feel free to contact us or Brenda
Becker, Assistant Secretary for Legislative and Intergovernmental Affairs,
Department of Commerce, at (202) 482-3663, or P a m Olson, Assistant Secretary
for Tax Policy, Department of the Treasury, at (202) 622-0050.
Sincerely,

Donald L. Evans

cc: Senator Ernest Hollings
Senator George Allen
Senator Ron Wyden

httn://www treas anv/nress/releases/is633.htm

John W . Snow

JS-634: Treasury Letter to Congress on C S R D F Restoration Following Debt Issuance Sus... Page 1 of 3

F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 30, 2003
JS-634
Treasury Letter to Congress on CSRDF Restoration Following Debt Issuance
Suspension
July 30, 2003

The Honorable J. Dennis Hastert
Speaker of the House
U.S. House of Representatives
Washington, D C 20515
Dear Mr. Speaker:
On December 24, 2002, Treasury informed Congress that the public debt
outstanding would reach the statutory limit of $6.4 trillion in the latter half of
February 2003. The public debt outstanding first reached the statutory limit on
February 20, 2003, and beginning on that date and thereafter, Treasury suspended
additional investments of the Government Securities Investment Fund, as
necessary, and took other lawful actions in order to keep from exceeding the
statutory limit. O n April 4, 2003, Treasury informed Congress that a "debt issuance
suspension period" would begin as early as April 4, but not later than April 11, and
last until July 11, 2003. Subsequently, on May 19, 2003, the "debt issuance
suspension period" was extended from July 11 to December 19, 2003. From April 8
through May 27, 2003, outstanding Treasury debt would have exceeded the
statutory limit if the Secretary of the Treasury had not taken actions relating to the
investment of assets of the Civil Service Retirement and Disability Fund (CSRDF).
This is the report required by section 8348 of Title 5, United States Code,
concerning the operation and status of the C S R D F during the recent debt issuance
suspension period.1 As explained below, the C S R D F has been fully restored.
Section 8348(j)(1) authorizes the Secretary to suspend the issuance of obligations
to the C S R D F if new obligations could not be issued without exceeding the public
debt limit. In addition, if the Secretary determines that a "debt issuance suspension
period" exists, he is authorized by section 8348(k)(1) and (2) to sell or redeem
securities held by the C S R D F to obtain any amount of funds not exceeding an
amount equal to the total amount of the benefit and other payments authorized to
be made from the C S R D F during the debt issuance suspension period.
O n April 8, 2003 and May 20, 2003, investments2 of the C S R D F were redeemed in
order to prevent the public debt from exceeding the statutory limit. During the debt
issuance suspension period, the C S R D F also received funds that could not be
invested without exceeding the debt limit. C S R D F receipts received between April 8
and M a y 27 totaling $2,541,232,000 remained uninvested.
Section 8348(j)(3) requires the Secretary, upon expiration of a debt issuance
suspension period, to issue to the C S R D F obligations that will ensure that the
holdings of the fund replicate to the maximum extent practicable the obligations the

h r t n 7 / w w w trpns anv/nress/releases/is634.htm

5/2/2005

JS-634: Treasury Letter to Congress on C S R D F Restoration Following Debt Issuance Sus... Page 2 of 3

fund would have held upon the expiration of the debt issuance suspension period if
the debt issuance suspension period had not occurred. Section 8348(j)(4) requires
the Secretary to pay to the C S R D F on the first normal interest payment date
following the expiration of a debt issuance suspension period the amount of interest
that would have been earned by the C S R D F if the debt issuance suspension period
had not occurred.
On May 27, 2003, the debt issuance suspension period ended when the President
signed legislation increasing the permanent debt limit to $7,384 trillion (P.L. 10824). In order to place the C S R D F in the same financial position it would have been
in had there not been a debt issuance suspension period, the following actions
were taken on May 27 and June 30, the first normal interest payment date following
the expiration of the debt issuance suspension period.
•On May 27"
1. Uninvested receipts of the C S R D F totaling $2,541,232,000 were
invested in a 4 % certificate of indebtedness maturing June 30, 2003.
2. Principal amounts of the 5 % % bond redeemed and not otherwise
used for benefit payments during the debt issuance suspension
period totaling $28,290,099,000 were
invested in a 5 % % bond maturing June 30, 2017.
3. A certificate of indebtedness maturing June 30, 2003 was redeemed
with interest and principal totaling about $4,109,901,000. A principal
amount of $4,109,901,000 was invested in the 5 % % bond maturing
June 30, 2017.3
•On June 30:
1. Interest totaling $100,822,854.44, representing the amount that
would have been earned, but for the debt issuance suspension
period, was paid and invested. This represents interest lost from the
early redemption of the 5 % % bond on April 8 and May 20 and
interest on receipts uninvested between April 8 and M a y 27. Based
on these actions, the C S R D F has been fully restored to the condition
in which it would
have been had there not been a debt issuance suspension period.
Sincerely,
Brian Roseboro
Assistant Secretary for
Financial Markets
Letter sent to:
Rep. Hastert Speaker of the House
Rep. DeLay House Majority Leader
Rep. Pelosi House Minority Leader
Rep. Thomas W a y s & Means Committee, Chairman
Rep. Rangel W a y s & Means Committee, Ranking Member
Rep. Nussle - Budget Committee, Chairman
Rep. Spratt - Budget Committee, Ranking Member
Rep. Oxley Financial Services Committee, Chairman
Rep. Frank Financial Services Committee, Ranking Member
Rep. Davis - Government Reform Committee, Chairman
Rep. W a x m a n • Government Reform Committee, Ranking Member
Sen. Frist Senate Majority Leader
Sen. Daschle - Senate Minority Leader
Sen. Stevens President Pro Tempore of the Senate
Sen. Grassley - Finance Committee, Chairman
Sen. Baucus - Finance Committee, Ranking Member
Sen. Shelby Banking, Housing, and Urban Affairs Committee, Chairman
Sen. Sarbanes - Banking, Housing, and Urban Affairs Committee, Ranking Member
Sen. Nickles Budget Committee, Chairman
Sen. Conrad Budget Committee, Ranking Member

http://www.treas.gov/press/releases/js634.htm

5/2/2005

JS-634: Treasury Letter to Congress on C S R D F Restoration Following Debt Issuance Sus... Page 3 of 3

Sen. Collins - Governmental Affairs Committee, Chairman
Sen. Lieberman Governmental Affairs Committee, Ranking Member

A similar report covering the operation and status of the Government Securities
Investment Fund of the federal employees' Thrift Savings Plan was submitted to
Congress on June 27, 2003.
2

Par Value: $12,150,000,000; Maturity: June 30, 2017; Interest Rate: 51/4%;
Redeemed April 8, 2003. Par Value: $20,250,000,000; Maturity: June 30, 2017;
Interest Rate: 5 % % ; Redeemed May 20, 2003.

3

This represents principal from the bonds redeemed on April 18 and May 20 and
used to make the benefit payments during the DISP (May 1, 2003 $3,959,209,000; May 7, 2003 - $75,346,000; and May 8, 2003 - $75,346, 000). Had
the DISP not occurred, these payments would have been properly paid through the
redemption of certificates of indebtedness.

http://www.treas.gov/press/releases/js634.htm

ori-u I o r I'M

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EMBARGOED UNTIL 11:00 A.M.
August 4, 2003

AVKMJI:, N.W,

•

W A S I I I N C T O V D.C;.»

Contact:

202211 •.:2u21 «»2 2.2<>MI

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $17,000 million to
refund an estimated $17,000 million of publicly held 4-week Treasury bills maturing
August 7, 2003.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDlrect will not be accepted.
The Federal Reserve System holds $13,722 million of the Treasury bills maturing
on August 7, 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 daylight saving 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.

oOo
Attachment

xjo <o3o

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED AUGUST 7, 2003
August 4, 2003
Offering Amount $17,000 million
Maximum Award (35% of Offering Amount) .. . $ 5,950 million
Maximum Recognized Bid at a Single Rate..$ 5,950 million
NLP Reporting Threshold
$ 5,950 million
NLP Exclusion Amount
$11,800 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NL 1
Auction date
August 5, 2003
Issue date
August 7, 2003
Maturity date
September 4 , 2003
Original issue date
March 6, 2003
Currently outstanding
$45,827 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 daylight saving time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern daylight saving 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 CONTACT: Office of Financing
August 05, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 07, 2003
September 04, 2003
912795NL1

High Rate: 0.915% Investment Rate 1/: 0.929% Price: 99.929
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 37.78%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

$

SUBTOTAL
Federal Reserve
TOTAL

$

45,025,190
34,771
0

Accepted
$

16,965,553
34,771
0

45,059,961

17,000,324

2,831,774

2,831,774

47,891,735

$

19,832,098

Median rate
0.910%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 45,059,961 / 17,000,324 = 2.65
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

<f$ bit

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 CONTACT: Office of Financing
August 05, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 3-YEAR NOTES
Interest Rate: 2 3/8% Issue Date: August 15, 2003
Series:
H-2006
Dated Date:
CUSIP No:
912828BF6
Maturity Date:

High Yield:

2.422%

Price:

August 15, 2003
August 15, 2006

99.865

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 65.84%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tend*Bred

$

$

278, 013
0

SUBTOTAL

31, .575, 013

Federal Reserve
TOTAL

31,,297, 000

Accepted

2 4 , 0 0 0 , 053 1/

3,. 906,967

$

35, 481, 980

2 3 , 7 2 2 ,.040
278, 013
0

3,906, 967

$

2 7 , 9 0 7 , 020

Median yield 2.350%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
2.250%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 31,575,013 / 24,000,053 = 1.32
1/ Awards to TREASURY DIRECT = $175,360,000

http ://www.publicdebt.treas.go v

& P1

Page 1 of4

2003 - August FFB Activity

federal financing bank
VVA 31 -I »v 3 F L ) K, O C

50 22 S

FEDERAL FINANCING BANK
2003 PRESS RELEASE
A u g u s t 2003
Brian Jackson, Chief Financial Officer, Federal Financing Bank (FFB)
announced the following activity for the month of August 2003.
FFB holdings of obligations issued, sold or guaranteed by other Federal
agencies totaled $36.4 billion on August 31, 2003, posting a decrease of $101.9
million from the level on July 31, 2003. This net change w a s the result of
decreases in holdings of agency assets of $95.0 million and in holdings of
government-guaranteed loans of $6.9 million. The FFB m a d e 41 disbursements
and received 35 prepayments during the month of August. The FFB also priced
8 buy-downs of loans guaranteed by the Rural Utilities Service ("RUB") during
the month.
Below are tables presenting FFB August loan activity and FFB holdings as of
August 31, 2003.

PRINT

FEDERAL FINANCING BANK
August 2003 ACTIVITY
Borrower

Date

Amount

of Advance

Final
Maturity

Semi-Annually
Interest Rate
or Quarterly

U.S. P O S T A L SERVICE
U.S. Postal Service

8/01

$546,900,000.00

8/4/2003

U.S. Postal Service

8/04

$546,900,000.00

8/5/2003

U.S. Postal Service

8/05

$546,900,000.00

8/6/2003

http://www.treas.gov/ffb/press_releases/2003-august-activity.html

1.061%
1.030%
1.030%

Semi-Annually
Semi-Annually
Semi-Annually

5/19/2005

2003 - August F F B Activity

U.S. Postal Service

Page 2 of 4

Semi-Annually

$150,000,000.00

8/7/2003
2/17/2004

1.030%
1.195%

Semi-Annually

8/07

$100,000,000.00

2/17/2004

1.195%

Semi-Annually

U.S. Postal Service

8/07

$1,000,000,000.00

8/15/2003

1.083%

Semi-Annually

U.S. Postal Service

8/07

$750,000,000.00

8/15/2003

1.051%

Semi-Annually

U.S. Postal Service

8/07

$2,000,000,000.00

2/5/2004

1.167%

Semi-Annually

U.S. Postal Service

8/07

$2,523,437,000.00

8/20/2003

1.051%

Semi-Annually

U.S. Postal Service

8/15

$1,000,000,000.00 11/17/2003

1.084%

Semi-Annually

U.S. Postal Service

8/15

$750,000,000.00 11/17/2003

1.084%

Semi-Annually

U.S. Postal Service

8/20

$2,523,437,000.00

9/4/2003

1.091%

Semi-Annually

Foley Services Contract

8/14

$63,404.49

7/31/2025

5.204%

Semi-Annually

Foley Services Contract

8/14

$96,425.24

7/31/2025

5.204%

Semi-Annually

Foley Services Contract

8/14

$157,554.85

7/31/2025

5.204%

Semi-Annually

San Francisco Bldg Lease

8/27

$3,665,169.76

8/1/2005

2.048%

Semi-Annually

San Francisco O B

8/28

$133,986.72

8/1/2005

2.137%

Semi-Annually

8/06

$1,122,819.12

1/2/2032

5.228%

Semi-Annually

$546,900,000.00

U.S. Postal Service

8/06
8/07

U.S. Postal Service

GOVERNMENT-GUARANTEED LOANS
G E N E R A L SERVICES ADMINISTRATION

D E P A R T M E N T OF EDUCATION
Tuskegee Univ.
RURAL UTILITIES SERVICE
Planters Electric #763

8/01

$840,000.00 12/31/2030

5.148%

Quarterly

Goodhue County #672

8/06

$410,000.00

3/31/2004

1.131%

Quarterly

Pee Dee Elec. #547

8/06

$984,000.00

1/2/2007

2.625%

Quarterly

Farmers Elec Coop Corp #877

8/07

$680,000.00

1/2/2035

5.111%

Quarterly

Tri-State E.M.C. #730

8/07

$1,000,000.00

1/2/2035

5.110%

Quarterly

Sac Osage Electric Coop. #815

8/08

5.116%

Quarterly

San Patricio Elec. #676

8/08

$1,182,000.00

1/2/2035

5.080%

Quarterly

Frontier Power #667

8/11

$967,000.00

1/2/2035

5.083%

Quarterly

Interstate Tele #661

8/12

4.287%

Quarterly

©French Broad Elec. #245

8/15

$507,193.17

4.488%

Quarterly

©French Broad Elec. #245

8/15

$179,078.79 12/31/2018

4.595%

Quarterly

©French Broad Elec. #245

8/15

$792,385.16 12/31/2018

4.595%

Quarterly

©French Broad Elec. #245

8/15

$512,558.22 12/31/2018

4.595%

Quarterly

©French Broad Elec. #245

8/15

$250,229.92 12/31/2018

4.595%

Quarterly

©French Broad Elec. #245

8/15

$90,792.64 12/31/2018

4.595%

Quarterly

©French Broad Elec. #245

8/15

$283,527.08 12/31/2018

4.595%

Quarterly

©French Broad Elec. #245

8/15

$120,576.07 12/31/2018

4.595%

Quarterly

Nolin Rural Elec. #840

8/15

$2,948,000.00 12/31/2003

0.992%

Quarterly

Swan's Island Electric #203

8/15

$23,000.00 12/31/2036

5.325%

Quarterly

Wild Rice Elec. #806

8/15

$279,000.00 12/31/2035

5.307%

Quarterly

Moreau-Grand #569

8/18

$184,800.00

6.055%

Quarterly

$554,000.00 12/31/2036

$1,573,656.00 12/31/2019
1/2/2018

1/3/2034

I
http://www.treas.gov/ffb/press_releases/2003-august-activity.html

5/19/2005

2003 - August F F B Activity

Page 3 of 4

Buggs Island Telephone #204

Quarterly

Rio Grand Electric #615

8/19
8/19

$1,039,000.00 12/31/2019
$525,000.00 1/3/2034

4.544%
5.220%

Quarterly

North Central Elec Coop. #201

8/21

$490,000.00 12/31/2036

5.209%

Quarterly

Cotton Electric Coop #203

8/22

$1,526,000.00 12/31/2037

5.259%

Quarterly

Central Georgia Elec. #201

8/25

$1,823,000.00

9/30/2013

4.402%

Quarterly

Pointe Coupee Electric #204

8/25

$850,000.00 12/31/2037

5.060%

Quarterly

East Kentucky Power #489

8/26

$3,938,000.00 12/31/2024

5.055%

Quarterly

Southern Iowa Electric #204

8/26

$1,500,000.00 12/31/2037

5.253%

Quarterly

Sangre De Cristo Elec. #732

8/28

3.527%

Quarterly

$500,000.00

9/30/2008

@ interest rate buydown

Return To top

FEDERAL FINANCING BANK HOLDINGS
AUGUST 2003
(in millions of dollars)
FEDERAL
FINANCING
August 31, 2003

Program

BANK
HOLDINGS
July 31, 2003

Fiscal Year
Monthly
Net Change
Net Change
8/1/03- 8/31/0310/1/02- 8/31/03

Agency Debt:
$7,273.4

$7,273.40

$0.00

($3,840.60)

$7,273.4

$7,273.40

$0.00

($3,840.60)

FmHA-RDIF

$855.00

$950.00

($95.00)

($95.00)

FmHA-RHIF

$2,530.00

$2,530.00

$0.00

($375.00)

$4,270.2

$4,270.20

$0.00

$0.00

$7,655.20

$7,750.20

($95.00)

($470.00)

$1,706.10

$1,739.70

($33.70)

($216.50)

$79.10

$78.00

$1.10

$10.00

$2.00

$3.20

($0.40)

($2.30)

$1,133.2

$1,133.20

$0.00

($74.10)

$2,150.10

$2,146.00

$4.10

($55.50)

$9.60

$9.60

$0.00

($1.80)

$607.00

$607.50

$0.00

($173.30)

$1,720.70

$1,696.90

$23.00

$1,662.50

$79.00

$80.90

($1.90)

($23.40)

$3.10

$3.10

$0.00

($0.10)

Subtotal*

$21,491.20

$21,498.10

($6.90)

$1,126.10

Grand total*

$36,419.00

$36,521.70

($101.90)

($3,184.50)

U.S. Postal Service
Subtotal*
Agency Assets:

Rural Utilities Service-CBO
Subtotal*
Government-Guaranteed
1 onHinn-

DOD-Foreign Military Sales
DoEd-HBCU+
D M U D - C o m m Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Devel Cos.
DOT-Section511

http://www.treas.gov/ffb/press_releases/2003-august-activity.html

5/19/2005

2003 - August F F B Activity

Page 4 of 4

*figures may not total due to rounding; +does not include capitalized interest

Return To top
Return to 2003 Press Releases
Return to PRESS RELEASES
Last Updated on 1/22/04

http://www.treas.gov/ffb/press_releases/2003-august-activity.html

5/19/2005

PRESS R O O M

F R O M THE OFFICE O F PUBLIC AFFAIRS
August 5, 2003
2003-8-5-16-48-46-26801
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 $80,694 million as of the end of that week, compared to $81,757 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
Julv 25,2003

August 1, 2003

81,757

80,694

TOTAL
1. Foreign Currency Reserves

]

a. Securities

Euro

Yen

7,649

13,238

TOTAL

20,887 j 7,450

Of which, issuer headquartered in the U.S.

Yen

TOTAL

13,108

20,558

Euro

0

0

b. Total deposits with:
b.i. Other central banks and BIS

12,471

2,658

15,129

12,193

2,632

14,825

b.ii. Banks headquartered in the U.S.

0

0

b.ii. Of which, banks located abroad

0

0

b.iii. Banks headquartered outside the U.S.

0

0

b.iii. Of which, banks located in the U.S.

0

0

2. IMF Reserve Position 2

23,086

22,800

3. Special Drawing Rights (SDRs) 2

11,611

11,468

4. Gold Stock 3

11,044

11,044

0

0

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
Julv 25, 2003
Euro
1. Foreign currency loans and securities

Yen

August L 2003

TOTAL

Euro

0

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

Xs' ^1

Yen

TOTAL
0

2. a. Short positions
2.b. Long positions
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
Julv 25, 2003
Euro

Yen

August 1, 2003

TOTAL

0

1. Contingent liabilities in foreign currency

Euro

Yen

TOTAL

0

1 .a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3. a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial 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 Accoun
(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 m a y 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 m a y 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.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 5, 2003
JS-640
J. Snow, D. Evans & E. Chao: Why we came to Wisconsin and Minnesota
John Snow, Don Evans and Elaine Chao
Published 08/05/2003
Last week, w e traveled together through Wisconsin and Minnesota to see the
American economy in action. In Wisconsin, w e met with workers and chief
executives in Milwaukee, small-business leaders at a forklift sales and servicing
company in Green Bay, and families at a Culver's in Mosinee. In Minnesota, w e met
health care professionals and students at the Mayo Clinic in Rochester, investors in
St. Paul, and retail workers at a Best Buy in Richfield. In Milwaukee, w e were so
enthusiastic for the workers and product at the Harley Davidson motorcycle
manufacturing plant that our two-state bus tour nearly became a two-wheeled bike
tour.
At each of our stops, we were impressed with the energy and optimism of the
American people. Folks have been weathering a slower economy the past few
years, but there is a general sense that it's improving and even better days are
ahead. With the implementation of the president's Jobs and Growth Plan, working
families are getting the relief they've earned, and businesses and entrepreneurs are
beginning to act on plans to create new jobs and increase output. In fact, more than
3.5 million taxpayers in these two states are now enjoying higher disposable
income thanks to the president's plan. They are putting that money to work for
themselves, their families and for this economy.
For families, the first child tax credit checks have already been mailed. July marked
the start of more generous paycheck withholding tables and the end of the marriage
penalty. The people w e met were taking notice.
On the supply side, investors and business leaders are beginning to realize the
benefits of lower dividend and capital gains taxes. Small businesses in particular
are cheering the higher expensing limits for new equipment purchases. These lower
taxes on capital are encouraging investment and smarter allocation of resources. In
more and more cases, that means large companies are returning cash to
shareholders, instead of retaining earnings indefinitely. For companies of all sizes, it
means taking long-standing capital spending plans off the shelf, and putting them
into action.
And we talked to workers taking advantage of training programs in the health care
sector, which is one of the fastest-growing sectors in the 21st-century workforce. By
the year 2010, there will be more than 1 million job openings for registered nurses
alone.
There are a lot of stories like these in our nation's economy right now, in Wisconsin,
Minnesota and in every state. The president's Jobs and Growth Plan is making a
difference, encouraging people to push forward with spending and investment
plans, plans that will ultimately boost growth and create new jobs throughout this
country.
Treasury Secretary John Snow, Commerce Secretary Don Evans and Labor
Secretary Elaine Chao are members of President Bush's Cabinet.

Bureau of the Public Debt: Public Debt Announces Activity for Securities in the STRIPS Program For J... Page 1 of 1

B u r e a u of the

Public

^ "I
bt'.itci UeparTmi-ri n iorA.rr,e
'.'ecsi'.'v

Public Debt Announces Activity for Securities in the STRIPS Program for July
2003
FOR IMMEDIATE RELEASE
August 6, 2003
The Bureau of the Public Debt announced activity for the month of July 2003, of securities within the Separate Trading of Registered
Interest and Principal of Securities program (STRIPS).

In Thousands
Principal Outstanding (Eligible Securities)

$2,393,375,777

Held in Unstripped Form

$2,215,818,315

Held in Stripped Form

$177,557,462

Reconstituted in July

$20,192,559

The accompanying table, gives a breakdown of STRIPS activity by individual loan description. The balances in this table are subject to
audit and subsequent revision. These monthly figures are included in Table V of the Monthly Statement of the Public Debt, entitled
"Holdings of Treasury Securities in Stripped Form."
The STRIPS table, along with the n e w Monthly Statement of the Public Debt, is available on Public Debt's Internet site at:
www.publicdebt.treas.gov. A wide range of information about the public debt and Treasury securities is also available at the site.
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004

cfs- Ml
http://www.publicdebt.treas.gov/com/com0803s.htm

5/19/2005

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 6, 2003
JS-642
Rob Nichols Sworn in as Assistant Secretary for Public Affairs
Treasury Secretary John Snow today swore in Rob Nichols as Assistant Secretary
for Public Affairs. Nominated for the position by President George W . Bush on April
10, 2003, Nichols was confirmed by the United States Senate on August 1, 2003.
As Assistant Secretary for Public Affairs, Nichols will play a leading role in
educating the American people about tax and currency policy, debt management,
Social Security and Medicare financing, and a host of international issues that
impact the U.S. economy. In addition to serving as the chief spokesman for the
Treasury Department and Secretary John Snow, Nichols also will design and
implement policies, communications strategies, and programs that will increase the
public's knowledge and understanding of Treasury's activities and services among
the news media, business groups, consumer groups, and other government
agencies.
In his new role, Nichols also will oversee the Office of Public Liaison, which
conducts outreach to business, advocacy and financial communities, including Wall
Street; elicits information, analysis and opinions from public and private
organizations representing business and consumer interests; and communicates
Treasury and Bush Administration views to these entities.
Since the beginning of the Bush Administration, Nichols has served as Deputy
Assistant Secretary for Public Affairs. In that position, Nichols was responsible for
media relations for the Department of the Treasury. This involved planning
strategies on how to present issues to the media; representing senior Treasury
officials to the media; providing tactical communications counsel; acting as a
Treasury spokesman; and representing the Bush Administration's views on issues
to the press, and through them, to the general public. O n a day-to-day basis,
Nichols arranged interviews, press conferences, background briefings, photo
opportunities, and responded to questions from the media.
Before joining the Department of the Treasury, Nichols served as Communications
Director for the Electronic Industries Alliance. Previously, he served as
Communications Director for Senator Slade Gorton and as Press Secretary for
Congresswoman Jennifer Dunn. Earlier in his career, Nichols was the Political
Director for the Washington State Republican Party. During the George H.W. Bush
administration, he worked at the White House as an aide in the Office of the Chief
of Staff, and at the Department of Transportation in the Office of the Secretary. A
native of Seattle, Washington, Nichols is a graduate of George Washington
University.
He resides in Washington, D.C with his wife Rebecca.

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 CONTACT: Office of Financing
August 06, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Interest Rate: 3 1/4% Issue Date: August 15, 2003
Series:
G-2008
Dated Date:
CUSIP No:
912828BG4
Maturity Date:

High Yield:

3.300%

Price:

August 15, 2003
August 15, 2008

99.771

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 35.75%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

44,474,005
236,878
0

SUBTOTAL

44,710,883

Federal Reserve

3,353,619

TOTAL

$

48,064,502

$

17,763,294
236,878
0
18,000,172 1/
3,353,619

$

21,353,791

Median yield
3.278%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
3.200%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 44,710,883 / 18,000,172 = 2.48
1/ Awards to TREASURY DIRECT = $115,506,000

http://www.publicdebt.treas.gov

(T5 (o/J

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 CONTACT: Office of Financing
August 07, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 10-YEAR NOTES
Interest Rate: 4 1/4% Issue Date: August 15, 2003
Series:
D-2013
Dated Date:
CUSIP No:
912828BH2
Maturity Date:

High Yield:

4.370%

Price:

August 15, 2003
August 15, 2013

99.036

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 82.62%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tendered
$

SUBTOTAL

$

35,975,558

Federal Reserve
TOTAL

35,735,825
239,733
0

Accepted

18,000,002 1/

2,515,214
$

38,490,772

17,760,269
239,733
0

2,515,214
$

20,515,216

Median yield
4.310%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
4.250%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 35,975,558 / 18,000,002 = 2.00
1/ Awards to TREASURY DIRECT = $117,103,000

http://www.publicdebt.treas.gov

<fS - M l

<H lit K O f PI'BI.K A l FAIRS • 1500 PI'AN^V l.\ A M V A> FN l.|.;. N.W, t W'AM'I IN C T O N , [).€.• 21122 (I • i2D2l (>22 20MI

EMBARGOED UNTIL 11:00 A.M.
August 7, 2003

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 $32,000
million to refund an estimated $29,884 million of publicly held 13-week and 26-week
Treasury bills maturing August 14, 2003, and to raise new cash of approximately $2,116
million. Also maturing is an estimated $8,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced August 11, 2003.
The Federal Reserve System holds $13,481 million of the Treasury bills maturing
on August 14, 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 August 12, 2003. 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.
Treasury-Direct customers have requested that we reinvest their maturing holdings
of approximately $1,095 million into the 13-week bill and $811 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.
oOo

Attachment

CK-GilS

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED AUGUST 14, 2003
August 7, 2003
Offering Amount
$16,000 million
Maximum Award (35% of Offering Amount)
$5,600 million
Maximum Recognized Bid at a Single Rate .... $5,600 million
NLP Reporting Threshold
$5,600 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 NW 7
August 11, 2003
August 14, 2003
November 13, 2003
May 15, 2003
$19,272 million
$1,000

$16,000 million
$5,600 million
$5,600 million
$5,600 million
None

182-day bill
912795 PK 1
August 11, 2003
August 14, 2003
February 12, 2004
August 14, 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 daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving 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. TreasuryDlrect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

FROM THE OFFICE OF PUBLIC AFFAIRS
August 8, 2003
JS-646
U.S. Treasury Announces U.S.-Brazil Group for Growth Meeting
WASHINGTON, DC - At the time of the meeting of President Lula with President
Bush on June 20, 2003, Secretary S n o w and Minister Palocci launched a Group for
Growth designed to examine strategies for raising productivity growth.
This group, chaired for the U.S. side by John B. Taylor, Under Secretary for
International Affairs at the U.S. Treasury, and for the Brazilian side by Joaquim V.
Levy, Secretary of the National Treasury, and Marcos Lisboa, Secretary for
Economic Policy, both at the Brazilian Ministry of Finance, will hold its first meeting
in Washington D.C. on August 27, 2003.
During the meeting, the Brazilian and U.S. delegations will hold a seminar on
determinants of growth and measures to boost small- and medium-sized
enterprises, including access to credit and capital markets. The meeting will also
offer a venue for each side to present an overview on recent growth performance
and discuss recent trends and prospects in the fiscal area.
Both countries are putting in place policies to raise growth, with voting on key
reform legislation in Brazil and the implementation of major jobs and growth
legislation in the United States. Closer understanding of the underpinnings of
economic activity and reforms in each country is thus of mutual interest.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free MQbe®AcroMMB.eader®.
August 11,2003
JS-647
Presentation of Terrorism Risk Insurance Program Executive Director Jeffrey
Bragg To the Vermont Captive Insurance Association
Slide 1: Introduction
Slide 2:
Good afternoon and thank you for the opportunity to speak to you today on
Treasury's progress and plans for implementing the Terrorism Risk Insurance Act of
2002, otherwise referred to as TRIA.
On November 26, 2002, President Bush signed TRIA into law.
With an estimated $40B in insured losses as a result of the events of 9/11 the
market for terrorism coverage became severely disrupted.
However in addition to wanting to address Insurance industry disruptions, the
Congress and the President recognized that such wide spread dislocations in
insurance markets also had a negative impact on business' ability to finance
economic activity and recovery.
TRIA was therefore enacted to stabilize the availability of insurance protection as
well as ^
Slide 3:
TRIA effectively places the Federal Government temporarily in the terrorism risk
reinsurance business:
The program provides coverage for commercial lines P&C losses including workers'
compensation.
Coverage is triggered when the Secretary of the Treasury the Secretary of State
and the Attorney General together certify that an act of terrorism carried out on
behalf of a foreign interest has occurred:
This terrorism generated loss must be greater than $5M
And. the event must have taken place in the US, or a US foreign mission, or on a
U S air carrier or vessel.
Slide 4:
One of the first things that had to be defined under the act was what constitutes a
P & C insurer.

This task w a s more difficult than it first appeared. However "Insurer" for purposes of
the act is any entity that is:
Licensed or admitted for primary or excess insurance in any state
A surplus lines carrier on the quarterly NAIC listing of alien insurers
Insurers approved by a federal agency in connection with maritime, energy, or
aviatipn activity
A State residual market or workers compensation fund
Altogether well over 2000 insurance companies are participating in the program.
But understandably programs with current federal exposure like the National Flood
Insurance Program are not included.
Also insurance products including assumed reinsurance, health and life insurance
and for now group life insurance are excluded from the program.
Slide 5:
Like any program there are restrictions.
Deductibles increase over the 3 year term of the program and are expressed as a
percent of an insurer's direct earned premium.
The Federal Governments share under the program is equal to 90%MthalpMLQ„n
MJn.suxed_Iosses„that exceed the insurer deductible.
While there is a cap on total insured losses: if total losses exceed the cap Congress
will determine the procedures for and source of payments for those excess losses.
The program is scheduled to end on December 31, 2005
Many of you here today believe that all federal programs last forever. However the
Former Riot Reinsurance Program and the Former Federal Crime Insurance
Program are 2 examples of government Jasurance_mecMnisms that have been
discontinued when it became clear that their temporary mission had been fulfilled.
Slide 6:
There are provisions under the act whereby the Secretary can recoup certain
government payments
Mandatory recoupment is triggered whenever there is a loss and the insurance
industry paid losses are less than that year's industry retention.
The annuaLJndustryietention is equal to the lesser of a dollar amount which was
fixed by Congress or the actual aggregate insured losses.
AsgregMe...lMuredJosses are all the losses associated with an act of terrorism that
are within an insurer's deductible and the 1 0 % of insured loss quota share.
Under mandatory recoupment The Secretary will establish Terrorism Loss Risk
Sharing Premiums of up to a 3 % surcharge on all commercial policy premiums
In addition The Secretary can depending on economic conditions impose an
additional discretionary recQ
additional surcharges on

insurance premiums can be collected.
Slide 7:
To illustrate lets assume there is a $20B covered loss during the 3rd year of the
program
This Loss is greater than the insurance industry's maximum aggregate retention
that year of $15B.
Further assume that 100 insurance companies were exposed to that loss and that
their collective direct earned premiums totaled $20B.
The third year deductible of 15% equals $3B for these 100 companies and their
1 0 % quota share equals another $1.7B making the 100 insurer's share of the total
paid losses for the companies involved $4.7B.
Under this example Treasury would pay $15.3B, which is the difference between
the total insured loss and the losses paid by the 100 involved companies.
However, under the law Treasury is required to recoup $10.3B which is the
difference between the industry aggregate retention of $15B and the $4.7B paid by
the 100 companies.
To accomplish this all companies covered under the program would impose up to a
3 % premium surcharge on all commercial policy holders until $10.3B had been
recouped and paid to Treasury.
Additionally depending on economic considerations the Secretary of the Treasury
has discretionary authority to impose additional recoupment surcharges and could
recoup up to the entire $20B loss.
Slide 8:
The Terrorism Risk Insurance Program or T.R.I.P. is itself under Treasury's
Department for Domestic Finance (headed by Under Secretary Peter Fisher) and
the Office of Financial Institutions (headed by Assistant Secretary W a y n e
Abernathy).
TRIP'S responsibilities include all of the operational functions necessary to
effectively implement and manage the program, including all claims management
and processing functions, as well as all auditing functions
TRIP is in essence the insurance company created by the new law.
However 2 additional Treasury offices play an important part in the program.
Treasury's Office of Economic Policy will be conducting studies associated with
coverage issue under TRIA and the overall effectiveness of the program.
The office of Financial Institutions Policy has been responsible for promulgating
rules and regulations for the program and will continue to assist TRIP in rule making
as w e m o v e to the operational phase of the program.
Slide 9:
Already substantial progress has been made in implementing the program
The Office of Financial Institutions Policy has been extremely active in

implementing the regulations necessary to support the n e w act.
They have issued
• 4 interim guidance notices
• 2 interim final rules
• 1 notice of proposed rulemaking
• A final rule.
Slide 10:
The final rule published in the federal register on July 11 sets forth key definitions
that Treasury will use in implementing the program.
Among other things this rule addresses:
• Guidance on the Lines of Insurance covered under the act
• Which entities are eligible for participation
• Control and affiliation issues
The Insurance industry generally and many of your representatives specifically
have been very helpful in representing your views to the Treasury Department on
these and other issues^
Howjeyexlur£eM.M.ypU- to review these regulations closely to make certain you
are in compliance with the act and can take advantage of this important federal
protection.
Slide 11:
One of the most discussed issues in the new regulations was the definitions of
affiliate and what constitutes control. The issue is important becausei it goeslo the
heaxt.plMnderstending the appropriate deductible to assign various affiliated
insurance groups.
Conclusive Control Exists
• if an insurer has power to vote 25% or more of any class of voting securities
of the other insurer.
• if an insurer controls the election of a majority of the Directors or Trustees of
the other insurer.
Presumptive Control Exists
If the Secretary of the Treasury determines that an insurer exercises a controlling
influence over another insurer.
In determining presumptive control The Secretary will consider approximately 11
other factors outlined in the regulations the^presencei of_any.2 could lead to a
determination of presumptive control
Hopefully it comes as no surprise to you that in Washington we do read the
insurance trade publications. And w e have noticed that s o m e industry trade journals
have described a number of "gaming" strategies to reduce an insurer's exposure,
including mechanisms to thwart the affiliate and control guidelines. Please
understand that w e will do all that is necessary to maintain the integrity of the
program and to prevent the evasion of insurer deductibles under TRIA
Slide 12:

However w e do understand that these rules and regulations can be confusing and
that honest minds can differ oyer the^meaning. intenL.andjntexprMatLon._pf all
aspects of the program.
In fact these rules envision that there will be some confusion over many issues
including the definition of an insurer and what constitutes a controlling interest.
We continue to receive many questions on these and many other topics. So if after
reviewing these regulations in s o m e detail you still have questions you m a y request
.anjnterprelatipn of the regulations as they apply to your specific situation.
In submitting your request it is not necessary to compose a lengthy dissertation and
w e will m a k e every effort to respond to your issues in a timely manner
Slide 13:
The ink is not yet dry on there final rules and we are already working to finalize a
second set of rules which will address and finalize such issues as:
• Make available requirements
• Disclosure requirements
• State residual markets
Unfortunately this process is really never ending.
Thousands of pages of rules, definitions, procedures, and regulations will be
drafted, debated, and finalized over the next 3 years. And believe m e there are still
m a n y issues to deal with.
Slide 14:
Even though much has been accomplished, considerable work remains. Many in
the industry have expressed concerns over such program issues as:
• Adverse selection
• Continued lack of reinsurance availability
• Huge exposures particularly in worker's compensation
• Affordability
In fact most of these issues have been volatile at various and numerous times in
the past.
TRIA was passed in part to address them. These issues are in fact characteristic of
other past Federal Insurance programs.
I believe that over time the free market will help solve these problems while TRIA
cpnMbutes_pyei„time.to help build capacity and stabilize the market. Again this w a s
precisely what the program w a s designed to do.
Slide 15:
Right now, what keeps me awake at night are operational issues. We.have a..huge
amountof.work._ahead._pf.us and not very much time to accomplish it.
In addition to having a tremendous amount to accomplish to get our program up

there be a loss before w e are fully operational w e will be able to respond to that
loss.
In essence this means working on a duel approach to make certain we are
prepared.
So as we go about implementing all of issues you see before you and more let me
describe the last bullet on the slide in more detail.
Through out my career both in the private sector and with my government service I
have been a strong advocate of outsourcing functions that can be better handled by
others with more experience and expertise.
I have also where possible created partnerships between the government and
private sector insurance industry which draws on the strengths of both entities to
create a more successful program. That was why w e created the Write Your O w n
program for the National Flood Insurance Program many years ago.
Therefore it should come as no surprise that in implementing this program we will
not be creating a huge infrastructure.
Rather we will establish a virtual company that permits us to form new partnerships
with the private insurance sector, harnessing that Insurance Industry's talents and
skills to make this an effective streamlined operation.
Slide 16
In addition to the overall operational issues we just discussed we also know there
are many specific claims issues to deal with including the speed with which w e will
be able to reimburse insures all the way down the list to the mechanisms by which
w e will audit our own payments.
Hopefully it will come as good news to you that we intend that claims made under
the program will be processed and paid in a manner highly consistent with what you
now experience with the reinsurance industry.
In implementing all of the requirements necessary to pass our own audits, as well
as the expected G A P audits, w e will be mindful of current insurance industry
practices standards and needs.
We will do our best to meet those needs as well as protect the people's assets
without overreaching.
Conclusion:
Ladies and gentlemen like all of you I sincerely hope and pray that this program will
never be tested. But with your help w e can at least try to be prepared should our
nation ever again be required to call upon our industry to respond to the needs of
our insured's
As in the past I look forward to working with the industry on this new venture and in
closing thank you for your time here today as well as for your future support.
Related Documents:
• Slides

iiiVH K O F PIKI.U ,U'I;\I«S • I5<M. I'I'NNSVI.V.M V AVKNI i:, \.W. • U A S H I \ C T O N . I>.f.» 1012U •ilOll bll-WhU

EMBARGOED UNTIL 11:00 A.M.
August 11, 2003

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $15,000 million to
refund an estimated $8,000 million of publicly held 4-week Treasury bills maturing
August 14, 2003, and to raise new cash of approximately $7,000 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 $13,481 million of the Treasury bills maturing
on August 14, 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.
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.

oOo
Attachment

JjT-*/*'

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED AUGUST 14, 2003
August 11, 2003
Offering Amount $15,000
Maximum Award (35% of Offering Amount)... $ 5,250
Maximum Recognized Bid at a Single Rate.. $ 5,250
NLP Reporting Threshold
$ 5,250
NLP Exclusion Amount
$12,100

million
million
million
million
million

Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NM 9
Auction date
August 12 , 2003
Issue date
August 14, 2003
Maturity date
September 11, 2003
Original issue date
March 13, 2003
Currently outstanding
$46,768 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 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving 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 CONTACT: Office of Financing
August 11, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 14, 2003
November 13, 2 0 03
912795NW7

High Rate: 0.940% Investment Rate 1/: 0.960% Price: 99.762
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 39.32%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

34,566,680
1,496,687
345,050

$

14,158,560
1,496,687
345,050

SUBTOTAL 36,408,417 16,000,297 2/
Federal Reserve 4,986,304 4,986,304
TOTAL $ 41,394,721 $ 20,986,601
Median rate 0.925%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.910%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 36,408,417 / 16,000,297 = 2.28
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,201,826,000

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 CONTACT: Office of Financing
August 11, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 14, 2003
February 12, 2004
912795PK1

High Rate: 1.030% Investment Rate 1/: 1.053% Price: 99.479
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 31.88%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

25,360,095
1,153,873
150,000

$

14,696,183
1,153,873
150,000

SUBTOTAL 26,663,968 16,000,056 2/
Federal Reserve 5,530,003 5,530,003
TOTAL $ 32,193,971 $ 21,530,059
Median rate 1.015%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.000%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 26,663,968 / 16,000,0.56 = 1.67
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $868,466,000

http://www.publicdebt.treas.gov

J-5 -6^3

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
August 12,2003
2003-8-12-15-6-36-18639
U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. A s indicated in this table, U.S. reserve assets
totaled $81,085 million as of the end of that week, compared to $80,635 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
August 1, 2003

August 8. 2003

80,635

81,085

TOTAL
1. Foreign Currency Reserves ]

r~

a. Securities

Euro

Yen

TOTAL

Euro

7,450

13,108

20,558

7,516

Of which, issuer headquartered in the U.S.

f

Yen

TOTAL

13,216

20,732

0

0

b. Total deposits with:
b.i. Other central banks and BIS

12,193

2,632

14,825

12,273

2,654

14,927

b.ii. Banks headquartered in the U.S.

0

0

b.ii. Of which, banks located abroad

0

0

b.iii. Banks headquartered outside the U.S.

0

0

b.iii. Of which, banks located in the U.S.

0

0

2. IMF Reserve Position 2

22,625

22,740

3. Special Drawing Rights (SDRs)2

11,583

11,643

4. Gold Stock3

11,044

11,044

0

0

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 1, 2003
Euro
1 • Foreign currency loans and securities

Yen

August 8. 2003

TOTAL

Euro

0

2- Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

<fs-ts7

Yen

TOTAL
0

2. a. Short positions
2.b. Long positions
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
August 1, 2003
Euro

Yen

August 8, 2003

TOTAL
0

1. Contingent liabilities in foreign currency

Euro

Yen

TOTAL
0

1 .a. Collateral guarantees o n debt due within 1
year
Lb. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial 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 m a y 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 m a y 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.

FROM THE OFFICE OF PUBLIC AFFAIRS
August 13,2003
JS-652
Treasury and Federal Reserve Identify Top Five Fundamentals
The Treasury Department and the Federal Reserve Board today announced the top
five fundamental practices that consumers should follow to manage their personal
credit.
During a May 22, 2003 credit management panel discussion hosted by Treasury
and the Federal Reserve and attended by representatives of financial services
organizations and community and consumer groups, consensus w a s reached on
the following five fundamental practices:
1. Build savings to avoid high-cost debt and improve payment options.
2. Pay bills on time.
3. Pay more than the minimum payment.
4. Comparison shop for credit and obtain only the credit you need.
5. Understand your credit history and how it affects you.
"These fundamentals are an important first step toward educating all Americans
about the importance of responsible credit management," said Treasury Assistant
Secretary for Financial Institutions W a y n e A. Abemathy. "Wise management of
personal credit is vitally important to reaching goals such as homeownership, higher
education, and small business development."
"Credit must be managed carefully and these concepts offer guidance on how to do
so," said Federal Reserve Board Governor Edward M. Gramlich. "The
fundamentals of money management can help people make smart decisions that
promote their own well-being and, on a broader scale, foster a more efficient
economy."
Participants in the May 22 panel discussion, chaired by Assistant Secretary
Abernathy and Governor Gramlich, included representatives from the National
Foundation for Credit Counseling, the Association for Financial Counseling and
Planning Education, the In-Charge Institute, the American Bankers Association,
America's Community Bankers, the Credit Union National Association, the Fannie
M a e Foundation, Freddie Mac, American Express, MasterCard, Visa, the
Community Financial Services Association of America, the Consumer Federation of
America, the National Council of La Raza, A A R P , and College Parents of America.
The issue of credit management is one of four areas of focus for the Treasury
Department's Office of Financial Education (OFE), established in 2002. The O F E
works to promote access to financial education programs so that Americans obtain
the practical knowledge and skills that will enable them to make informed financial
choices throughout their lives. The O F E chairs the Federal Government Financial
Education Coordinating Group.
As the agency with responsibility for the Truth in Lending Act regulations, the
Federal Reserve has worked to promote access to credit and fair lending for underserved consumers and communities. In 2000, the Federal Reserve hosted a
discussion on best practices in consumer credit education; and through its W e b site
and consumer education materials is working to ensure that consumers know their
rights and responsibilities in credit transactions.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 13,2003
JS-653
Office of Financial Education Announces Online Financial Education
Directory
The Treasury Department's Office of Financial Education (OFE) today announced
the availability of a new online "Federal Financial Education Resources" directory
that will make financial education information more accessible to government
entities, community-based organizations, and the general public.
The directory, available at www.treas.gov/financiaieducation, provides access to the
many resources available within the federal government to assist in the
implementation of financial education initiatives. More than twenty-five separate
resources are listed, and programs are catalogued by subject area, program n a m e
and sponsoring organization.
Throughout the federal government, agencies are sponsoring and developing
financial education initiatives directed to a broad and diverse constituency, and for
the first time, this wealth of resources is available in a single location," said
Treasury Assistant Secretary for Financial Institutions W a y n e A. Abernathy. This
directory is a great first step in providing access to financial education for all
Americans."
The Office of Financial Education, established in 2002, seeks to ensure that all
Americans have access to financial education programs and that they obtain the
practical knowledge and skill sets that will enable them to make informed financial
choices throughout various life stages.

«)l lit I- I). ITBI.K

A M - M K S • 1500 Pl> VN N Y I.V \\ I V ,WI'"M'I.. \.M. • W A M 1 I M M O V H.C '.• 2Vl2tt a (.21)21 fi22-20MI

EMBARGOED UNTIL 11:00 A.M.
August 14, 2003

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 $32,000
million to refund an estimated $31,043 million of publicly held 13-week and 26-week
Treasury bills maturing August 21, 2003, and to raise new cash of approximately $957
million. Also maturing is an estimated $10,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced August 18, 2003.
The Federal Reserve System holds $14,303 million of the Treasury bills maturing
on August 21, 2 0 03, 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 August 19. 2003. 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.
Treasury-Direct customers have requested that we reinvest their maturing holdings
of approximately $1,046 million into the 13-week bill and $624 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.
oOo

Attachment

JS LQ

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED AUGUST 21, 2 003
August 14, 2 0 03
Offering Amount $16,000 million $16,000 million
Maximum Award (3 5% 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

5,600
5,600
5,600
5,600

million
million
million
million

91-day bill
912795 NX 5
August 18, 2003
August 21, 2003
November 20, 2003
May 22, 2003
$21,931 million
$1,000

$ 5,600 million
$ 5,600 million
$ 5,600 million
None

182-day bill
912795 PL 9
August 18, 2003
August 21, 2003
February 19, 2004
August 21, 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 daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving 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. Treasury-Direct customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

Bureau of the Public Debt: Treasury's Inflation-Indexed Securities Reference CPI Numbers and Daily In... Page 1 of 1

PUBLIC DEBT NEWS
Department of the Treasury « Bureau of the Public Debt - Washington, DC 202'!%

FOR IMMEDIATE RELEASE
August 15, 2003

Contact: Office of Financing
(202) 691-3550

TREASURY'S INFLATION-INDEXED SECURITIES
SEPTEMBER 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 September for the following
Treasury inflation-indexed securities:
(1) 3-3/8% 10-year notes due January 15, 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, 2 009
(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, _2 012
(10) 3% 10-year notes due July 15, 2 012
(11) 1-7/8% 10-year notes due July 15, 2013
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 October is expected to be
released on September 16, 2003.

oOo
September Reference CPI Numbers and Daily Index Ratios Table PDF format (file size-16KB, uploaded-08/15/03)
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated January 12, 2005

<?H$6
htj://www.publicdebt,treas.gov/of/ofcpi092003pr.htm

5/19/2005

Bureau of the Public Debt: 3-3/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

3-3/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2007
Ref CPI and Index Ratios for September 2003
Contact: Office of Financing
DESCRIPTION
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTE[ OF:
NUMBER OF DAYS IN MONTH[:

202- -691-3550
Series3 A-2007
9128272M3
Januai_
:y 15, 1997
February 6, 1997
April 15, 1997
Januai:y 15, 2007
158. ,43548
September 2003
30

CPI-U (NSA) May' 2003
CPI-U (NSA) June 2003
CPI-U (NSA) July 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183. 5
183. 7
183. 9
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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.15946
1.15950
1.15955
1.15959
1.15963
1.15967
1.15971
1.15976
1.15980
1.15984
1.15988
1.15993
1.15997
1.16001
1.16005
1.16009
1.16014
1.16018
1.16022
1.16026
1.16030
1.16035
1.16039
1.16043
1.16047
1.16051
1.16056
1.16060
1.16064
1.16068

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Bureau of the Public Debt: 3-5/8% T R E A S U R Y 10-YEAR I N F L A T I O N - I N D E X E D N O T E S

Page 1 of 2

3-5/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2008
Ref CPI and Index Ratios for September 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
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) July 2003
Month

Callendar Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183.5
183.7
183.9
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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.13708
1.13712
1.13716
1.13720
1.13724
1.13728
1.13732
1.13736
1.13741
1.13745
1.13749
1.13753
1.13757
1.13761
1.13765
1.13769
1.13774
1.13778
1.13782
1.13786
1.13790
1.13794
1.13798
1.13802
1.13807
1.13811
1.13815
1.13819
1.13823
1.13827

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Bureau of the Public Debt: 3-5/8% T R E A S U R Y 30-YEAR INFLATION-INDEXED B O N D S

Page 1 of2

3-5/8% TREASURY 30-YEAR INFLATION-INDEXED BONDS
Due April 15, 2028
Ref CPI and Index Ratios for September 2003
Contact: Office of Financing
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 •

202- -691-3550
Bonds of April 20
912810FD5
April 15, 1998
Apr: .1 15, 1998
July '.
L5, 1998
Apri.1 15, 2028
161. 74000
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) July 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183. 5
183. 7
183. 9
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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.13577
1.13581
1.13586
1.13590
1.13594
1.13598
1.13602
1.13606
1.13610
1.13614
1.13619
1.13623
1.13627
1.13631
1.13635
1.13639
1.13643
1.13647
1.13652
1.13656
1.13660
1.13664
1.13668
1.13672
1.13676
1.13680
1.13685
1.13689
1.13693
1.13697

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Bureau of the Public Debt: 3-7/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

3-7/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2009
Ref CPI and Index Ratios for September 2003
Contact: Office of Financing
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 •

202- -691-3550
Series .A-2009
9128274Y5
January 15, 1999
January 15, 1999
July 15 , 1999
January 15, 2009
164.00000
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) Jun e 2003
CPI-U (NSA) July 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183.5
183.7
183.9
Year

Ref CPI

I]ndex 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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.12012
1.12016
1.12020
1.12024
1.12028
1.12033
1.12037
1.12041
1.12045
1.12049
1.12053
1.12057
1.12061
1.12065
1.12069
1.12073
1.12077
1.12081
1.12085
1.12089
1.12093
1.12098
1.12102
1.12106
1.12110
1.12114
1.12118
1.12122
1.12126
1.12130

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Bureau of the Public Debt: 3-7/8% T R E A S U R Y 30-YEAR INFLATION-INDEXED B O N D S

Page 1 of2

3-7/8% TREASURY 30-YEAR INFLATION-INDEXED BONDS
Due April 15, 2029
Ref CPI and Index Ratios for September 2003
Contact: Office of Financing
DESCRIPTION i
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATE:

202- -691-3550

MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH i

Bonds of April 2029
912810FH6
April 15, 1999
April 15, 1999
Octobe*r 15, 1999
Octobesr 15, 2000
April 15, 2029
164. .39333
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) Jul y 2003

183. ,5
183. ,7
183. .9

Month

Calenda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.11744
1.11748
1.11752
1.11756
1.11760
1.11764
1.11769
1.11773
1.11777
1.11781
1.11785
1.11789
1.11793
1.11797
1.11801
1.11805
1.11809
1.11813
1.11817
1.11821
1.11825
1.11829
1.11833
1.11837
1.11842
1.11846
1.11850
1.11854
1.11858
1.11862

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Bureau of the Public Debt: 4-1/4% T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

4-1/4% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2010
Ref CPI and Index Ratios for September 2003
Contact : Office of Financing
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 *

202- -691-3550
Series .A-2010
9128275W8
January 15, 2000
January 18, 2000
July 17 , 2000
January 15, 2010
168.24516
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) Jul y 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183.5
183.7
183.9
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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.09186
1.09190
1.09194
1.09198
1.09202
1.09206
1.09210
1.09214
1.09218
1.09222
1.09226
1.09229
1.09233
1.09237
1.09241
1.09245
1.09249
1.09253
1.09257
1.09261
1.09265
1.09269
1.09273
1.09277
1.09281
1.09285
1.09289
1.09293
1.09297
1.09301

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Bureau of the Public Debt: 3-1/2% T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

3-1/2% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2011
Ref CPI and Index Ratios for September 2003
Contact: Office of Financing
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

202- -691-3550
Series A-2011
9128276R8
January 15, 2001
January 16, 2001
July 16 , 2001
January 15, 2011
174.04516
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) July 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183.5
183.7
183.9
Year

Ref CPI

I]ndex 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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.05547
1.05551
1.05555
1.05559
1.05563
1.05566
1.05570
1.05574
1.05578
1.05582
1.05586
1.05589
1.05593
1.05597
1.05601
1.05605
1.05609
1-05612
1.05616
1.05620
1.05624
1.05628
1.05632
1.05635
1.05639
1.05643
1.05647
1.05651
1.05655
1.05658

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Bureau of the Public Debt: 3-3/8% T R E A S U R Y 30-1/2-YEAR I N F L A T I O N - I N D E X E D B O N D S

Page 1 of2

3-3/8% TREASURY 30-1/2-YEAR INFLATION-INDEXED BONDS
Due April 15, 2032
Ref CPI and Index Ratios for September 2003
Contact : Office of Financing
DESCRIPTION :
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH •

202--691-3550
Bonds of April 2032
912810FQ6
October 15, 2001
October 15, 2001
April 15, 2032
177.,50000
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) Jul y 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183. 5
183..7
183. 9
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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.03493
1.03497
1.03500
1.03504
1.03508
1.03512
1.03515
1.03519
1.03523
1.03527
1.03531
1.03534
1.03538
1.03542
1.03546
1.03549
1.03553
1.03557
1.03561
1.03564
1.03568
1.03572
1.03576
1.03579
1.03583
1.03587
1.03591
1.03594
1.03598
1.03602

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5/19/2005

Bureau of the Public Debt: 3-3/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

3-3/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due January 15, 2012
Ref CPI and Index Ratios for September 2003
Contact: Office of Financing 202-691-3550
DESCRIPTION :
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
MATURITY DATE:
Ref CPI on ]DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH

Series A-2012
9128277J5
January 15, 2002
January 15, 2002
January 15, 2012
177..56452
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) Jul y 2003

183.,5
183..7
183.,9

Month

Cal(5ndar Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.03455
1.03459
1.03463
1.03467
1.03470
1.03474
1.03478
1.03482
1.03485
1.03489
1.03493
1.03497
1.03500
1.03504
1.03508
1.03512
1.03515
1.03519
1.03523
1.03527
1.03530
1.03534
1.03538
1.03542
1.03545
1.03549
1.03553
1.03557
1.03560
1.03564

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Bureau of the Public Debt: 3 % T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

3 % TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due July 15, 2012
Ref CPI and Index Ratios for September 2003
Contact : Office of Financing
DESCRIPTION :
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
ADDITIONAL ISSUE DATES:

202- -691-3550

MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH i

Series C-2012
<
912828AF7
July 15 , 2002
July 15 , 2002
October 15, 2002
January 15, 2003
July 15 , 2012
179.80000
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) Jul y 2003

183.5
183.7
183.9

Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

Iindex 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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.02169
1.02173
1.02176
1.02180
1.02184
1.02188
1.02191
1.02195
1.02199
1.02202
1.02206
1.02210
1.02214
1.02217
1.02221
1.02225
1.02228
1.02232
1.02236
1.02240
1.02243
1.02247
1.02251
1.02254
1.02258
1.02262
1.02265
1.02269
1.02273
1.02277

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Bureau of the Public Debt: 1-7/8% T R E A S U R Y 10-YEAR INFLATION-INDEXED N O T E S

Page 1 of2

1-7/8% TREASURY 10-YEAR INFLATION-INDEXED NOTES
Due July 15, 2013
Ref CPI and Index Ratios for September 2003
Contact

Office of Financing
DESCRIPTION :
CUSIP NUMBER:
DATED DATE:
ORIGINAL ISSUE DATE:
MATURITY DATE:
Ref CPI on DATED DATE:
TABLE FOR MONTH OF:
NUMBER OF DAYS IN MONTH ;

202- -691-3550
Series C-2013
912828BD1
July 15 , 2003
July 15 , 2003
July 15 , 2013
183.66452
September 2003
30

CPI-U (NSA) May 2003
CPI-U (NSA) June 2003
CPI-U (NSA) Jul y 2003
Month

Cal enda r Day

September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September
September

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

183.5
183.7
183.9
Year

Ref CPI

I]ndex 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

183.70000
183.70667
183.71333
183.72000
183.72667
183.73333
183.74000
183.74667
183.75333
183.76000
183.76667
183.77333
183.78000
183.78667
183.79333
183.80000
183.80667
183.81333
183.82000
183.82667
183.83333
183.84000
183.84667
183.85333
183.86000
183.86667
183.87333
183.88000
183.88667
183.89333

1.00019
1.00023
1.00027
1.00030
1.00034
1.00037
1.00041
1.00045
1.00048
1.00052
1.00056
1.00059
1.00063
1.00067
1.00070
1.00074
1.00077
1.00081
1.00085
1.00088
1.00092
1.00096
1.00099
1.00103
1.00106
1.00110
1.00114
1.00117
1.00121
1.00125

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5/19/2005

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 15, 2003
JS-659
LOCAL TV Board Proposes Rule to Bring Local TV
to Nonserved and Underserved Areas
The LOCAL Television Loan Guarantee Board today issued a proposed regulation
to implement the L O C A L Television Loan Guarantee Program, as authorized by the
Launching Our Communities' Access to Local Television Act of 2000. The
proposed rule appeared in the Federal Register today.
The proposed rule establishes the Program's eligibility and guarantee requirements,
the application and approval process, as well as the administration of guarantees
made by the Board. Additionally, the rule proposes the process through which the
Board will consider applications under the priority considerations required in the
Act.
The Act established the LOCAL Television Loan Guarantee Board and authorized it
to guarantee up to 8 0 % of loans totaling no more than $1.25 billion to facilitate
access, on a technologically neutral basis, to signals of local television stations for
households located in nonserved areas and underserved areas.
The Board consists of designees of the Secretaries of Treasury, Agriculture, and
Commerce, and the Chairman of the Board of Governors of the Federal Reserve
System. The designees are: Treasury - Brian Roseboro, Assistant Secretary for
Financial Markets, and Chairman of the Board; Agriculture - Hilda Gay Legg,
Administrator of the Rural Utilities Service, Commerce - Nancy J. Victory, Assistant
Secretary for Communications and Information and Administrator of the National
Telecommunications and Information Administration; and Federal Reserve System
- Governor Edward M. Gramlich, Member of the Board of Governors of the Federal
Reserve System.
Written comments on the proposed rule must be received by the LOCAL Television
Loan Guarantee Board, or bear a postmark or equivalent, no later than September
15, 2003. Comments regarding the information and recordkeeping requirements
must be received by October 14, 2003.
Written comments should be addressed to Secretary, L O C A L Television Loan
Guarantee Board, S T O P 1575, R o o m 2919-S, 1400 Independence Avenue, S W ,
Washington, D C 20250-1575. Telephone (202) 720-0530; Facsimile (202) 7202734; E-mail localtv@rus.usda.gov.
The full text of the rule and additional information about the Program are available
on its website at: http://w^w,usda.goy/rus/loca

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 15, 2003
JS-660
Statement by Treasury Assistant Secretary for Public Affairs Rob Nichols
We applaud the initial response of the financial services industry, including the
exchanges and their member firms, to the power outage. The extraordinary
commitment of the men and w o m e n who make our markets work have again
demonstrated the resiliency and strength of the U.S. financial system. The fact
that the markets have operated so smoothly under these adverse conditions and
have continued functioning in relatively normal fashion, underscores the confidence
people around the world have in the U.S.financialmarkets.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 14, 2003
JS-662
Statement by Treasury Spokesman Rob Nichols
in response to the power outage affecting the U.S. and Canada
The U.S. financial system is extremely resilient. Power went down after the stock
markets were closed. Our information is that market participants and exchanges
were able to shut down in an orderly manner. W e are actively monitoring the
situation and are in close touch with the financial regulators, the bond markets, the
N e w York Fed and others.The bond markets are not disrupted. W e have not
received reports of any major disruption to the nation's banking system.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 15, 2003
JS-664
Designation of National Council of Resistance in Iran,
National Council of Resistance and Peoples Mujahedin of
Iran under Executive Order 13224
In support of a State Department amendment to the designation of Mujahedin-e
Khalq (MEK), the Treasury Department's Office of Foreign Assets Control (OFAC)
has listed the National Council of Resistance in Iran (NCRI) - previously listed as a
Foreign Terrorist Organization (FTO) - as a Specially Designated Global Terrorist
(SDGT) under Executive Order 13224 and has clarified that the National Council of
Resistance (NCR) and People's Mujahedin of Iran (PMOI) are aliases of M E K . The
listing also clarifies that the designation includes the U.S. representative offices of
NCRI and the U.S. press office of PMOI. These organizations have been added to
the Specially Designated Nationals (SDN) list, effectively freezing all assets and
properties and prohibiting transactions between U.S. persons and these
organizations.

F R O M T H E OFFICE O F P U B U C AFFAIRS
August 15.2003
JS-655
Treasury Department Praises Financial Markets for
Response to P o w e r Outage and Announces Filing Relief
for Taxpayers in Affected Area
Treasury Secretary John Snow today praised the financial institutions and the men
and w o m e n w h o m a k e U.S. financial markets wor<fortheir initial response to
yesterday's massive power outage. H e also announced that the IRS wlfl grant a
one-week extensionfortaxpayers in the affected areatofile their returns.
'We applaud the initial response of critical financial institutions to the power
outage." said Secretary Snow. T h e m e n and w o m e n w h o m a k e our markets wiork
did an extraordinary job of ensuring that ourfinancialmarkets lived up to their
reputation as the most resBient in the world/'
Despite the power outage that caused disruptions in large parts of the United States
and Canada, the U.S.financialsystem weathered fhe outage relatively well.
Ever though ouiage began at about 4:11 pm EDT after the stock markets were
closed, financial firms still had a considerable volume of after-market trades to
process. But due to back-up systems, critical financial institutions were able to
nan die these functions.
The Treasury Department has received no reports of any major disruptions to the
financial system, no reports of major damagetofinancialsystems, and no reports of
losses of financial data.
The nation's financial system v.as largely unaffected by the outage due in particular
to the steps the private sector has take" to enhance the resiliency of their systems.
E^nancements to the nation's financial infraslrucr_.re include:
• People. The men arc women who make the financial system work have again
shown great professionalism in a time of challenge. They have again shown great
commitment to the safety of their colleagues, the health o^ their institutions, and the
well-being of their customers. Many of these professionals have participated in
numerous drills, simulations, and tests since September 11,2001. Even when
these exercises did not involve a response to a power outage, they helped further
prepare the people w h o make the system .vork.
• Drocedures. After September 11. 2001, many institutions revised and improved
their business continuity procedures. These new procedures appear to have
helped thefinancialsystem weather the outage. Regular testing of systems and
plans, ccmoined with cross training of key employees, helped to ensure continuity
of operations. For example, certainfinancialinstitutions implemented procedures
to redirect operations to back-up facilities in areas not affected by the outage.
• Systems. Many institutions have invested in new or upgraded business continuity
equipment including un-interruptible power supply systems and back-up
generators. ">is enabled a number of institutions to seamiessly switch their
irrfbrmation technology operations to back-up power sources, preserving the

integrity of data and continuing the orderly processing of transactions.
• Communication. Financial institutions did an excellent job of communicating their
status to their employees, customers, and counter-parties. In particular, market
participants are to be c o m m e n d e d for their early commitment to open for business
today despite the outage. In addition, the Financial Services Sector Coordinating
Council did a superb job of sharing information within the industry and between the
industry and the financial regulators.
• Cooperation. The financial regulators worked together to share information and
solve problems. Shortly after the outage, the Financial and Banking Information
Infrastructure Committee (FBIIC), which is chaired by the Treasury and comprised
of federal and state financial regulators, convened a conference call to discuss the
impact of the outage on the financial sector. There also w a s good cooperation
between financial regulators and state and local authorities.
The Department recognizes that while we are still in the process of restoring power
and returning pperations of utilities, transportation services, and the financial
industry to normal, w e are confident that the industry will continue to meet this
challenge with the s a m e success with which they have initially responded to the
outage.
While the financial infrastructure and the markets are largely unaffected by the
outage, individual taxpayers in the area have been affected. A s a result, the
Treasury Department today is announcing that it is granting additional time for
taxpayers to file returns.
The Internal Revenue Service will offer relief for those hit by the power blackout in
the Northeastern United States. The IRS will consider as timely any tax returns or
payments due from today through Friday, Aug. 22, 2003 if they are completed by
Aug. 22, 2003.
"The IRS is doing the right thing for taxpayers by providing this important relief to
those affected by the power outages in the Northeast," Secretary S n o w said.
Interest will continue on any overdue taxes during this period, but penalties will be
waived. To qualify for this relief, affected taxpayers should put " N O R T H E A S T
B L A C K O U T " in red ink at the top of the return relying on this relief.
"We want to make sure that taxpayers affected by the blackout don't have to worry
about today's filing deadline; it's the least w e can do," said Secretary Snow.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 15, 2003
JS-666
Treasury Announces Decision on Group Life Coverage
Under Terrorism Risk Insurance Program
The Treasury Department today announced its decision on group life insurance
coverage under the Terrorism Risk Insurance Program. As passed by Congress,
the Terrorism Risk Insurance Act of 2002 did not provide coverage for group life
insurance policies. Instead, the Treasury Department was tasked with evaluating
market conditions and making a determination on coverage. Treasury could
include coverage for group life insurance if both insurance and reinsurance were
not available, or not likely to be available in the future.
During its evaluation, the Treasury found no appreciable reduction in the availability
of group life insurance coverage for consumers, although Treasury did find a
current general lack of catastrophic reinsurance for insurance companies that offer
group life coverage. Given that evaluation, Treasury has determined that it could
not extend taxpayer coverage for group life insurance under the Terrorism Risk
Insurance Program.
"This decision is the result of a careful consideration of market conditions, with
significant input from users and providers of group life insurance," said Assistant
Treasury Secretary for Financial Institutions Wayne A. Abemathy. "We were
pleased to find that group life insurance companies have stayed with their
customers and continued to make group life insurance available on much the same
terms as before the terrorist tragedies of September 11th. However, Treasury will
continue to monitor conditions and developments in the market for group life
insurance."
The Terrorism Risk Insurance Act of 2002 was enacted to provide a temporary
federal reinsurance backstop for providers of commercial property and casualty
insurance against risks from international terrorism while the private sector
develops its own resources and programs. Such resources and programs would
include traditional reinsurance, as well as other market mechanisms for risk
sharing. The coverage under the legislation expires on December 31, 2005.

F R O M THE OFFICE O F PUBLIC AFFAIRS
August 18, 2003
2003-8-18-17-18-48-28990
Air Transportation Stabilization Board Announces Resignation of Executive
Director Daniel G. Montgomery
The Air Transportation Stabilization Board (ATSB) today announced the
resignation of Daniel G. Montgomery as Executive Director, effective
August 22, 2003. Mr. Montgomery, named Executive Director in April
2002, has accepted a position with Kroll Zolfo Cooper LLC, the financial
consulting subsidiary of Kroll Inc.
ATSB Chairman Edward M. Gramlich said, "I want to express the Board's
gratitude to Dan Montgomery for his service to the A T S B . Dan has
extensive knowledge of capital markets and has used it well, working
tirelessly during a period critical to the nation's airline industry."
Until a new Executive Director is named, Treasury Assistant Secretary for
Financial Markets Brian C. Roseboro will serve as Acting Executive
Director of the A T S B .
Additional information on the ATSB is available on its web site,
www.treas.gov/atsb.

-30-

5$ (_,(*!

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 CONTACT: Office of Financing
August 18, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 21, 2003
November 20, 2003
912795NX5

High Rate: 0.945% Investment Rate 1/: 0.964% Price: 99.761
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 53.97%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

29,669,628
1,389,452
240,000

$

14,370,686
1,389,452
240,000

SUBTOTAL 31,299,080 16,000,138 2/
Federal Reserve 5,475,804 5,475,804
TOTAL $ 36,774,884 $ 21,475,942
Median rate 0.940%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.920%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 31,299,080 / 16,000,138 = 1.96
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,135,174,000

http://www.publicdebt.treas.gov

l>$

PUBLIC DEBT N E W S
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 CONTACT: Office of Financing
August 18, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 21, 2003
February 19, 2004
912795PL9

High Rate: 1.035% Investment Rate 1/: 1.057% Price: 99.477
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
7.82%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

28,500,415
916,325
250,000

$

14,834,080
916,325
250,000

SUBTOTAL 29,666,740 16,000,405 2/
Federal Reserve 5,720,975 5,720,975
TOTAL $ 35,387,715 $ 21,721,380
Median rate 1.020%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.000%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 29,666,740 / 16,000,405 = 1.85
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $687,061,000

http://www.publicdebt.treas.gov

JS -4,61

DEPARTMENT

OF

THE

TREASURY

TREASURY j j l N E W S
O F F H F O F V\ BI.IC A F F A I R S • 1500 !'!•NNS VIA A \[ V AYF.M.I.. \.W, • W A S H f\C I O N . D . C * 2022(1 ».202i <i22-2*>ftfl

Contact:

EMBARGOED UNTIL 11:00 A.M.
August 18, 2003

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $18,000 million to
refund an estimated $10,000 million of publicly held 4-week Treasury bills maturing
August 21, 2003, and to raise new cash of approximately $8,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
Treasury-Direct will not be accepted.
The Federal Reserve System holds $14,303 million of the Treasury bills maturing
on August 21, 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.
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.

oOo
Attachment

<fs

670

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED AUGUST 21, 2003
August 18, 2003
Offering Amount $18 , 000 million
Maximum Award (35% of Offering Amount)... $ 6,300
Maximum Recognized Bid at a Single Rate..$ 6,300
NLP Reporting Threshold
$ 6,300
NLP Exclusion Amount
$12 ,000

million
million
million
million

Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NN 7
Auction date
August 19, 2003
Issue date
August 21, 2003
Maturity date
September 18, 2003
Original issue date
March 20, 2003
Currently outstanding
$46, 634 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 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 18, 2003
JS-671
Secretary Snow to Encourage Economic Growth in Asia
Treasury Secretary John Snow will travel to three Asian nations in early September
where he will encourage countries to take strong measures to increase global
economic growth.
Secretary Snow will visit Tokyo, Japan September 1-2; Beijing, China September 23; and then Phuket, Thailand on September 4-5 for meetings with finance ministers
of the Asia-Pacific Economic Cooperation (APEC) forum.
"Achieving strong and vibrant global growth is one of the world's most pressing
priorities," said Secretary Snow. "We live in an interdependent world economy
where our fortunes are inextricably linked. Let m e be clear: increased economic
growth overseas equals more jobs here."
In Japan, Secretary Snow will meet with top political, economic and finance officials
of the Government of Japan. He will also meet with private sector economists and
financial analysts. Secretary Snow has emphasized the importance of Japan, the
world's second largest economy, returning to strong economic growth. S n o w will
assess Japan's prospects for sustaining economic growth and review the nation's
efforts to end deflation and resolve non-performing loans in the nation's banking
system.
"Japan's growth is critical not only for its own citizens and for Asia, but also for
Americans," said Snow. "Our economy directly benefits when Japan buys more of
our goods and that creates jobs for Americans."
Secretary Snow will then travel to Beijing to meet with the Chinese leadership and
their top economic officials as well as representatives from the business community
and private economists. Secretary Snow will discuss a broad range of issues
important to the country's economic relationship with the United States, including
liberalization and reform of the financial sector, trade, and exchange rate issues.
The visit to Thailand at the occasion of the meeting of the APEC finance ministers
will give Secretary Snow the opportunity to engage in discussions with his
counterparts in the region on economic issues affecting the global economy, with
particular attention to Asia and the Pacific Rim. In addition to official A P E C '
meetings, Secretary Snow will host a series of bilateral discussions with finance
ministers from the region.
Among the issues on the table at the APEC meeting is the plight of the emerging
world. Helping emerging nations lift themselves from poverty is a key priority for
President Bush and his Administration. Secretary Snow noted that raising growth
also aides our friends in emerging economies, "Cooperation between the United
States and our trading partners in Asia is vital for raising economic growth and
improving living standards - not just in our regions, but also in the emerging and
developing economies as well."
Secretary Snow recently visited the United Kingdom and Germany where he
reviewed efforts to generate economic growth in the European Community market.
Upon completion of this trip, Secretary Snow - in only seven months on the job -

will have visited the world's largest economies as part of his campaign to
encourage global growth.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 22, 2003
JS-672
U.S. Designates Five Charities Funding Hamas and Six Senior Hamas Leaders
as Terrorist Entities
Present Bush today announced that the U.S. Treasury is designating five Hamas
related charities and six senior H a m a s leaders as Specially Designated Global
Terrorists (SDGTs), freezing any assets in the U.S. and prohibiting transactions
with U.S. nationals. "By claiming responsibility for the despicable act of terror on
August 19, H a m a s has reaffirmed that it is a terrorist organization committed to
violence against Israelis and to undermining progress toward peace between Israel
and the Palestinian people," President Bush stated.
"Hamas' leaders and those who provide their funding again have the blood of
innocents on their hands," U.S. Treasury Secretary John S n o w stated. "Empty
words cannot wash them clean. As they resist the road m a p for peace, H a m a s is
devastating the dreams of the Palestinian people for freedom, prosperity, and an
independent state."
The United States will continue to work with our allies to encourage the recognition
of H a m a s as a terrorist organization and to shut down their sources of funding and
support.
The following individuals are designated as SDGTs by today's action:
1. Sheik Ahmed Yassin, the leader of Hamas in Gaza.
2. Imad Khalil Al-Alami, a member of the H a m a s Political Bureau in
Damascus, Syria.
3. U s a m a Hamdan, a senior H a m a s leader in Lebanon.
4. Khalid Mishaal, head of the H a m a s Political Bureau and Executive
Committee in Damascus, Syria.
5. Musa Abu Marzouk, Deputy Chief of the Political Bureau in Syria.
6. Abdei Aziz Rantisi, a H a m a s leader in Gaza reporting to Sheik Yassin.

The following charities that provide support to H a m a s and form part of its funding
network in Europe are designated as well:
1. Commite de Bienfaisance et de Secours aux Palestiniens (CBSP), of
France.
2. The Association de Secours Palestinien (ASP), of Switzerland. (An
organization related to C B S P )
3. The Palestinian Relief and Development Fund, or Interpal,
headquartered in the United Kingdom.
4. The Palestinian Association in Austria, P V O E .
5. The Sanabil Association for Relief and Development, based in Lebanon.
Today's action follows several actions taken against Hamas previously, including
the designation of several entities that formed part of the H a m a s network such as
Holy Land Foundation for Relief and Development and the Al Aqsa Foundation, key
sources of financial support for Hamas.

ATTACHED: Fact Sheet
END'

Fact Sheet
HAMAS
HAMAS is a terrorist organization that has intentionally killed hundreds of innocent
civilians and continues to kill and maim with the aim of terrorizing a civilian
population. H A M A S w a s formed in 1987 as an outgrowth of the Palestinian branch
of the Muslim Brotherhood. H A M A S activists have conducted m a n y attacks including large-scale suicide bombings - against Israeli citizens and military targets.
In the early 1990s, they also targeted U.S. citizens, suspected Palestinian
collaborators and Fatah rivals.
During 2002, more than 370 persons - including 10 US citizens - were killed in
Israel, the West Bank and the Gaza Strip by acts of terrorism. H A M A S w a s
responsible for carrying out more than 50 of these attacks, including shootings,
suicide bombings, and standoff mortar-and-rocket attacks against civilian and
military targets. The group w a s responsible for the most deadly Palestinian terrorist
attack of the year - the suicide bombings of a Passover gathering at a Netanya
hotel that killed 29 Israelis, including one dual US-Israeli citizen. H A M A S ' s bombing
of a cafeteria on the Hebrew University campus, which killed nine, including five U S
citizens, demonstrated its willingness to stage operations in areas frequented by
students and tourists, including U S citizens.
In addition, HAMAS's rejectionist policies and terrorist actions are aimed at derailing
the peace process in the Middle East. O n April 30, 2003, the U.S. government
released the roadmap for peace between Israel and the Palestinians, which
constitutes a crucial step in international efforts to actively support movement
towards peace in the region. H A M A S , however, has since the mid-90s purposefully
worked against all regional peace efforts by engaging in suicide attacks and other
acts of the most violent type of terrorism. O n June 8 and June 11 H A M A S took
credit for attacks against Israelis. The organization also took credit for four suicide
bombings in a 24-hour period during the weekend preceding M a y 20th.
On June 29th, HAMAS and two other designated terrorist groups announced a
cease-fire. O n August 19th, a suicide bomber detonated his b o m b in the back of a
double-length city bus near the border between east and west Jerusalem.
According to a C N N report, H A M A S said that it w a s committed to the cease-fire, but
also claimed responsibility, stating that "the m a n w a s a m e m b e r of its military wing,
the Izzedine al-Qassam Brigades, and the attack c a m e in revenge for the killing of
two of its members." A s noted by the H u m a n Rights Watch, "the H a m a s leadership
has pursued attacks against civilians as a conscious policy. A group that pursues
multiple, intentional attacks against civilians as a matter of policy is responsible for
crimes against humanity." Erased in a Moment: Suicide Bombing Attacks Against
Israeli Civilians at 67 (October 2002).
Under Executive Order 13224, the United States government may block the assets
of H A M A S (which it has done) and the assets of individuals and entities owned or
controlled by; acting for or on behalf of; or providing support, financial or otherwise,
to designated terrorists and terrorist organizations. H A M A S has been designated as
a Foreign Terrorist Organization (66 Fed. Reg. 51088) and as a Specially
Designated Global Terrorist (SDGT) under Executive Order 13224, "Blocking
Property and Prohibiting Transactions with Persons w h o Commit, or Support
Terrorism."
The United States government has credible evidence that the following six HAMAS
leaders that c o m m a n d and control terrorist activity.

Sheik A h m e d YASSIN
Yassin is the head of H A M A S in Gaza. He maintains a direct line of communication
with other H A M A S leaders on coordination of HAMAS's military activities and
openly admits that there is no distinguishing the political and military wings of
Hamas. Yassin also conveys messages about operational planning to other
Palestinian terrorist organizations.
Surrounding Yassin is an entourage of personal "bodyguards," including many
implicated in providing information and supplies to fugitives, recruiting personnel to
undertake military operations, planning terrorist cells, attacking settlements, and
manufacturing weapons and explosives.
imad Khalil AL-ALAMI
Imad al-Alami is a member of HAMAS's Political Bureau, located in Damascus,
Syria and a military operations leader. As part of HAMAS's external leadership, he
is part of the most effective and powerful wing of H A M A S because it controls the
West Bank and prison branches of H A M A S and has gained total financial control.
Al-Alami has had oversight responsibility for the military wing of HAMAS within the
Palestinian territories. As a H A M A S military leader, al-Alami directs sending
personnel and funding to the West Bank and Gaza.
Usama HAMDAN
Hamdan, a senior HAMAS official based in Lebanon, maintains contact with
representatives with other terrorist organizations with the purpose of strengthening
the ties between these organizations in order to strengthen an international Islamic
Jihad. He has worked with other H A M A S and Hizballah leaders on initiatives to
develop and activate the military network inside the Palestinian territories in support
of the current intifada, including the movement of weapons, explosives and
personnel to the West Bank and Gaza for H A M A S fighters.
Funds transferred from charitable donations to HAMAS for distribution to the
families of Palestinian "martyrs" have been transferred to the bank account of
Hamdan and used to support H A M A S military operations in Israel.
Mishaal has been responsible for supervising assassination operations, bombings
and the killing of Israeli settlers. To execute H A M A S military activities, Mishaal
maintains a direct link to Gaza-based H A M A S leader, Abdel Aziz Rantisi (see
below). He also provides instructions to other parts of the H A M A S military wing.
Funds transferred from charitable donations to HAMAS for distribution to the
families of Palestinian martyrs have been transferred to the bank account of
Mishaal and used to support H A M A S military operations in Israel.
Musa Abu MARZOUK
Musa Abu Marzouk is the Deputy Chief of HAMAS's Political Bureau based in
Damascus, Syria. His activities include directing and coordinating terrorist acts by
H A M A S against soldiers and civilians in Israel and the West Bank and Gaza.
Marzouk maintains relationships with other terrorist organizations.
The Holy Land Foundation for Relief and Development, designated as an SDGT
under E O 13224 in December 2001 based on its support of H A M A S , received startup funding and instructions from Marzouk. Marzouk is implicated in receiving
financing for H A M A S terrorist attacks, funds that have been used to mobilize
military activity inside Israel and the West Bank/Gaza.
Abdel Aziz RANTISI

Rantisi is part of the H A M A S leadership in Gaza, operating directly under H A M A S
Leader Shaykh Yassin (see above) with w h o m he maintains a direct line of
communication for the coordination of military operations. Mishaal (see above) has
also issued orders for H A M A S terrorist activities through Rantisi.
In October of 2002, Rantisi was reported in Al-Hayat as personally claiming
responsibility for the assassination of a Palestinian Authority Police Colonel. In
December 2002, he w a s calling for Iraq to prepare thousands of martyrdom cells to
fight the United States and its allies in the event of war.
HAMAS Fundraising
HAMAS raises tens of millions or dollars per year throughout the world using
charitable fundraising as cover. While H A M A S m a y provide money for legitimate
charitable work, this work is a primary recruiting tool for the organization's militant
causes. H A M A S relies on donations from Palestinian expatriates around the world
and private benefactors located in moderate Arab states, Western Europe and
North America. H A M A S uses a w e b of charities to facilitate funding and to funnel
money. Charitable donations to non-governmental organizations are commingled,
moved between charities in ways that hide the money trail, and then often diverted
or siphoned to support terrorism.
The funds pouring into HAMAS coffers directly undermine the Middle East peace
process. These funds allow the group to continue to foment violence, strengthen its
terrorist infrastructure, and undermine responsible leadership.
The political leadership of HAMAS directs its terrorist networks just as they oversee
their other activities. H A M A S leader Yassin confirms this relationship, stating to alSharq al-Awsat on August 12, 2002: "When w e make decisions on the political level
and convey them to the military wing, it abides by it normally." The intensity of this
relationship is reflected in Yassin's words quoted by Reuters on May 12, 1998:
We can not separate the wing from the body. If we do so, the body will not be able
to fly. H A M A S is one body.
A report issued by Human Rights Watch has also noted the unified nature of
HAMAS:
In the case of Hamas, there is abundant evidence that the military wing is
accountable to a political steering committee .... Yassin himself, as well as Salah
Shehadah, the late founder and commander of the 'Izz al-Din al-Qassam Brigades,
have confirmed in public remarks that the military wing implements policies that are
set by the political wing." Erased in a Moment: Suicide Bombing Attacks Against
Israeli Civilians at 63 (October 2002).
Fundraising may involve community solicitation in the United States, Canada,
Europe and the Middle East or solicitations directly to wealthy donors. While s o m e
donors m a y be aware of the intended use of their donations, too many innocent
donors w h o intend for their money to be used to provide humanitarian services here
or abroad, are unwittingly funding acts of violence when these funds are diverted to
terrorist causes.
HAMAS fundraising directly undermines Prime Minister Mahmud Abbas's ability to
clamp down on this terrorist organization. O n e of the obstacles and threats to
establishing a meaningful dialogue toward peace comes from terrorist groups such
as H A M A S , which view peace discussions as inimical to their interests and are
intent on undermining the multilateral work on the roadmap by fomenting violence.
In order to support m o m e n t u m towards peace, to strengthen the ability of the new
Palestinian leadership to take the actions it must take against H A M A S , the assets
of groups like H A M A S must be frozen, as well as the assets of organizations raising
funds for such terrorist groups.
E.O. 13224 provides a means to disrupt the financial-support network funding

terrorist attacks committed by H A M A S . Under this Order, the United States
government m a y block the assets of H A M A S (which it has done) and the assets of
individuals and entities owned or controlled by; acting for or on behalf of; or
providing support, financial or otherwise, to designated terrorists and terrorist
organizations. H A M A S has been designated as a Foreign Terrorist Organization
(66 Fed. Reg. 51088) and as a Specially Designated Global Terrorist (SDGT) under
Executive Order 13224, "Blocking Property and Prohibiting Transactions with
Persons w h o Commit, or Support Terrorism."
The United States government has credible evidence that the following five
organizations are part of a w e b of charities raising funds on behalf of H A M A S and
using humanitarians purposes as a cover for acts that support H A M A S . Funds are
generated by, and flow through, these organizations on behalf of H A M A S .
Commite de Bienfaisance et de Secours aux Palestiniens (CBSP) and
Association de Secours Palestinien (ASP)
CBSP and ASP are primary fundraisers for HAMAS in France and Switzerland,
respectively. Founded in France in the late 80s/early 90s, C B S P acts in
collaboration with more than a dozen humanitarian organizations based in different
towns in the West Bank and Gaza and in Palestinian refugee camps in Jordan and
Lebanon. A S P , a subsidiary of C B S P , was founded in Switzerland in 1994. The
group has collected large amounts of money from mosques and Islamic centers,
which it then transfers to sub-organizations of H A M A S . Khalid Al-Shuli is the
president of C B S P and A S P .
Palestinian Relief and Development Fund (Interpal)
Interpal, headquartered in the UK, has been a principal charity utilized to hide the
flow of money to H A M A S . Reporting indicates it is the conduit through which money
flows to H A M A S from other charities, e.g., the Al Aqsa Foundation (designated
under E O 13224 on May 29th) and oversees the activities of other charities. For
example, the Sanabil Association for Relief and Development (designated as part of
this tranche), represents Interpal in Lebanon. Reporting indicates that Interpal is the
fundraising coordinator of H A M A S . This role is of the type that includes supervising
activities of charities, developing new charities in targeted areas, instructing how
funds should be transferred from one charity to another, and even determining
public relations policy.
Sanabil Association for Relief and Development
The Sanabil Association for Relief and Development (Sanabil), based in Sidon,
Lebanon, receives large quantities of funds raised by major HAMAS-affiliated
charities in Europe and the Middle East and, in turn, provides funding to H A M A S .
For example, Sanabil has received funding from the Al Aqsa Foundation
(designated as an S D G T under E O 13224 in May 2003); the Holy Land Foundation
for Relief and Development (designated as an S D G T under E O 13224 in December
2001), and Interpal (designated as an S D G T under E O 13224 as part of this
tranche). H A M A S recruits permanent members from the religious and the poor by
extending charity to them from organizations such as Sanabil.
At the request of a HAMAS political leader, Sanabil began opening offices in all of
the Palestinian refugee camps in Lebanon in August of 2001 in order to increase
the foundation's role inside the camps. After starting by providing basic necessities
the charity eventually began asking poor families within the camps to fill out
application forms, particularly those w h o had worked with the Islamic Movement
(Al-Haraka al-lslamiyya) and H A M A S . As a result of these efforts, Sanabil has
increased its scope of influence within the camps.

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 CONTACT: Office of Financing
August 19, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 21, 2003
September 18, 2003
912795NN7

High Rate: 0.945% Investment Rate 1/: 0.955% Price: 99.927
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 47.06%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tendered

$

SUBTOTAL
Federal Reserve
TOTAL

$

45,999,885
43,827
0

Accepted

$

17, 956,. 405
43, .827
0

46,043,712

18,000, 232

3,106,001

3,106, 001

49,149,713

$

21,106, 233

Median rate
0.935%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 46,043,712 / 18,000,232 = 2.56
1/ Equivalent coupon-issue yield.

http ://www.pub!icdebt.treas.gov

^

1,73

Wli-£_42__*_s_ ,£__,*•

_•<_____

>RESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
August 20, 2003
2003-8-20-14-42-47-29674
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 $80,916 million as of the end of that week, compared to $81,085 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

August 8, 2003

August 15. 2003

81,085

80,916

TOTAL
1. Foreign Currency Reserves '

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

7,516

13,216

20,732

7,464

13,192

20,656

0

Of which, issuer headquartered in the U.S.

0

b. Total deposits with:
b.i. Other central banks and BIS

12,273

2,654

14,927

12,206

2,649

14,855

b.ii. Banks headquartered in the U.S.

0

0

b.ii. Of which, banks located abroad

0

0

b.iii. Banks headquartered outside the U.S.

0

0

b.iii. Of which, banks located in the U.S.

0

0

2. IMF Reserve Position

22,740

22,726

3. Special Drawing Rights (SDRs)

11,643

11,635

4. Gold Stock3

11.044

11,044

0

0

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 8, 2003
Euro
1. Foreign currency loans and securities

Yen

August 15, 2003

TOTAL

Euro

0

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

Yen

TOTAL
0

2. a. Short positions
2.b. Long positions
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
August 8. 2003
Euro

Yen

August 15, 2003

TOTAL
0

1. Contingent liabilities in foreign currency

Euro

Yen

TOTAL
0

l.a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and otherfinancialinstitutions
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 m a y 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 m a y 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.

JS-674: Treasury and I R S Issue Final Regulations O n The Treatment of Stock-Based Co...

^w^miff^

Page 1 of 1

**/>*.., -^

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
August 25, 2003
JS-674
Treasury and IRS Issue Final Regulations On The Treatment of Stock-Based
Compensation In Qualified Cost Sharing Arrangements
Today, the Treasury Department and the IRS issued final regulations on the tax
treatment of stock-based compensation under the related party transfer pricing
rules governing qualified cost sharing arrangements.
"It is critically important to ensure that related party transactions, particularly
transactions involving cross-border transfers of valuable intangible assets, are
treated appropriately for tax purposes," stated Treasury Assistant Secretary for Tax
Policy Pamela Olson. "These final regulations represent a step in ensuring that the
rules governing qualified cost sharing arrangements for the joint development of
intangible assets reach results that are consistent with the arm's length standard of
the transfer pricing rules and cannot be used to facilitate the migration of intangibles
outside the United States for less than arm's length compensation. The Treasury
Department is continuing to evaluate further regulatory steps that m a y be needed in
this area."
In order for an arrangement to be considered a qualified cost sharing arrangement,
the participants in the arrangement must share all costs related to the development
of intangibles in the same proportion as they share the reasonably anticipated
benefits attributable to the intangible development. The final regulations generally
follow the proposed regulations that were published on July 29, 2002. A s under the
proposed regulations, the final regulations clarify that stock-based compensation,
like other compensation, is taken into account in determining the costs of a
participant.
The regulations also provide rules for measuring the cost associated with stockbased compensation, generally allowing taxpayers a choice of measuring the cost
based on the stock price at the date of exercise or the "fair value", as noted in
financial statements, at the date of grant. In response to comments on the proposed
regulations, the availability of the fair value method of measurement has been
expanded in the final regulations.
The text of the final regulations is attached.
-30Related Documents:
• final regulations text

http://www.treas.gov/press/releases/js674.htm

5/2/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9088]
RIN 1545-BA57
Compensatory Stock Options Under Section 482
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that provide guidance regarding
the application of the rules of section 482 governing qualified cost sharing
arrangements. These regulations provide guidance regarding the treatment of stockbased compensation for purposes of the rules governing qualified cost sharing
arrangements and for purposes of the comparability factors to be considered under the
comparable profits method.
DATES: Effective Date: These regulations are effective August 26, 2003.
Applicability Dates: For dates of applicability of these regulations, see §§1.48210(5) and 1.482-7(k).
FOR FURTHER INFORMATION CONTACT: Douglas Giblen, (202) 435-5265 (not a
toll-free number).

SUPPLEMENTARY INFORMATION
Paperwork Reduction Act
The collections of information contained in these final regulations have been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 15451794. Responses to these collections of information are required by the IRS to monitor
compliance with the federal tax rules for determining stock-based compensation costs
to be shared among controlled participants in qualified cost sharing arrangements.
An agency may not conduct or sponsor, and a person is not required to respond

to, a collection of information unless the collection of information displays a valid co
number assigned by the Office of Management and Budget.
The estimated annual burden per respondent or recordkeeper varies from 2
hours to 7 hours, depending on individual circumstances, with an estimated average of
4 hours.
Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be sent to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224.
Books or records relating to a collection of information must be retained as long

as their contents may become material in the administration of any internal revenue law.

-2-

Generally, tax returns and tax return information are confidential, as required by 26
U.S.C. 6103.
Background
On July 29, 2002, Treasury and the IRS published in the Federal Register (67
FR 48997) proposed amendments to the regulations (REG-106359-02) under section
482 of the Internal Revenue Code (Code). These proposed regulations provide
guidance regarding treatment of stock-based compensation for purposes of qualified
cost sharing arrangements (QCSAs) and the comparable profits method and clarify the
coordination of the rules regarding QCSAs with the arm's length standard. Written
comments responding to these proposed regulations were received, and a public
hearing was held on November 20, 2002. After consideration of all the comments, the
proposed regulations under section 482 of the Code are adopted as revised by this
Treasury decision.
Explanation of Revisions and Summary of Comments
These final regulations are the first in a series of regulatory guidance under
section 482 through which Treasury and the IRS intend to update, clarify and improve

current regulatory guidance in the transfer pricing area. A broader regulatory project on
the treatment of QCSAs and a regulatory project on the transfer pricing of services are
in progress, and Treasury and the IRS intend to issue proposed regulations with respect
to each project in the near term.
These final regulations set forth explicit provisions clarifying that stock-based
compensation is taken into account in determining the operating expenses treated as

-3-

intangible development costs of a controlled participant in a Q C S A under §1.482-7.
These final regulations provide rules for measuring the cost associated with stockbased compensation; clarify that the utilization and treatment of stock-based
compensation is appropriately taken into account as a comparability factor for purposes
of the comparable profits method under §1.482-5; and provide rules that coordinate the
rules of §1482-7 regarding QCSAs with the arm's length standard as set forth in
§1.482-1.
Treasury and the IRS received comments with respect to the proposed
regulations. Most commentators objected to the proposed regulations in their entirety or
suggested postponement of their finalization. Some commentators suggested
modifications to be adopted in the event that the proposed regulations were finalized in
some form.
After fully considering these comments, Treasury and the IRS continue to believe
that the proposed regulations reflect a sound application of established principles under
section 482. At the same time, Treasury and the IRS have concluded that certain
suggested modifications to the administrative provisions of the proposed regulations are
appropriate. These modifications are incorporated into the final regulations.
A. Stock-Based Compensation as a Cost to Be Shared and the Arm's Length Standard
as Applied to Q C S A s - §§1.482-7(d)(2)(i) and (a)(3). and 1.482-1 (a)(1). (b)(2)(\) and (c)
A QCSA subject to the rules of §1.482-7 is an arrangement to develop
intangibles which meets certain administrative and other requirements and in which the
participants to the arrangement share intangible development costs in proportion to their
shares of reasonably anticipated benefits attributable to the intangibles developed under

-4-

the arrangement. In the case of a Q C S A , §1.482-7(a)(2) limits the ability of the
Commissioner to make allocations, except to the extent necessary to make each
controlled participant's share of the costs equal its share of reasonably anticipated
benefits. An arrangement in which significant intangible development costs are not
shared in proportion to reasonably anticipated benefits (or are not shared at all) would
not in substance constitute an arrangement to which the rules of §1.482-7 are
applicable.
The proposed regulations address the treatment of stock-based compensation
under a QCSA, and the interaction between the rules applicable to QCSAs and the
arm's length standard. The proposed regulations provide that stock-based
compensation related to the covered intangible development area must be taken into
account in determining the costs to be shared by participants in a QCSA. The proposed
regulations further provide that a QCSA produces results consistent with an arm's
length result if, and only if, all costs related to the intangible development, as
determined in accordance with the specific guidance in §1.482-7(d), are shared in
proportion to reasonably anticipated benefits.
Commentators objected to this rule on the basis of interpretations of the arm's
length standard and on other grounds.
1. Comments relating to arm's length standard
Commentators asserted that taking stock-based compensation into account in
the QCSA context would be inconsistent with the arm's length standard unless there is
evidence that parties at arm's length take stock-based compensation into account in
similar circumstances. Commentators asserted that third-party evidence, such as the
-5-

government's o w n procurement contracting practices and agreements between
unrelated parties with some characteristics similar to QCSAs, would show that parties at
arm's length do not take stock-based compensation into account in determining costs to
be reimbursed.
Treasury and the IRS continue to believe that requiring stock-based
compensation to be taken into account for purposes of QCSAs is consistent with the
legislative intent underlying section 482 and with the arm's length standard (and
therefore with the obligations of the United States under its income tax treaties and with
the OECD transfer pricing guidelines). The legislative history of the Tax Reform Act of
1986 expressed Congress's intent to respect cost sharing arrangements as consistent
with the commensurate with income standard, and therefore consistent with the arm's
length standard, if and to the extent that the participants' shares of income "reasonably
reflect the actual economic activity undertaken by each." See H.R. Conf. Rep. No. 99481, at II-638 (1986). The regulations relating to QCSAs implement that legislative
intent by using costs incurred by each controlled participant with respect to the
intangible development as a proxy for actual economic activity undertaken by each, and
by requiring each controlled participant to share these costs in proportion to its
anticipated economic benefit from intangibles developed pursuant to the arrangement.
In order for the costs incurred by a participant to reasonably reflect its actual economic
activity, the costs must be determined on a comprehensive basis. Therefore, in order
for a QCSA to reach an arm's length result consistent with legislative intent, the QCSA
must reflect all relevant costs, including such critical elements of cost as the cost of
compensating employees for providing services related to the development of the
-6-

intangibles pursuant to the Q C S A . Treasury and the IRS do not believe that there is
any basis for distinguishing between stock-based compensation and other forms of
compensation in this context.

Treasury and the IRS do not agree with the comments that assert that taking
stock-based compensation into account in the QCSA context would be inconsistent with
the arm's length standard in the absence of evidence that parties at arm's length take
stock-based compensation into account in similar circumstances. Section 1.482-1 (b)(1)
provides that a "controlled transaction meets the arm's length standard if the results of
the transaction are consistent with the results that would have been realized if
uncontrolled taxpayers had engaged in the same transaction under the same
circumstances." (Emphasis added). While the results actually realized in similar
transactions under similar circumstances ordinarily provide significant evidence in
determining whether a controlled transaction meets the arm's length standard, in the
case of QCSAs such data may not be available. As recognized in the legislative history
of the Tax Reform Act of 1986, there is little, if any, public data regarding transactions
involving high-profit intangibles. H.R. Rep. No. 99-426, at 423-25 (1985). The
uncontrolled transactions cited by commentators do not share enough characteristics of
QCSAs involving the development of high-profit intangibles to establish that parties at
arm's length would not take stock options into account in the context of an arrangement
similar to a QCSA. Government contractors that are entitled to reimbursement for
services on a cost-plus basis under government procurement law assume substantially
-7-

less entrepreneurial risk than that assumed by service providers that participate in
QCSAs, and therefore the economic relationship between the parties to such an
arrangement is very different from the economic relationship between participants in a
QCSA. The other agreements highlighted by commentators establish arrangements
that differ significantly from. QCSAs in that they provide for the payment of markups on
cost or of non-cost-based service fees to service providers within the arrangement or for
the payment of royalties among participants in the arrangement. Such terms, which
may have the effect of mitigating the impact of using a cost base to be shared or
reimbursed that is less than comprehensive, would not be permitted by the QCSA
regulations. Further, the QCSA regulations would not allow the Commissioner to
impose such terms in the context of a QCSA.
The regulations relating to QCSAs have as their focus reaching results consistent
with what parties at arm's length generally would do if they entered into cost sharing
arrangements for the development of high-profit intangibles. These final regulations
reflect that at arm's length the parties to an arrangement that is based on the sharing of
costs to develop intangibles in order to obtain the benefit of an independent right to
exploit such intangibles would ensure through bargaining that the arrangement reflected
all relevant costs, including all costs of compensating employees for providing services
related to the arrangement. Parties dealing at arm's length in such an arrangement
based on the sharing of costs and benefits generally would not distinguish between
stock-based compensation and other forms of compensation.
For example, assume that two parties are negotiating an arrangement similar to
a QCSA in order to attempt to develop patentable pharmaceutical products, and that
-8-

they anticipate that they will benefit equally from their exploitation of such patents in
their respective geographic markets. Assume further that one party is considering the
commitment of several employees to perform research with respect to the arrangement.
That party would not agree to commit employees to an arrangement that is based on
the sharing of costs in order to obtain the benefit of independent exploitation rights
unless the other party agrees to reimburse its share of the compensation costs of the
employees. Treasury and the IRS believe that if a significant element of that
compensation consists of stock-based compensation, the party committing employees
to the arrangement generally would not agree to do so on terms that ignore the stockbased compensation.
An arrangement between controlled taxpayers for the development of intangible
assets in which one taxpayer's share of significant costs exceeds its share of
reasonably anticipated benefits from the exploitation of the developed intangibles would
not in substance be a QCSA and therefore would be subject to analysis under the other
section 482 regulations. For example, as in the transactions cited by commentators, a
controlled taxpayer might agree at the outset of an arrangement to bear a
disproportionate share of costs in an arrangement in which it receives a service fee or a
contingent royalty from the exploitation of the developed intangibles. More generally,
controlled taxpayers might agree at the outset of an arrangement to determine the
compensation of one party based on a subset of that taxpayer's costs or on a basis that
does not take that taxpayer's costs into account at all (e.g., based on an amount
determined with reference to a comparable uncontrolled price or transaction). In either
case, such an arrangement between controlled taxpayers would not in substance
-9-

constitute an arrangement to which the rules of §1.482-7 would apply. Indeed, the
limitations contained in §1.482-7(a)(2) could produce results inconsistent with an arm's
length result if applied to such an arrangement because the Commissioner would be
precluded from making allocations that could be necessary to ensure that each
controlled taxpayer is compensated appropriately. Rather, such an arrangement should
be analyzed under the other section 482 regulations (in particular, sections 1.482-1,
1.482-2(b), and 1.482-4) to determine whether it reaches results consistent with the
arm's length standard, and any allocations by the Commissioner should be consistent
with such other section 482 regulations.
2. Other comments
Commentators offered various other reasons for not taking stock-based
compensation into account in the context of QCSAs. Commentators expressed the
view that stock-based compensation should not be taken into account because it does
not constitute an economic cost or require a cash outlay, or, to the extent such
compensation does constitute a cost, because the cost is borne by shareholders whose
share value is diluted when additional shares are issued on exercise. Commentators
also noted that the treatment of stock-based compensation for financial reporting
purposes should not mandate that stock-based compensation be taken into account in
the context of QCSAs.
In response to such views, and as discussed above, Treasury and the IRS
continue to believe that requiring stock-based compensation to be taken into account for
in the context of QCSAs is appropriate. The final regulations provide that stock-based
compensation must be taken into account in the context of QCSAs because such a
-10-

result is consistent with the arm's length standard. Treasury and the IRS agree that the
disposition of financial reporting issues does not mandate a particular result under these
regulations.
One commentator suggested that even if stock-based compensation generates a
cost to a participant, there is precedent within the regulations relating to QCSAs for
excluding certain costs, notably interest and taxes. Treasury and the IRS believe that
the technical treatment under the regulations relating to QCSAs of interest, taxes and
other expenses not related to the intangible development area does not warrant failing
to take into account an element of employee compensation that is clearly related to the
intangible development area. Treasury and the IRS believe that in order for the costs
incurred by a participant to reasonably reflect its actual economic activity consistent with
the legislative intent in this area, those costs must be determined on a comprehensive
basis and so must take into account all relevant costs, in particular critical elements
such as employee compensation. As noted above, Treasury and the IRS do not believe
that there is a basis for distinguishing between stock-based compensation and other
forms of compensation in this context.
One commentator also claimed that the historical administrative practice of the
IRS has been not to challenge the failure to take stock-based compensation into
account in other transfer pricing contexts in which the determination of cost is relevant.
Treasury and the IRS believe that such perceived practices of the IRS with respect to
other section 482 contexts are not relevant to determining the appropriate regulatory
rule applicable to QCSAs.

-11-

A s an alternate approach, one commentator suggested that rather than requiring
stock-based compensation to be taken into account in the QCSA context, Treasury and
the IRS should promulgate a "stock-based compensation safe harbor" applicable to
QCSAs. This suggested "safe harbor" has not been adopted in the final regulations. As
noted above, Treasury and the IRS believe that in order for the costs incurred by a
participant to reasonably reflect its actual economic activity, those costs must be
determined on a comprehensive basis and so must take into account all relevant costs,
in particular critical elements such as employee compensation. The final regulations
therefore require employee compensation to be taken into account, rather than provide
for a safe harbor under which such compensation could be ignored.
B. Grant-Date Identification Rule - §1.482-7(d)(2)(ii)
The proposed regulations identify the stock-based compensation to be included
in the cost pool based on whether the compensation is related to the intangible
development area on the date the option is granted.
One commentator noted that this identification rule is inconsistent with the IRS
treatment of stock-based compensation in other tax areas such as sourcing, where IRS
rulings trace the compensation to the entire period over which the employee performed
the services compensated by the option.
The grant-date identification rule has been retained in the final regulations. As
noted in the preamble of the proposed regulations, it is desirable in the QCSA context to
select a single date for identification of covered stock-based compensation. The grant
of compensation generally is the single economic event most closely associated with
the services being compensated.
-12-

C. Provision of Specific Methods of Measurement and Timing
The proposed regulations prescribe two alternative methods for determining the
operating expenses attributable to stock-based compensation. The default rule under
§1.482-7(d)(2)(iii)(A) provides that the costs attributable to stock-based compensation
generally are included as intangible development costs upon the exercise of the option
and measured by the spread between the option strike price and the price of the
underlying stock. An elective rule under §1.482-7(d)(2)(iii)(B) provides that the costs
attributable to stock options are taken into account in certain cases in accordance with
the "fair value" of the option, as reported for financial accounting purposes either as a
charge against income or in footnoted disclosures.
Commentators claimed that parties at arm's length would not use either of the
alternatives prescribed in the proposed regulations because they would produce results
that are too speculative or not sufficiently related to the employee services that are
compensated. One commentator suggested that the final regulations should not limit
taxpayers to the two prescribed measurement methods but rather should codify the
current IRS administrative practice of permitting any reasonable method. In the
commentator's view, a standard based on any reasonable method should permit the
intrinsic-value method, which measures the difference between strike price and
underlying stock value at date of grant, exclusive of time value. However, the
commentator suggested that if Treasury and the IRS consider an element of time value
indispensable, an alternative would be to require the use of the "minimum value"
method, which accounts for the time value of stock options by assuming the underlying
stock will grow at the risk-free interest rate.
-13-

These suggestions were not adopted. Treasury and the IRS believe that it is
appropriate for regulations to prescribe guidance in this context that is consistent with
the arm's length standard and that also is objective and administrable. As long as the
measurement method is determined at or before grant date, either of the prescribed
measurement methods can be expected to result in an appropriate allocation of costs
among QCSA participants and therefore would be consistent with the arm's length
standard. The results under the default measurement rule are consistent with what
would occur under an arm's length agreement at or before the grant date to take stockbased compensation into account at the date of exercise when more facts are known
and therefore to share the risks associated with such compensation between the date of
grant and the date of exercise. The results under the elective measurement rule are
consistent with what would occur under an alternative arm's length agreement at or
before the grant date to*determine the value of the compensation up front and take such
compensation into account at that time. With respect to the specific methods proposed
by commentators, Treasury and the IRS believe that "intrinsic value" ignores significant
elements of the economic value of stock-based compensation and "minimum value"
ignores the important variable of volatility that enters into the economic pricing models
used for financial reporting purposes.
The prescribed measurement methods are objective and administrable because
they rely on valuations or measurements of stock-based compensation prepared for
other purposes. The prescribed measurement methods do not require or permit
valuations of stock-based compensation specifically for QCSA purposes. A standard
under which the validity of the taxpayer's method would have to be analyzed on a case-14-

by-case basis would be unduly difficult to administer and potentially could lead to
significant disputes.

D. General Rule of Measurement - §1.482-7(d)(2)(iii)(A)
Under the default measurement rule, the amount taken into account for QCSA
purposes generally is the amount allowable as a federal income tax deduction on
exercise of the stock-based compensation. This amount generally is the "spread"
between the option price and the fair market value of the underlying stock at the date of
exercise.
One commentator suggested that this method would be improved if the amount
taken into account for QCSA purposes were limited to the portion of the spread that
accrued between date of grant and full vesting, as further prorated to reflect only the
time during which the employee was engaged in cost-shared activities.
This suggestion has not been adopted in the final regulations. Treasury and the
IRS believe that the grant-date identification rule already limits in an appropriate way the
stock-based compensation taken into account. The purpose of the default
measurement rule is to measure the amount attributable to stock-based compensation
that must be taken into account under the grant-date identification rule. Accordingly, the
default measurement rule does not require further refinement through proration.
Further, additional recordkeeping and analysis necessary to identify relevant time
periods and employee activities involving the covered intangibles and to perform
proration calculations are not warranted.
The proposed regulations set forth special rules for the application of the general
rule of measurement in the event of modification of a stock option and expiration or
termination of a QCSA. The final regulations retain these rules with technical
modifications.
-16-

E. Treatment of Statutory Stock Options - $1.482-7(d)(2)(iii)(A)(1)
Under the default measurement rule in the proposed regulations, a special rule
applies to statutory stock options (also referred to as incentive and employee stock
purchase plan stock options). Under this special rule, the spread on statutory stock
options generally is taken into account for QCSA purposes on exercise, even though
section 421 denies a deduction with respect to statutory stock options unless and until
there is a disqualifying disposition of the underlying stock by the employee.
One commentator suggested that the special rule for statutory stock options
should be removed because it imposes an unnecessary administrative burden on
taxpayers to apply different rules for different purposes. This suggestion was not
adopted in the final regulations. Treasury and the IRS believe that the more important
concern is consistent treatment of statutory and nonstatutory stock options for this
purpose. This consistency is achieved only if the spread on both statutory and
nonstatutory options is included in the cost pool on exercise.
F. Elective Method of Measurement - §1.482-7(d)(2)(iii)(B)
The proposed regulations permit an elective method of measurement and timing
with respect to options on publicly traded stock of companies subject to financial
reporting under U.S. generally accepted accounting principles (U.S. GAAP), provided
that the stock is traded on a U.S. securities market. Under the election, the amount
taken into account for QCSA purposes associated with compensatory stock options is
their "fair value," generally measured by reference to economic pricing models as of the
date of grant, as reflected either as a charge against income or as a footnote disclosure
in the company's audited financial statements, in compliance with current U.S. GAAP.
-17-

O n e commentator proposed that the elective measurement method be m a d e
available to all taxpayers. The commentator further suggested that controlled
participants should be permitted to use any reasonable method to measure stock-based
compensation in the form of options on stock of foreign corporations as long as that
method is consistent with international accounting standards or with accounting
principles that are prevalent in the home country of the controlled participant. In the
commentator's view, the limitations in the proposed regulations are not justified by
difficulty of valuation and may be vulnerable to challenges under anti-discrimination
clauses in U.S. income tax treaties.
Treasury and the IRS agree that the elective method should be more broadly
available and have modified these rules in the final regulations. Specifically, the final
regulations extend the availability of the elective method to options on the stock of
certain companies that prepare their financial statements in accordance with accounting
principles other than U.S. GAAP, while continuing to limit the availability of the elective
method to options on stock that is publicly traded on a U.S. securities market. Thus, the
availability of the elective method is not extended to options on stock of privately held
companies or companies whose stock is traded only on foreign securities markets.
Treasury and the IRS believe that objectivity and ease of administration are
important features of any method of measuring costs attributable to stock-based
compensation for purposes of QCSAs. The elective method should be available only
for options on stock whose value is readily determinable and for companies that are
required to determine the fair value of stock options for a non-tax purpose. Treasury
and the IRS recognize that foreign-based companies whose stock is traded on a U.S.
-18-

securities market (directly or through the use of American Depository Receipts) are
required to determine the fair value of options on their stock even though they do not
necessarily prepare financial statements in accordance with U.S. GAAP. Companies
satisfy that requirement by preparing financial statements in accordance with a
comprehensive body of generally accepted accounting principles (GAAP) that is
consistent with the U.S. GAAP requirement of determining the fair value of stock
options, or by preparing reconciliations of their financial statements with U.S. GAAP in a
manner that reflects the fair value of stock options.
Accordingly, the final regulations provide that in determining eligibility for the
elective method, financial statements prepared in accordance with GAAP other than
U.S. GAAP are considered as prepared in accordance with U.S. GAAP in two
circumstances. First, financial statements are considered as prepared in accordance
with U.S. GAAP where the fair value of stock options is reflected in a legally required
reconciliation between the applicable GAAP and U.S. GAAP. In such a case, the fair
value of stock options for purposes of the elective method of measurement will be the
fair value reflected in such reconciliation. Second, financial statements are considered
as prepared in accordance with U.S. GAAP where, under the applicable GAAP, the fair
value of stock options is reflected as a charge against income in audited financial
statements or is disclosed in footnotes to such statements. In such a case, the fair
value of stock options for purposes of the elective method of measurement will be the
fair value reflected in such audited financial statements.
Treasury and the IRS continue to believe that the elective method should be
available only for options on stock whose value is readily determinable and for
-19-

companies that are required to determine the fair value of stock options for a non-tax
purpose. Accordingly, the final regulations do not extend the availability of the elective
method to options on stock of privately held companies or companies whose stock is
traded only on foreign securities markets.
One commentator suggested that the election to use the elective method should
be made on the taxpayer's return rather than evidenced in the written cost sharing
agreement. In the view of the commentator, such a procedure would be more practical
from an enforcement perspective.
This suggestion was not adopted. Treasury and the IRS continue to believe that
the most effective way to ensure that all participants are bound by the election is to
incorporate it within the written cost sharing agreement.
G. Modification of Comparable Profits Method -- §1,482-5(c)(2)(iv)
The proposed regulations provide that in applying the comparable profits method,
if there are material differences among the tested party and uncontrolled comparables
with respect to the utilization or treatment of stock-based compensation, such material
differences are an appropriate basis for comparability adjustments. One commentator
expressed the view that this provision contradicts the arm's length coordination rules for
QCSAs because the treatment of stock-based compensation by unrelated parties is
considered relevant for purposes of the comparable profits method but not relevant for
purposes of QCSAs.
No revision was made in response to this comment. Treasury and the IRS
believe that the rule provided in the proposed regulations with respect to the application
of the comparable profits method is appropriate because the financial data with respect
-20-

to similar business activities that generally is used as a reference point for that method
is subject to adjustment to ensure comparability.
H. Effective Date and Transition Rules - S1.482-7(k) and (d)(2)(iii)(B)(2)
The provisions of the proposed regulations applicable to QCSAs would apply to
stock-based compensation granted in taxable years beginning on or after publication of
final regulations. Participants in a QCSA in existence on the effective date may, on a
one-time basis, amend their agreement to elect the grant-date method of measurement
without the Commissioner's consent. The election with respect to existing QCSAs must
be made not later than the latest due date, without regard to extensions, for an income

tax return of a controlled participant for the first taxable year beginning after the effecti
date of final regulations.
One commentator stated that the prospective effective date does not afford
taxpayers a reasonable time to amend their cost sharing agreements or restructure
complex international operations. A transition period of two years after the publication
of final regulations was suggested.
This suggestion was not adopted. Treasury and the IRS consider the period
stated in the proposed regulations adequate for the initial planning and recordkeeping
that may be occasioned by the final regulations.
With respect to the special transition rule permitting taxpayers to elect the grantdate method of measurement by amendment of an existing written cost sharing
agreement no later than the latest due date of an income tax return of a controlled
participant, one commentator suggested that the due date should not disregard filing

-21-

extensions. The commentator maintained that fairness dictates affording taxpayers this
extra time for the analysis needed to make this significant decision.
In response to this comment, the final regulations provide that the due date for
amendments to existing cost sharing agreements is determined with regard to filing
extensions.
Some commentators urged Treasury and the IRS to postpone finalization of the
proposed regulations until the OECD completes its ongoing consideration of the
treatment of stock options for transfer pricing purposes and an international consensus
begins to form so that the potential for international disputes and resulting negative
effects on U.S. business can be minimized. Similarly, a commentator suggested that
the effects of applying the principles of the proposed regulations to other areas of
transfer pricing should be thoroughly studied and harmonized before finalizing the
regulations to avoid creating traps for the unwary or other unforeseen consequences.
These suggestions were not implemented. Treasury and the IRS do not believe
that international discussion of issues compels the suspension of the regulatory
process. Also, Treasury and the IRS believe that it is important to provide timely
guidance on issues such as those addressed by the proposed and final regulations.
Finally, the preamble to the proposed regulations states that the proposed
regulations clarify that stock-based compensation must be taken into account in the
QCSA context. Several commentators interpreted this language as in effect requiring
the new rules to be applied retroactively. These commentators urged that the final
regulations contain further assurances of prospective intent and explicitly recognize that

-22-

these regulations represent a fundamental change to the traditional approach to section
482.
No revisions were made in light of these comments. As noted earlier, Treasury
and the IRS believe that requiring stock-based compensation to be taken into account in
the QCSA context is consistent with the arm's length standard and long-standing
policies underlying section 482. The final regulations, like the proposed regulations,
clearly specify that the specific rules provided therein are prospective in application.
Moreover, as stated in the proposed regulations, while taxpayers may rely on the
proposed regulations until the effective date of the final regulations, no inference is
intended with respect to the treatment of stock-based compensation granted in taxable
years beginning before the effective date of these final regulations.
I. Paperwork Reduction Act and Regulatory Flexibility Act
One commentator expressed the view that the compliance burden imposed by
the proposed regulations on each taxpayer will significantly exceed the two to seven
hours estimated under the Paperwork Reduction Act. The commentator also asserted
that the estimated number of taxpayers affected by the rules was too low.
The burden estimates as stated in the final regulations reflect no change.
Treasury and the IRS reviewed the estimates made in the proposed regulations and
concluded that they are reasonable.
Similarly, with respect to the Regulatory Flexibility Act, the commentator
challenged the statement in the preamble of the proposed regulations that the new
regulatory requirements will not have a significant economic impact on a substantial
number of small entities. Upon review of available information, Treasury and the IRS
-23-

found no basis for a change in the statement or in the operative finding that the
economic impact of the collections of information in the proposed regulations is not
significant with respect to small entities.
J. Documentation Reguirements and Other Provisions on Which No Comments
Received
Section 1.482-7(j)(2)(i)(F) of the proposed regulations requires that controlled
participants maintain specific documentation to establish the amount attributable to
stock-based compensation that is taken into account in determining the costs to be
shared, including the method of measurement and timing used with respect to that
amount. No comments were received on this particular provision, and it is retained in
the final regulations.
Treasury and the IRS intend that this provision will require controlled participants
that use the elective method of measurement to maintain documentation establishing
compliance with the requirements of §1.482-7(d)(2)(iii)(B). For example, documentation
should establish that applicable financial statements reflecting the value of stock options
with respect to which the elective method is used, as well as applicable accounting
principles under which such financial statements are prepared, are in conformity with
the fair-value and reconciliation requirements adopted in the final regulations with
respect to GAAP other than U.S. GAAP.
Several other provisions of the proposed regulations similarly were not
commented upon and have been adopted without modification in the final regulations.
These provisions include §1.482-7(d)(2)(iii)(A)(2), relating to deductions of foreign
controlled participants; the last sentence of §1.482-7(d)(2)(ii), relating to repricing and
-24-

other modifications of stock options; and §1.482-7(d)(2)(iii)(C), providing consistency
rules for measurement and timing of stock-based compensation.
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 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. It is hereby

certified that the collection of information in these regulations will not have a signif
economic impact on a substantial number of small entities. This certification is based
upon the fact that few small entities are expected to enter into QCSAs involving stockbased compensation, and that for those who do, the burdens imposed under §1.482-

7(d)(2)(iii)(B) and (j)(2)(i)(F) wi,l De minimal. Therefore, a Regulatory Flexibility Analys
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f), the proposed regulations preceding these regulations were 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 Douglas Giblen of the Office of
Associate Chief Counsel (International). However, other personnel from Treasury and
the IRS participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
-25-

26 C F R Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are 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 * * *
Sections 1.482-1, 1.482-5 and 1.482-7 also issued under 26 U.S.C. 482. * * *
Par. 2. Section 1.482-0 is amended by:
1. Redesignating the entry for §1.482-7(a)(3) as the entry for §1.482-7(a)(4).
2. Adding a new entry for §1.482-7(a)(3).
3. Redesignating the entry for §1,482-7(d)(2) as the entry for §1.482-7(d)(3).
4. Adding new entries for §1.482-7(d)(2).
The additions and redesignation read as follows:
§1.482-0 Outline of regulations under section 482.
*****

§1.482-7 Sharing of costs.
(a) In general.
*****

(3) Coordination with §1.482-1.
(4) Cross references.
** * * *

(d) Costs.
* * ** *

(2) Stock-based compensation.
(i) In general.
(ii) Identification of stock-based compensation related to intangible development.
(iii) Measurement and timing of stock-based compensation expense.
-26-

(A)
(1)
(2)
(3)
(4)
(B)
(1)
(2)
(3)
(4)
(C)
(3)

In general.
Transfers to which section 421 applies.
Deductions of foreign controlled participants.
Modification of stock option.
Expiration or termination of qualified cost sharing arrangement.
Election with respect to options on publicly traded stock.
In general.
Publicly traded stock.
Generally accepted accounting principles.
Time and manner of making the election.
Consistency.
Examples.

*****

Par. 3. Section 1.482-1 is amended by:
1. Removing the sixth sentence of paragraph (a)(1) and adding two sentences in
its place.
2. Adding a sentence at the end of paragraph (b)(2)(i).
3. Adding a sentence at the end of paragraph (c)(1).
4. Adding paragraph G)(5).
The additions read as follows:
§1.482-1 Allocation of income and deductions among taxpayers.
(a) * * *
(1) * * * Section 1.482-7T sets forth the cost sharing provisions applicable to •
taxable years beginning on or after October 6, 1994, and before January 1, 1996.
Section 1.482-7 sets forth the cost sharing provisions applicable to taxable years
beginning on or after January 1, 1996. * * *
* * * * *

(b) * * *
(2) * * *
-27-

(i) * * * Section 1.482-7 provides the specific method to be used to evaluate
whether a qualified cost sharing arrangement produces results consistent with an arm's
length result.
*****

(c) * * *
(1) * * * See §1.482-7 for the applicable method in the case of a qualified cost
sharing arrangement.
*****
/:\ * * *

(5) The last sentences of paragraphs (b)(2)(i) and (c)(1) of this section and of
paragraph (c)(2)(iv) of §1.482-5 apply for taxable years beginning on or after August 26,
2003.
Par. 4. Section 1.482-5 is amended by adding a sentence at the end of
paragraph (c)(2)(iv) to read as follows:
§1.482-5 Comparable profits method.
*****

(c) * * *
/o\ * * *

(iv) * * * As another example, it m a y be appropriate to adjust the operating profit
of a party to account for material differences in the utilization of or accounting for stockbased compensation (as defined by §1.482-7(d)(2)(i)) a m o n g the tested party and
comparable parties.
* *** *

-28-

Par. 5. Section 1.482-7 is amended by:
1. Redesignating paragraph (a)(3) as paragraph (a)(4).
2. Adding a new paragraph (a)(3).
3. Redesignating paragraph (d)(2) as paragraph (d)(3).
4. Adding a new paragraph (d)(2).
5. Removing the word "and" at the end of paragraph (j)(2)(i)(D).
6. Removing the period at the end of paragraph (j)(2)(i)(E) and adding "; and" in
its place.
7. Adding paragraph (j)(2)(i)(F).
8. Revising paragraph (k).
The additions and revision read as follows:
§1.482-7 Sharing of costs.
(a) * * *
(3) Coordination with §1.482-1. A qualified cost sharing arrangement produces
results that are consistent with an arm's length result within the meaning of §1.4821(b)(1) if, and only if, each controlled participant's share of the costs (as determined
under paragraph (d) of this section) of intangible development under the qualified cost
sharing arrangement equals its share of reasonably anticipated benefits attributable to
such development (as required by paragraph (a)(2) of this section) and all other
requirements of this section are satisfied.
* ****

(d)

-29-

(2) Stock-based compensation--(i) In general. For purposes of this section, a
controlled participant's operating expenses include all costs attributable to
compensation, including stock-based compensation. As used in this section, the term
stock-based compensation means any compensation provided by a controlled
participant to an employee or independent contractor in the form of equity instruments,
options to acquire stock (stock options), or rights with respect to (or determined by
reference to) equity instruments or stock options, including but not limited to property to
which section 83 applies and stock options to which section 421 applies, regardless of
whether ultimately settled in the form of cash, stock, or other property.
(ii) Identification of stock-based compensation related to intangible development.
The determination of whether stock-based compensation is related to the intangible
development area within the meaning of paragraph (d)(1) of this section is made as of
the date that the stock-based compensation is granted. Accordingly, all stock-based
compensation that is granted during the term of the qualified cost sharing arrangement
and is related at date of grant to the development of intangibles covered by the
arrangement is included as an intangible development cost under paragraph (d)(1) of
this section. In the case of a repricing or other modification of a stock option, the
determination of whether the repricing or other modification constitutes the grant of a
new stock option for purposes of this paragraph (d)(2)(ii) will be made in accordance
with the rules of section 424(h) and related regulations.
(iii) Measurement and timing of stock-based compensation expense--(A) In
general. Except as otherwise provided in this paragraph (d)(2)(iii), the operating
expense attributable to stock-based compensation is equal to the amount allowable to
-30-

the controlled participant as a deduction for Federal income tax purposes with respect
to that stock-based compensation (for example, under section 83(h)) and is taken into
account as an operating expense under this section for the taxable year for which the
deduction is allowable.
(I) Transfers to which section 421 applies. Solely for purposes of this paragraph
(d)(2)(iii)(A), section 421 does not apply to the transfer of stock pursuant to the exercise
of an option that meets the requirements of section 422(a) or 423(a).
(2) Deductions of foreign controlled participants. Solely for purposes of this
paragraph (d)(2)(iii)(A), an amount is treated as an allowable deduction of a controlled
participant to the extent that a deduction would be allowable to a United States
taxpayer.
(3) Modification of stock option. Solely for purposes of this paragraph
(d)(2)(iii)(A), if the repricing or other modification of a stock option is determined, under
paragraph (d)(2)(ii) of this section, to constitute the grant of a new stock option not
related to the development of intangibles, the stock option that is repriced or otherwise
modified will be treated as being exercised immediately before the modification,
provided that the stock option is then exercisable and the fair market value of the
underlying stock then exceeds the price at which the stock option is exercisable.
Accordingly, the amount of the deduction that would be allowable (or treated as
allowable under this paragraph (d)(2)(iii)(A)) to the controlled participant upon exercise
of the stock option immediately before the modification must be taken into account as
an operating expense as of the date of the modification.

-31-

(4) Expiration or termination of Qualified cost sharing arrangement. Solely for
purposes of this paragraph (d)(2)(iii)(A), if an item of stock-based compensation related
to the development of intangibles is not exercised during the term of a qualified cost
sharing arrangement, that item of stock-based compensation will be treated as being
exercised immediately before the expiration or termination of the qualified cost sharing
arrangement, provided that the stock-based compensation is then exercisable and the
fair market value of the underlying stock then exceeds the price at which the stockbased compensation is exercisable. Accordingly, the amount of the deduction that
would be allowable (or treated as allowable under this paragraph (d)(2)(iii)(A)) to the
controlled participant upon exercise of the stock-based compensation must be taken
into account as an operating expense as of the date of the expiration or termination of
the qualified cost sharing arrangement.
(B) Election with respect to options on publicly traded stock --(1) In general. With
respect to stock-based compensation in the form of options on publicly traded stock, the
controlled participants in a qualified cost sharing arrangement may elect to take into
account all operating expenses attributable to those stock options in the same amount,
and as of the same time, as the fair value of the stock options reflected as a charge
against income in audited financial statements or disclosed in footnotes to such financial
statements, provided that such statements are prepared in accordance with United
States generally accepted accounting principles by or on behalf of the company issuing
the publicly traded stock.
(2) Publicly traded stock. As used in this paragraph (d)(2)(iii)(B), the term
publicly traded stock means stock that is regularly traded on an established United
-32-

States securities market and is issued by a company w h o s e financial statements are
prepared in accordance with United States generally accepted accounting principles for
the taxable year.
(3) Generally accepted accounting principles. For purposes of this paragraph
(d)(2)(iii)(B), a financial statement prepared in accordance with a comprehensive body
of generally accepted accounting principles other than United States generally accepted
accounting principles is considered to be prepared in accordance with United States
generally accepted accounting principles provided that either(i) The fair value of the stock options under consideration is reflected in the
reconciliation between such other accounting principles and United States generally
accepted accounting principles required to be incorporated into the financial statement
by the securities laws governing companies whose stock is regularly traded on United
States securities markets; or
(ii) In the absence of a reconciliation between such other accounting principles
and United States generally accepted accounting principles that reflects the fair value of
the stock options under consideration, such other accounting principles require that the
fair value of the stock options under consideration be reflected as a charge against
income in audited financial statements or disclosed in footnotes to such statements.
(4) Time and manner of making the election. The election described in this

paragraph (d)(2)(iii)(B) is made by an explicit reference to the election in the written cos
sharing agreement required by paragraph (b)(4) of this section or in a written
amendment to the cost sharing agreement entered into with the consent of the
Commissioner pursuant to paragraph (d)(2)(iii)(C) of this section. In the case of a
-33-

qualified cost sharing arrangement in existence on August 26, 2003, the election must
be made by written amendment to the cost sharing agreement not later than the latest
due date (with regard to extensions) of a federal income tax return of any controlled
participant for the first taxable year beginning after August 26, 2003, and the consent of
the Commissioner is not required.
(C) Consistency. Generally, all controlled participants in a qualified cost sharing
arrangement taking options on publicly traded stock into account under paragraph
(d)(2)(iii)(A) or (B) of this section must use that same method of measurement and
timing for all options on publicly traded stock with respect to that qualified cost sharing
arrangement. Controlled participants may change their method only with the consent of
the Commissioner and only with respect to stock options granted during taxable years
subsequent to the taxable year in which the Commissioner's consent is obtained. All
controlled participants in the qualified cost sharing arrangement must join in requests for
the Commissioner's consent under this paragraph. Thus, for example, if the controlled
participants make the election described in paragraph (d)(2)(iii)(B) of this section upon
the formation of the qualified cost sharing arrangement, the election may be revoked
only with the consent of the Commissioner, and the consent will apply only to stock
options granted in taxable years subsequent to the taxable year in which consent is
obtained. Similarly, if controlled participants already have granted stock options that
have been or will be taken into account under the general rule of paragraph (d)(2)(iii)(A)
of this section, then except in cases specified in the last sentence of paragraph
(d)(2)(iii)(B)(2) of this section, the controlled participants may make the election
described in paragraph (d)(2)(iii)(B) of this section only with the consent of the
-34-

Commissioner, and the consent will apply only to stock options granted in taxable years
subsequent to the taxable year in which consent is obtained.
* * * * *
/:\ * * *
/o\ * * *

/j\ * * *

(F) The amount taken into account as operating expenses attributable to stockbased compensation, including the method of measurement and timing used with
respect to that amount as well as the data, as of date of grant, used to identify stockbased compensation related to the development of covered intangibles.
*****

(k) Effective date. This section applies for taxable years beginning on or after
January 1, 1996. However, paragraphs (a)(3), (d)(2) and G)(2)(i)(F) of this section apply
for stock-based compensation granted in taxable years beginning on or after August 26,
2003.
* ****

-35-

P A R T 602-OMB C O N T R O L N U M B E R S U N D E R T H E P A P E R W O R K R E D U C T I O N
ACT
Par. 9. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 10. In §602.101, paragraph (b) is amended by adding an entry in numerical
order to the table to read in part as follows :
§602.101 OMB Control numbers.
*****

(b)
C F R part or section where
identified and described control No.

Current O M B

*****

1.482-7 1545-1794
*****

Deputy Commissioner for Services and Enforcement.
Robert E. Wenzel

Approved: August 11, 2003

Assistant Secretary of the Treasury.
Pamela F. Olson

JS-675: Treasury Issues Final Regulations O n Treatment O f I n c o m e

P a g e 1 of 1

PRESS R O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
August 25, 2003
JS-675
Treasury Issues Final Regulations On Treatment Of Income From
International Operation Of Ships And Aircraft
Today the Treasury Department issued final regulations regarding the
treatment of income derived by foreign corporations from the international
operation of ships or aircraft. These regulations generally follow
regulations that were issued in proposed form in August 2002, with s o m e
modifications in response to comments received.
A foreign corporation's income from the international operation of ships or
aircraft generally is exempt from U.S. tax if the foreign corporation is
organized in a country that provides an equivalent exemption to U.S.
corporations under its domestic law or under a diplomatic agreement with
the United States.
The regulations provide guidance on the scope of this exemption and set
forth certain information reporting requirements for foreign corporations
claiming this exemption. In particular, the regulations provide guidance on
w h e n a foreign corporation is to be considered engaged in the international
operation of ships or aircraft, and w h e n a foreign country is to be
considered to provide an equivalent exemption.
The regulations also provide detailed guidance on the types of income that
qualify for the exemption. Generally, the exemption is available for income
from the international carnage of passengers and cargo and from certain
activities that are incidental to the international operation of ships or
aircraft, such as the sale of tickets for another airline under a code-sharing
arrangement.
In addition, the regulations provide guidance regarding the ownership
requirements for foreign corporations claiming the exemption. Generally,
the exemption is available to foreign corporations that are majority-owned
by residents of the country in which they are incorporated (or of another
country that provides a reciprocal exemption to U.S. corporations) or that
are publicly traded and widely held. The regulations provide detailed rules
regarding the information required for foreign corporations to substantiate
that they meet the applicable ownership requirements.
The text of the final regulations is attached.
Related Documents:
• final regulations text

http://www.treas.gov/press/releases/js675.htm

[4830-01-P]

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD9087]
RIN 1545-BA07
Exclusions From Gross Income of Foreign Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations
implementing sections 883(a) and (c) that relate to income
derived by foreign corporations from the international
operation of ships or aircraft. The final regulations reflect
changes made by the Tax Reform Act of 1986 and subsequent
legislative amendments. The final regulations provide, in
general, that a foreign corporation organized in a qualified
foreign country and engaged in the international operation of
ships or aircraft shall exclude qualified income from gross
income for purposes of U.S. Federal income taxation, provided
that the corporation can satisfy certain ownership and related
documentation requirements. The final regulations explain
when a foreign country is a qualified foreign country and what
1

aw

JS-676: U.S. Treasury to Hold First U.S.-Brazil Group for Growth Meeting

Page 1 of 1

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
August 26, 2003
JS-676
U.S. Treasury to Hold First U.S.-Brazil Group for Growth Meeting

O n Wednesday, August 27, 2003, U.S. Treasury officials and officials of the
Brazilian Finance Ministry will hold the first session of the U.S.-Brazil Group for
Growth.
The U.S. delegation will be chaired by John B. Taylor, Under Secretary for
International Affairs at the Department of Treasury. U.S. participants will include
Federal Reserve Governor Ben Bemanke and Council of Economic Advisors
member-designate Kristin Forbes. The Brazilian delegation will be co-chaired by
Joaquim V. Levy, Secretary of the National Treasury, and Marcos Lisboa, Secretary
for Economic Policy, both at the Ministry of Finance. Brazilian participants will also
include Brazilian Ambassador to the United States Rubens Barbosa and Brazilian
Executive Director to the IMF Murillo Portugal. The Group for Growth was initiated
by President Bush and President Lula of Brazil in June.
Brazil and U.S. delegations will hold discussions on the determinants of growth and
measures to boost small- and medium-sized enterprises, including access to credit
and capital markets. The meeting will also offer a venue for each side to present an
overview on recent growth performance and discuss recent trends and prospects in
the fiscal area. Both the United States and Brazil are putting in place policies to
raise growth, with voting on key reform legislation in Brazil and the implementation
of major jobs and growth legislation in the United States. Closer understanding of
the underpinnings of economic activity and reforms in each country is thus of
mutual interest and would benefit the hemisphere.
A photo opportunity will be held at the conclusion of the meetings and a press
briefing with U.S. and Brazil officials will follow.
U.S.-Brazil Group for Growth
Under Secretary John Taylor, U.S. Treasury
Joaquim V. Levy, Brazil Secretary of the National Treasury
Marcos Lisboa, Brazil Secretary for Economic Policy
9:00-1:45 P M
U.S. Department of the Treasury, R o o m 4121
1500 Pennsylvania Ave N W
Washington, D C
* 1:30PM- Photo Opportunity - Office of U/S John Taylor (Room 3432)
* 1:45PM - Press Availability - Media R o o m (Room 4121)

http://www.treas.gov/press/releases/js676.htm

5/2/2005

JS-678: U.S.-Brazil Group for Growth

P a a e 1 of 1

F R O M T H E OFFICE O F PUBLIC A F F A I R S
August 27, 2003
JS-678
U.S.-Brazil Group for Growth
The United States and Brazil held the first meeting of the Group for Growth today in
Washington, D.C. Formation of the Group was announced at the June 2003
meeting between President Bush and President Lula with the goal of developing
strategies to raise economic growth in both countries.
The U.S. delegation was chaired by John B. Taylor, Under Secretary for
International Affairs at the Department of Treasury. U.S. participants included
Federal Reserve Governor Ben Bemanke and Council of Economic Advisors
member-designate Kristin Forbes. The Brazilian delegation was co-chaired by
Joaquim V. Levy, Secretary of the National Treasury, and Marcos Lisboa, Secretary
for Economic Policy, both at the Ministry of Finance. Brazilian participants included
Brazilian Ambassador to the United States Rubens Barbosa and Brazilian
Executive Director to the IMF Murilo Portugal.
During the meeting, the delegations discussed the measures for raising productivity
growth in both countries, including tax and pension reform in Brazil and the major
jobs and growth legislation in the United States. The Brazilian representatives also
reported on their government's initiatives for expanding access to credit for
microenterprises and small- and medium-sized enterprises.
"The Lula Administration is taking very significant steps to increase economic
growth in Brazil," John Taylor said. "The pension and tax reforms proposed by
President Lula address s o m e of the most fundamental fiscal challenges facing
Brazil. The United States strongly supports the government's efforts."
"The strength of the U.S. economy provides convincing evidence of the importance
of competition to foster economic growth," Marcos Lisboa said. For his part,
Joaquim Levy noted that "a well developed capital market that helps funnel savings
to productive investment—including by small businesses—is a major factor to
ensure growth, innovation, and lower costs to finance public debt." Both were
confident that policy measures taken by the U.S. government in recent months will
help accelerate the recovery of the U.S. economy, which is expected to have
positive spillover effects for the rest of the world.
The Group agreed to reconvene in Brazil in the first quarter of 2004.

http://www.treas.gov/press/releases/js678.htm

5/19/2005

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 CONTACT: Office of Financing
August 27, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate: 2% Issue Date: September 02, 2003
Series:
P-2005
Dated Date:
CUSIP No:
912828BJ8
Maturity Date:

August 31, 2003
August 31, 2005

High Yield: 2.040% Price: 99.922
All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted
0.89%. All tenders at lower yields were accepted in full.
Accrued interest of $ 0.10989 per $1,000 must be paid for the period
from August 31, 2003 to September 02, 2003.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tendered
$

$

43,141, 607

SUBTOTAL

$

48,731, 474

24,163,,268
836,,794
0
25,000, 062 1/

5,589, 867

Federal Reserve
TOTAL

42,304,,813
836,,794
0

Accepted

5,589, 867
$

30,589. 929

Median yield
1.998%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
1.950%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 43,141,607 / 25,000,062 = 1.73
1/ Awards to TREASURY DIRECT = $620,025,000

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 CONTACT: Office of Financing
August 25, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 28, 2003
February 26, 2004
912795PM7

High Rate: 1.040% Investment Rate 1/: 1.063% Price: 99.474
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 79.83%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

30,345,226
1,351,479
574,500

$

14,074,296
1,351,479
574,500

SUBTOTAL 32,271,205 16,000,275 2/
Federal Reserve 5,735,903 5,735,903
TOTAL $ 38,007,108 $ 21,736,178
Median rate 1.03 0%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.000%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 32,271,205 / 16,000,275 = 2.02
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT - $998,64 5,000

C

JJ

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 CONTACT: Office of Financing
August 25, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 92-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

August 28, 2003
November 28, 2003
912795NY3

High Rate: 0.980% Investment Rate 1/: 0.997% Price: 99.750
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 45.34%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

31,055,248
1,483,002
385,800

$

14,131,368
1,483,002
385,800

SUBTOTAL 32,924,050 16,000,170 2/
Federal Reserve 5,570,281 5,570,281
TOTAL $ 38,494,331 $ 21,570,451
Median rate 0.965%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.940%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 32,924,050 / 16,000,170 = 2.06
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,183,020,000

0 ^ t«
http://www.publicdebt.treas.gov

AMENDED AUGUST 25, 2003 3:25 P.M.
EMBARGOED UNTIL 11:00 A.M.
August 25, 2003

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $25,000 million of 2-year notes to refund $13,075
million of publicly held notes maturing August 31, 2003, and to raise new cash of
approximately $11,925 million.
In addition to the public holdings, Federal Reserve Banks hold $5,590 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.
Treasury-Direct customers requested that we reinvest their maturing holdings
of approximately $538 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.
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.

oOo
Attachment

& >

^

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED SEPTEMBER 2, 2003
August 25, 2003
Offering Amount $25,000 million
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Yield
NLP Reporting Threshold
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest payable by investor
Premium or discount
STRIPS Information:
Minimum amount required
Corpus CUSIP number
Due date(s) and CUSIP number(s)
for additional TINT(s)

$ 8,750 million
$ 8,750 million
$ 8,750 million

2-year notes
P-2005
912828 BJ 8
August 27, 2003
September 2, 2003
August 31, 2003
August 31, 2005
Determined based on the highest
accepted competitive bid
Determined at auction
The last calendar day of February and
August through August 31, 2005
$1,000
Determined at auction
Determined at auction

$1,000
912820 JF 5
August 31, 2005 - - 912833 ZN 3

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 12:00 noon eastern daylight saving time on auction day.
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving 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. Treasury-Direct 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 flft N E W S
On'ICI-lOK \*\ KI.K A H AlKS • 1500 I'l-NNSYIAAMA

AYKMJI.. N.W. • WASJI l\CT O N . t>.t .» 2022(1 • ,2lJ> i (,11 2*>M

EMBARGOED UNTIL 11:00 A.M.
August 25, 2003

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $26,000 million to
refund an estimated $20,000 million of publicly held 4-week Treasury bills maturing
August 28, 2003, and to raise new cash of approximately $6,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
Treasury-Direct will not be accepted.
The Federal Reserve System holds $14,592 million of the Treasury bills maturing
on August 28, 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.
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.

oOo
Attachment

V&

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED AUGUST 28, 2003
August 25, 2003
Offering Amount $26,000 million
Maximum Award (35% of Offering Amount) . . . $ 9,100 million
Maximum Recognized Bid at a Single Rate.. $ 9,100 million
NLP Reporting Threshold
$ 9,100 million
NLP Exclusion Amount
$11,800 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NP 2
Auction date
August 26, 2003
Issue date
August 28, 2003
Maturity date
September 25, 2003
Original issue date
March 27, 2003
Currently outstanding
$45,900 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 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

JS-685: Treasury Issues Proposed Regulations on Tax Treatment

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
August 28, 2003
JS-685
Treasury Issues Proposed Regulations on Tax Treatment
of Foreign Currency Contingent Payment Debt Instruments
Today the Treasury Department issued proposed regulations providing detailed
rules on the tax treatment of contingent payment debt instruments that are
denominated in a foreign currency.
Existing regulations provide guidance on the tax treatment of non-contingent debt
instruments denominated in foreign currency, and on contingent payment debt
instruments not denominated in foreign currency. The proposed regulations fill the
regulatory gap between these two existing sets of rules.
In general, the proposed regulations apply the so-called "non-contingent bond
method" provided in regulations under section 1275 to the debt instrument in the
currency in which it is denominated. The resulting amounts then are translated into
the taxpayer's functional currency, and gain or loss determined, under rules similar
to the existing rules for non-contingent foreign currency-denominated debt
instruments. The proposed regulations generally follow the methodology that was
described in Announcement 99-76.
Related Documents:
• The text of the proposed regulations

http://www.treas.eov/Dress/releases/js685Jitm

5/2/2005

[4830-01-P]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106486-98; INTL-0015-91]
RIN 1545-AW33; RIN 1545-PP78
Guidance Regarding the Treatment of Certain Contingent Payment Debt Instruments with One
or More Payments that Are Denominated in, or Determined by Reference to, a Nonfunctional
Currency
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking; notice of public hearing; and withdrawal of previous
proposed regulations section.
SUMMARY: This document contains proposed regulations regarding the treatment of
contingent payment debt instruments for which one or more payments are denominated in, or
determined by reference to, a currency other than the taxpayer's functional currency. These
regulations are necessary because current regulations do not provide guidance concerning the

treatment of such instruments. The proposed regulations generally provide that taxpayers shou
apply the existing rules under section 1275 of the Internal Revenue Code, with certain
modifications, to nonfunctional currency contingent payment debt instruments. This document

also withdraws existing proposed regulations and provides notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments and requests to speak (with outlines of oral comments
to be discussed) at the public hearing scheduled for December 3, 2003, at 10 a.m. must be
submitted by November 12, 2003.

A D D R E S S E S : Send submissions to: CC:PA:RU (REG-106486-98), room 5203, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may

be hand delivered between the hours of 8 a.m. and 4 p.m. to: REG-106486-98, Courier's Des
Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. or sent

electronically, via the IRS Internet site at: www.irs.gov/regs. The public hearing will b
room 6718, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Milton
Cahn at (202) 622-3870; concerning submission and delivery of comments and the public
hearing, Treena Garrett, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collections of information contained in this notice of proposed rulemaking have been

submitted to the Office of Management and Budget for review in accordance with the Paperw

Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information shou
be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of
Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies
the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP
Washington, DC 20224. Comments on the collection of Information should be received by
October 28, 2003. Comments are specifically requested concerning:
Whether the proposed collections of information is necessary for the proper performance
of the functions of the Internal Revenue Service, including whether the information will

2

practical utility;
The accuracy of the estimated burden associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of the information to be collected may be enhanced;
How the burden of complying with the proposed collections of information may be
minimized, including through the application of automated collection techniques or other forms
of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and purchase
of service to provide information.
The collections of information in this proposed regulation are in §1.988-6(a)(l) (cross
reference to §1.1275-4) and §1.988-6(d)(3). This information is required to ensure consistency in
the treatment of the debt instrument between the issuer and the holders. This information will be
used for audit and examination purposes. The disclosure of information is mandatory as regards
the issuers of nonfunctional currency contingent payment debt instruments. The reporting of
information is mandatory as regards holders of debt instruments which determine their own
projected payment schedule. The recordkeeping requirement is mandatory for any party that
determines the comparable yield and projected payment schedule for a debt instrument. The
likely respondents are business or other for-profit institutions.
Taxpayers provide the information on a statement attached to its timely filed federal
income tax return for the taxable year that includes the acquisition date of the debt instrument.
Estimated total annual reporting, and/or recordkeeping burden: 100 hours.
Estimated average annual burden hours per respondent and/or recordkeeper: 1 hour.

3

Estimated number of respondents and/or recordkeepers: 100
Estimated annual frequency of responses: on occasion.
An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number assigned by the Office of
Management and Budget.
Books or records relating to a collection of information must be retained as long as their
contents may become material in the administration of any internal revenue law. Generally, tax
returns and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On March 17, 1992, Treasury and the IRS issued proposed regulations (INTL-0015-91),
§§1.988-1(a)(3), (4) and (5), regarding contingent payment debt instruments, dual currency debt
instruments and multi-currency debt instruments. The proposed regulations followed the general
approach in the then-proposed §1.1275-4(g) contingent payment debt regulations (LR-189-84;
51 FR 12022 (1986), amended at 56 FR 8308 (1991)) and bifurcated such debt instruments into
contingent and noncontingent components. After an instrument was bifurcated, the proposed
regulations applied the rules in §§1.988-1 through 1.988-5, as appropriate, to the resulting
components.
On December 16, 1994, Treasury and the IRS withdrew the then proposed §1.1275-4(g)
regulations and proposed a new set of §1.1275-4 regulations (FI-59-91, 59 FR-64884). These
regulations were finalized on June 14, 1996.
Section 1.1275-4 of the final regulations adopted the "noncontingent bond method" for
certain contingent payment debt instruments. Under the noncontingent bond method, interest

4

accrues on a contingent payment debt instrument at a rate equal to the instrument's comparable
yield, which is the yield at which an issuer would issue a fixed rate debt instrument with terms
and conditions similar to those of the contingent payment debt instrument. In addition, the
noncontingent bond method treats all interest on a debt instrument as original issue discount,
which must be taken into account as it accrues, regardless of the taxpayer's normal method of
accounting.
Under the noncontingent bond method, the comparable yield is used to construct a
projected payment schedule for the debt instrument, which includes a projected amount for each
contingent payment. If the actual amount of a contingent payment is greater than the projected
amount, the difference is treated as additional interest. If the actual amount of a contingent
payment is less than the projected amount, the difference generally offsets current interest

accruals. In some cases, the difference may result in a loss to the holder and income to the issue
On August 2, 1999, as a result of the withdrawal of the 1994 proposed §1.1275-4(g)
regulations and the promulgation of the final §1.1275-4 regulations, the IRS issued
Announcement 99-76 (1999-2 C.B. 223) which provided a description of a regulatory approach
that Treasury and the IRS were considering as a replacement to the proposed regulations in
§§1.988-1(a)(3), (4) and (5) for contingent payment debt instruments with one or more payments
denominated in, or determined by reference to, a nonfunctional currency. Announcement 99-76
stated that Treasury and the IRS were considering issuing regulations that would apply the
noncontingent bond method in the taxpayer's nonfunctional currency and would translate
payments received on the instrument into functional currency under the rules of §§1.988-1
through 1.988-5. Announcement 99-76 requested comments on this approach. No comments

5

were received.
Treasury and the IRS believe that proposed regulations §1.988-1(a)(3), (4) and (5) should
be withdrawn because they incorporate the bifurcation approach rather than the noncontingent
bond method ultimately adopted under §1.1275-4. Treasury and the IRS believe, as reflected in
Announcement 99-76, that nonfunctional currency contingent payment debt instruments should
be accounted for under rules similar to those that govern the treatment of functional currency
contingent payment debt instruments. Treasury and the IRS believe that providing a consistent
set of rules in this area is in the best interests of sound tax administration.
Explanation of Provisions
In General
These proposed regulations provide guidance for four different types of debt instruments:
(1) debt instruments issued for money or publicly-traded property for which all payments of
principal and interest are denominated in, or determined by reference to, a single nonfunctional
currency and which have one or more non-currency contingencies, (2) debt instruments issued
for money or publicly-traded property for which payments of principal or interest are
denominated in, or determined by reference to, more than one currency and which have no noncurrency contingencies, (3) debt instruments issued for money or publicly-traded property for
which payments of principal or interest are denominated in, or determined by reference to, more
than one currency and which also have one or more non-currency contingencies, and (4) debt

instruments which otherwise would fall into one of the three foregoing categories but for the fact
that the instruments are not issued for money or publicly-traded property. These proposed
regulations do not discuss the treatment of tax-exempt obligations described in §1.1275-4(d)

6

which are denominated in one or more nonfunctional currencies. C o m m e n t s are requested as to
the proper treatment of such instruments.
Consistent with the approach described in Announcement 99-76, these proposed
regulations generally apply the rules of § 1.1275-4(b) (i.e., the noncontingent bond method) to
nonfunctional currency contingent payment debt instruments issued for money or publicly traded
property. The proposed regulations generally provide that the noncontingent bond method is
applied in the currency in which the instrument is denominated (the denomination currency).
Application of the §1.1275-4(b) rules to nonfunctional currency contingent instruments
generally requires taxpayers (i) to accrue interest in the denomination currency at a yield at
which the issuer would issue a fixed rate debt instrument denominated in the denomination
currency with terms and conditions similar to those of the contingent payment debt instrument,

(ii) to translate the interest accrued from the denomination currency into the functional currency
(and account for foreign currency gain or loss on payments of interest and principal) under the
principles of §1.988-2(b), and (iii) to account for gain or loss arising from contingencies in a
manner consistent with the rules of §1.1275-4(b).
Applying the Noncontingent Bond Method in the Denomination Currency
As noted, the proposed regulations require taxpayers to apply the noncontingent bond
method in the instrument's denomination currency. For example, in the case of an instrument
whose denomination currency is the British pound, an issuer whose functional currency is the
U.S. dollar would first determine the comparable yield of the instrument, that is, the yield at
which the issuer would issue a fixed rate instrument in British pounds with terms and conditions
similar to those of the instrument actually being issued. Second, the issuer would construct a

7

projected payment schedule applying that yield. Third, the amount of interest accrued in each
taxable year would be determined in British pounds based on the comparable yield and translated
into dollars under the principles of section 988. Fourth, the issuer and holder would account for
differences between the projected amount of payments and the actual amount of payments (socalled positive adjustments and negative adjustments) under rules similar to those in §1.12754(b). Consistent with the rules of § 1.1275-4(b), the proposed regulations provide that net
positive adjustments are treated as additional interest on the instrument. Net negative
adjustments generally offset current interest accruals, and in some cases may result in a loss to
the holder and income to the issuer. Finally, the issuer and holders would determine foreign
currency gain or loss with respect to interest and principal payments on the instrument.
Determination of the comparable yield and projected payment schedule
Consistent with §1.1275-4(b)(4)(iv), the holder uses the yield and projected payment
schedule determined by the issuer to determine the holder's interest accruals and adjustments for
a debt instrument. If the issuer does not determine a comparable yield and projected payment
schedule for the debt instrument, or if the issuer's comparable yield or projected payment
schedule is unreasonable, the holder of the debt instrument must determine the comparable yield
and the projected payment schedule for the debt instrument under the rules of the proposed
regulations. A holder that determines its own comparable yield and projected payment schedule
must explicitly disclose, in the manner set forth in §1.1275-4(b)(4)(iv), both this fact and the
reason why the holder made its own determination.
Determination of Basis
In general, the proposed regulations provide that a holder maintains its adjusted basis in

8

functional currency by computing basis adjustments in the denomination currency under the
rules of §1.1275-4(b)(7)(iii) and then translating such adjustments into functional currency.
Thus, the proposed regulations provide that a holder's basis is increased by the holder's accrued
but unpaid interest inclusions on the debt instrument, generally without regard to any positive or
negative adjustments, and decreased by the amount of any noncontingent payment and the
projected amount of any contingent payment previously made on the debt instrument to the
holder. These amounts are translated into functional currency under the principles of §1.9882(b).
Determination of Amount Realized
The proposed regulations generally follow §1.1275-4(b)(7)(iv) in determining the amount
realized, but do so in the denomination currency. Thus, for purposes of determining the amount
realized by a holder on the scheduled retirement of a debt instrument, the holder generally is
treated as receiving the projected amount of any contingent payment due at maturity. In the case
of a sale, exchange or unscheduled retirement of a debt instrument, general recognition
principles of tax law generally apply (e.g., section 1001(b)). However, the amount realized by a
holder on either the scheduled retirement, or the sale, exchange, or unscheduled retirement of a
debt instrument, is reduced by any negative adjustment carryforward existing in the taxable year
of the sale, exchange or retirement.
To calculate gain or loss other than foreign currency gain or loss, the proposed
regulations require the translation of the amount realized into functional currency. Foreign
currency gain or loss is computed separately, as described below. The proposed regulations
generally translate the amount realized by reference to the rates used to translate the components

9

of interest and principal that m a k e up adjusted basis. The amount realized is translated using the
adjusted basis rates in order to separate from the foreign currency gain or loss the amount of gain
or loss on the sale, exchange or retirement of the debt instrument which does not result from
changes in foreign exchange rates. Thus, where the amount realized in the denomination
currency equals the adjusted basis of the instrument in the denomination currency prior to
translation, the amount realized is translated in its entirety by reference to the rates used to
translate adjusted basis. Where the amount realized differs from the adjusted basis prior to
translation, additional attribution and translation rules are required.
Where the amount realized in the denomination currency is less than the adjusted basis in
the denomination currency, that is, where the holder realizes a loss (not taking into account
foreign currency gain or loss), the following rules apply as to which parts of adjusted basis are
not recovered. In the case of a scheduled retirement at maturity, the loss is attributable to
principal (the amount in denomination currency which the holder paid to purchase the debt
instrument). The loss is attributable to principal because the holder will not entirely recover the
holder's original investment in the debt instrument. In the case of a sale or exchange, the loss is

first attributable to accrued interest. Attributing the loss first to interest results in symmetrical
treatment between a loss resulting from a negative adjustment and a loss resulting from a sale.
When the holder's amount realized in the denomination currency exceeds the amount of
its basis in the denomination currency prior to translation, that is, where the holder realizes a
gain (not taking into account foreign currency gain or loss), the excess of amount realized over
adjusted basis is translated at the spot rate on the date of receipt. This rule ensures symmetrical
treatment between a positive adjustment and a gain on the instrument.

10

Determination of Foreign Currency Gain or Loss
The proposed regulations provide that foreign currency gain or loss is determined on an
instrument with respect to principal and interest based on the comparable yield and projected
payment schedule under the principles of §1.988-2(b). In general, no foreign currency gain or
loss is recognized until payment is made or received pursuant to the instrument, and no foreign
currency gain or loss is computed with respect to positive or negative adjustments. However,
foreign currency gain or loss is determined with respect to positive adjustments described in
§1.1275-4(b)(9)(ii) (relating to certain fixed but deferred contingent payments), based upon the
difference between the spot rate on the date the positive adjustment becomes fixed and the spot
rate on the date the positive adjustment is paid or received.
Source Rules
Consistent with the rules of §1.1275-4(b)(6)(ii), the proposed regulations provide that all
gain (other than foreign currency gain) on an instrument is characterized as interest for all tax
purposes, including source and character rules. Losses of a holder from a contingent payment
debt instrument are generally sourced by reference to the rules of §1.1275-4(b)(9)(iv). Under
§1.1275-4(b)(9)(iv), a holder's deductions or loss related to a contingent payment debt

instrument that are treated as ordinary losses are treated as deductions that are definitely relate
to the class of gross income to which income from such debt instrument belongs. Deductions or
losses that the holder treats as capital losses are allocated, consistently with the general
principles of §1.865-1(b)(2), to the class of gross income with respect to which interest income
from the instrument would give rise.
Treatment of Subsequent Holders

11

The proposed regulations provide that the rules of § 1.1275-4(b)(9) generally apply to
subsequent holders of an instrument who purchase the instrument for an amount greater or less
than the instrument's adjusted issue price (determined in the denomination currency).
Accordingly, to the extent that the purchase price for an instrument exceeds the adjusted issue
price of the instrument, the holder is required to allocate such excess to interest accrued on the
instrument or to projected payments on the instrument in a reasonable manner. Each such
allocation is treated as a negative adjustment on the instrument, and the holder's basis on the
instrument is decreased as these negative adjustments are taken into account.
To the extent that the adjusted issue price of the instrument exceeds its purchase price,
the holder is required to allocate such excess to interest accrued on the instrument or to projected
payments on the instrument in a reasonable manner. As the difference is taken into account, the
holder is treated as receiving a positive adjustment on the instrument, and the holder's basis is
increased as these positive adjustments are taken into account.
The proposed regulations generally translate the difference between the purchase price
and adjusted issue price into functional currency at the rate used to translate the interest or
projected payment subject to the adjustment. Thus, for example, a positive adjustment
attributable to interest is translated at the same rate used to translate interest in the period in
which it accrues (e.g., the average rate for the accrual period). The basis adjustment
corresponding to such a positive or negative adjustment is translated at the same rate applicable
to the positive or negative adjustment itself.
Netting
The proposed regulations do not provide for the netting of market gain or loss with

12

currency gain or loss on nonfunctional currency contingent payment debt instruments. O n the
one hand, different character and source rules generally apply to market gain or loss and
currency gain or loss, and netting such items may produce results inconsistent with the tax
treatment of other types of instruments. On the other hand, where market gain or loss and
currency gain or loss counteract each other with respect to a taxpayer, requiring separate
recognition of such gain and loss may not accurately reflect the economic benefits and burdens
associated with the instrument. Accordingly, Treasury and the IRS request comments regarding
the extent to which netting should be permitted or required. Examples 2 and 4 of the proposed
regulations demonstrate cases in which netting potentially could be permitted or required
because both illustrate instances in which market loss could be netted against currency gain.
Debt Instruments Denominated in Multiple Currencies
In the case of an instrument for which payments are denominated in, or determined by
reference to, more than one currency, the proposed regulations provide that the issuer must first
determine the instrument's predominant currency, which will be used as the instrument's
denomination currency for purposes of applying the rules of the proposed regulations. The
predominant currency of the instrument is determined on the issue date by comparing the present
value in functional currency of the noncontingent and projected payments denominated in, or
determined by reference to, each currency. For this purpose, the applicable discount rate must be
a nonfunctional currency discount rate, but the rate may be determined using any method,
consistently applied, that reasonably reflects the instrument's economic substance. If a taxpayer
does not determine a discount rate using such a method, the Commissioner may choose a method
for determining the discount rate that does reflect the instrument's economic substance.

13

After the denomination currency has been determined, all payments on the instrument
that are denominated in, or determined by reference to, a currency other than the denomination
currency are treated as non-currency related contingent payments for purposes of applying the
rules of the proposed regulations. Treasury and the IRS request comments regarding whether all
gain or loss with respect to a debt instrument for which payments are denominated in, or
determined by reference to, more than one currency and which has no non-currency
contingencies should be treated as foreign currency gain or loss.
Debt Instruments Issued for Non-publicly Traded Property
In the case of a nonfunctional currency contingent debt instrument issued for nonpublicly traded property, the instrument is not accounted for using the noncontingent bond
method. Rather, the debt instrument is separated into its components based on the currency in
which the payments are denominated and whether the payments are contingent or noncontingent.
The noncontingent components in each currency are treated as a separate debt instrument
denominated in the currency in which the payment (or payments) is denominated. A component
consisting of a contingent payment is generally treated in the manner provided in §1.1275-

4(c)(4). For purposes of the contingent payment, the test rate (the interest rate which is used to
discount the contingent payment so as to determine the amount of the payment which is treated

as principal, and the amount which is treated as interest) is determined by reference to the doll
unless the dollar does not reasonably reflect the economic substance of the contingent
component.
Proposed Effective Dates
Section 1.988-6 is proposed to apply to nonfunctional currency contingent payment debt

14

instruments issued 60 days or more after the date §1.988-6 is published as a final regulation in
the Federal Register.
Special Analysis
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 is hereby certified that these regulations will not have a significant economic impact on

a substantial number of small entities. This certification is based upon the fact that few, if any
small entities issue or hold foreign currency denominated contingent payment debt instruments.
Generally, it is expected that the only domestic holders of these instruments will likely be
financial institutions, investment banking firms, investment funds, and other sophisticated

investors, due to the foreign currency risk and other contingencies inherent in these instruments.
Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue 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 any written comments (preferably a signed original and eight (8) copies) 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

15

be available for public inspection and copying.
A public hearing has been scheduled for December 3, 2003, at 10 a.m. in room 6718
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building
security procedures, visitors must enter at the Constitution Avenue entrance. In addition, 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. 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 electronic or written comments and an outline of the topics
to be discussed and the time to be devoted to each topic (signed original and eight (8) copies)
November 12, 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 author of these regulations is Milton Cahn of the Office of the Associate
Chief Counsel (International). However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.

16

Section 1.988-l(a)(3), (4) and (5) as proposed on March 17, 1992 at 57 F R 9218 income tax
regulations are withdrawn, and 26 CFR part 1 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 * * *
Par. 2. Section 1.988-2 is amended by:
1. Adding the text of paragraph (b)(2)(i)(B)(l).
2. Removing the last sentence of paragraph (b)(2)(i)(B)(2).
The addition reads as follows:
§1.988-2 Recognition and computation of exchange gain or loss.

fo\ * * *

(2) * * *
/j\ * * *

(B) * * * (I) Operative rules. See §1.988-6 for rules applicable to contingent debt
instruments for which one or more payments are denominated in, or determined by reference to,
a nonfunctional currency.

Par. 3. Section 1.988-6 is added to read as follows:
§ 1.988-6 Nonfunctional currency contingent payment debt instruments.
(a) In general—(1) Scope. This section determines the accrual of interest and the amount,
timing, source, and character of any gain or loss on nonfunctional currency contingent payment

17

debt instruments described in this paragraph (a)(1). Except as set forth by the rule in this section,
the rules in §1.1275-4 (relating to contingent payment debt instruments) apply to the following
instruments—
(i) A debt instrument described in §1.1275-4(b)(l) for which all payments of principal and
interest are denominated in, or determined by reference to, a single nonfunctional currency and
which has one or more non-currency related contingencies;
(ii) A debt instrument described in §1.1275-4(b)(l) for which payments of principal or
interest are denominated in, or determined by reference to, more than one currency and which
has no non-currency related contingencies;
(iii) A debt instrument described in §1.1275-4(b)(1) for which payments of principal or
interest are denominated in, or determined by reference to, more than one currency and which
has one or more non-currency related contingencies; and
(iv) A debt instrument otherwise described in paragraph (a)(l)(i), (ii) or (iii) of this section,
except that the debt instrument is described in §1.1275-4(c)(l) rather than §1.1275-4(b)(l) (e.g.,
the instrument is issued for non-publicly traded property).
(2) Exception for hyperinflationarv currencies-(i) In general. Except as provided in
paragraph (a)(2)(ii) of this section, this section shall not apply to an instrument described in
paragraph (a)(1) of this section if any payment made under such instrument is determined by

reference to a hyperinflationary currency, as defined in § 1.985-1 (b)(2)(ii)(D). In such case, the
amount, timing, source and character of interest, principal, foreign currency gain or loss, and
gain or loss relating to a non-currency contingency shall be determined under the method that
reflects the instrument's economic substance.

18

(ii) Discretion as to method. If a taxpayer does not account for an instrument described in
paragraph (a)(2)(i) of this section in a manner that reflects the instrument's economic substance,
the Commissioner may apply the rules of this section to such an instrument or apply the
principles of §1.988-2(b)(15), reasonably taking into account the contingent feature or features
of the instrument.
(b) Instruments described in paragraph (a)(l)(i) of this section-(l) In general. Paragraph
(b)(2) of this section provides rules for applying the noncontingent bond method (as set forth in
§1.1275-4(b)) in the nonfunctional currency in which a debt instrument described in paragraph
(a)(l)(i) of this section is denominated, or by reference to which its payments are determined
(the denomination currency). Paragraph (b)(3) of this section describes how amounts determined
in paragraph (b)(2) of this section shall be translated from the denomination currency of the
instrument into the taxpayer's functional currency. Paragraph (b)(4) of this section describes
how gain or loss (other than foreign currency gain or loss) shall be determined and characterized
with respect to the instrument. Paragraph (b)(5) of this section describes how foreign currency
gain or loss shall be determined with respect to accrued interest and principal on the instrument.
Paragraph (b)(6) of this section provides rules for determining the source and character of any
gain or loss with respect to the instrument. Paragraph (b)(7) of this section provides rules for
subsequent holders of an instrument who purchase the instrument for an amount other than the
adjusted issue price of the instrument. Paragraph (c) of this section provides examples of the
application of paragraph (b) of this section. See paragraph (d) of this section for the
determination of the denomination currency of an instrument described in paragraph (a)(l)(ii) or

(iii) of this section. See paragraph (e) of this section for the treatment of an instrument describ

19

in paragraph (a)(l)(iv) of this section.
(2) Application of noncontingent bond method—(i) Accrued interest. Interest accruals on an
instrument described in paragraph (a)(l)(i) of this section are initially determined in the
denomination currency of the instrument by applying the noncontingent bond method, set forth
in §1.1275-4(b), to the instrument in its denomination currency. Accordingly, the comparable
yield, projected payment schedule, and comparable fixed rate debt instrument, described in
§1.1275-4(b)(4), are determined in the denomination currency. For purposes of applying the
noncontingent bond method to instruments described in this paragraph, the applicable Federal
rate described in §1.1275-4(b)(4)(i) shall be the rate described in §1.1274-4(d) with respect to
the denomination currency.
(ii) Net positive and negative adjustments. Positive and negative adjustments, and net
positive and net negative adjustments, with respect to an instrument described in paragraph
(a)(l)(i) of this section are determined by applying the rules of §1.1275-4(b)(6) (and §1.12754(b)(9)(i) and (ii), if applicable) in the denomination currency. Accordingly, a net positive
adjustment is treated as additional interest (in the denomination currency) on the instrument. A
net negative adjustment first reduces interest that otherwise would be accrued by the taxpayer
during the current tax year in the denomination currency. If a net negative adjustment exceeds
the interest that would otherwise be accrued by the taxpayer during the current tax year in the
denomination currency, the excess is treated as ordinary loss (if the taxpayer is a holder of the
instrument) or ordinary income (if the taxpayer is the issuer of the instrument). The amount
treated as ordinary loss by a holder with respect to a net negative adjustment is limited, however,
to the amount by which the holder's total interest inclusions on the debt instrument (determined

20

in the denomination currency) exceed the total amount of the holder's net negative adjustments
treated as ordinary loss on the debt instrument in prior taxable years (determined in the
denomination currency). Similarly, the amount treated as ordinary income by an issuer with
respect to a net negative adjustment is limited to the amount by which the issuer's total interest
deductions on the debt instrument (determined in the denomination currency) exceed the total
amount of the issuer's net negative adjustments treated as ordinary income on the debt
instrument in prior taxable years (determined in the denomination currency). To the extent a net
negative adjustment exceeds the current year's interest accrual and the amount treated as
ordinary loss to a holder (or ordinary income to the issuer), the excess is treated as a negative
adjustment carryforward, within the meaning of §1.1275-4(b)(6)(iii)(C), in the denomination
currency.
(iii) Adjusted issue price. The adjusted issue price of an instrument described in paragraph
(a)(l)(i) of this section is determined by applying the rules of §1.1275-4(b)(7) in the
denomination currency. Accordingly, the adjusted issue price is equal to the debt instrument's
issue price in the denomination currency, increased by the interest previously accrued on the
debt instrument (determined without regard to any net positive or net negative adjustments on
the instrument) and decreased by the amount of any noncontingent payment and the projected
amount of any contingent payment previously made on the instrument. All adjustments to the
adjusted issue price are calculated in the denomination currency.
(iv) Adjusted basis. The adjusted basis of an instrument described in paragraph (a)(l)(i) of
this section is determined by applying the rules of §1.1275-4(b)(7) in the taxpayer's functional
currency. In accordance with those rules, a holder's basis in the debt instrument is increased by

21

the interest previously accrued on the debt instrument (translated into functional currency),
without regard to any net positive or net negative adjustments on the instrument (except as
provided in paragraph (b)(7) or (8) of this section, if applicable), and decreased by the amount of
any noncontingent payment and the projected amount of any contingent payment previously
made on the instrument to the holder (translated into functional currency). See paragraph
(b)(3)(iii) of this section for translation rules.
(v) Amount realized. The amount realized by a holder and the repurchase price paid by the
issuer on the scheduled or unscheduled retirement of a debt instrument described in paragraph
(a)(l)(i) of this section are determined by applying the rules of §1.1275-4(b)(7) in the
denomination currency. For example, with regard to a scheduled retirement at maturity, the
holder is treated as receiving the projected amount of any contingent payment due at maturity,
reduced by the amount of any negative adjustment carryforward. For purposes of translating the
amount realized by the holder into functional currency, the rules of paragraph (b)(3)(iv) of this
section shall apply.
(3) Treatment and translation of amounts determined under noncontingent bond method-(i)
Accrued interest. The amount of accrued interest, determined under paragraph (b)(2)(i) of this
section, is translated into the taxpayer's functional currency at the average exchange rate, as

described in §1.988-2(b)(2)(iii)(A), or, at the taxpayer's election, at the appropriate spot rate, a
described in §1.988-2(b)(2)(iii)(B).
(ii) Net positive and negative adjustments-(A) Net positive adjustments. A net positive
adjustment, as referenced in paragraph (b)(2)(h) of this section, is translated into the taxpayer's
functional currency at the spot rate on the last day of the taxable year in which the adjustment is

22

taken into account under §1.1275-4(b)(6), or, if earlier, the date the instrument is disposed of or
otherwise terminated.
(B) Net negative adjustments. A net negative adjustment is treated and, where necessary, is
translated from the denomination currency into the taxpayer's functional currency under the
following rules:
(i) The amount of a net negative adjustment determined in the denomination currency that
reduces the current year's interest in that currency shall first reduce the current year's accrued
but unpaid interest, and then shall reduce the current year's interest which was accrued and paid.
No translation is required.
(2) The amount of a net negative adjustment treated as ordinary income or loss under

§1.1275-4(b)(6)(iii)(B) first is attributable to accrued but unpaid interest accrued in prior taxabl
years. For this purpose, the net negative adjustment shall be treated as attributable to any unpaid
interest accrued in the immediately preceding taxable year, and thereafter to unpaid interest
accrued in each preceding taxable year. The amount of the net negative adjustment applied to

accrued but unpaid interest is translated into functional currency at the same rate used, in each of
the respective prior taxable years, to translate the accrued interest.
(3) Any amount of the net negative adjustment remaining after the application of paragraphs

(b)(3)(ii)(B)(I) and (2) of this section is attributable to interest accrued and paid in prior taxab
years. The amount of the net negative adjustment applied to such amounts is translated into
functional currency at the spot rate on the date the debt instrument was issued or, if later,
acquired.
(4) Any amount of the net negative adjustment remaining after application of paragraphs

23

(b)(3)(ii)(B)(I), (2) and (3) of this section is a negative adjustment carryforward, within the
meaning of §1.1275-4(b)(6)(iii)(C). A negative adjustment carryforward is carried forward in the
denomination currency and is applied to reduce interest accruals in subsequent years. In the year
in which the instrument is sold, exchanged or retired, any negative adjustment carryforward not
applied to interest reduces the holder's amount realized on the instrument (in the denomination
currency). An issuer of a debt instrument described in paragraph (a)(l)(i) of this section who
takes into income a negative adjustment carryforward (that is not applied to interest) in the year
the instrument is retired, as described in §1.1275-4(b)(6)(iii)(C), translates such income into
functional currency at the spot rate on the date the instrument was issued.
(iii) Adjusted basis—(A) In general. Except as otherwise provided in this paragraph and
paragraphs (b)(7) or (8) of this section, a holder determines and maintains adjusted basis by
translating the denomination currency amounts determined under §1.1275-4(b)(7)(iii) into
functional currency as follows:
(I) The holder's initial basis in the instrument is determined by translating the amount paid
by the holder to acquire the instrument (in the denomination currency) into functional currency
at the spot rate on the date the instrument was issued or, if later, acquired.
(2) An increase in basis attributable to interest accrued on the instrument is translated at the
rate applicable to such interest under paragraph (b)(3)(i) of this section.
(3) Any noncontingent payment and the projected amount of any contingent payments
determined in the denomination currency that decrease the holder's basis in the instrument under
§1.1275-4(b)(7)(iii) are translated as follows:
(i) The payment first is attributable to the most recently accrued interest to which prior

24

amounts have not already been attributed. The payment is translated into functional currency at
the rate at which the interest was accrued.
(ii) Any amount remaining after the application of paragraph (b)(3)(iii)(A)(3)(i) of this
section is attributable to principal. Such amounts are translated into functional currency at the
spot rate on the date the instrument was issued or, if later, acquired.
(B) Exception for interest reduced by a negative adjustment carryforward. Solely for
purposes of this §1.988-6, any amounts of accrued interest income that are reduced as a result of
a negative adjustment carryforward shall be treated as principal and translated at the spot rate on
the date the instrument was issued or, if later, acquired.
(iv) Amount realized—(A) Instrument held to maturity—(1) In general. With respect to an
instrument held to maturity, a holder translates the amount realized by separating such amount in
the denomination currency into the component parts of interest and principal that make up

adjusted basis prior to translation under paragraph (b)(3)(iii) of this section, and translating eac
of those component parts of the amount realized at the same rate used to translate the respective
component parts of basis under paragraph (b)(3)(iii) of this section. The amount realized first
shall be translated by reference to the component parts of basis consisting of accrued interest
during the taxpayer's holding period as determined under paragraph (b)(3)(iii) of this section and
ordering such amounts on a last in first out basis. Any remaining portion of the amount realized
shall be translated by reference to the rate used to translate the component of basis consisting of
principal as determined under paragraph (b)(3)(iii) of this section.
(2) Subsequent purchases at discount and fixed but deferred contingent payments. For
purposes of this paragraph (b)(3)(iv) of this section, any amount which is required to be added to

25

adjusted basis under paragraph (b)(7) or (8) of this section shall be treated as additional interest
which was accrued on the date the amount was added to adjusted basis. To the extent included in
amount realized, such amounts shall be translated into functional currency at the same rates at
which they were translated for purposes of determining adjusted basis. See paragraphs (b)(7)(iv)
and (b)(8) of this section for rules governing the rates at which the amounts are translated for
purposes of determining adjusted basis.
(B) Sale, exchange, or unscheduled retirement—(1) Holder. In the case of a sale, exchange,

or unscheduled retirement, application of the rule stated in paragraph (b)(3)(iv)(A) of this section
shall be as follows. The holder's amount realized first shall be translated by reference to the
principal component of basis as determined under paragraph (b)(3)(iii) of this section, and then
to the component of basis consisting of accrued interest as determined under paragraph (b)(3)(iii)
of this section and ordering such amounts on a first in first out basis. Any gain recognized by the
holder (i.e., any excess of the sale price over the holder's basis, both expressed in the
denomination currency) is translated into functional currency at the spot rate on the payment
date.
(2) Issuer. In the case of an unscheduled retirement of the debt instrument, any excess of the
adjusted issue price of the debt instrument over the amount paid by the issuer (expressed in
denomination currency) shall first be attributable to accrued unpaid interest, to the extent the
accrued unpaid interest had not been previously offset by a negative adjustment, on a last-infirst-out basis, and then to principal. The accrued unpaid interest shall be translated into

functional currency at the rate at which the interest was accrued. The principal shall be translated
at the spot rate on the date the debt instrument was issued.

26

(C) Effect of negative adjustment carryforward with respect to the issuer. A n y amount of
negative adjustment carryforward treated as ordinary income under §1.1275-4(b)(6)(iii)(C) shall
be translated at the exchange rate on the day the debt instrument was issued.
(4) Determination of gain or loss not attributable to foreign currency. A holder of a debt

instrument described in paragraph (a)(l)(i) of this section shall recognize gain or loss upon sale,
exchange, or retirement of the instrument equal to the difference between the amount realized
with respect to the instrument, translated into functional currency as described in paragraph
(b)(3)(iv) of this section, and the adjusted basis in the instrument, determined and maintained in
functional currency as described in paragraph (b)(3)(iii) of this section. The amount of any gain
or loss so determined is characterized as provided in §1.1275-4(b)(8), and sourced as provided in
paragraph (b)(6) of this section.
(5) Determination of foreign currency gain or loss--(T, In general. Other than in a taxable
disposition of the debt instrument, foreign currency gain or loss is recognized with respect to a
debt instrument described in paragraph (a)(l)(i) of this section only when payments are made or
received. No foreign currency gain or loss is recognized with respect to a net positive or negative
adjustment, as determined under paragraph (b)(2)(h) of this section (except with respect to a
positive adjustment described in paragraph (b)(8) of this section). As described in this paragraph
(b)(5), foreign currency gain or loss is determined in accordance with the rules of §1.988-2(b).
(ii) Foreign currency gain or loss attributable to accrued interest. The amount of foreign
currency gain or loss recognized with respect to payments of interest previously accrued on the
instrument is determined by translating the amount of interest paid or received into functional
currency at the spot rate on the date of payment and subtracting from such amount the amount

27

determined by translating the interest paid or received into functional currency at the rate at which
such interest was accrued under the rules of paragraph (b)(3)(i) of this section. For purposes of
this paragraph, the amount of any payment that is treated as accrued interest shall be reduced by
the amount of any net negative adjustment treated as ordinary loss (to the holder) or ordinary
income (to the issuer), as provided in paragraph (b)(2)(h) of this section. For purposes of
determining whether the payment consists of interest or principal, see the payment ordering rules
in paragraph (b)(5)(iv) of this section.
(iii) Principal. The amount of foreign currency gain or loss recognized with respect to
payment or receipt of principal is determined by translating the amount paid or received into
functional currency at the spot rate on the date of payment or receipt and subtracting from such
amount the amount determined by translating the principal into functional currency at the spot

rate on the date the instrument was issued or, in case of the holder, if later, acquired. For purposes
of determining whether the payment consists of interest or principal, see the payment ordering
rules in paragraph (b)(5)(iv) of this section.
(iv) Payment ordering rules—(A) In general. Except as provided in paragraph (b)(5)(iv)(B) of
this section, payments with respect to an instrument described in paragraph (a)(l)(i) of this
section shall be treated as follows:
(I) A payment shall first be attributable to any net positive adjustment on the instrument that
has not previously been taken into account.
(2) Any amount remaining after applying paragraph (b)(5)(iv)(A)(I) of this section shall be
attributable to accrued but unpaid interest, remaining after reduction by any net negative
adjustment, and shall be attributable to the most recent accrual period to the extent prior amounts

40

have not already been attributed to such period.
(3) Any amount remaining after applying paragraphs (b)(5)(iv)(A)(I) and (2) of this section
shall be attributable to principal. Any interest paid in the current year that is reduced by a net
negative adjustment shall be considered a payment of principal for purposes of determining
foreign currency gain or loss.
(B) Special rule for sale or exchange or unscheduled retirement. Payments made or received
upon a sale or exchange or unscheduled retirement shall first be applied against the principal of
the debt instrument (or in the case of a subsequent purchaser, the purchase price of the instrument
in denomination currency) and then against accrued unpaid interest (in the case of a holder,
accrued while the holder held the instrument).
(C) Subsequent purchaser that has a positive adjustment allocated to a daily portion of

interest. A positive adjustment that is allocated to a daily portion of interest pursuant to paragra

(b)(7)(iv) of this section shall be treated as interest for purposes of applying the payment orderin
rule of this paragraph (b)(5)(iv).
(6) Source of gain or loss. The source of foreign currency gain or loss recognized with
respect to an instrument described in paragraph (a)(l)(i) of this section shall be determined
pursuant to §1.988-4. Consistent with the rules of §1.1275-4(b)(8), all gain (other than foreign
currency gain) on an instrument described in paragraph (a)(l)(i) of this section is treated as
interest income for all purposes. The source of an ordinary loss (other than foreign currency loss)
with respect to an instrument described in paragraph (a)(l)(i) of this section shall be determined
pursuant to §1.1275-4(b)(9)(iv). The source of a capital loss with respect to an instrument
described in paragraph (a)(l)(i) of this section shall be determined pursuant to §1.865-1(b)(2).

41

(7) Basis different from adjusted issue price-(i) In general. The rules of §1.1275-4(b)(9)(i),
except as set forth in this paragraph (b)(7), shall apply to an instrument described in paragraph
(a)(l)(i) of this section purchased by a subsequent holder for more or less than the instrument's
adjusted issue price.
(ii) Determination of basis. If an instrument described in paragraph (a)(l)(i) of this section is
purchased by a subsequent holder, the subsequent holder's initial basis in the instrument shall
equal the amount paid by the holder to acquire the instrument, translated into functional currency
at the spot rate on the date of acquisition.
(iii) Purchase price greater than adjusted issue price. If the purchase price of the instrument
(determined in the denomination currency) exceeds the adjusted issue price of the instrument, the
holder shall, consistent with the rules of §1.1275-4(b)(9)(i)(B), reasonably allocate such excess to
the daily portions of interest accrued on the instrument or to a projected payment on the

instrument. To the extent attributable to interest, the excess shall be reasonably allocated over the
remaining term of the instrument to the daily portions of interest accrued and shall be a negative
adjustment on the dates the daily portions accrue. On the date of such adjustment, the holder's
adjusted basis in the instrument is reduced by the amount treated as a negative adjustment under
this paragraph (b)(7)(iii), translated into functional currency at the rate used to translate the
interest which is offset by the negative adjustment. To the extent related to a projected payment,
such excess shall be treated as a negative adjustment on the date the payment is made. On the date
of such adjustment, the holder's adjusted basis in the instrument is reduced by the amount treated

as a negative adjustment under this paragraph (b)(7)(iii), translated into functional currency at the
spot rate on the date the instrument was acquired.

42

(iv) Purchase price less than adjusted issue price. If the purchase price of the instrument
(determined in the denomination currency) is less than the adjusted issue price of the instrument,
the holder shall, consistent with the rules of §1.1275-4(b)(9)(i)(C), reasonably allocate the
difference to the daily portions of interest accrued on the instrument or to a projected payment on
the instrument. To the extent attributable to interest, the difference shall be reasonably allocated
over the remaining term of the instrument to the daily portions of interest accrued and shall be a
positive adjustment on the dates the daily portions accrue. On the date of such adjustment, the
holder's adjusted basis in the instrument is increased by the amount treated as a positive
adjustment under this paragraph (b)(7)(iv), translated into functional currency at the rate used to
translate the interest to which it relates. For purposes of determining adjusted basis under
paragraph (b)(3)(iii) of this section, such increase in adjusted basis shall be treated as an
additional accrual of interest during the period to which the positive adjustment relates. To the
extent related to a projected payment, such difference shall be treated as a positive adjustment on
the date the payment is made. On the date of such adjustment, the holder's adjusted basis in the
instrument is increased by the amount treated as a positive adjustment under this paragraph
(b)(7)(iv), translated into functional currency at the spot rate on the date the adjustment is taken
into account. For purposes of determining the amount realized on the instrument in functional
currency under paragraph (b)(3)(iv) of this section, amounts attributable to the excess of the
adjusted issue price of the instrument over the purchase price of the instrument shall be translated
into functional currency at the same rate at which the corresponding adjustments are taken into
account under this paragraph (b)(7)(iv) for purposes of determining the adjusted basis of the
instrument.

43

(8) Fixed but deferred contingent payments. In the case of an instrument with a contingent
payment that becomes fixed as to amount before the payment is due, the rules of § 1.12754(b)(9)(h) shall be applied in the denomination currency of the instrument. For this purpose,
foreign currency gain or loss shall be recognized on the date payment is made or received with
respect to the instrument under the principles of paragraph (b)(5) of this section. Any increase
decrease in basis required under §1.1275-4(b)(9)(ii)(D) shall be taken into account at the same
exchange rate as the corresponding net positive or negative adjustment is taken into account.
(c) Examples. The provisions of paragraph (b) of this section may be illustrated by the
following examples. In each example, assume that the instrument described is a debt instrument
for federal income tax purposes. No inference is intended, however, as to whether the instrument
is a debt instrument for federal income tax purposes. The examples are as follows:
Example 1. Treatment of net positive adjustment-(i) Facts. On December 31, 2004, Z, a
calendar year U.S. resident taxpayer whose functional currency is the U.S. dollar, purchases from
a foreign corporation, at original issue, a zero-coupon debt instrument with a non-currency
contingency for £1000. All payments of principal and interest with respect to the instrument are
denominated in, or determined by reference to, a single nonfunctional currency (the British
pound). The debt instrument would be subject to §1.1275-4(b) if it were denominated in dollars.
The debt instrument's comparable yield, determined in British pounds under paragraph (b)(2)(i) of
this section and §1.1275-4(b), is 10 percent, compounded annually, and the projected payment
schedule, as constructed under the rules of §1.1275-4(b), provides for a single payment of £1210
on December 31, 2006 (consisting of a noncontingent payment of £975 and a projected payment
of £235). The debt instrument is a capital asset in the hands of Z. Z does not elect to use the
spot-rate convention described in §1.988-2(b)(2)(iii)(B). The payment actually m a d e on
December 31, 2006, is £1300. The relevant pound/dollar spot rates over the term of the
instrument are as follows:

Date

Dec. 31,2004
Dec. 31,2005
Dec. 31,2006

Spot rate (pounds to dollars)

£1.00=$ 1.00
£1.00=$ 1.10
£1.00=$ 1.20

44

Accrual period Average rate (pounds to dollars)

2005
2006

£1.00=$ 1.05
£1.00=$ 1.15

(ii) Treatment in 2005-(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £100 of interest on the debt instrument
for 2005 (issue price of £1000 x 10 percent). Under paragraph (b)(3)(i) of this section, Z
translates the £100 at the average exchange rate for the accrual period ($1.05 x £100 = $105).
Accordingly, Z has interest income in 2005 of $105.
(B) Adjusted issue price and basis. Under paragraphs (b)(2)(iii) and (iv) of this section, the
adjusted issue price of the debt instrument determined in pounds and Z's adjusted basis in dollars
in the debt instrument are increased by the interest accrued in 2005. Thus, on January 1, 2006, the
adjusted issue price of the debt instrument is £1100. For purposes of determining Z's dollar basis
in the debt instrument, the $1000 basis ($1.00 x £1000 original cost basis) is increased by the
£100 of accrued interest, translated at the rate at which interest was accrued for 2005. See
paragraph (b)(3)(iii) of this section. Accordingly, Z's adjusted basis in the debt instrument as of
January 1,2006, is $1105.
(iii) Treatment in 2006—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £110 of interest on the debt instrument
for 2006 (adjusted issue price of £1100 x 10 percent). Under paragraph (b)(3)(i) of this section, Z
translates the £110 at the average exchange rate for the accrual period ($1.15 x £110 = $126.50).
Accordingly, Z has interest income in 2006 of $126.50.
(B) Effect of net positive adjustment. The payment actually made on December 31, 2006, is
£1300, rather than the projected £1210. Under paragraph (b)(2)(h) of this section, Z has a net
positive adjustment of £90 on December 31, 2006, attributable to the difference between the
amount of the actual payment and the amount of the projected payment. Under paragraph
(b)(3)(ii)(A) of this section, the £90 net positive adjustment is treated as additional interest
income and is translated into dollars at the spot rate on the last day of the year ($1.20 x £90 =
$108). Accordingly, Z has a net positive adjustment of $108 resulting in a total interest inclusion
for 2006 of $234.50 ($126.50 + $108 = $234.50).
(C) Adjusted issue price and basis. Based on the projected payment schedule, the adjusted
issue price of the debt instrument immediately before the payment at maturity is £1210 (£1100
plus £110 of accrued interest for 2006). Z's adjusted basis in dollars, based only on the
noncontingent payment and the projected amount of the contingent payment to be received, is
$1231.50 ($1105 plus $126.50 of accrued interest for 2006).

45

(D) A m o u n t realized. Even though Z receives £1300 at maturity, for purposes of determining
the amount realized, Z is treated under paragraph (b)(2)(v) of this section as receiving the
projected amount of the contingent payment on December 31, 2006. Therefore, Z is treated as
receiving £1210 on December 31, 2006. Under paragraph (b)(3)(iv) of this section, Z translates its
amount realized into dollars and computes its gain or loss on the instrument (other than foreign
currency gain or loss) by breaking the amount realized into its component parts. Accordingly,
£100 of the £1210 (representing the interest accrued in 2005) is translated at the rate at which it
was accrued (£1 = $1.05), resulting in an amount realized of $105; £110 of the £1210
(representing the interest accrued in 2006) is translated into dollars at the rate at which it was
accrued (£1 = $1.15), resulting in an amount realized of $126.50; and £1000 of the £1210
(representing a return of principal) is translated into dollars at the spot rate on the date the
instrument was purchased (£1 = $1), resulting in an amount realized of $1000. Z's total amount
realized is $1231.50, the same as its basis, and Z recognizes no gain or loss (before consideration
of foreign currency gain or loss) on retirement of the instrument.
(E) Foreign currency gain or loss. Under paragraph (b)(5) of this section Z recognizes foreign
currency gain under section 988 on the instrument with respect to the consideration actually
received at maturity (except for the net positive adjustment), £1210. The amount of recognized
foreign currency gain is determined based on the difference between the spot rate on the date the
instrument matures and the rates at which the principal and interest were taken into account. With
respect to the portion of the payment attributable to interest accrued in 2005, the foreign currency
gain is $15 [£100 x ($1.20 - $1.05)]. With respect to interest accrued in 2006, the foreign
currency gain equals $5.50 [£110 x ($1.20 - $1.15)]. With respect to principal, the foreign
currency gain is $200 [£1000 x ($1.20 - $1.00)]. Thus, Z recognizes a total foreign currency gain
on December 31, 2006, of $220.50.
(F) Source. Z has interest income of $105 in 2005, interest income of $234.50 in 2006
(attributable to £110 of accrued interest and the £90 net positive adjustment), and a foreign
currency gain of $220.50 in 2006. Under paragraph (b)(6) of this section and section 862(a)(1),
the interest income is sourced by reference to the residence of the payor and is therefore from
sources without the United States. Under paragraph (b)(6) of this section and §1.988-4, Z's
foreign currency gain of $220.50 is sourced by reference to Z's residence and is therefore from
sources within the United States.
Example 2. Treatment of net negative adjustment—(i) Facts. Assume the same facts as in
Example 1, except that Z receives £975 at maturity instead of £1300.
(ii) Treatment in 2005. The treatment of the debt instrument in 2005 is the same as in
Example 1. Thus, Z has interest income in 2005 of $105. O n January 1, 2006, the adjusted issue
price of the debt instrument is £1100, and Z's adjusted basis in the instrument is $1105.
(iii) Treatment in 2006—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section and based on the comparable yield, Z's accrued interest for 2006 is £110 (adjusted

46

issue price of £1100 x 10 percent). Under paragraph (b)(3)(i) of this section, the £110 of accrued
interest is translated at the average exchange rate for the accrual period ($1.15 x £110 = $126.50).
(B) Effect of net negative adjustment. The payment actually made on December 31, 2006, is
£975, rather than the projected £1210. Under paragraph (b)(2)(h) of this section, Z has a net
negative adjustment of £235 on December 31, 2006, attributable to the difference between the
amount of the actual payment and the amount of the projected payment. Z's accrued interest
income of £110 in 2006 is reduced to zero by the net negative adjustment. Under paragraph
(b)(3)(ii)(B)(I) of this section the net negative adjustment which reduces the current year's
interest is not translated into functional currency. Under paragraph (b)(2)(ii) of this section, Z
treats the remaining £125 net negative adjustment as an ordinary loss to the extent of the £100
previously accrued interest in 2005. This £100 ordinary loss is attributable to interest accrued but
not paid in the preceding year. Therefore, under paragraph (b)(3)(ii)(B)(2) of this section, Z
translates the loss into dollars at the average rate for such year (£1 = $1.05). Accordingly, Z has
an ordinary loss of $105 in 2006. The remaining £25 of net negative adjustment is a negative
adjustment carryforward under paragraph (b)(2)(h) of this section.
(C) Adjusted issue price and basis. Based on the projected payment schedule, the adjusted
issue price of the debt instrument immediately before the payment at maturity is £1210 (£1100
plus £110 of accrued interest for 2006). Z's adjusted basis in dollars, based only on the
noncontingent payments and the projected amount of the contingent payments to be received, is
$1231.50 ($1105 plus $126.50 of accrued interest for 2006).
(D) Amount realized. Even though Z receives £975 at maturity, for purposes of determining
the amount realized, Z is treated under paragraph (b)(2)(v) of this section as receiving the
projected amount of the contingent payment on December 31, 2006, reduced by the amount of Z's
negative adjustment carryforward of £25. Therefore, Z is treated as receiving £1185 (£1210 - £25)
on December 31, 2006. Under paragraph (b)(3)(iv) of this section, Z translates its amount realized
into dollars and computes its gain or loss on the instrument (other than foreign currency gain or
loss) by breaking the amount realized into its component parts. Accordingly, £100 of the £1185
(representing the interest accrued in 2005) is translated at the rate at which it was accrued (£1 =
$1.05), resulting in an amount realized of $105; £110 of the £1185 (representing the interest
accrued in 2006) is translated into dollars at the rate at which it was accrued (£1 = $1.15),
resulting in an amount realized of $126.50; and £975 of the £1185 (representing a return of
principal) is translated into dollars at the spot rate on the date the instrument was purchased (£1 =
$1), resulting in an amount realized of $975. Z's amount realized is $1206.50 ($105 +$126.50 +
$975 = $1206.50), and Z recognizes a capital loss (before consideration of foreign currency gain
or loss) of $25 on retirement of the instrument ($1206.50 - $1231.50 = -$25).
(E) Foreign currency gain or loss. Z recognizes foreign currency gain with respect to the
consideration actually received at maturity, £975. Under paragraph (b)(5)(h) of this section, no
foreign currency gain or loss is recognized with respect to unpaid accrued interest reduced to zero
by the net negative adjustment resulting in 2006. In addition, no foreign currency gain or loss is
recognized with respect to unpaid accrued interest from 2005, also reduced to zero by the

47

ordinary loss. Accordingly, Z recognizes foreign currency gain with respect to principal only.
Thus, Z recognizes a total foreign currency gain on December 31, 2006, of $195 [£975 x ($1.20 $1.00)].
(F) Source. In 2006, Z has an ordinary loss of $105, a capital loss of $25, and a foreign
currency gain of $195. Under paragraph (b)(6) of this section and §1.1275-4(b)(9)(iv), the $105
ordinary loss generally reduces Z's foreign source passive income under section 904(d) and the
regulations thereunder. Under paragraph (b)(6) of this section and §1.865-1(b)(2), the $25 capital
loss is sourced by reference to h o w interest income on the instrument would have been sourced.
Therefore, the $25 capital loss generally reduces Z's foreign source passive income under
section 904(d) and the regulations thereunder. Under paragraph (b)(6) of this section and §1.9884, Z's foreign currency gain of $195 is sourced by reference to Z's residence and is therefore from
sources within the United States.
Example 3. Negative adjustment and periodic interest payments—(i) Facts. On December 31,
2004, Z, a calendar year U.S. resident taxpayer whose functional currency is the U.S. dollar,
purchases from a foreign corporation, at original issue, a two-year debt instrument with a noncurrency contingency for £1000. All payments of principal and interest with respect to the
instrument are denominated in, or determined by reference to, a single nonfunctional currency
(the British pound). The debt instrument would be subject to §1.1275-4(b) if it were denominated
in dollars. The debt instrument's comparable yield, determined in British pounds under §§1.9882(b)(2) and 1.1275-4(b), is 10 percent, compounded semiannually. The debt instrument provides
for semiannual interest payments of £30 payable each June 30, and December 31, and a
contingent payment at maturity on December 31, 2006, which is projected to equal £1086.20
(consisting of a noncontingent payment of £980 and a projected payment of £106.20) in addition
to the interest payable at maturity. The debt instrument is a capital asset in the hands of Z. Z does
not elect to use the spot-rate convention described in §1.988-2(b)(2)(iii)(B). The payment actually
made on December 31, 2006, is £981.00. The relevant pound/dollar spot rates over the term of the
instrument are as follows:

Date

Dec. 31,2004
June 30, 2005
Dec. 31,2005
June 30, 2006
Dec. 31,2006

Spot rate (pounds to dollars)

£1.00=$
£1.00=$
£1.00=$
£1.00=$
£1.00=$

1.00
1.20
1.40
1.60
1.80

Accrual period Average rate (pounds to dollars)

48

Jan. - June 2005
July - Dec. 2005
Jan. - June 2006
July - Dec. 2006

£1.00=$ 1.10
£1.00=$ 1.30
£1.00=$ 1.50
£1.00=$ 1.70

(ii) Treatment in 2005-(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £50 of interest on the debt instrument
for the January-June accrual period (issue price of £1000 x 10 percent/2). Under paragraph
(b)(3)(i) of this section, Z translates the £50 at the average exchange rate for the accrual period
($1.10 x £50 = $55.00). Similarly, Z accrues £51 of interest in the July-December accrual period
[(£1000 + £50 - £30) x 10 percent/2], which is translated at the average exchange rate for the
accrual period ($1.30 x £51 = $66.30). Accordingly, Z accrues $121.30 of interest income in
2005.
(B) Adjusted issue price and basis—(1) January-June accrual period. Under paragraphs
(b)(2)(ih) and (iv) of this section, the adjusted issue price of the debt instrument determined in
pounds and Z's adjusted basis in dollars in the debt instrument are increased by the interest
accrued, and decreased by the interest payment made, in the January-June accrual period. Thus,
on July 1, 2005, the adjusted issue price of the debt instrument is £1020 (£1000 + £50 - £30 =
£1020). For purposes of determining Z's dollar basis in the debt instrument, the $1000 basis is
increased by the £50 of accrued interest, translated, under paragraph (b)(3)(iii) of this section, at
the rate at which interest was accrued for the January-June accrual period ($1.10 x £50 = $55).
The resulting amount is reduced by the £30 payment of interest m a d e during the accrual period,
translated, under paragraph (b)(3)(iii) of this section and §1.988-2(b)(7), at the rate applicable to
accrued interest ($1.10 x £30 = $33). Accordingly, Z's adjusted basis as of July 1, 2005, is $1022
($1000+ $55-$33).
(2) July-December accrual period. Under paragraphs (b)(2)(iii) and (iv) of this section, the
adjusted issue price of the debt instrument determined in pounds and Z's adjusted basis in dollars
in the debt instrument are increased by the interest accrued, and decreased by the interest payment
made, in the July-December accrual period. Thus, on January 1, 2006, the adjusted issue price of
the instrument is £1041 (£1020 + £51 - £30 = £1041). For purposes of determining Z's dollar
basis in the debt instrument, the $1022 basis is increased by the £51 of accrued interest,
translated, under paragraph (b)(3)(iii) of this section, at the rate at which interest was accrued for
the July-December accrual period ($1.30 x £51 = $66.30). The resulting amount is reduced by the
£30 payment of interest m a d e during the accrual period, translated, under paragraph (b)(3)(iii) of
this section and §1.988-2(b)(7), at the rate applicable to accrued interest ($1.30 x £30 = $39).
Accordingly, Z's adjusted basis as of January 1, 2006, is $1049.30 ($1022 + $66.30 - $39).
(C) Foreign currency gain or loss. Z will recognize foreign currency gain on the receipt of
each £30 payment of interest actually received during 2005. The amount of foreign currency gain
in each case is determined, under paragraph (b)(5)(h) of this section, by reference to the
difference between the spot rate on the date the £30 payment was m a d e and the average exchange

49

rate for the accrual period during which the interest accrued. Accordingly, Z recognizes $3 of
foreign currency gain on the January-June interest payment [£30 x ($1.20 - $1.10)], and $3 of
foreign currency gain on the July-December interest payment [£30 x ($1.40 - $1.30)]. Z
recognizes in 2005 a total of $6 of foreign currency gain.
(D) Source. Z has interest income of $121.30 and a foreign currency gain of $6. Under
paragraph (b)(6) of this section and section 862(a)(1), the interest income is sourced by reference
to the residence of the payor and is therefore from sources without the United States. Under
paragraph (b)(6) of this section and §1.988-4, Z's foreign currency gain of $6 is sourced by
reference to Z's residence and is therefore from sources within the United States.
(iii) Treatment in 2006—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z's accrued interest for the January-June accrual
period is £52.05 (adjusted issue price of £1041 x 10 percent/2). Under paragraph (b)(3)(i) of this
section, Z translates the £52.05 at the average exchange rate for the accrual period ($1.50 x
£52.05 = $78.08). Similarly, Z accrues £53.15 of interest in the July-December accrual period
[(£1041 + £52.05 - £30) x 10 percent/2], which is translated at the average exchange rate for the
accrual period ($1.70 x £53.15 = $90.35). Accordingly, Z accrues £105.20, or $168.43, of interest
income in 2006.
(B) Effect of net negative adjustment. The payment actually made on December 31, 2006, is
£981.00, rather than the projected £1086.20. Under paragraph (b)(2)(ii)(B) of this section, Z has a
net negative adjustment of £105.20 on December 31, 2006, attributable to the difference between
the amount of the actual payment and the amount of the projected payment. Z's accrued interest
income of £105.20 in 2006 is reduced to zero by the net negative adjustment. Elimination of the
2006 accrued interest fully utilizes the net negative adjustment.
(C) Adjusted issue price and basis—(1) January-June accrual period. Under paragraphs
(b)(2)(iii) and (iv) of this section, the adjusted issue price of the debt instrument determined in
pounds and Z's adjusted basis in dollars in the debt instrument are increased by the interest
accrued, and decreased by the interest payment made, in the January-June accrual period. Thus,
on July 1, 2006, the adjusted issue price of the debt instrument is £1063.05 (£1041 + £52.05 - £30
= £1063.05). For purposes of determining Z's dollar basis in the debt instrument, the $1049.30
adjusted basis is increased by the £52.05 of accrued interest, translated, under paragraph
(b)(3)(iii) of this section, at the rate at which interest was accrued for the January-June accrual
period ($1.50 x £52.05 = $78.08). The resulting amount is reduced by the £30 payment of interest
made during the accrual period, translated, under paragraph (b)(3)(iii) of this section and §1.9882(b)(7), at the rate applicable to accrued interest ($1.50 x £30 = $45). Accordingly, Z's adjusted
basis as of July 1, 2006, is $1082.38 ($1049.30 + $78.08 - $45).
(2) July-December accrual period. Under paragraphs (b)(2)(iii) and (iv) of this section, the
adjusted issue price of the debt instrument determined in pounds and Z's adjusted basis in dollars
in the debt instrument are increased by the interest accrued, and decreased by the interest payment
made, in the July-December accrual period. Thus, immediately before maturity on December 31,

50

2006, the adjusted issue price of the instrument is £1086.20 (£1063.05 + £53.15 - £30 =
£1086.20). For purposes of determining Z's dollar basis in the debt instrument, the $1082.38
adjusted basis is increased by the £53.15 of accrued interest, translated, under paragraph
(b)(3)(iii) of this section, at the rate at which interest was accrued for the July-December accrual
period ($1.70 x £53.15 = $90.36). The resulting amount is reduced by the £30 payment of interest
made during the accrual period, translated, under paragraph (b)(3)(iii) of this section and §1.9882(b)(7), at the rate applicable to accrued interest ($1.70 x £30 = $51). Accordingly, Z's adjusted
basis on December 31, 2006, immediately prior to maturity is $1121.74 ($1082.38 + $90.36 $51).
(D) Amount realized. Even though Z receives £981.00 at maturity, for purposes of
determining the amount realized, Z is treated under paragraph (b)(2)(v) of this section as
receiving the projected amount of the contingent payment on December 31, 2006. Therefore, Z is
treated as receiving £1086.20 on December 31, 2006. Under paragraph (b)(3)(iv) of this section,
Z translates its amount realized into dollars and computes its gain or loss on the instrument (other
than foreign currency gain or loss) by breaking the amount realized into its component parts.
Accordingly, £20 of the £1086.20 (representing the interest accrued in the January-June 2005
accrual period, less £30 interest paid) is translated into dollars at the rate at which it was accrued
(£1 = $1.10), resulting in an amount realized of $22; £21 of the £1086.20 (representing the
interest accrued in the July-December 2005 accrual period, less £30 interest paid) is translated
into dollars at the rate at which it was accrued (£1 = $1.30), resulting in an amount realized of
$27.30; £22.05 of the £1086.20 (representing the interest accrued in the January-June 2006
accrual period, less £30 interest paid) is translated into dollars at the rate at which it was accrued
(£1 = $1.50), resulting in an amount realized of $33.08; £23.15 of the £1086.20 (representing the
interest accrued in the July 1-December 31, 2006 accrual period, less the £30 interest payment) is
translated into dollars at the rate at which it was accrued (£1 = $1.70), resulting in an amount
realized of $39.36; and £1000 (representing principal) is translated into dollars at the spot rate on
the date the instrument was purchased (£1 = $1), resulting in an amount realized of $1000.
Accordingly, Z's total amount realized is $1121.74 ($22 + $27.30 + $33.08 + $39.36 + $1000),
the same as its basis, and Z recognizes no gain or loss (before consideration of foreign currency
gain or loss) on retirement of the instrument.
(E) Foreign currency gain or loss. Z recognizes foreign currency gain with respect to each
£30 payment actually received during 2006. These payments, however, are treated as payments of
principal for this purpose because all 2006 accrued interest is reduced to zero by the net negative
adjustment. See paragraph (b)(5)(iv)(A)(3) of this section. The amount of foreign currency gain in
each case is determined, under paragraph (b)(5)(iii) of this section, by reference to the difference
between the spot rate on the date the £30 payment is m a d e and the spot rate on the date the debt
instrument was issued. Accordingly, Z recognizes $18 of foreign currency gain on the JanuaryJune 2006 interest payment [£30 x ($1.60 - $1.00)], and $24 of foreign currency gain on the JulyDecember 2006 interest payment [£30 x ($1.80 - $1.00)]. Z separately recognizes foreign
currency gain with respect to the consideration actually received at maturity, £981.00. The
amount of such gain is determined based on the difference between the spot rate on the date the
instrument matures and the rates at which the principal and interest were taken into account. With

51

respect to the portion of the payment attributable to interest accrued in January-June 2005 (other
than the £30 payments), the foreign currency gain is $14 [£20 x ($1.80 - $1.10)]. With respect to
the portion of the payment attributable to interest accrued in July-December 2005 (other than the
£30 payments), the foreign currency gain is $10.50 [£21 x ($1.80 - $1.30)]. With respect to the
portion of the payment attributable to interest accrued in 2006 (other than the £30 payments), no
foreign currency gain or loss is recognized under paragraph (b)(5)(h) of this section because such
interest was reduced to zero by the net negative adjustment. With respect to the portion of the
payment attributable to principal, the foreign currency gain is $752 [£940 x ($1.80 - $1.00)].
Thus, Z recognizes a foreign currency gain of $42 on receipt of the two £30 payments in 2006,
and $776.50 ($14 + $10.50 + $752) on receipt of the payment at maturity, for a total 2006 foreign
currency gain of $818.50.
(F) Source. Under paragraph (b)(6) of this section and §1.988-4, Z's foreign currency gain of
$818.50 is sourced by reference to Z's residence and is therefore from sources within the United
States.
Example 4. Purchase price greater than adjusted issue price—(i) Facts. On July 1, 2005, Z, a
calendar year U.S. resident taxpayer whose functional currency is the U.S. dollar, purchases a
debt instrument with a non-currency contingency for £1405. All payments of principal and
interest with respect to the instrument are denominated in, or determined by reference to, a single
nonfunctional currency (the British pound). The debt instrument would be subject to §1.1275-4(b)
if it were denominated in dollars. The debt instrument was originally issued by a foreign
corporation on December 31, 2003, for an issue price of £1000, and matures on December 31,
2006. The debt instrument's comparable yield, determined in British pounds under §§1.9882(b)(2) and 1.1275-4(b), is 10.25 percent, compounded semiannually, and the projected payment
schedule for the debt instrument (determined as of the issue date under the rules of §1.1275-4(b))
provides for a single payment at maturity of £1349.70 (consisting of a noncontingent payment of
£1000 and a projected payment of £349.70). At the time of the purchase, the adjusted issue price
of the debt instrument is £1161.76, assuming semiannual accrual periods ending on June 30 and
December 31 of each year. The increase in the value of the debt instrument over its adjusted issue
price is due to an increase in the expected amount of the contingent payment. The debt instrument
is a capital asset in the hands of Z. Z does not elect to use the spot-rate convention described in
§1.988-2(b)(2)(iii)(B). The payment actually made on December 31, 2006, is £1400. The relevant
pound/dollar spot rates over the term of the instrument are as follows:

Date
July 1, 2005
Dec. 31,2006

Spot rate (pounds to dollars)
£1.00=$ 1.00
£1.00=$ 2.00

Accrual period Average rate (pounds to dollars)

52

July 1 - December 31, 2005
January 1 - June 30, 2006
July 1 - December 31, 2006

£1.00=$ 1.50
£1.00=$ 1.50
£1.00=$ 1.50

(ii) Initial basis. Under paragraph (b)(7)(h) of this section, Z's initial basis in the debt
instrument is $1405, Z's purchase price of £1405, translated into functional currency at the spot
rate on the date the debt instrument was purchased (£1 = $1).
(iii) Allocation of purchase price differential. Z purchased the debt instrument for £1405
when its adjusted issue price was £1161.76. Under paragraph (b)(7)(iii) of this section, Z allocates
the £243.24 excess of purchase price over adjusted issue price to the contingent payment at
maturity. This allocation is reasonable because the excess is due to an increase in the expected
amount of the contingent payment and not, for example, to a decrease in prevailing interest rates.
(iv) Treatment in 2005-(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £59.54 of interest on the debt
instrument for the July-December 2005 accrual period (issue price of £1161.76 x 10.25
percent/2). Under paragraph (b)(3)(i) of this section, Z translates the £59.54 of interest at the
average exchange rate for the accrual period ($1.50 x £59.54 = $89.31). Accordingly, Z has
interest income in 2005 of $89.31.
(B) Adjusted issue price and basis. Under paragraphs (b)(2)(iii) and (iv) of this section, the
adjusted issue price of the debt instrument determined in pounds and Z's adjusted basis in dollars
in the debt instrument are increased by the interest accrued in July-December 2005. Thus, on
January 1, 2006, the adjusted issue price of the debt instrument is £1221.30 (£1161.76 + £59.54).
For purposes of determining Z's dollar basis in the debt instrument on January 1, 2006, the $1405
basis is increased by the £59.54 of accrued interest, translated at the rate at which interest was
accrued for the July-December 2005 accrual period. Paragraph (b)(3)(iii) of this section.
Accordingly, Z's adjusted basis in the instrument, as of January 1, 2006, is $1494.31 [$1405 +
(£59.54 x $1.50)].
(v) Treatment in 2006—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £62.59 of interest on the debt
instrument for the January-June 2006 accrual period (issue price of £1221.30 x 10.25 percent/2).
Under paragraph (b)(3)(i) of this section, Z translates the £62.59 of accrued interest at the average
exchange rate for the accrual period ($1.50 x £62.59 = $93.89). Similarly, Z accrues £65.80 of
interest in the July-December 2006 accrual period [(£1221.30 + £62.59) x 10.25 percent/2], which
is translated at the average exchange rate for the accrual period ($1.50 x £65.80 = $98.70).
Accordingly, Z accrues £128.39, or $192.59, of interest income in 2006.
(B) Effect of positive and negative adjustments—(1) Offset of positive adjustment. The
payment actually m a d e on December 31, 2006, is £1400, rather than the projected £1349.70.
Under paragraph (b)(2)(h) of this section, Z has a positive adjustment of £50.30 on December 31,
2006, attributable to the difference between the amount of the actual payment and the amount of

53

the projected payment. Under paragraph (b)(7)(hi) of this section, however, Z also has a negative
adjustment of £243.24, attributable to the excess of Z's purchase price for the debt instrument
over its adjusted issue price. Accordingly, Z will have a net negative adjustment of £192.94
(£50.30 - £243.24 = -£192.94) for 2006.
(2) Offset of accrued interest. Z's accrued interest income of £128.39 in 2006 is reduced to
zero by the net negative adjustment. The net negative adjustment which reduces the current year's
interest is not translated into functional currency. Under paragraph (b)(2)(h) of this section, Z
treats the remaining £64.55 net negative adjustment as an ordinary loss to the extent of the £59.54
previously accrued interest in 2005. This £59.54 ordinary loss is attributable to interest accrued
but not paid in the preceding year. Therefore, under paragraph (b)(3)(ii)(B)(2) of this section, Z
translates the loss into dollars at the average rate for such year (£1 = $1.50). Accordingly, Z has
an ordinary loss of $89.31 in 2006. The remaining £5 of net negative adjustment is a negative
adjustment carryforward under paragraph (b)(2)(h) of this section.
(C) Adjusted issue price and basis—(1) January-June accrual period. Under paragraph
(b)(2)(hi) of this section, the adjusted issue price of the debt instrument on July 1, 2006, is
£1283.89 (£1221.30 + £62.59 = £1283.89). Under paragraphs (b)(2)(iv) and (b)(3)(iii) of this
section, Z's adjusted basis as of July 1, 2006, is $1588.20 ($1494.31 + $93.89).
(2) July-December accrual period. Based on the projected payment schedule, the adjusted
issue price of the debt instrument immediately before the payment at maturity is £1349.70
(£1283.89 + £65.80 accrued interest for July-December). Z's adjusted basis in dollars, based only
on the noncontingent payments and the projected amount of the contingent payments to be
received, is $1686.90 ($1588.20 plus $98.70 of accrued interest for July-December).
(3) Adjustment to basis upon contingent payment. Under paragraph (b)(7)(hi) of this section,
Z's adjusted basis in the debt instrument is reduced at maturity by £243.24, the excess of Z's
purchase price for the debt instrument over its adjusted issue price. For this purpose, the
adjustment is translated into functional currency at the spot rate on the date the instrument was
acquired (£1 = $1). Accordingly, Z's adjusted basis in the debt instrument at maturity is $1443.66
($1686.90-$243.24).
(D) Amount realized. Even though Z receives £1400 at maturity, for purposes of determining
the amount realized, Z is treated under paragraph (b)(2)(v) of this section as receiving the
projected amount of the contingent payment on December 31, 2006, reduced by the amount of Z's
negative adjustment carryforward of £5.01. Therefore, Z is treated as receiving £1344.69
(£1349.70 - £5.01) on December 31, 2006. Under paragraph (b)(3)(iv) of this section, Z translates
its amount realized into dollars and computes its gain or loss on the instrument (other than foreign
currency gain or loss) by breaking the amount realized into its component parts. Accordingly,
£59.54 of the £1344.69 (representing the interest accrued in 2005) is translated at the rate at
which it w a s accrued (£1 = $1.50), resulting in an amount realized of $89.31; £62.59 of the
£1344.69 (representing the interest accrued in January-June 2006) is translated into dollars at the
rate at which it was accrued (£1 = $1.50), resulting in an amount realized of $93.89; £65.80 of the

54

£1344.69 (representing the interest accrued in July-December 2006) is translated into dollars at
the rate at which it was accrued (£1 = $1.50), resulting in an amount realized of $98.70; and
£1156.76 of the £1344.69 (representing a return of principal) is translated into dollars at the spot
rate on the date the instrument was purchased (£1 = $1), resulting in an amount realized of
$1156.76. Z's amount realized is $1438.66 ($89.31 + $93.89 + $98.70 + $1156.76), and Z
recognizes a capital loss (before consideration of foreign currency gain or loss) of $5 on
retirement of the instrument ($1438.66 - $1443.66 = -$5).
(E) Foreign currency gain or loss. Z recognizes foreign currency gain under section 988 on
the instrument with respect to the entire consideration actually received at maturity, £1400. While
foreign currency gain or loss ordinarily would not have arisen with respect to £50.30 of the
£1400, which was initially treated as a positive adjustment in 2006, the larger negative adjustment
in 2006 reduced this positive adjustment to zero. Accordingly, foreign currency gain or loss is
recognized with respect to the entire £1400. Under paragraph (b)(5)(h) of this section, however,
no foreign currency gain or loss is recognized with respect to unpaid accrued interest reduced to
zero by the net negative adjustment resulting in 2006, and no foreign currency gain or loss is
recognized with respect to unpaid accrued interest from 2005, also reduced to zero by the
ordinary loss. Therefore, the entire £1400 is treated as a return of principal for the purpose of
determining foreign currency gain or loss, and Z recognizes a total foreign currency gain on
December 31, 2001, of $1400 [£1400 x ($2.00 - $1.00)].
(F) Source. Z has an ordinary loss of $89.31, a capital loss of $5, and a foreign currency gain
of $1400. Under paragraph (b)(6) of this section and §1.1275-4(b)(9)(iv), the $89.31 ordinary loss
generally reduces Z's foreign source passive income under section 904(d) and the regulations
thereunder. Under paragraph (b)(6) of this section and §1.865-1(b)(2), the $5 capital loss is
sourced by reference to h o w interest income on the instrument would have been sourced.
Therefore, the $5 capital loss generally reduces Z's foreign source passive income under
section 904(d) and the regulations thereunder. Under paragraph (b)(6) of this section and §1.9884, Z's foreign currency gain of $1400 is sourced by reference to Z's residence and is therefore
from sources within the United States.
Example 5. Sale of an instrument with a negative adjustment carryforward— (i) Facts. On
December 31, 2003, Z, a calendar year U.S. resident taxpayer whose functional currency is the
U.S. dollar, purchases at original issue a debt instrument with non-currency contingencies for
£1000. All payments of principal and interest with respect to the instrument are denominated in,
or determined by reference to, a single nonfunctional currency (the British pound). The debt
instrument would be subject to §1.1275-4(b) if it were denominated in dollars. The debt
instrument's comparable yield, determined in British pounds under §§1.988-2(b)(2) and 1.12754(b), is 10 percent, compounded annually, and the projected payment schedule for the debt
instrument provides for payments of £310 on December 31, 2005 (consisting of a noncontingent
payment of £50 and a projected amount of £260) and £990 on December 31, 2006 (consisting of a
noncontingent payment of £940 and a projected amount of £50). The debt instrument is a capital
asset in the hands of Z. Z does not elect to use the spot-rate convention described in
§1.988-2(b)(2)(iii)(B). The payment actually m a d e on December 31, 2005, is £50. O n December

55

30, 2006, Z sells the debt instrument for £940. The relevant pound/dollar spot rates over the term
of the instrument are as follows:

Date

Spot rate (pounds to dollars)

Dec. 31,2003 £1.00=$ 1.00
Dec. 31,2005
Dec. 30,2006

£1.00=$ 2.00
£1.00=$ 2.00

Accrual period Average rate (pounds to dollars)
January 1 - December 31, 2004 £1.00=$ 2.00
January 1 - December 31, 2005
£1.00=$ 2.00
January 1 - December 31, 2006
£1.00=$ 2.00
(ii) Treatment in 2004—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £100 of interest on the debt instrument
for 2004 (issue price of £1000 x 10 percent). Under paragraph (b)(3)(i) of this section, Z
translates the £100 at the average exchange rate for the accrual period ($2.00 x £100 = $200).
Accordingly, Z has interest income in 2004 of $200.
(B) Adjusted issue price and basis. Under paragraphs (b)(2)(iii) and (iv) of this section, the
adjusted issue price of the debt instrument determined in pounds and Z's adjusted basis in dollars
in the debt instrument are increased by the interest accrued in 2004. Thus, on January 1, 2005, the
adjusted issue price of the debt instrument is £1100. For purposes of determining Z's dollar basis
in the debt instrument, the $1000 basis ($1.00 x £1000 original cost basis) is increased by the
£100 of accrued interest, translated at the rate at which interest was accrued for 2004. See
paragraph (b)(3)(iii) of this section. Accordingly, Z's adjusted basis in the debt instrument as of
January 1, 2005, is $1200 ($1000 + $200).
(iii) Treatment in 2005—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z's accrued interest for 2005 is £110 (adjusted
issue price of £1100 x 10 percent). Under paragraph (b)(3)(i) of this section, the £110 of accrued
interest is translated at the average exchange rate for the accrual period ($2.00 x £110 = $220).
(B) Effect of net negative adjustment. The payment actually made on December 31, 2005, is
£50, rather than the projected £310. Under paragraph (b)(2)(h) of this section, Z has a net
negative adjustment of £260 on December 31, 2005, attributable to the difference between the
amount of the actual payment and the amount of the projected payment. Z's accrued interest
income of £110 in 2005 is reduced to zero by the net negative adjustment. Under paragraph
(b)(3)(ii)(B)(I) of this section, the net negative adjustment which reduces the current year's
interest is not translated into functional currency. Under paragraph (b)(2)(h) of this section, Z

56

treats the remaining £150 net negative adjustment as an ordinary loss to the extent of the £100
previously accrued interest in 2004. This £100 ordinary loss is attributable to interest accrued but
not paid in the preceding year. Therefore, under paragraph (b)(3)(ii)(B)(2) of this section, Z
translates the loss into dollars at the average rate for such year (£1 = $2.00). Accordingly, Z has
an ordinary loss of $200 in 2005. The remaining £50 of net negative adjustment is a negative
adjustment carryforward under paragraph (b)(2)(h) of this section.
(C) Adjusted issue price and basis. Based on the projected payment schedule, the adjusted
issue price of the debt instrument on January 1, 2006 is £900, i.e., the adjusted issue price of the
debt instrument on January 1, 2005 (£1100), increased by the interest accrued in 2005 (£110),
and decreased by the projected amount of the December 31, 2005, payment (£310). See
paragraph (b)(2)(iii) of this section. Z's adjusted basis in dollars, based only on the
noncontingent payments and the projected amount of the contingent payments to be received, is
$900 (determined as described below). Z's adjusted basis on January 1, 2006 is Z's adjusted
basis on January 1, 2005 ($1200), increased by the functional currency amount of interest
accrued in 2005 ($220), and decreased by the amount of the payments m a d e in 2005, based
solely on the projected payment schedule, (£310). The amount of the projected payment is first
attributable to the interest accrued in 2005 (£110), and then to the interest accrued in 2004
(£100), and the remaining amount to principal (£100). The interest component of the projected
payment is translated into functional currency at the rates at which it was accrued, and the
principal component of the projected payment is translated into functional currency at the spot
rate on the date the instrument was issued. See paragraph (b)(3)(iii) of this section. Accordingly,
Z's adjusted basis in the debt instrument, following the increase of adjusted basis for interest
accrued in 2005 ($1200 + $220 = $1420), is decreased by $520 ($220 + $200 + $100 = $520).
Z's adjusted basis on January 1, 2006 is therefore, $900.
(D) Foreign currency gain or loss. Z will recognize foreign currency gain on the receipt of the
£50 payment actually received on December 31, 2005. Based on paragraph (b)(5)(iv) of this
section, the £50 payment is attributable to principal since the accrued unpaid interest was
completely eliminated by the net negative adjustment. The amount of foreign currency gain is
determined, under paragraph (b)(5)(hi) of this section, by reference to the difference between the
spot rate on the date the £50 payment was m a d e and the spot rate on the date the debt instrument
was issued. Accordingly, Z recognizes $50 of foreign currency gain on the £50 payment. [($2.00 $1.00) x £50 =$50]. Under paragraph (b)(6) of this section and §1.988-4, Z's foreign currency
gain of $50 is sourced by reference to Z's residence and is therefore from sources within the
United States.
(iv) Treatment in 2006—(A) Determination of accrued interest. Under paragraph (b)(2)(i) of
this section, and based on the comparable yield, Z accrues £90 of interest on the debt instrument
for 2004 (adjusted issue price of £900 x 10 percent). Under paragraph (b)(3)(i) of this section, Z
translates the £90 at the average exchange rate for the accrual period ($2.00 x £90 = $180).
Accordingly, prior to taking into account the 2005 negative adjustment carryforward, Z has
interest income in 2006 of $180.

57

(B) Effect of net negative adjustment. The £50 negative adjustment carryforward from 2005
is a negative adjustment for 2006. Since there are no other positive or negative adjustments, there
is a £50 negative adjustment in 2006 which reduces Z's accrued interest income by £50.
Accordingly, after giving effect to the £50 negative adjustment carryforward, Z will accrue $80 of
interest income. [(£90-£50) x $2.00 = $80]
(C) Adjusted issue price. Under paragraph (b)(2)(iii) of this section, the adjusted issue price
of the debt instrument determined in pounds is increased by the interest accrued in 2006 (prior to
taking into account the negative adjustment carryforward). Thus, on December 30, 2006, the
adjusted issue price of the debt instrument is £990.
(D) Adjusted basis. For purposes of determining Z's dollar basis in the debt instrument, Z's
$900 adjusted basis on January 1, 2006 is increased by the accrued interest, translated at the rate
at which interest was accrued for 2006. See paragraph (b)(3)(iii)(A) of this section. Note,
however, that under paragraph (b)(3)(iii)(B) the amount of accrued interest which is reduced as a
result of the negative adjustment carryforward, i.e., £50, is treated for purposes of this section as
principal, and is translated at the spot rate on the date the instrument was issued, i.e., £1.00
=$1.00. Accordingly, Z's adjusted basis in the debt instrument as of December 30, 2006, is $1030
($900 + $50 + $80).
(E) Amount realized. Z's amount realized in denomination currency is £940, he., the amount
of pounds Z received on the sale of the debt instrument. Under paragraph (b)(3)(iv)(B)(I) of this
section, Z's amount realized isfirsttranslated by reference to the principal component of basis
(including the amount which is treated as principal under paragraph (b)(3)(hi)(B) of this section)
and then the remaining amount realized, if any, is translated by reference to the accrued unpaid
interest component of adjusted basis. Thus, £900 of Z's amount realized is translated by reference
to the principal component of adjusted basis. The remaining £40 of Z's amount realized is treated
as principal under paragraph (b)(3)(iii)(B) of this section, and is also is translated by reference to
the principal component of adjusted basis. Accordingly, Z's amount realized in functional
currency is $940. (No part of Z's amount realized is attributable to the interest accrued on the
debt instrument.) Z realizes a loss of $90 on the sale of the debt instrument ($1030 basis - $940
amount realized). Under paragraph (b)(4) of this section and § 1.1275-4(b)(8), $80 of the loss is
characterized as ordinary loss, and the remaining $10 of loss is characterized as capital loss.
Under §§ 1.988-6(b)(6) and 1.1275-4(b)(9)(iv) the $80 ordinary loss is treated as a deduction that
is definitely related to the interest income accrued on the debt instrument. Similarly, under §§
1.988-6(b)(6) and 1.865-1(b)(2) the $10 capital loss is also allocated to the interest income from
the debt instrument.
(F) Foreign currency gain or loss. Z recognizes foreign currency gain with respect to the

£940 he received on the sale of the debt instrument. Under paragraph (b)(5)(iv) of this section, the
£940 Z received is attributable to principal (and the amount which is treated as principal under

58

paragraph (b)(3)(iii)(B) of this section). Thus, Z recognizes foreign currency gain on December
31, 2006, of $940. [($2.00-$ 1.00) x £940]. Under paragraph (b)(6) of this section and §1.988-4,
Z's foreign currency gain of $940 is sourced by reference to Z's residence and is therefore from
sources within the United States.
(d) Multicurrency debt instruments-fl) In general.
Except as provided in this paragraph (d), a multicurrency debt instrument described in paragraph

(a)(1)(h) or (iii) of this section shall be treated as an instrument described in paragraph (a)(l)(
this section and shall be accounted for under the rules of paragraph (b) of this section. Because
payments on an instrument described in paragraph (a)(1)(h) or (iii) of this section are
denominated in, or determined by reference to, more than one currency, the issuer and holder or
holders of the instrument are required to determine the denomination currency of the instrument
under paragraph (d)(2) of this section before applying the rules of paragraph (b) of this section.
(2) Determination of denomination currency. The denomination currency of an instrument
described in paragraph (a)(1)(h) or (iii) of this section shall be the predominant currency of the
instrument. The predominant currency of the instrument shall be determined by comparing the
functional currency value of the noncontingent and projected payments denominated in, or
determined by reference to, each currency on the issue date, discounted to present value (in each
relevant currency), and translated (if necessary) into functional currency at the spot rate on the
issue date. For this purpose, the applicable discount rate may be determined using any method,
consistently applied, that reasonably reflects the instrument's economic substance. If a taxpayer
does not determine a discount rate using such a method, the Commissioner may choose a method
for determining the discount rate that does reflect the instrument's economic substance. The

59

predominant currency is determined as of the issue date and does not change based on subsequent
events (e.g., changes in value of one or more currencies).
(3) Issuer/holder consistency. The issuer determines the denomination currency under the
rules of paragraph (d)(2) of this section and provides this information to the holders of the
instrument in a manner consistent with the issuer disclosure rules of §1.1275-2(e). If the issuer
does not determine the denomination currency of the instrument, or if the issuer's determination
is unreasonable, the holder of the instrument must determine the denomination currency under the
rules of paragraph (d)(2) of this section. A holder that determines the denomination currency

itself must explicitly disclose this fact on a statement attached to the holder's timely filed feder
income tax return for the taxable year that includes the acquisition date of the instrument.
(4) Treatment of payments in currencies other than the denomination currency. For purposes
of applying the rules of paragraph (b) of this section to debt instruments described in paragraph
(a)(1)(h) or (iii) of this section, payments not denominated in (or determined by reference to) the
denomination currency shall be treated as non-currency-related contingent payments.
Accordingly, if the denomination currency of the instrument is determined to be the taxpayer's
functional currency, the instrument shall be accounted for under §1.1275-4(b) rather than this
section.
(e) Instruments issued for nonpublicly traded property-(l) Applicability. This paragraph (e)
applies to debt instruments issued for nonpublicly traded property that would be described in

paragraph (a)(l)(i), (ii), or (iii) of this section, but for the fact that such instruments are descr
in §1.1275-4(c)(l) rather than §1.1275-4(b)(l). For example, this paragraph (e) generally applies
to a contingent debt instrument denominated in a nonfunctional currency that is issued for non-

60

publicly traded property. Generally the rules of §1.1275-4(c) apply except as set forth by the rules
of this paragraph (e).
(2) Separation into components. An instrument described in this paragraph (e) is not
accounted for using the noncontingent bond method of § 1.1275-4(b) and paragraph (b) of this
section. Rather, the instrument is separated into its component payments. Each noncontingent
payment or group of noncontingent payments which is denominated in a single currency shall be
considered a single component treated as a separate debt instrument denominated in the currency
of the payment or group of payments. Each contingent payment shall be treated separately as
provided in paragraph (e)(4) of this section.
(3) Treatment of components consisting of one or more noncontingent payments in the same
currency. The issue price of each component treated as a separate debt instrument which consists
of one or more noncontingent payments is the sum of the present values of the noncontingent
payments contained in the separate instrument. The present value of any noncontingent payment
shall be determined under §1.1274-2(c)(2), and the test rate shall be determined under §1.1274-4
with respect to the currency in which each separate instrument is considered denominated. No
interest payments on the separate debt instrument are qualified stated interest payments (within
the meaning of §1.1273-1(c)) and the de minimis rules of section 1273(a)(3) and §1.1273-1(d) do
not apply to the separate debt instrument. Interest income or expense is translated, and exchange
gain or loss is recognized on the separate debt instrument as provided in §1.988-2(b)(2), if the
instrument is denominated in a nonfunctional currency.
(4) Treatment of components consisting of contingent payments-(i) General rule. A
component consisting of a contingent payment shall generally be treated in the manner provided

61

in §1.1275-4(c)(4). However, except as provided in paragraph (e)(4)(h) of this section, the test
rate shall be determined by reference to the U.S. dollar unless the dollar does not reasonably
reflect the economic substance of the contingent component. In such case, the test rate shall be
determined by reference to the currency which most reasonably reflects the economic substance
of the contingent component. Any amount received in nonfunctional currency from a component
consisting of a contingent payment shall be translated into functional currency at the spot rate
the date of receipt. Except in the case when the payment becomes fixed more than six months
before the payment is due, no foreign currency gain or loss shall be recognized on a contingent
payment component.
(ii) Certain delayed contingent payments—(A) Separate debt instrument relating to the fixed
component. The rules of §1.1275-4(c)(4)(hi) shall apply to a contingent component the payment
of which becomes fixed more than 6 months before the payment is due. For this purpose, the
denomination currency of the separate debt instrument relating to the fixed payment shall be the
currency in which payment is to be made and the test rate for such separate debt instrument shall

be determined in the currency of that instrument. If the separate debt instrument relating to the
fixed payment is denominated in nonfunctional currency, the rules of §1.988-2(b)(2) shall apply
to that instrument for the period beginning on the date the payment is fixed and ending on the
payment date.
(B) Contingent component. With respect to the contingent component, the issue price
considered to have been paid by the issuer to the holder under §1.1275-4(c)(4)(iii)(A) shall be

translated, if necessary, into the functional currency of the issuer or holder at the spot rate o
date the payment becomes fixed.

62

(5) Basis different from adjusted issue price. The rules of §1.1275-4(c)(5) shall apply to an
instrument subject to this paragraph (e).
(6) Treatment of a holder on sale, exchange, or retirement. The rules of §1.1275-4(c)(6) shall
apply to an instrument subject to this paragraph (e).
(f) Rules for nonfunctional currency tax exempt obligations described in $1.1275-4(d).
[RESERVED]
(g) Effective date. This section shall apply to debt instruments issued 60 days or more after
the date final regulations are published in the Federal Register.

63

Par. 4. In §1.1275-4, paragraph (a)(2)(iv) is revised to read as follows:
§ 1.1275-4 Contingent payment debt instruments.
(a)***

(iv) A debt instrument subject to section 988 (except as provided in §1.988-6);

David A. Mader
Acting Deputy Commissioner of Internal Revenue.

64

DI in i
" or ri h u e

\FI-"\IKS • i5«o i'i> \ N > V I.\ \ M V \\ i M

EMBARGOED UNTIL 11:00 A.M.
August 28, 2003

I._ \.W. • xv \ M I I M _ T O V h.c .• 2nin\ • >mi

CONTACT:

<n22^2*JMI

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 $32,000
million to refund an estimated $33,735 million of publicly held 13-week and 26-week
Treasury bills maturing September 4, 2003, and to pay down approximately $1,735
million. Also maturing is an estimated $17,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced September 2, 2 003.
The Federal Reserve System holds $14,924 million of the Treasury bills maturing
on September 4, 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 September 3, 2003. 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 $1,053 million into the 13-week bill and $622 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.
oOo

Attachment

<ft Ltt

HIGHLIGHTS OF TREASURY OFFERINGS OF B I L L S
TO B E ISSUED SEPTEMBER 4, 2003

August 28, 2003
Offering Amount $16,000 million $16,000 million
Maximum Award (3 5% 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

5,600
5,600
5,600
6,200

million
million
million
million

91-day bill
912795 NZ 0
September 2, 2003
September 4, 2003
December 4, 2003
June 5, 2003
$24,387 million
$1,000

$ 5,600 million
$ 5,600 million
$ 5,600 million
None

182-day bill
912795 PN 5
September 2, 2003
September 4, 2003
March 4, 2004
September 4, 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 daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving 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

TREASURY

OF

THE

!

>

/ * • ;
/ • < $ /

TREASURY

NEWS

OrKICK Or PI 'Bl.lt U l M R S • 1500 I'lWSYI.VWI . .WKNUI., N.W. •ttA Sll l\(. I ON.tt.t.» 20220 • .2021 *>22.2<>f>fi

EMARGOED UNTIL 11:00 A.M.
August 28, 2003

I

CONTACT: Office of Financing
202/691-3550

TREASURY OFFERS CASH MANAGEMENT BILLS

The Treasury will auction approximately $23,000 million of 12-day
Treasury cash management bills to be issued September 3, 2003.
Tenders for Treasury cash management bills to be held on the book-entry
records of TreasuryDlrect will not 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 daylight saving 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.
oOo
Attachment

CO

.%

HIGHLIGHTS OF TREASURY OFFERING
OF 12-DAY CASH MANAGEMENT BILLS
August 28, 2003
Offering Amount $23,000 million
Maximum Award (35% of Offering Amount) . . $ 8,050 million
Maximum Recognized Bid at a Single Rate . $ 8,050 million
NLP Reporting Threshold
$ 8,050 million
Description of Offering:
Term and type of security
12-day Cash Management Bill
CUSIP number
912795 QG 9
Auction date
September 2, 2003
Issue date
September 3, 2003
Maturity date
September 15, 2003
Original issue date
September 3, 2003
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 (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 daylight saving time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern daylight saving time on auction day
ment Terms:
date.

By charge to a funds account at a Federal Reserve Bank on issue

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