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Treas.
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v.407

Department of the Treasury

PRESS R E L E A S E S

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JS-690 and 767
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PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
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September 2, 2003
JS-688
Treasury Issues Regulations On Consolidated Attributes
Today the Treasury Department and the IRS issued temporary regulations that
provide rules for reducing tax attributes (e.g., net operating losses, tax credit
carryovers) when the debt of a member of a consolidated group is forgiven.
"These regulations are an important clarification of how consolidated groups are to
treat debt forgiveness in bankruptcy," stated P a m Olson, Assistant Secretary for
Tax Policy.
Under current law, the discharge of indebtedness is generally income to a debtor
corporation. There is an exception to this rule, however, when the debtor
corporation is in bankruptcy. In lieu of including the amount of indebtedness
discharged in income, the bankrupt corporation must reduce its "tax attributes" by
the amount of debt discharged. The reduction of attributes prevents corporations
from avoiding taxable income in bankruptcy while retaining tax attributes that can
reduce future tax liability.
Because consolidated attributes could later be used to reduce the tax liability of the
bankrupt member, the temporary regulations clarify that all of the consolidated
attributes of the group are available for reduction when the debt of a m e m b e r of the
group is discharged. In addition, they provide a methodology for reducing attributes.
The temporary regulations apply immediately.
The text of the regulations is attached.
-30Related Documents:
• The Text of The Regulations

[4830-01-p]
DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9089]
RIN 1545-BC39

Guidance Under Section 1502; Application of Section 108 to Members of a Consolidated
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations under section 1502 that govern
application of section 108 when a member of a consolidated group realizes discharge

indebtedness income. These temporary regulations affect corporations filing consolid

returns. The text of the temporary regulations also serves as the text of the propos

set forth in the notice of proposed rulemaking on this subject in the Proposed Rules
this issue of the Federal Register.
DATES: Effective Date: These regulations are effective August 29, 2003.
FOR FURTHER INFORMATION CONTACT: Amber Renee Cook or Marie C. MilnesVasquez at (202) 622-7530 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 61(a)(12) of the Internal Revenue Code provides that gross income includes

income from the discharge of indebtedness, except as provided by law. Section 108(a)

that gross income of a C corporation does not include any amount that would otherwise be
includible in gross income by reason of the discharge, in whole or in part, of indebtedness of the
taxpayer if the discharge occurs in a title 11 case (section 108(a)(1)(A)), the discharge occurs
when the taxpayer is insolvent, but only to the extent of the insolvency (section 108(a)(1)(B)), or
the indebtedness discharged is qualified farm indebtedness (section 108(a)(1)(C)).
Although section 108 does not require certain taxpayers to include discharge of
indebtedness income in gross income, it does require the reduction of tax attributes. Section
108(b)(1) provides that if a taxpayer excludes an amount from gross income under section
108(a)(1)(A), (B), or (C), the taxpayer must reduce its tax attributes by the amount excluded.
Absent an election under section 108(b)(5) (described below), pursuant to section 108(b)(2), tax
attributes are reduced in the following order: net operating losses and net operating loss
carryovers, general business credits under section 38, minimum tax credits under section 53(b),
net capital losses and capital loss carryovers, asset basis, passive activity loss and credit
carryovers under section 469(b), and foreign tax credits and foreign tax credit carryovers.
Section 108(b)(5) provides that the taxpayer may elect to apply any portion of excluded
discharge of indebtedness income to first reduce basis in depreciable assets under the rules of
section 1017. Any amount of debt discharge that remains after attribute reduction is not
includible in income. See H.R. Rep. 96-833 at 11 (1980); S. Rep. No. 96-1035 at 12 (1980).
These provisions are designed to "preserve the debtor's 'fresh start' after bankruptcy."
H.R. Rep. 96-833 at 9 (1980); see S. Rep. No. 96-1035 at 10 (1980). In addition, they are
intended to "carry out the Congressional intent of deferring, but eventually collecting within a
reasonable period, tax on ordinary income realized from debt discharge." H.R. Rep. 96-833 at 9

(1980); see S. Rep. N o . 96-1035 at 10 (1980). B y making attributes unavailable to offset income
in later years, the provisions offer the debtor a temporary, rather than a permanent, deferral of
tax.
Questions have arisen regarding the application of section 108 when the taxpayer with
discharge of indebtedness income that is excluded from gross income is a member of a
consolidated group. In particular, questions have arisen regarding the determination of the
attributes that are available for reduction in a consolidated group and the method for reducing
those attributes. These regulations provide guidance regarding those questions.
Explanation of Provisions
A. Application of Section 108(a)(1)(B)
As described above, pursuant to section 108(a)(1)(B), gross income of an insolvent C
corporation does not include any amount that would otherwise be includible in gross income by
reason of the discharge, in whole or in part, of indebtedness of the taxpayer, but only to the
extent of the insolvency. The IRS and Treasury believe that computing the amount of the
insolvency for purposes of section 108(a)(1)(B) with respect to only the debtor member reflects
that, without an agreement that provides otherwise, the assets of members other than the debtor
member will not be available to satisfy claims of the creditors of the debtor member. Therefore,
these temporary regulations provide that the amount of discharge of indebtedness income
excluded from gross income in the case in which the debtor is insolvent is determined based on
the assets and liabilities of only the member with discharge of indebtedness income.
B. Application of Section 108(b)
1. Consolidated approach

The IRS and Treasury Department have considered a separate entity approach and
various consolidated approaches to the application of the attribute reduction rules of section
108(b) in the consolidated group context. As explained below, these regulations adopt a
consolidated approach that reduces all attributes that are available to the debtor.
The IRS and Treasury Department have rejected a separate entity approach. Such an
approach would reduce only the attributes attributable to the member with excluded discharge of
indebtedness income. The IRS and Treasury Department have rejected this approach because it
fails to take into account the fact that consolidated attributes that are attributable to other
members will be available to offset income of the debtor member as long as the debtor is a
member of the group. A separate entity approach could result in the permanent exclusion of
discharge of indebtedness income when there are other attributes available to the debtor member.
In the view of the IRS and Treasury Department, the policies underlying section 108
require a consolidated approach that reduces all attributes that are available to the debtor. An
approach that does not reduce all of such attributes is inconsistent with Congressional intent that
income realized from debt discharge generally be deferred and not permanently eliminated.
Furthermore, reducing all of the consolidated attributes available to the debtor member reflects
the principle enunciated by the Supreme Court in United Dominion Indus., Inc. v. United States.
532 U.S. 822 (2001), that, in general, the only net operating loss of a consolidated group or its
members for a consolidated return year is the consolidated net operating loss. Consistent with
United Dominion, the tax attributes subject to reduction under section 108(b) when the debtor is
a member of a consolidated group include the group's consolidated attributes in their entirety.
Therefore, these temporary regulations provide for the reduction of consolidated net operating

losses and all other consolidated tax attributes, including consolidated tax attributes that are
attributable to members other than the debtor member.
When the debtor is a member of a consolidated group, consolidated tax attributes
attributable to other members may be used to offset income of the debtor member. That ability
may enable the debtor member to offset future income with the consolidated attributes
attributable to other members. As a result, unless such other attributes are reduced, discharge of
indebtedness income that is excluded from gross income may never result in taxable income.
Unlike consolidated attributes, the basis of assets held by members other than the debtor
member is not directly available to offset income of the debtor member. In fact, the basis of
assets held by members other than the debtor member may never give rise to an attribute that
could be directly available to offset income of a member of the group for a consolidated return
year. Therefore, as explained below, these temporary regulations provide for a reduction of
basis of assets of members other than the debtor member only in limited circumstances.
2. Ordering rule
Under these temporary regulations, the attributes attributable to the debtor member are
first subject to reduction. For this purpose, attributes attributable to the debtor member include
(1) consolidated attributes attributable to the debtor member, (2) attributes that arose in separate
return limitation years of the debtor member, and (3) the basis of property of the debtor member.
The amount of a consolidated attribute attributable to the debtor member is determined pursuant
to the principles of § 1.1502-21 (b). To the extent that the excluded discharge of indebtedness
income exceeds the attributes attributable to the debtor member, these temporary regulations
require the reduction of consolidated attributes attributable to other members and attributes

attributable to m e m b e r s other than the debtor m e m b e r that arose (or are treated as arising) in a
separate return limitation year to the extent that the debtor member is a member of the separate
return limitation year subgroup with respect to such attribute.
The availability of tax attributes attributable to other members of a consolidated group to
reduce the future income of the debtor member creates the possibility of shifting the location of
tax attributes and future tax liability. Preserving the location of tax items within the group is a
fundamental policy underlying the consolidated return regulations which is reflected in a number
of such regulations. See, e.g., §1.1502-13 (regarding intercompany transactions); §1.1502-21
(regarding the use of attributes that arise in separate return limitation years). Location is
particularly important when a member leaves the group and no longer shares the attributes
attributable to it with, or uses the attributes attributable to, the other members. This sharing of
tax attributes can shift the location of items within the group, affecting the amount of
consolidated tax attributes that a member takes with it when it leaves the group.
The IRS and Treasury Department did not adopt an alternative consolidated approach
that would require the reduction of consolidated attributes attributable to other members prior to
the reduction of all of the attributes attributable to the debtor member. Such an approach would
not preserve the location of income in the debtor member resulting from the reduction of
attributes as effectively as the approach adopted in these temporary regulations. For example, a
reduction of the consolidated attributes attributable to each member before the reduction of all of
the attributes attributable to the debtor member could cause a shifting of the tax burden if the
debtor member subsequently leaves the group. In that case, the debtor member may take with it
a larger portion of the consolidated attributes than it otherwise would, while a portion of the

consolidated attributes attributable to other m e m b e r s would be reduced. T h e larger portion of
the consolidated attributes that the debtor member would take with it would be available to offset
future income of the debtor member, while the remaining members of the group would bear a
higher tax burden as a result of the unavailability of those consolidated attributes.
These temporary regulations achieve the dual objectives of subjecting the entire amount
of consolidated attributes to reduction and preserving the location of future income that is
deferred by first reducing attributes attributable to the debtor member, including consolidated
attributes, in the order prescribed in section 108(b) and then reducing the remaining amount of
consolidated attributes. This ordering rule reduces the potential to shift the location of attributes
within the group.
3. Look-through rule
The adopted approach include a look-through rule that applies if the attribute of the
debtor member reduced is the basis of stock of another member of the group. In these cases,
corresponding adjustments must be made to the attributes attributable to the lower-tier member.
To effect those corresponding adjustments, these temporary regulations treat the lower-tier
member as a debtor member that has discharge of indebtedness income that is excluded from
gross income in the amount of the stock basis reduction for purposes of the rules relating to the
reduction of the attributes attributable to a debtor member. For this purpose, the consolidated
attributes attributable to the lower-tier member (determined pursuant to the principles of
§1.1502-21(b)) as well as the lower-tier member's separate attributes (including attributes that
arose in separate return limitation years and asset basis) are available for reduction. The lookthrough rule is consistent with the treatment of a group as a single taxpayer under a number of

the consolidated return regulations, including the provisions allowing the consolidated tax
attributes attributable to one member of a group to offset income of other members of the group
and the investment adjustment rules that adjust the basis of subsidiary stock to reflect the income
and absorbed losses of the subsidiary.
C. Corresponding Amendments
Included in these temporary regulations are amendments to certain provisions of the
consolidated return regulations that reflect the attribute reduction rules that apply when the
debtor is a member of a consolidated group. The following paragraphs describe these
amendments.
1. The investment adjustment rules
Under §1.1502-32(b)(3)(ii)(C), discharge of indebtedness income of a subsidiary that is
excluded from gross income is treated as tax-exempt income for purposes of the investment
adjustment rules only to the extent it is applied to reduce attributes. For this purpose, a discharge
of indebtedness is treated as applied to reduce tax attributes only to the extent the attribute
reduction is taken into account as a noncapital, nondeductible expense under §1.1502-32. The
investment adjustment rules of § 1.1502-32 do not apply to affect the basis of the stock of the
common parent of a group. Therefore, to the extent that discharge of indebtedness income
reduces consolidated attributes that are attributable to the common parent, no positive basis
adjustment is made to the stock of the subsidiary. Furthermore, because the reduction of a tax
credit is not a noncapital, nondeductible expense, to the extent that the discharge of indebtedness
income reduces a tax credit, no positive basis adjustment is made to the stock of the subsidiary.
The IRS and Treasury Department believe that a positive basis adjustment should be

m a d e to the basis of the stock of a debtor subsidiary even if the discharge of indebtedness
income reduces an attribute that is attributable to the common parent. This position is consistent
with the approach of §1.1502-32 that income of a subsidiary that is offset by net operating losses
generated by the common parent results in an increase in the basis of the subsidiary stock. In
addition, the IRS and Treasury Department believe that a positive basis adjustment should be
made to the basis of the stock of a debtor subsidiary even if the discharge of indebtedness
income reduces a credit of any member. Accordingly, these temporary regulations treat as taxexempt income discharge of indebtedness income that is excluded from gross income to the
extent that such excluded income reduces tax attributes, including tax attributes attributable to
the common parent and any other attribute the reduction of which is not treated as a noncapital,
nondeductible expense, such as a credit.
2. The excess loss account rules
Under §1.1502-19, an excess loss account attributable to subsidiary stock must be
included in income when an indebtedness of that subsidiary is discharged and any part of the
amount discharged is not included in gross income and is not treated as tax-exempt income under
§1.1502-32. This rule may require inclusion of an excess loss account in income in an amount
that is substantially greater than the amount discharged that is not treated as tax-exempt income.
The IRS and Treasury Department believe that requiring the inclusion of the excess loss
account in income only to the extent of the amount discharged that is not treated as tax-exempt
income is consistent with the policies underlying section 108 and the consolidated return
regulations. Accordingly, these temporary regulations modify the rules of § 1.1502-19 to provide
that the excess loss account must be included in income only to the extent that any amount

discharged that is excluded from gross income is not treated as tax-exempt income.
3. Rules governing apportionment of net operating losses
The temporary regulations also include modifications to the rules of §1.1502-21 relating
to the amount of consolidated net operating losses apportioned to a subsidiary when a
consolidated net operating loss is absorbed and when a subsidiary departs from the group. These
modifications take into account the reduction of the net operating losses attributable to that
member that occurs as a result of discharge of indebtedness.
D. Request for Comments
The IRS and Treasury Department are considering adopting rules under section 1502
(and possibly other Code sections) to address the effect of transitory transactions and other
transactions designed to avoid the application of the rules concerning attribute reduction.
Comments are requested regarding whether such a rule should be adopted and the appropriate
scope of such a rule. Even in the absence of such a rule, such transactions may be challenged
under existing law. If the IRS and Treasury Department determine such a rule is necessary to
protect the policies underlying section 108 and the consolidated return regulations, the IRS and
Treasury Department are prepared to promulgate such a rule with retroactive effect to discharges
of indebtedness that occur after August 29, 2003.
Effective Dates
The temporary regulations related to the application of section 108(b) when a member of
a consolidated group realizes discharge of indebtedness income that is excluded from gross
income apply to discharges of indebtedness that occur after August 29, 2003. The amendments
to the investment adjustment rules apply with respect to determinations of stock basis in

consolidated return years the original return for which is due (without extensions) after August
29, 2003. The amendments to the excess loss account rules apply to dispositions of subsidiary
stock after August 29, 2003. However, taxpayers may apply the amendments to the investment
adjustment rules and the excess loss account rules retroactively. Finally, the amendments to the
net operating loss rules apply only to taxable years the original return for which the due date
(without extensions) is after August 29, 2003.
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. These
temporary regulations are necessary to provide taxpayers with immediate guidance regarding the
application of section 108 when a member of a consolidated group has discharge of indebtedness
income that is excluded from gross income. Current circumstances have made the application of
section 108 in the consolidated group context an issue that needs to be addressed at this time. In
addition, consolidated groups may be taking positions that are inconsistent with the policies
underlying section 108 and the principle enunciated by the Supreme Court in United Dominion
Indus., Inc. v. United States, 532 U.S. 822 (2001). Accordingly, good cause is found for
dispensing with notice and public procedure pursuant to 5 U.S.C. 553(b)(B) and with a delayed
effective date pursuant to 5 U.S.C. 553(d)(3). For applicability of the Regulatory Flexibility Act,
please refer to the cross-reference notice of proposed rulemaking published elsewhere in this
issue of the Federal Register. Pursuant to section 7805(f) of the Internal Revenue Code, these
temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small business.

Drafting Information
Various personnel from the IRS and Treasury Department participated in the
development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by removing the two entries for
§1.1502-32T and adding the following entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502- 19T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-28T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-32T also issued under 26 U.S.C. 1502. * * *
Par. 2. Section 1.1502-19 is amended as follows:
1. Paragraph (b)(1) is revised.
2. The headings for paragraphs (h)(2) and (h)(2)(i) are revised.
3. Paragraph (h)(2)(h) is redesignated as paragraph (h)(2)(iii).
4. New paragraph (h)(2)(ii) is added.
The revisions and addition read as follows:
§1.1502-19 Excess loss accounts.

(b)***(l) [Reserved]. For further guidance, see §1.1502-19T(b)(l).

/fj-v * * *

(2) Dispositions of stock—(i) Dispositions of stock before effective date. * * *
(ii) Application of special limitation. [Reserved]. For further guidance, see §1.150219T(h)(2)(ii).

Par. 3. Section 1.1502-19T is added to read as follows:
$1.1502-19T Excess loss accounts (temporary).
(a) [Reserved]. For further guidance, see §1.1502-19(a).
(b) Excess loss account taken into account as income or gain--(l) Operating rules—(i)
General rule. Except as provided in paragraph (b)(1)(h) of this section, if P is treated under
§1.1502-19 as disposing of a share of S's stock, P takes into account its excess loss account in
the share as income or gain from the disposition.
(ii) Special limitation on amount taken into account. Notwithstanding paragraph (b)(l)(i)
of this section, if P is treated as disposing of a share of S's stock as a result of the application
§1.1502-19(c)( 1 )(iii)(B), the aggregate amount of its excess loss account in the shares of S's
stock that P takes into account as income or gain from the disposition shall not exceed the
amount of S's indebtedness that is discharged that is neither included in gross income nor treated
as tax-exempt income under §1.1502-32T(b)(3)(ii)(C)(J_). If more than one share of S's stock
has an excess loss account, such excess loss accounts shall be taken into account pursuant to the
preceding sentence, to the extent possible, in a manner that equalizes the excess loss accounts in
S's shares that have an excess loss account.

(iii) Treatment of disposition. Except as provided in § 1.1502-19(b)(4), the disposition is
treated as a sale or exchange for purposes of determining the character of the income or gain.
(b)(2) through (h)(2)(i) [Reserved]. For further guidance, see §1.1502-19(b)(2) through
(h)(2)(i).
(h)(2)(h) Application of special limitation. If P was treated as disposing of stock of S
because S was treated as worthless as a result of the application of §1.1502-19(c)(l)(iii)(B) after
August 29, 2003 and in a consolidated return year beginning on or after January 1, 1995, the
amount of P's income, gain, deduction, or loss, and the stock basis reflected in that amount, are
determined or redetermined with regard to paragraph (b)(1)(h) of this section. If P was treated
as disposing of stock of S because S was treated as worthless as a result of the application of
§1.1502-19(c)( 1 )(iii)(B) on or before August 29, 2003 and in a consolidated return year
beginning on or after January 1, 1995, the group may determine or redetermine the amount of
P's income, gain, deduction, or loss, and the stock basis reflected in that amount with regard to
paragraph (b)(1)(h) of this section.
(h)(2)(iii) through (h)(3) [Reserved], For further guidance, see §1.1502-19(h)(2)(iii)
through (h)(3).
Par. 4. Section 1.1502-21 is amended as follows:
1. Paragraphs (b)(2)(iv) and (c)(2)(vii) are revised.
2. Paragraphs (h)(6) and (h)(7) are redesignated as paragraphs (h)(7) and (h)(8),
respectively.
3. New paragraph (h)(6) is added.
4. Newly designated paragraph (h)(8) is revised.

The revision and additions read as follows:
§1.1502-21 Net operating losses.

/^\ * * *

O) * * *
(iv) [Reserved]. For further guidance, see §1.1502-2lT(b)(2)(iv).

(2) * * *
(vii) [Reserved]. For further guidance, see §1.1502-21 T(c)(2)(vii).

A^\ * * *

(6) [Reserved]. For further guidance, see §1.1502-21 T(h)(6).

(8) [Reserved]. For further guidance, see §1.1502-21 T(h)(8).
Par. 5. Section 1.1502-21T is amended as follows:
1. Paragraphs (b)(1) through (b)(3)(ii)(B) are revised.
2. Paragraphs (c) through (h)(7) are revised.
3. Paragraph (h)(8) is added.
The revisions and addition read as follows:
§1.1502-2IT Net operating losses (temporary).

(b) * * *
(1) Carryovers and carrybacks generally. The net operating loss carryovers and
carrybacks to a taxable year are determined under the principles of section 172 and this section.
Thus, losses permitted to be absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they arose, and losses carried from taxable years ending on
the same date, and which are available to offset consolidated taxable income for the year,
generally are absorbed on a pro rata basis. In addition, the amount of any CNOL absorbed by
the group in any year is apportioned among members based on the percentage of the CNOL
attributable to each member as of the beginning of the year. The percentage of the CNOL
attributable to a member is determined pursuant to paragraph (b)(2)(iv)(B) of this section.
Additional rules provided under the Internal Revenue Code or regulations also apply. See, e.g.,

section 382(1)(2)(B) (if losses are carried from the same taxable year, losses subject to limitatio

under section 382 are absorbed before losses that are not subject to limitation under section 382).

See §1.1502-21 (c)( 1 )(iii), Example 2, for an illustration of pro rata absorption of losses subjec
to a SRLY limitation. See paragraph (b)(3)(v) of this section regarding the treatment of any loss
that is treated as expired under §1.1502-3 5T(f)( 1).
(2)(i) through (hi) [Reserved], For further guidance, see §1.1502-21 (b)(2)(i) through
(iii).
(iv) Operating rules-(A) Amount of CNOL attributable to a member. The amount of a
CNOL that is attributable to a member shall equal the product of the CNOL and the percentage
of the CNOL attributable to such member.
(B) Percentage of CNOL attributable to a member-(l) In general. Except as provided in

paragraph (b)(2)(iv)(B)(2) of this section, the percentage of the C N O L attributable to a m e m b e r
shall equal the separate net operating loss of the member for the year of the loss divided by the

sum of the separate net operating losses for that year of all members having such losses. For this
purpose, the separate net operating loss of a member is determined by computing the CNOL by
reference to only the member's items of income, gain, deduction, and loss, including the
member's losses and deductions actually absorbed by the group in the taxable year (whether or
not absorbed by the member).
(2) Special rule. If during a taxable year either a member realizes discharge of
indebtedness income that is excluded from gross income under section 108(a) and such amount
reduces any portion of the CNOL attributable to such member pursuant to section 108 and
§1.1502-28T, or a member that had a separate net operating loss for the year of the CNOL ceases
to be a member, the percentage of the CNOL attributable to each member as of the first day of
the following taxable year shall be recomputed. In addition, if a portion of the CNOL
attributable to a member for a taxable year is carried back to a separate return year, the
percentage of the CNOL attributable to each member as of the first day of the taxable year
following the taxable year of the CNOL shall be recomputed. In each case, such recomputed
percentage shall equal the unabsorbed CNOL attributable to the member on the first day of the
following taxable year divided by the sum of the unabsorbed CNOL attributable to all of the
members on the first day of the following taxable year. For purposes of the preceding sentence,
a CNOL that is reduced pursuant to section 108 and §1.1502-28T or that is otherwise
permanently disallowed or eliminated shall be treated as absorbed.
(b)(2)(v) through (b)(3)(ii)(B) [Reserved], For further guidance, see §1.1502-2l(b)(2)(v)

through (b)(3)(ii)(B).

(c)(1) through (c)(2)(vi) [Reserved]. For further guidance, see §1.1502-21(c)(1) through
(c)(2)(vi).
(vii) Corporations that leave a SRLY subgroup. If a loss member ceases to be affiliated
with a SRLY subgroup, the amount of the member's remaining SRLY loss from a specific year
is determined pursuant to the principles of §1.1502-2 l(b)(2)(ii)(A) and §1.1502-2 lT(b)(2)(iv).
(c)(2)(viii) through (h)(5) [Reserved]. For further guidance, see §1.1502-2l(c)(2)(viii)
through (h)(5).
(6) Certain prior periods. Paragraphs (b)(1), (b)(2)(iv), and (c)(2)(vii) of this section

shall only apply to taxable years the original return for which the due date (without extensions)
is after August 29, 2003. For taxable years the original return for which the due date (without
extensions) is on or before August 29, 2003, see paragraphs (b)(1), (b)(2)(iv), and (c)(2)(vii) of
§1.1502-21 and paragraph (b)( 1) of § 1.1502-21T as contained in 26 CFR part 1 revised April 1,
2003.
(7) [Reserved]. For further guidance, see §1.1502-21(h)(7).
(8) Losses treated as expired under §1.1502-35T(f) (1) . Paragraph
(b)(3)(v) of this section is effective for losses treated as
expired under §1.1502-35T(f)(l) on and after March 7, 2002, and no later than March 11,
2006. Par. 6. Section 1.1502-28T is added to read as follows:
S1.1502-28T Consolidated section 108 (temporary).
(a) In general. This section sets forth rules for the application of section 108(a) and the

reduction of tax attributes pursuant to section 108(b) w h e n a m e m b e r of the group realizes
discharge of indebtedness income that is excluded from gross income under section 108(a)
(excluded COD income).
(1) Application of section 108(a). Section 108(a)(1)(B) is applied separately to each
member that realizes excluded COD income. Therefore, the limitation of section 108(a)(3) on
the amount of discharge of indebtedness income that is treated as excluded COD income is
determined based on the assets (including stock and securities of other members) and liabilities
(including liabilities to other members) of only the member that realizes excluded COD income.
(2) Reduction of tax attributes attributable to the debtor—(i) In general. With respect to a
member that realizes excluded COD income in a taxable year, the tax attributes attributable to
that member (and its direct and indirect subsidiaries to the extent required by section
1017(b)(3)(D) and paragraph (a)(3) of this section), including basis of assets and losses and
credits arising in separate return limitation years, shall be reduced as provided in sections 108
and 1017 and this section. Basis of subsidiary stock, however, shall not be reduced below zero.
(ii) Consolidated tax attributes attributable to a member. For purposes of this section, the
amount of a consolidated tax attribute that is attributable to a member shall be determined
pursuant to the principles of §1.1502-21T(b)(2)(iv). In addition, if the member is a member of a
separate return limitation year subgroup, the amount of a tax attribute that arose in a separate
return limitation year that is attributable to that member shall also be determined pursuant to the
principles of § 1.1502-21 T(b)(2)(iv).
(3) Look-through rules—(i) Priority of section 1017(b)(3)(D). If a member treats stock of
a subsidiary as depreciable property pursuant to section 1017(b)(3)(D), the basis of the

depreciable property of such subsidiary shall be reduced pursuant to section 1017(b)(3)(D) prior
to the application of paragraph (a)(3)(h) of this section.
(ii) Application of additional look-through rule. If the basis of stock of a member (the
lower-tier member) that is owned by another member is reduced pursuant to section 108, section
1017, and paragraph (a)(2) of this section (but not as a result of treating subsidiary stock as
depreciable property pursuant to section 1017(b)(3)(D)), solely for purposes of sections 108 and
1017 and this section other than paragraphs (a)(4) and (b)(1) of this section, the lower-tier
member shall be treated as realizing excluded COD income. The amount of such excluded COD
income shall be the amount of such basis reduction. Accordingly, the tax attributes attributable
to such lower-tier member shall be reduced as provided in sections 108 and 1017 and this
section. To the extent that the excluded COD income realized by the lower-tier member
pursuant to this paragraph (a)(3) does not reduce a tax attribute attributable to the lower-tier
member, such excluded COD income shall not be applied to reduce tax attributes attributable to
any member under paragraph (a)(4) of this section.
(4) Reduction of certain tax attributes attributable to other members. To the extent that,
pursuant to paragraph (a)(2) of this section, the excluded COD income is not applied to reduce
the tax attributes attributable to the member that realizes the excluded COD income, after the
application of paragraph (a)(3) of this section, such amount shall be applied to reduce the
remaining consolidated tax attributes of the group as provided in section 108 and this section.
Such amount also shall be applied to reduce the tax attributes attributable to members that arose
(or are treated as arising) in a separate return limitation year to the extent that the member that
realizes excluded COD income is a member of the separate return limitation year subgroup with

respect to such attribute. The reduction of each tax attribute pursuant to the two preceding
sentences shall be made in the order prescribed in section 108 and pursuant to §1.150221T(b)(l). Except to the extent that the member that realizes excluded COD income is a
member of the separate return limitation year subgroup with respect to a tax attribute that arose
(or is treated as arising) in a separate return limitation year, such attribute is not subject to

reduction pursuant to this paragraph (a)(4). In addition, basis in assets is not subject to reduction
pursuant to this paragraph (a)(4). Finally, to the extent that the realization of excluded COD
income by a member pursuant to paragraph (a)(3) does not reduce a tax attribute attributable to
such lower-tier member, such excess shall not be applied to reduce tax attributes attributable to
any member pursuant to this paragraph (a)(4).
(b) Special rules—(1) Multiple debtor members-(i) Reduction of tax attributes
attributable to debtor members prior to reduction of consolidated tax attributes. If in a single
taxable year multiple members realize excluded COD income, paragraphs (a)(2) and (3) of this
section shall apply with respect to the excluded COD income of each such member prior to the
application of paragraph (a)(4) of this section.
(ii) Reduction of higher-tier debtor's tax attributes. If in a single taxable year multiple
members realize excluded COD income and one such member is a higher-tier member of another
such member, paragraphs (a)(2) and (3) of this section shall be applied with respect to the
excluded COD income of the higher-tier member before such paragraphs are applied to the
excluded COD income of the other such member. A member (the first member) is a higher-tier
member of another member (the second member) if the first member is the common parent or
investment adjustments under §1.1502-32 or §1.1502-32T with respect to the stock of the second

m e m b e r would affect investment adjustments with respect to the stock of thefirstmember.
(hi) Reduction of additional tax attributes. If more than one member realizes excluded
COD income that has not been applied to reduce a tax attribute attributable to such member (the
remaining COD amount) and the remaining tax attributes available for reduction under
paragraph (a)(4) of this section are less than the aggregate of the remaining COD amounts, after
the application of paragraph (a)(2) of this section, each such member's remaining COD amount
shall be applied on a pro rata basis (based on the relative remaining COD amounts), pursuant to
paragraph (a)(4) of this section, to reduce such remaining available tax attributes.
(2) Election under section 108(b)(5). Any member that realizes excluded COD income
may make the election described in section 108(b)(5). The election is made separately for each
member. Therefore, an election may be made for one member that realizes excluded COD

income (either actually or pursuant to paragraph (a)(3) of this section) while another election, or
no election, may be made for another member that realizes excluded COD income (either
actually or pursuant to paragraph (a)(3) of this section). See §1.108-4 for rules relating to the
procedure for making an election under section 108(b)(5).
(3) Limitation of section 1017(b)(2). The limitation of section 1017(b)(2) on the
reduction in basis of property shall be applied by reference to the aggregate of the basis of the
property held by the member that realizes excluded COD income, not the aggregate of the basis
of the property held by all of the members of the group, and the liabilities of such member, not
the aggregate liabilities of all of the members of the group.
(c) Examples. The principles of paragraphs (a) and (b) of this section are illustrated by
the following examples. Unless otherwise indicated, no election under section 108(b)(5) has

been made. The examples are as follows:
Example 1. (i) Facts. P is the c o m m o n parent of a consolidated group that includes
subsidiaries SI and S2. P owns 80 percent of the stock of SI and 100 percent of the stock of S2.
In Year 1, the P group sustained a $250 consolidated net operating loss. Under the principles of
§1.1502-2 lT(b)(2)(iv), of that amount, $125 was attributable to P and $125 was attributable to
SI. O n D a y 1 of Year 2, S2 joined the P group. A s of the beginning of Year 2, S2 had a $50 net
operating loss carryover from Year 1, a separate return limitation year. In Year 2, the P group
sustained a $200 consolidated net operating loss. Under the principles of § 1.1502-21T(b)(2)(iv),
of that amount, $90 was attributable to P, $70 was attributable to SI, and $40 was attributable to
S2. In Year 3, S2 realized $200 of excluded C O D income from the discharge of nonintercompany indebtedness. After the discharge of this indebtedness, S2 had no liabilities. In
that same year, the P group sustained a $50 consolidated net operating loss, of which $40 was
attributable to SI and $10 was attributable to S2 under the principles of §1.1502-2lT(b)(2)(iv).
A s of the beginning of Year 4, S2 had Asset A with a basis of $40 and a fair market value of
$10.
(ii) Analysis—(A) Reduction of tax attributes attributable to debtor. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to S2 mustfirstbe reduced to take
into account its excluded C O D income in the amount of $200.
(i) Reduction of net operating losses. Pursuant to section 108(b)(2)(A), the net operating
loss and the net operating loss carryovers of S2 are reduced. Pursuant to section 108(b)(4)(B)
and paragraph (a) of this section, the net operating loss and the net operating loss carryovers
attributable to S2 under the principles of § 1.1502-21 T(b)(2)(iv) are reducedfirst.Accordingly,
the consolidated net operating loss for Year 3 is reduced by $10, the portion of the consolidated
net operating loss attributable to S2, to $40. Then, again pursuant to section 108(b)(4)(B), S2's
net operating loss carryover of $50 from its separate return limitation year is reduced to $0.
Finally, the consolidated net operating loss carryover from Year 2 is reduced by $40, the portion
of that consolidated net operating loss carryover attributable to S2, to $160.
(2) Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S2, S2 reduces its basis in its assets pursuant to section
1017 and §1.1017-1. Accordingly, S2 reduces its basis in Asset A by $40, from $40 to $0.
(B) Reduction of remaining consolidated tax attributes. The remaining $60 of excluded
C O D income then reduces consolidated tax attributes pursuant to paragraph (a)(4) of this section.
In particular, the remaining $40 consolidated net operating loss for Year 3 is reduced to $0.
Then, the consolidated net operating loss carryover from Year 1 is reduced by $20 from $250 to
$230. Pursuant to paragraph (a)(4) of this section, a pro rata amount of the consolidated net
operating loss carryover from Year 1 that is attributable to each of P and SI is treated as reduced.
Therefore, $10 of the consolidated net operating loss carryover from Year 1 that is attributable
to each of P and SI is treated as reduced.

Example 2. (i) Facts. P is the c o m m o n parent of a consolidated group that includes
subsidiaries SI and S2. P owns 100 percent of the stock of SI and SI o w n s 100 percent of the
stock of S2. N o n e of P, SI, or S2 has a separate return limitation year. In Year 1, the P group
sustained a $50 consolidated net operating loss. Under the principles of § 1.1502-21 T(b)(2)(iv),
of that amount, $10 was attributable to P, $20 was attributable to SI, and $20 was attributable to
S2. In Year 2, the P group sustained a $70 consolidated net operating loss. Under the principles
of §1.1502-2 lT(b)(2)(iv), of that amount, $30 was attributable to P, $30 was attributable to SI,
and $10 was attributable to S2. In Year 3, SI realized $170 of excluded C O D income from the
discharge of non-intercompany indebtedness. After the discharge of this indebtedness, SI and
S2 had no liabilities. In that same year, the P group sustained a $50 consolidated net operating
loss, of which $10 was attributable to SI and $40 was attributable to S2 under the principles of
§1.1502-2 lT(b)(2)(iv). A s of the beginning of Year 4, Si's sole asset was the stock of S2, and
SI had a $80 basis in the S2 stock. In addition, at the beginning of Year 4, S2 had an asset with
a $0 basis and a $10 value.
(ii) Analysis-(A) Reduction of tax attributes attributable to debtor. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to SI mustfirstbe reduced to take
into account its excluded C O D income in the amount of $170.
(I) Reduction of net operating losses. Pursuant to section 108(b)(2)(A), the net operating
loss and the net operating loss carryovers of SI are reduced. Pursuant to section 108(b)(4)(B)
and paragraph (a) of this section, the net operating loss and the net operating loss carryovers
attributable to S1 under the principles of § 1.1502-21 T(b)(2)(iv) are reducedfirst.Accordingly,
the consolidated net operating loss for Year 3 is reduced by $10, the portion of the consolidated
net operating loss for Year 3 attributable to SI, to $40. Then, the consolidated net operating loss
carryover from Year 1 is reduced by $20, the portion of that consolidated net operating loss
carryover attributable to SI, to $30, and the consolidated net operating loss carryover from Year
2 is reduced by $30, the portion of that consolidated net operating loss carryover attributable to
SI, to $40.
(2) Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S1, S1 reduces its basis in its assets pursuant to section
1017 and §1.1017-1. Accordingly, SI reduces its basis in the stock of S2 by $80, from $80 to
$0.
(3) Tiering down of stock basis reduction. Pursuant to paragraph (a)(3) of this section,
for purposes of sections 108 and 1017 and this section, S2 is treated as realizing $80 of excluded
C O D income. Accordingly, the consolidated net operating loss for Year 3 is reduced by an
additional $40, the portion of the consolidated net operating loss for Year 3 attributable to S2, to
$0. Then, the consolidated net operating loss carryover from Year 1 is reduced by $20, the
portion of that consolidated net operating loss carryover attributable to S2, to $10. Then, the
consolidated net operating loss carryover from Year 2 is reduced by $10, the portion of that
consolidated net operating loss carryover attributable to S2, to $30. S2's remaining $10 of
excluded C O D income does not reduce consolidated tax attributes attributable to P or S1 under

paragraph (a)(4) of this section.
(B) Reduction of remaining consolidated tax attributes. Finally, pursuant to paragraph
(a)(4) of this section, Si's remaining $30 of excluded C O D income reduces the remaining
consolidated tax attributes. In particular, the remaining $10 consolidated net operating loss
carryover from Year 1 is reduced by $10 to $0, and the remaining $30 consolidated net operating
loss carryover from Year 2 is reduced by $20 to $10.
Example 3. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries SI, S2, and S3. P owns 100 percent of the stock of SI, SI owns 100 percent of the
stock of S2, and S2 owns 100 percent of the stock of S3. In Year 1, the P group sustained a $150
consolidated net operating loss. Under the principles of § 1.1502-21 T(b)(2)(iv), of that amount,
$50 was attributable to S2, and $100 was attributable to S3. In Year 2, the P group sustained a
$50 consolidated net operating loss. Under the principles of § 1.1502-2 lT(b)(2)(iv), of that
amount, $40 was attributable to SI and $10 was attributable to S2. In Year 3, SI realized $170
of excluded C O D income from the discharge of non-intercompany indebtedness. After the
discharge of this indebtedness, SI, S2, and S3 had no liabilities. In that same year, the P group
sustained a $50 consolidated net operating loss, of which $10 was attributable to SI, $20 was
attributable to S2, and $20 was attributable to S3 under the principles of §1.1502-2 lT(b)(2)(iv).
At the beginning of Year 4, Si's only asset was the stock of S2, with a basis of $120, and S2's
only asset was the stock of S3 with a basis of $180 and a value of $10. N o n e of P, SI, or S2 had
a separate return limitation year.
(ii) Analysis—Reduction of tax attributes attributable to debtor. Pursuant to paragraph
(a)(2) of this section, the tax attributes attributable to SI mustfirstbe reduced to take into
account its excluded C O D income in the amount of $170.
(A) Reduction of net operating losses. Pursuant to section 108(b)(2)(A), the net
operating loss and the net operating loss carryovers of S1 are reduced. Pursuant to section
108(b)(4)(B) and paragraph (a) of this section, the net operating loss and the net operating loss
carryovers attributable to SI under the principles of §1.1502-21T(b)(2)(iv) are reduced first.
Pursuant to section 108(b)(4)(B), Si's net operating loss for the taxable year of the discharge is
reducedfirst.Accordingly, the consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss attributable to SI, to $40. Then, again pursuant to
section 108(b)(4)(B), the consolidated net operating loss carryover from Year 2 is reduced by
$40, the portion of that consolidated net operating loss carryover attributable to SI, to $10.
(B) Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S1, S1 reduces its basis in its assets pursuant to section
1017 and §1.1017-1. Accordingly, SI reduces its basis in the stock of S2 by $120, from $120 to
$0.
(C) Tiering down of stock basis reduction to S2. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S2 is treated as realizing $120 of

excluded C O D income. Pursuant to section 108(b)(2)(A), therefore, the net operating loss and
net operating loss carryovers of S2 are reduced. Pursuant to section 108(b)(4)(B) and paragraph
(a) of this section, the net operating loss and the net operating loss carryovers attributable to S2
under the principles of § 1.1502-21 T(b)(2)(iv) are reduced. Pursuant to section 108(b)(4)(B),
S2's net operating loss for the taxable year of the discharge is reduced. Accordingly, the
consolidated net operating loss for Year 3 is further reduced by $20, the portion of the
consolidated net operating loss attributable to S2, to $20. Then, again pursuant to section
108(b)(4)(B), the consolidated net operating loss carryover from Year 1 is reduced by $50, the
portion of that consolidated net operating loss carryover attributable to S2, to $100. Then, again
pursuant to section 108(b)(4)(B), the consolidated net operating loss carryover from Year 2 is
further reduced by $10, the portion of that consolidated net operating loss carryover attributable
to S2, to $0. Following the reduction of the net operating loss and the net operating loss
carryovers attributable to S2, S2 reduces its basis in its assets pursuant to section 1017 and
§1.1017-1. Accordingly, S2 reduces its basis in its S3 stock by $40 to $140.
(D) Tiering down of stock basis reduction to S3. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S3 is treated as realizing $40 of
excluded C O D income. Pursuant to section 108(b)(2)(A), therefore, the net operating loss and
the net operating loss carryovers of S3 are reduced. Pursuant to section 108(b)(4)(B) and
paragraph (a) of this section, the net operating loss and the net operating loss carryovers
attributable to S3 under the principles of § 1.1502-21 T(b)(2)(iv) are reduced. Pursuant to section
108(b)(4)(B), S3's net operating loss for the taxable year of the discharge is reduced.
Accordingly, the consolidated net operating loss for Year 3 is further reduced by $20, the portion
of the consolidated net operating loss attributable to S3, to $0. Then, again pursuant to section
108(b)(4)(B), the consolidated net operating loss carryover from Year 1 is reduced by $20, the
lesser of the portion of that consolidated net operating loss carryover attributable to S3 and the
remaining excluded C O D income, to $80.
Example 4. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries SI, S2, and S3. P owns 100 percent of the stock of each of SI and S2. Each of SI
and S2 owns stock of S3 that represents 50 percent of the value of the stock of S3. In Year 1, the
P group sustained a $ 160 consolidated net operating loss. Under the principles of § 1.150221T(b)(2)(iv), of that amount, $10 was attributable to P, $50 was attributable to S2, and $100
was attributable to S3. In Year 2, the P group sustained a $110 consolidated net operating loss.
Under the principles of §1.1502-2 lT(b)(2)(iv), of that amount, $40 was attributable to SI and
$70 was attributable to S2. In Year 3, SI realized $200 of excluded C O D income from the
discharge of non-intercompany indebtedness, and S2 realized $270 of excluded C O D income
from the discharge of non-intercompany indebtedness. After the discharge of this indebtedness,
SI, S2, and S3 had no liabilities. In that same year, the P group sustained a $50 consolidated net
operating loss, of which $10 was attributable to SI, $20 was attributable to S2, and $20 was
attributable to S3 under the principles of § 1.1502-21 T(b)(2)(iv). At the beginning of Year 4,
Si's basis in its S3 stock was $60, S2's basis in its S3 stock was $120, and S3 had one asset with
a basis of $200 and a value of $10. N o n e of P, SI, S2, or S3 had a separate return limitation
year.

(ii) Analysis-Reduction of tax attributes attributable to debtors. Pursuant to paragraph
(b)(l)(i) of this section, the tax attributes attributable to each of SI and S 2 are reduced pursuant
to paragraph (a)(2) of this section, and the tax attributes attributable to S3 are reduced pursuant
to paragraph (a)(3) of this section so as to reflect a reduction of Si's and S2's basis in the stock of
S3 prior to the application of paragraph (a)(4) to reduce additional tax attributes. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to SI and S2 must be reduced to
take into account their excluded C O D income.
(A) Reduction of net operating losses generally. Pursuant to section 108(b)(2)(A), the
net operating losses and the net operating loss carryovers of S1 and S 2 are reduced. Pursuant to
section 108(b)(4)(B) and paragraph (a) of this section, the net operating losses and the net
operating loss carryovers attributable to SI and S2 under the principles of §1.1502-21T(b)(2)(iv)
are reduced first.
(B) Reduction of net operating losses attributable to SI. Pursuant to section
108(b)(4)(B), Si's net operating loss for the taxable year of the discharge is reduced.
Accordingly, the consolidated net operating loss for Year 3 is reduced by $10, the portion of the
consolidated net operating loss attributable to SI, to $40. Then, again pursuant to section
108(b)(4)(B), the consolidated net operating loss carryover from Year 2 is reduced by $40, the
portion of that consolidated net operating loss carryover attributable to SI, to $70.
(C) Reduction of net operating losses attributable to S2. Pursuant to section
108(b)(4)(B), S2's net operating loss for the taxable year of the discharge is reduced.
Accordingly, the consolidated net operating loss for Year 3 is further reduced by $20, the portion
of the consolidated net operating loss attributable to S2, to $20. Then, pursuant to section
108(b)(4)(B), the consolidated net operating loss carryover from Year 1 is reduced by $50, the
portion of that consolidated net operating loss carryover attributable to S2, to $110. Then, again
pursuant to section 108(b)(4)(B), the consolidated net operating loss carryover from Year 2 is
further reduced by $70, the portion of that consolidated net operating loss carryover attributable
to S2, to $0.
(D) Reduction of basis. Following the reduction of the net operating losses and the net
operating loss carryovers attributable to S1 and S2, S1 and S2 must reduce their basis in their
assets pursuant to section 1017 and §1.1017-1. Accordingly, SI reduces its basis in the stock of
S3 by $60, from $60 to $0, and S2 reduces its basis in the stock of S3 by $120, from $120 to $0.
(E) Tiering down of basis reduction. Pursuant to paragraph (a)(3) of this section, for
purposes of sections 108 and 1017 and this section, S3 is treated as realizing $180 of excluded
C O D income. Pursuant to section 108(b)(2)(A), therefore, the net operating loss and the net
operating loss carryovers of S3 are reduced, in the order indicated by section 108(b)(4)(B).
Pursuant to paragraph (a)(2) of this section the consolidated net operating loss and any
consolidated net operating loss carryovers that are attributable to S3 under the principles of
§1.1502-21T(b)(2)(iv) are reduced. Accordingly, the consolidated net operating loss for Year 3

is further reduced by $20, the portion of the consolidated net operating loss attributable to S3, to
$0. Then, the consolidated net operating loss carryover from Year 1 is reduced by $100, the
portion of that consolidated net operating loss carryover attributable to S3, to $10. Following the
reduction of the net operating loss and the net operating loss carryover attributable to S3, S3
reduces its basis in its asset pursuant to section 1017 and §1.1017-1. Accordingly, S3 reduces its
basis in its asset by $60, from $200 to $140.
(F) Reduction of remaining consolidated tax attributes. Finally, pursuant to paragraph
(a)(4) of this section, the remaining $90 of Si's excluded C O D income and the remaining $10 of
S2's excluded C O D income reduce the remaining consolidated tax attributes. In particular, the
remaining $10 consolidated net operating loss carryover from Year 1 is reduced by $10 to $0.
Because that amount is less than the aggregate amount of remaining excluded C O D income, such
income is applied on a pro rata basis to reduce the remaining consolidated tax attributes.
Accordingly, $9 of Si's remaining excluded C O D income and $1 of S2's remaining excluded
C O D income is applied to reduce the remaining consolidated net operating loss carryover from
Year 1. Consequently, of Si's excluded C O D income of $200, only $119 is applied to reduce tax
attributes, and, of S2's excluded C O D income of $270, only $261 is applied to reduce tax
attributes.
(d) Effective date. This section applies to discharges of indebtedness that occur after
August 29, 2003.
Par. 7. Section 1.1502-32 is amended as follows:
1. Paragraphs (b)(3)(ii)(C)(l) and (b)(3)(iii)(A) are revised.
2. Paragraph (b)(4)(vii) is added.
3. Paragraph (b)(5)(h), Example 4, paragraphs (a), (b), and (c), are revised.
4. Paragraph (h)(7) is added.
The revisions and additions read as follows:
§1.1502-32 Investment adjustments.

fo\ * * *

(2) * * *
I 11 i

SQ\ * * #

(I) [Reserved], For further guidance, see §1.1502-32T(b)(3)(ii)(C)(l).

(hi) * * *
(A) [Reserved]. For further guidance, see §1.1502-32T(b)(3)(iii)(A).

/^\ * * *

(vii) [Reserved]. For further guidance, see §1.1502-32T(b)(4)(vii).
(5) * * *
II1 I

Example 4(a), (b), and (c) [Reserved]. For further guidance, see §1.1502-32T(b)(5)( ii),
Example 4(a), (b), and (c).

fa\ * * *

(7) [Reserved]. For further guidance, see §1.1502-32T(h)(7).
Par. 8. Section 1.1502-32T is amended as follows:
1. Paragraphs (b) through (b)(3)(iii)(B) are revised.
2. Add and reserve paragraph (b)(3)(iv) and revise paragraphs (b)(4) through (b)(4)(iv).
3. Add and reserve paragraphs (b)(5) and revise paragraphs (c) through (h)(5)(h) are
revised.
4. Paragraph (h)(7) is added.
The revisions and addition read as follows:

§1.1502-32T Investment adjustments (temporary).

(b) through (b)(3)(ii)(B) [Reserved]. For further guidance, see §1.1502-32(b) through
(b)(3)(ii)(B).
(C) Discharge of indebtedness income-(l) In general. Discharge of indebtedness income
of S that is excluded from gross income under section 108 is treated as tax-exempt income only
to the extent the discharge is applied to reduce tax attributes attributable to any member of the
group under section 108, section 1017, or §1.1502-28T. If S is treated as realizing discharge of
indebtedness income that is excluded from gross income pursuant to §1.1502-28T(a)(3), S shall
not be treated as realizing excluded COD income for purposes of the preceding sentence.
(b)(3)(ii)(C)(2) through (b)(3)(ii)(D) [Reserved]. For further guidance, see §1.150232(b)(3)(ii)(C)(2) through (b)(3)(ii)(D).
(hi) Noncapital, nondeductible expenses—(A) In general. S's noncapital, nondeductible
expenses are its deductions and losses that are taken into account but permanently disallowed or
eliminated under applicable law in determining its taxable income or loss, and that decrease,
directly or indirectly, the basis of its assets (or an equivalent amount). For example, S's Federal
taxes described in section 275 and loss not recognized under section 311(a) are noncapital,
nondeductible expenses. Similarly, if a loss carryover (e.g., under section 172 or 1212)
attributable to S expires or is reduced under section 108(b) and §1.1502-28T, it becomes a
noncapital, nondeductible expense at the close of the last tax year to which it may be carried.
However, when a tax attribute attributable to S is reduced as required pursuant to §1.150228T(a)(3), the reduction of the tax attribute is not treated as a noncapital, nondeductible expense

of S. Finally, if S sells and repurchases a security subject to section 1091, the disallowed loss is
not a noncapital, nondeductible expense because the corresponding basis adjustments under
section 1091(d) prevent the disallowance from being permanent.
(b)(3)(iii)(B) [Reserved]. For further guidance, see §1.1502-32(b)(3)(iii)(B).

(b)(3)(iv) through (b)(4)(iv) [Reserved]. For further guidance, see §1.1502-32(b)(3)(iv)
through (b)(4)(iv).

(b)(5)(i) through (b)(5)(h), Example 3 [Reserved]. For further guidance, see §1.150232(b)(5)(i) through (b)(5)(h), Example 3.
Example 4. Discharge of indebtedness, (a) Facts. P forms S on January 1 of Year 1 and
S borrows $200. During Year 1, S's assets decline in value and the P group has a $100
consolidated net operating loss. O f that amount, $10 is attributable to P and $90 is attributable to
S under the principles of §1.1502-2 lT(b)(2)(iv). N o n e of the loss is absorbed by the group in
Year 1, and S is discharged from $100 of indebtedness at the close of Year 1. P has a $0 basis in
the S stock. P and S have no attributes other than the consolidated net operating loss. Under
section 108(a), S's $100 of discharge of indebtedness income is excluded from gross income
because of insolvency. Under section 108(b) and §1.1502-28T, the consolidated net operating
loss is reduced to $0.

(b) Analysis. Under §1.1502-32(b)(3)(iii)(B), the reduction of $90 of the consolidated
net operating loss attributable to S is treated as a noncapital, nondeductible expense in Year 1
because that loss is permanently disallowed by section 108(b) and §1.1502-28T. Under
paragraph (b)(3)(ii)(C)(I) of this section, all $100 of S's discharge of indebtedness income is
treated as tax-exempt income in Year 1 because the discharge results in a $100 reduction to the
consolidated net operating loss. Consequently, the loss and the cancellation of the indebtedness
result in a net positive $10 adjustment to P's basis in its S stock.
(c) Insufficient attributes. The facts are the same as in paragraph (a) of this Example 4,
except that S is discharged from $120 of indebtedness at the close of Year 1. Under section
108(a), S's $120 of discharge of indebtedness income is excluded from gross income because of
insolvency. Under section 108(b) and §1.1502-28T, the consolidated net operating loss is
reduced to $0 at the close of Year 1. Under §1.1502-32(b)(3)(iii)(B), the reduction of $90 of the
consolidated net operating loss attributable to S is treated as a noncapital, nondeductible
expense. Under paragraph (b)(3)(ii)(C)(I) of this section, only $100 of the discharge is treated
as tax-exempt income because only that amount is applied to reduce tax attributes. The
remaining $20 of discharge income excluded under section 108(a) has no effect on P's basis in
S's stock.
(b)(5)(h), Example 4(d) through (h)(5)(h) [Reserved], For further guidance, see §1.150232(b)(5)(h), Example 4(d) through (h)(5)(h).

(h)(7) Rules related to discharges of indebtedness excluded from gross income.
Paragraphs (b)(3)(ii)(C)(I), (b)(3)(iii)(A), and (b)(5)(h), Example 4, paragraphs (a), (b), and (c),
of this section apply with respect to determinations of the basis of the stock of a subsidiary in
consolidated return years the original return for which is due (without extensions) after August
29, 2003. For determinations in consolidated return years the original return for which is due
(without extensions) on or before August 29, 2003, groups may apply paragraphs
(b)(3)(ii)(C)(I), (b)(3)(iii)(A), and (b)(5)(h), Example 4, paragraphs (a), (b), and (c), of this
section without regard to the references to §1.1502-28T or, alternatively, apply paragraphs
(b)(3)(ii)(C)(I), (b)(3)(iii)(A), and (b)(5)(h), Example 4. paragraphs (a), (b), and (c), of §1.150232 as contained in 26 CFR part 1 edition revised as of April 1, 2003.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.

Approved: August 28, 2003.
Gregory F. Jenner,
Deputy Assistant Secretary of the Treasury.

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
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Viewer.
September 2, 2003
JS-689
Treasury and IRS Issue Proposed Regulations Providing
Guidance for Partnerships Engaged in a U.S. Trade or Business
Today, the Treasury Department and the IRS issued proposed regulations that
provide guidance on the withholding tax obligation of partnerships that have one or
more foreign partners and that are engaged in a U.S. trade or business. A foreign
person that conducts a trade or business in the United States generally is subject to
U.S. tax on the income that is effectively connected with that trade or business.
Similar rules apply to income earned by a foreign person through a partnership that
is engaged in a U.S. trade or business. To ensure collection of the tax owed by the
foreign partner, section 1446 of the Internal Revenue Code requires a partnership
that is engaged in a U.S. trade or business to withhold and pay over tax to the
extent that its net income that is effectively connected with its U.S. trade or
business is allocable to a foreign partner. The amount of the tax due is computed
by applying the highest marginal income tax rate to the amount of the partnership's
effectively connected income that is allocable to its foreign partners.
The proposed regulations issued today update and elaborate on guidance currently
provided in Revenue Procedure 89-31 (as modified by Revenue Procedure 92-66)
concerning a partnership's obligation to withhold tax on the income allocated to its
foreign partners. The proposed regulations provide guidance on the information a
partnership may rely on in determining if its partners are foreign partners, the
computation of the tax due, and the payment of the tax on a quarterly basis in the
case of estimated tax payments. The proposed regulations also provide rules on
reporting the amount of tax withheld for direct and indirect foreign partners. In
addition, the proposed regulations provide special rules regarding the withholding
tax obligation for partnerships that are publicly traded. The proposed regulations
generally are consistent with the rules in Revenue Procedures 89-31 and 92-66 and
will replace those revenue procedures when the proposed regulations are finalized.
Related Documents:
• The text of the proposed regulations

_ /! -STir\

i i

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts land 301
[REG-108524-00]
RIN 1545-AY28
Section 1446 Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations regarding the obligation o

partnership to pay a withholding tax on effectively connected taxable income al

section 704 to a foreign partner. The regulations will affect partnerships enga
business in the United States that have one or more foreign partners.

DATES: Written or electronic comments and requests to speak, with outlines of t

discussed at the public hearing scheduled for December 4, 2003, must be receive
13, 2003.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-108524-00), room 5203, Interna

Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Subm

may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p
CC:PA:LPD:PR (REG-108524-00), Courier's Desk, Internal Revenue Service, 1111

Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may submit c

electronically directly to the IRS Internet site at www.irs.gov/regs. The publi

-2-

held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, David J.

Sotos, at (202) 622-3860, or to be placed on the attendance list for the hearing
at (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed rulemaking
submitted to the Office of Management and Budget for review in accordance with

Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of inform

be sent to the Office of Management and Budget, Attn: Desk Officer for the Depa

Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, w

the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T

Washington DC 20224. Comments on the collections of information should be recei
November 3, 2003. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for the proper

performance of the functions of the Internal Revenue Service, including whether
will have practical utility;

The accuracy of the estimated burden associated with the proposed collections o
information (see below);

How the quality, utility, and clarity of the information to be collected may be

-3How 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 services to provide information.
The collections of information in this proposed regulation are in §§1.871-10, 1.1446-1,
1.1446-3, and 1.1446-4. This information is required to determine whether a partnership is
required to pay a withholding tax with respect to a foreign partner and provide information

concerning the tax paid on such partner's behalf, and to determine the foreign person required t

report the effectively connected taxable income earned by such partnership and entitled to claim

credit for the withholding tax paid by the partnership. This information will be used in issuing
refunds to foreign persons claiming credit for withholding tax paid on their behalf, as well as
audit and examination purposes. The reporting requirements in §§1.871-10 and 1.1446-3 are
mandatory. The reporting requirement in § 1.1446-1 and 1.1446-4 are voluntary. The likely
respondents include individuals, business or other for profit institutions, and small businesses
organizations.
Estimated total annual reporting burden: 7,805 hours.
Estimated average annual burden hours per respondent: 0.5 hours.
Estimated number of respondents: 15,775.
Estimated annual frequency of responses: on occasion and quarterly.
An agency may not conduct or sponsor, and a person is not

-4required 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
This document contains proposed amendments to 26 CFR part 1 under section 1446 of
the Internal Revenue Code (Code). Section 1446 was added to the Code by section 1246(a) of
the Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 2085, 2582 (1986 Act)), to impose

withholding at a rate of 20 percent on distributions to a foreign partner by a partnership tha
engaged in a U.S. trade or business. Section 1012(s)(l)(A) of the Technical and Miscellaneous
Revenue Act of 1988 (Public Law 100-647, 102 Stat. 3342, 3526 (1988 Act)) revised section
1446 to require that a withholding tax (1446 tax) be imposed on effectively connected taxable

income (ECTI) allocable to a partner that is a foreign person (foreign partner) at the highest

rate applicable to such person. Finally, section 781 l(i)(6) of the Omnibus Budget Reconciliat
Act of 1989 (Public Law 101-239, 103 Stat. 2106, 2410 (1989 Act)), made certain technical
amendments to section 1446.
Treasury and the IRS issued Rev. Proc. 88-21 (1988-1 C.B. 777) to provide guidance on
the operation of the withholding tax imposed under section 1446 as enacted by the 1986 Act.
After the 1988 Act, which revised the withholding approach to apply to a partner's allocable
share of ECTI instead of to distributions, Treasury and the IRS published Rev. Proc. 89-31

-5(1989-1 C.B. 895), which made Rev. Proc. 88-21 obsolete. Rev. Proc. 89-31 was modified by
Rev. Proc. 92-66 (1992-2 C.B. 428). Rev. Proc. 89-31, as modified by Rev. Proc. 92-66,
provides current guidance to partnerships for calculating, paying over, and reporting the 1446
tax.
Explanation of Provisions
A. In General
Prior to the enactment of section 1446, a partnership generally was not required to

withhold on income that was effectively connected with the conduct of a trade or business withi

the United States (a U.S. trade or business) and allocated or distributed to its foreign partner
Congress enacted section 1446 because it was concerned that passive foreign investors could
escape U.S. tax on their partnership income. See S. Rep. No. 99-313, 99 Cong., 2d Sess. 414
(1986). As originally enacted, section 1446 generally required both domestic and foreign

partnerships with any income, gain, or loss that was effectively connected with the conduct of a
U.S. trade or business to withhold a tax equal to 20 percent of any amount distributed to a
foreign partner. Through a series of modifications and refinements discussed below, this
withholding tax regime evolved from its original structure of withholding on distributions to
foreign partners to its present form of, generally, withholding on an installment basis on
partnership ECTI (whether distributed or not distributed), apart from special provisions for
publicly traded partnerships.
In response to the enactment of section 1446, Treasury and the IRS issued Rev. Proc. 8821 to provide guidance for partnerships to comply with section 1446. After Rev. Proc. 88-21

-6was issued, the 1988 Act amended section 1446 retroactively and provided that no withholding
was required under section 1446 for partnership taxable years beginning before January 1, 1988.
Section 1446, as revised by the 1988 Act, shifted from imposing a withholding tax on
partnership distributions to imposing a withholding tax on the amount of ECTI allocable to the

partnership's foreign partners. More specifically, section 1446(a) requires partnerships that have
ECTI in any taxable year, any portion of which is allocable under section 704 to a foreign
partner, to pay the 1446 tax at such time and in such manner as prescribed in regulations. The
amount of withholding tax payable by a partnership under section 1446 is equal to the applicable
percentage of the partnership's ECTI allocable under section 704 to foreign partners. The
applicable percentage for ECTI allocable to a foreign corporation is the highest rate of tax
specified in section 11(b), and the applicable percentage for ECTI allocable to a non-corporate
foreign partner is the highest rate of tax specified in section 1. Further, section 1446(d), as
amended by the 1988 Act, provides that a foreign partner is entitled to a credit under section 33
for such partner's share of the 1446 tax, and, except as provided in regulations, such partner's

share of the 1446 tax paid by the partnership is treated as distributed to such partner on the las
day of the taxable year for which such tax was paid. The credit under section 33 is applied
against the partner's U.S. tax liability for the taxable year in which the partner includes its
allocable share of the partnership's effectively connected income.
Treasury and the IRS issued Rev. Proc. 89-31 to provide guidance to partnerships under
section 1446, as amended by the 1988 Act. This revenue procedure made Rev. Proc. 88-21
obsolete. In general, Rev. Proc. 89-31 provides guidance concerning the requirement to pay a
withholding tax, the determination of whether a partner is a foreign person, the calculation of

-7partnership ECTI, the amount of the withholding tax, and the procedures for reporting and
paying over the 1446 tax. The revenue procedure generally follows the regime set forth in
section 6655 for estimated tax payments by corporations, and requires a partnership to annualize
its ECTI and pay over the 1446 tax in quarterly installments. Further, the revenue procedure
provides special rules for publicly traded partnerships and tiered partnership structures. A
partnership subject to section 1446 must continue to comply with Rev. Proc. 89-31, as modified
by Rev. Proc. 92-66 (discussed below), until the partnership's first taxable year beginning after
the date these regulations are issued in final form.
Section 781 l(i)(6) of the 1989 Act amended section 1446 in three respects. First, the
amendment provides that, except as provided in regulations, a foreign partner's share of the 1446
tax paid by a partnership is treated as distributed to such partner on the earlier of the day on
which such tax is paid by the partnership or the last day of the partnership's taxable year for
which such tax is paid. Second, the amendment grants Treasury and the IRS regulatory authority

to apply the addition to tax under section 6655 to a partnership as if it were a corporation. Thir
the amendment clarifies that the applicable percentage for a foreign corporate partner is the
highest rate of tax specified in section 11(b)(1). The changes made by the 1989 Act are effective

for partnership taxable years beginning after December 31, 1987, as if originally included as par
of the 1988 Act amendments.
In 1992, Treasury and the IRS issued Rev. Proc. 92-66, which modified Rev. Proc. 89-31
in three respects. First, Rev. Proc. 92-66 provides that the applicable percentage to be used by

publicly traded partnerships in calculating the 1446 tax is the highest rate of tax imposed under
section 1, which at that time was 31 percent. Second, the revenue procedure allows a partnership

-8to seek a refund from the IRS in certain circumstances for amounts it has paid under section
1446. Third, the revenue procedure provides that a foreign partnership subject to withholding
under section 1445(a) during a taxable year is allowed to credit the amount withheld under

section 1445(a), to the extent such amount is allocable to foreign partners, against its liability t
pay the 1446 tax for that year.
B. Structure of the Proposed Regulations

In general, the proposed regulations follow the approach in Rev. Proc. 89-31 for
computing, paying over and reporting the 1446 tax. The proposed regulations are set forth in six
sections. Section 1.1446-1 contains rules regarding a partnership's requirement to pay a
withholding tax, and how a partnership should determine the status of its partners (i.e., domestic
or foreign, corporate or non-corporate). Section 1.1446-2 contains rules for calculating
partnership ECTI allocable to each foreign partner. Section 1.1446-3 contains rules pertaining to
a partnership's obligation to pay the 1446 tax on an installment basis, including guidance on
calculating the 1446 tax, reporting and paying over the 1446 tax, and penalties for underpayment
of the 1446 tax. Section 1.1446-4 contains special rules applicable to publicly traded
partnerships. These rules generally implement a withholding regime based upon the distribution
of effectively connected income to foreign partners. These regulations also permit publicly
traded partnerships to elect to withhold and pay over the 1446 tax based upon the general rules
set forth in §§1.1446-1 through 1.1446-3 (withholding based upon ECTI allocable under section
704 to foreign partners). Section 1.1446-5 contains rules applicable to tiered partnership
structures, including rules for looking through certain upper-tier foreign partnerships to

-9determine the 1446 tax obligation of a lower-tier partnership. Finally, §1.1446-6 contains the
proposed effective date of the regulations.
In addition to the proposed regulatory amendments under section 1446, these regulations
also include proposed amendments to §§1.871-10, 1.1443-1, 1.1461-1 through 1.1461-3, 1.14621, 1.1463-1, 301.6109-1, and 301.6721-1, to coordinate the section 1446 withholding regime
with existing regulations.
C. Determining the Status and Classification of Partners—
$1.1441-1
Section 1446 applies only to partnerships with ECTI allocable under section 704 to one
or more foreign partners. Section 1446(e) defines a foreign partner as any partner who is not a
United States person. Section 7701(a)(30) defines a United States person to include a citizen or
resident of the United States, a domestic partnership, a domestic corporation, any estate other
than a foreign estate within the meaning of section 7701(a)(31), and any trust if a court within

the United States is able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial decisions of the

trust. Section 1446 and the legislative history are silent as to how a partnership is to determine
the domestic or foreign status of its partners.
Rev. Proc. 89-31 contains rules for determining whether a partner is a foreign partner for
purposes of section 1446. Under the revenue procedure, a partnership may determine a partner's

status by relying upon a certification of non-foreign status provided by the partner, or by relyin
on any other means. See Rev. Proc. 89-31, §5.02 and §5.03.
In order to reduce the paperwork burden imposed on taxpayers and avoid conflicting
information, the proposed regulations reflect an approach different from the approach taken in

-10Rev. Proc. 89-31 for determining whether a partner is a foreign partner. The proposed
regulations generally require a partnership to comply with the paperwork requirements used
under section 1441 to determine the status (domestic or foreign) and the tax classification
(corporate or non-corporate) of its partners. Under the proposed regulations, a partnership
should obtain either a Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner for
U.S. Tax Withholding," Form W-8IMY, "Certificate of Foreign Intermediary, Flow Through
Entity, or Certain U.S. Branches for United States Tax Withholding," or Form W-9, "Request for
Taxpayer Identification Number and Certification," from each of its partners. Additionally,

special rules are provided with respect to domestic and foreign trusts all or a portion of which
treated as owned by a grantor or another person under subpart E of subchapter J of the Code.
The documentation requirement set forth in the proposed regulations will allow a partnership
required to withhold under both section 1441 and section 1446 to receive one form instead of
two from each of its partners, and thus will reduce the paperwork and recordkeeping burden
imposed upon partners and partnerships. Further, the required documentation will also serve to
establish a uniform basis for determining the foreign or non-foreign status of partners and to
reduce the instances where a partnership receives inconsistent documentation.

In the absence of a valid Form W-8BEN, Form W-8IMY, or Form W-9 from a partner (or
upon the receipt of a form that the partnership has actual knowledge or reason to know is
incorrect or unreliable), the proposed regulations contain a presumption that the partner is a
foreign person and that the partnership must pay 1446 tax on ECTI allocable to the partner.
However, this presumption does not apply, and the partnership shall not be liable for 1446 tax

-11with respect to a partner, to the extent the partnership relies on other means to ascertain the non-

foreign status of a partner, and the partnership is correct in its determination that such partner is
a U.S. person. This approach is similar to Rev. Proc. 89-31, which permitted partnerships to rely
on other means to ascertain the non-foreign status of a partner. See Rev. Proc. 89-31, §5.03.
Under the proposed regulations, when the presumption of foreign status applies, the following
rules apply for purposes of determining the applicable rate that will apply in computing the 1446
tax. If the partnership knows that the partner is an individual and not an entity, the partnership
shall compute the 1446 tax with respect to such partner using the highest rate in section 1. If the
partnership knows that the partner is an entity that is a corporation under §301.7701-2(b)(8)

(included on the per se list of entities under the entity classification regulations), the partnership
shall treat the partner as a foreign corporation and compute the 1446 tax with respect to such
partner using the highest rate in section 11(b)(1). In all other cases, including where the
partnership cannot reliably determine the status of the partner, the proposed regulations presume
that the partner is either a corporate or non-corporate partner, based upon whichever
classification results in a higher 1446 tax being due. This presumption is necessary to prevent a
partner from obtaining a more favorable withholding result than would have been achieved if the
partner complied with the documentation requirements. The duration and validity of the forms
required for purposes of section 1446 is intended to be consistent with the standards applicable
when these forms are submitted in the context of sections 1441, 1442, and 3406. These forms
and their instructions will be modified as necessary to facilitate their use under section 1446.
D. Determining a Foreign Partner's Allocable Share of
Partnership E C T I ~ § 1.1446-2

-12The proposed regulations contain rules for computing partnership ECTI allocable to
foreign partners. Consistent with Rev. Proc. 89-31, the partnership determines its ECTI
allocable to a foreign partner using an aggregate approach. The partnership first determines the
effectively connected partnership items allocable to each of the partnership's foreign partners.
Partnership ECTI allocable to all foreign partners then is computed by combining all of the
foreign partners' allocable shares of partnership ECTI.
The proposed regulations also provide guidance concerning capital losses, suspended
losses, and loss carryovers and carrybacks when determining a foreign partner's allocable share
of partnership ECTI. The proposed regulations permit capital losses allocable to a foreign
partner to offset such partner's allocable share of capital gains consistent with section 1211(a).
Solely for purposes of section 1446, the proposed regulations do not permit the partnership to
consider section 1211(b), which permits an individual to use capital losses in excess of capital
gains to the extent of $3,000 per taxable year. Further, the proposed regulations do not permit
the partnership to take into account in determining a foreign partner's allocable share of
partnership ECTI any losses of a partner that are carried over or back or are suspended.
A number of issues arise under section 1446 where the partnership has cancellation of
indebtedness income under section 61(a)(12), including difficulties arising because the exclusion
of cancellation of indebtedness income under section 108 is applied at the partner level rather
than at the partnership level. See section 108(d)(6). These proposed regulations do not
specifically address the treatment of cancellation of indebtedness income of a partnership under
section 1446. Comments are requested concerning the appropriate treatment under section 1446
of such income allocable to a foreign partner.

-13E. Calculating, Paving Over, and Reporting the 1446 Tax—
§1.1446-3
Section 1446(f)(2) provides that the Secretary shall prescribe such regulations as may be

necessary to carry out the purposes of section 1446, including regulations providing (1) that, for
purposes of section 6655, the withholding tax imposed under section 1446 be treated as a tax
imposed by section 11 and any partnership required to pay such tax be treated as a corporation,
and (2) appropriate adjustments in applying section 6655 with respect to such withholding.
Section 6655 generally requires a corporation to make estimated tax payments throughout its
taxable year, and determines an addition to tax for any underpayment of the required
installments.
Rev. Proc. 89-31 generally requires a partnership, other than a publicly traded
partnership, to determine its ECTI allocable to foreign partners, and, ultimately, its 1446 tax
obligation, by annualizing its effectively connected items under one of the three options
generally available to corporations under section 6655 when paying estimated taxes. As an
alternative, Rev. Proc. 89-31 permits a partnership to determine its 1446 tax obligation based
upon a safe harbor. Under both the safe harbor and the annualization methods, a partnership
must pay the 1446 tax on an installment basis.
The proposed regulations adopt, with some modifications, the estimated tax payment
rules set forth in section 6655, including the imposition of an addition to tax for an
underpayment of the 1446 tax. Consistent with Rev. Proc. 89-31, the proposed regulations

require a partnership to pay its 1446 tax obligation on an installment basis, and pay its 1446 tax
either based upon annualizing its income or based upon a safe harbor. The proposed regulations
broaden the approaches available in Rev. Proc. 89-31 in certain circumstances. Under the

-14proposed regulations, a partnership that chooses to annualize its income may use certain methods
in section 6655 that address the seasonality of income earned by a partnership. See section
6655(e). Further, the proposed regulations modify the safe harbor set forth in Rev. Proc. 89-31
so that a partnership does not need to have filed Form 1065, "U.S. Return of Partnership
Income," and Form 8804, "Annual Return for Partnership Withholding Tax (Section 1446)," at

the time it makes an installment payment. Instead, it is sufficient if the partnership timely fil
these forms (taking into account extensions).
F. Special Rule for Tiered Trust or Estate Structures—
§1.1446-3(d)(2)(iii)
Treasury and the IRS are concerned about the potential abuse of tiered trust structures to
claim inappropriate refunds of the 1446 tax, to avoid reporting by a beneficiary of ECTI earned
by a partnership, or to avoid section 1446 entirely. Existing provisions contemplate that

entitlement to a credit or refund of any section 1446 withholding tax follows the liability for t
Section 1446(d) provides that each foreign partner of a partnership shall be allowed a credit
under section 33 for such partner's share of the 1446 tax paid by the partnership. A foreign
partner's share of any 1446 tax paid by the partnership is treated as distributed to the partner
such partnership. Section 1462 provides that income on which any tax is required to be withheld

at the source under chapter 3 of the Code, including section 1446, shall be included in the retur
of the recipient of such income, and any amount of tax so withheld may be credited against the
amount of income tax as computed in such return. The regulations under section 1462 explain
that an amount withheld on a payment to a fiduciary, partnership, or intermediary is deemed to
have been paid by the taxpayer ultimately liable for the tax upon such income. See § 1.14621(b). Sections 702(b), 652(b), and 662(b) ensure that the character of income (e.g., income that

-15is effectively connected income) of a partnership allocated to a trust (whether domestic or
foreign) is preserved in the hands of a beneficiary (see Rev. Rul. 85-60 (1985-1 C.B. 187)).
The proposed regulations include clarification of the regulations under section 1462 to
coordinate with section 1446(d) to provide that a foreign trust's or estate's allocable share of
ECTI is deemed to have been paid by the taxpayer ultimately liable for tax upon such income. In

the case of a foreign grantor trust, the taxpayer ultimately liable for the tax upon such income is
the grantor of such trust.
Further, §1.1446-3 of the proposed regulations includes two rules and several examples

pertaining to tiered trust or estate structures. The rules are intended to match the credit claimed
under section 33 with the taxpayer that reports and pays tax on the ECTI upon which the credit is

based. The first rule applies where a foreign trust or estate is a partner in a partnership require

to pay the 1446 tax and the beneficiary of the foreign trust or estate is either another foreign tr

(with a foreign person as a beneficiary of such trust) or a foreign person. In such a circumstance,
the proposed regulations provide that the foreign trust or estate is only entitled to claim the

portion of the credit under section 33 that corresponds to the portion of the associated effectivel
connected income on which it bears the tax liability.
The second rule addresses the use of a domestic trust. The second rule applies where a
partnership knows or has reason to know that a foreign person that is the ultimate beneficial
owner of the effectively connected income holds its interest in the partnership through a
domestic trust, and such domestic trust was formed or availed of with a principal purpose of

avoiding the 1446 tax. The use of a domestic trust in a tiered trust structure may have a principal
purpose of avoiding the 1446 tax even though the tax avoidance purpose is outweighed by other

-16purposes when taken together. Where applicable, this rule allows the IRS to impose the 1446 tax
obligation on such partnership as if each domestic trust in the chain is a foreign trust.
G. Publicly Traded Partnerships—§ 1.1446-4
Section 1446(f)(1) provides that the Secretary shall prescribe regulations to apply section

1446 in the case of publicly traded partnerships. In this regard, the legislative history to sectio
1446 specifically notes that special rules may be necessary in identifying a publicly traded
partnership's partners as U.S. or foreign. See H.R. Rep. No. 100-795, 100th Cong., 2d Sess. 291
(1988); S. Rep. No. 100-445, 100th Cong., 2d Sess. 305 (1988).
Rev. Proc. 89-31 provides special rules for publicly traded partnerships. Under Rev.
Proc. 89-31, the term publicly traded partnership means a regularly traded partnership within the
meaning of the regulations under section 1445(e)(1), but not a publicly traded partnership treated
as a corporation under the general rules of section 7704(a). Generally, publicly traded
partnerships with effectively connected income, gain or loss are required to withhold based upon
distributions made to foreign partners. Rev. Proc. 92-66 modified the applicable percentage for
withholding on distributions to the highest rate of tax imposed under section 1, and applied that
percentage to both corporate and non-corporate partners.
Under Rev. Proc. 89-31, a publicly traded partnership generally determines the tax status
of its partners by receiving either a certificate of non-foreign status, a Form W-8, or a Form W-9
from its partners, or by relying on other means. Further, nominees that hold interests in a
publicly traded partnership on behalf of one or more foreign partners may be responsible for the
1446 tax liability for foreign partners under certain circumstances. Finally, Rev. Proc. 89-31
permits publicly traded partnerships to elect to apply the general rules that determine the 1446

-17tax based on a foreign partner's allocable share of partnership ECTI rather than on distributions
to foreign partners. Under Rev. Proc. 89-31, the publicly traded partnership makes this election
by complying with the payment and reporting requirements of the general rules and attaching a
statement to its annual return of withholding tax indicating that the election is being made.
The proposed regulations modify several of the rules for publicly traded partnerships set
forth in Rev. Proc. 89-31. First, the proposed regulations define publicly traded partnership
solely by reference to the definition in section 7704. Second, the proposed regulations provide
that the documentation requirements and presumptions of §1.1446-1 apply to publicly traded
partnerships, thereby requiring such partnerships to obtain a Form W-8BEN, Form W-8IMY, or
Form W-9 from each of their partners if they do not rely on other means to determine the status
of their partners. Third, the proposed regulations provide that the applicable percentage for
withholding on distributions is the rate applicable under section 1446(b).
Comments are requested as to whether the special rules applicable to publicly traded
partnerships should be extended to other partnerships. Specifically, Treasury and the IRS are
considering whether these special rules should apply to partnerships that make an election under
section 775 of the Code or partnerships with a specified minimum number of partners.
H. Tiered Partnership Structures—§1.1446-5
Special concerns arise when a foreign partnership (upper-tier partnership) is a partner in a
second partnership (lower-tier partnership) that is subject to section 1446. Section 1446(f)
provides the Secretary with regulatory authority to prescribe rules necessary to carry out the

purposes of the section. The legislative history to section 1446 notes that in the context of tiere
partnership structures, "rules may be necessary to prevent the imposition of more tax than will be

-18properly due (for example, rules to prevent the tax from being imposed on more than one
partnership and rules to determine the applicable percentages)." H.R. Rep. No. 100-795, 100th
Cong., 2d Sess. 291 (1988); S. Rep. No. 100-445, 100th Cong., 2d Sess. 305 (1988).
Rev. Proc. 89-31 employs an entity approach in computing the 1446 tax obligation of a
partnership that has a foreign partnership as one of its partners. Under the entity approach, a
lower-tier partnership must pay a 1446 tax at the highest rate in section 1 on an upper-tier
foreign partnership's allocable share of ECTI, regardless of the composition of the upper-tier
partnership. Rev. Proc. 89-31 provides the upper-tier partnership a credit for a portion of the
1446 tax paid by the lower-tier partnership to avoid multiple application of the 1446 tax. This
approach may result in a partnership paying a 1446 tax that is greater in amount than would have

been required if the partners of the upper-tier partnership had been direct partners of the lower
tier partnership, for example, where some of the partners of the upper-tier partnership are U.S.
persons.
The proposed regulations modify the rules in Rev. Proc. 89-31 with respect to certain

tiered partnership structures to address this situation. The proposed regulations provide that if
partner in a partnership that is required to pay the 1446 tax is a foreign partnership, it may
submit a completed Form W-8IMY to the lower-tier partnership. If the upper-tier foreign
partnership completes and submits Form W-8IMY to the lower-tier partnership, and passes along
the Form W-8BEN, Form W-8IMY, or Form W-9 it received for some or all of its partners, as
well as information describing how effectively connected items are allocated among its partners,
the lower-tier partnership shall look through the upper-tier partnership to the partners of the
upper-tier partnership (to the extent that it has received the appropriate documentation and

-19allocation information and can reliably associate the allocation of its effectively connected items
to the partners of the upper-tier partnership) to determine its 1446 tax obligation. To the extent
the lower-tier partnership receives a valid Form W-8IMY from the upper-tier partnership but
cannot reliably associate the upper-tier partnership's allocable share of effectively connected
partnership items with a withholding certificate for each of the upper-tier partnership's partners,
the lower-tier partnership shall withhold at the higher of the applicable percentages in section
1446(b).
Therefore, in appropriate circumstances, the lower-tier partnership may determine its
1446 tax obligation based on the status of its indirect partners. This approach generally is
consistent with the paperwork requirements under section 1441 applicable to a nonwithholding
foreign partnership and will ensure that the 1446 tax paid by the partnership more closely
approximates the actual tax liability of the beneficial owner of the income in the case of a tiered
partnership structure. An upper-tier foreign partnership with foreign partners remains obligated
to file and report with respect to its 1446 tax obligation. Accordingly, the upper-tier partnership
must comply with the general rules of section 1446, including requiring payment in installments,
and reporting and passing along the credit under section 33 to its partners, which in these
situations will also include the tax paid at the lower-tier partnership level.
Comments are requested on the general approach taken in these proposed regulations for
situations involving two or more tiers of partnerships. Further, comments are requested as to the
desirability and administrability of an alternative approach that allows a domestic upper-tier
partnership with foreign partners to elect to pass information regarding its partners to the lower-

-20tier partnership and have the lower-tier partnership pay the 1446 tax based upon the composition
of the partners of the upper-tier partnership.
I. Withholding in Excess of Partner's Actual Tax Liability
Since the enactment of section 1446, Treasury and the IRS have received and considered
several comments regarding the potential for section 1446 to require a partnership to pay a
withholding tax in an amount that exceeds a foreign partner's actual tax liability for a taxable
year. This situation may occur for several reasons, including that: (1) section 1446 does not take
into account a partner's losses from outside the partnership during the year, or a partner's loss
carryovers; and (2) section 1446 requires withholding at the maximum statutory rates generally
applicable to a foreign partner with effectively connected income. Section 1446 does not contain
provisions for reducing or eliminating the general withholding obligation like the provisions
contained in section 1445 (which impose a withholding tax in the case of the disposition of an
interest in United States real property). See section 1445(c). Rev. Proc. 89-31 provides that
section 1446 applies instead of section 1445(e)(1) where the two sections overlap, and,
accordingly, partnerships owning U.S. real property are not permitted to reduce withholding on
gains from the disposition of such property through the use of the procedures available under
section 1445. See also §8.01 of Rev. Proc. 2000-35 (2000-2 C.B. 211).
Treasury and the IRS considered comments regarding alternative approaches for
adjusting the withholding tax obligation under section 1446 to more closely approximate a
foreign partner's actual U.S. tax liability. These proposed regulations contain provisions aimed

at mitigating the potential for withholding in excess of the partner's actual tax liability (see e
§ 1.1446-5). These proposed regulations do not contain other provisions that have been

-21suggested because, among other reasons, of concerns regarding the administrability of such
approaches. Comments are requested with respect to approaches that would permit an
adjustment to the amount of 1446 tax obligation that are consistent with the statute and
legislative history and administrate by partnerships, partners and the IRS. In particular,
comments are requested on whether the rules coordinating sections 1445 and 1446 should be
modified to address these concerns.
J. Effective Date
These regulations are proposed to apply to partnership taxable years beginning after the
date these regulations are published as final regulations in the Federal Register.
Effect on Other Documents
The following publications will be obsolete for partnership taxable years beginning after
the date these regulations are published as final regulations in the Federal Register:
Rev. Proc. 89-31 (1989-1 C.B. 895)
Rev. Proc. 92-66 (1992-2 C.B. 428)
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. It also has been determined that section
533(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these
regulations. With respect to the collections of information contained in §1.871-10, §1.1446-1

(pertaining to domestic grantor trusts), and §1.1446-3 (pertaining to foreign trusts), it is hereb
certified that these collections of information will not have a significant economic impact on a

substantial number of small entities. This certification is based upon the fact that only limited

-22-

small entities are impacted by these collections and the burden associated with such collections
is .5 hours. With respect to the collections of information in §§1.1446-3 (pertaining to a

partnership required to notify its foreign partners of an installment payment of 1446 tax paid o

behalf of such partner) and 1.1446-4, it is hereby certified that these sections will not impose

significant economic impact on a substantial number of small entities. This certification is bas

upon the fact that while approximately 15,000 small entities will be impacted by these sections,
the estimated annual burden associated with these sections is only .5 hours per respondent.
Moreover, the information collection in §1.1446-4 is voluntary. 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 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 (a signed original and eight (8) copies) that are submitted timely
to the IRS. Alternatively, taxpayers may submit comments electronically directly to the IRS
Internet Site at www.irs.gov/regs. All comments will be available for public inspection and
copying. The Treasury Department and IRS request comments on the clarity of the proposed
regulations and how they may be made easier to understand.
A public hearing has been scheduled for December 4, 2003, beginning at 10 a.m. in the
IRS Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington,
DC. All visitors must come to the Constitution Avenue entrance and present photo identification

-23-

to enter the building. Because of access restrictions, visitors will not be admitted beyond t

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) by November 13, 2003. A period of 10 minutes will be allotted to each person for
making comments. An agenda showing the schedule of speakers will be prepared after the

deadline for receiving outlines has passed. Copies of the agenda will be available free of ch
at the hearing.
Drafting Information
The principal author of these proposed regulations is David J. Sotos, Office of the
Associate Chief Counsel (International). However, other personnel from the Treasury
Department and IRS participated in their development.
List of Subjects
26 CFR Parti
Income taxes, Reporting and recordkeeping requirements
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties,
Reporting and Recordkeeping requirements.
Proposed Amendments to the Regulations

-24Accordingly, 26 CFR parts 1 and 301 are 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 * * *
§1.1446-3 also issued under 26 U.S.C. 1446(f).
§1.1446-4 also issued under 26 U.S.C. 1446(f).* * *
Par. 2. In §1.871-10, paragraph (d)(3) is amended by adding a sentence at the end of that
paragraph, and paragraph (e) is amended by revising the first sentence to read as follows:

§1.871-10 Election to treat real property income as effectively connected with U.S. business.

stf\ * * *

(3) Election by partnership. * * * If the nonresident alien or foreign corporation makes an
election, such person must provide the partnership a Form W-8BEN, "Certificate of Foreign
Status of Beneficial Owner for U.S. Withholding," and must indicate that the nonresident alien
or foreign corporation has made the election under this section to treat real property income as
effectively connected income.
(e) Effective date. This section shall apply for taxable years beginning after December
31, 1966, except the last sentence of paragraph (d)(3) shall apply to partnership taxable years
beginning after the date these regulations are published as final regulations in the Federal
Register.* * *
Par. 3. In §1.1443-1 is amended by:

-251. Revising the first sentence of paragraph (a) and adding a sentence at the end of the
paragraph.
2. Revising paragraph (c)(1).
The revision and additions read as follows:
§1.1443-1 Foreign tax-exempt organizations.
(a) Income includible in computing unrelated business taxable income. In the case of a
foreign organization that is described in section 501(c), amounts paid or effectively connected
taxable income allocable to the organization that are includible under section 512 in computing
the organization's unrelated business taxable income are subject to withholding under §§1.14411, 1.1441-4, 1.1441-6, and 1.1446-1 through 1.1446-5, in the same manner as payments or
allocations of effectively connected taxable income of the same amounts to any foreign person
that is not a tax-exempt organization.*** See also §1.1446-3(c)(3).

(1) In general. This section applies to payments made after December 31, 2000, except
that the references in paragraph (a) of this section to effectively connected taxable income and
withholding under section 1446 shall apply to partnership taxable years beginning after the date
these regulations are published as final regulations in the Federal Register.

Par. 4. Sections 1.1446-0 through 1.1446-6 are added to read as follows.
§1.1446-0 Table of contents. This section lists the captions contained in §§1.1446-1 through
1.1446-6.

-26§1.1446-1 Withholding tax on foreign partners' share of effectively connected taxable income.
(a) In general.
(b) Steps in determining 1446 tax obligation.
(c) Determining whether a partnership has a foreign partner.
(1) In general.
(2) Forms W - 8 B E N , W - 8 I M Y , and W - 9 .
(i) In general.
(ii) Effect of Forms W - 8 B E N , W - 8 I M Y , W - 9 , and statement.
(hi) Requirements for certificates to be valid.
(A) W h e n period of validity expires.
(B) Required information for Forms W - 8 B E N and W - 8 I M Y .
(iv) Parmer must provide n e w withholding certificate when there is a change in circumstances.
(v) Partnership must retain withholding certificates.
(3) Presumption of foreign status in absence of valid Form W - 8 B E N , Form W - 8 I M Y , Form W - 9 ,
or statement.
(4) Consequences when partnership knows or has reason to k n o w that Form W - 8 B E N , Form W 8 I M Y , or Form W - 9 is incorrect or unreliable and does not withhold.

§1.1446-2 Determining a partnership's effectively connected taxable income allocable to foreig
partners under section 704.
(a) In general.
(b) Computation.
(1) In general.
(2) Income and gain rules.
(i) Application of the principles of section 864.
(ii) Income treated as effectively connected.
(hi) Exempt income.
(3) Deduction and losses.
(i) Oil and gas interests.
(ii) Charitable contributions.
(hi) Net operating losses and other suspended or carried losses.
(iv) Interest deductions.
(v) Limitation on capital losses.
(vi) Other deductions.
(vii) Limitations on deductions.
(4) Other rules.
(i) Exclusion of items allocated to U.S. partners.
(ii) Partnership credits.
(5) Examples.
§1.1446-3 Time and manner of calculating and paying over the 1446 tax.
(a) In general.

-27(1) Calculating 1446 tax.
(2) Applicable percentage.
(b) Installment payments.
(1) In general.
(2) Calculation.
(i) General application of the principles of section 6655.
(ii) Annualization methods.
(hi) Partner's estimated tax payments.
(iv) Partner whose interest terminates during the partnership's taxable year.
(v) Exceptions and modifications to the application of the principles under section 6655.
(A) Inapplicability of special rules for large corporations.
(B) Inapplicability of special rules regarding early refunds.
(C) Period of underpayment.
(D) Other taxes.
(E) 1446 tax treated as tax under section 11.
(F) Prior year tax safe harbor.
(3) 1446 tax safe harbor.
(i) In general.
(ii) Permission to change to standard annualization method.
(c) Coordination with other withholding rules.
(1) Fixed or determinable, annual or periodical income.
(2) Real property gains.
(i) Domestic partnerships.
(ii) Foreign partnerships.
(3) Coordination with section 1443.
(d) Reporting and crediting the 1446 tax.
(1) Reporting 1446 tax.
(i) Reporting of installment tax payments, installment tax payment due dates, and notification to
partners of installment tax payments.
(ii) Payment due dates.
(hi) Annual return and notification to partners.
(iv) Information provided to beneficiaries of foreign trusts and estates.
(v) Attachments required of foreign trusts and estates.
(vi) Attachments required of beneficiaries of foreign trusts and estates.
(vii) Information provided to beneficiaries of foreign trusts and estates that are partners in certain
publicly traded partnerships.
(2) Crediting 1446 tax against a partner's U.S. tax liability.
(i) In general.
(ii) Substantiation for purposes of claiming the credit under section 33.
(hi) Tiered structures including trusts or estates.
(A) Foreign estates and trusts.
(B) Use of domestic trusts to circumvent section 1446.
(iv) Refunds to withholding agent.
(v) 1446 tax treated as cash distribution to partners.

-28(vi) Examples.
(e) Liability of partnership for failure to withhold.
(1) In general.
(2) Proof that tax liability has been satisfied.
(3) Liability for interest and penalties.
(f) Effect of withholding on partner.
§1.1446-4 Publicly traded partnerships.
(a) In general.
(b) Definitions.
(1) Publicly traded partnership.
(2) Applicable percentage.
(3) Nominee.
(4) Qualified notice.
(c) Time and manner of payment.
(d) Rules for designation of nominees to withhold tax under section 1446.
(e) Determining foreign status of partners.
(1) In general.
(2) Presumptions regarding payee's status in absence of documentation.
(f) Distributions subject to withholding.
(1) In general.
(2) In-kind distributions.
(3) Ordering rule relating to distributions.
(4) Coordination with section 1445.
(g) Election to withhold based upon E C T I allocable to foreign partners instead of withholding on
distributions.
§1.1446-5 Tiered partnership structures.
(a) In general.
(b) Reporting requirements.
(1) In general.
(2) Publicly traded partnerships.
(c) Look through rules for foreign upper-tier partnerships.
(d) Examples.
§1.1446-6 Effective date.

§1.1446-1 Withholding tax on foreign partners' share of effectively connected taxable income.

-29(a) In general. If a domestic or foreign partnership has effectively connected taxable
income as computed under §1.1446-2 (ECTI), for any partnership tax year, and any portion of

such taxable income is allocable under section 704 to a foreign partner, then the partnership must
pay a withholding tax under section 1446 (1446 tax) at the time and in the manner set forth in
this section and §§1.1446-2 through 1.1446-5.
(b) Steps in determining 1446 tax obligation. In general, a partnership determines its
1446 tax as follows. The partnership determines whether it has any foreign partners in
accordance with paragraph (c) of this section. If the partnership does not have any foreign
partners (including any person presumed to be foreign under paragraph (c) of this section and

any domestic trust treated as foreign under §1.1446-3 (d)) during its taxable year, it generally w
not have a 1446 tax obligation. If the partnership has one or more foreign partners, it then
determines under §1.1446-2 whether it has ECTI any portion of which is allocable to one or
more of the foreign partners. If the partnership has ECTI allocable to one or more of its foreign
partners, the partnership computes its 1446 tax, pays over 1446 tax, and reports the amount paid
in accordance with the rules in § 1.1446-3. For special rules applicable to publicly traded
partnerships, see §1.1446-4. For special rules applicable to tiered partnership structures, see
§1.1446-5.
(c) Determining whether a partnership has a foreign partner—(1) In general. Except as
otherwise provided in §1.1446-3, only a partnership that has at least one foreign partner during
the partnership's taxable year can have a 1446 tax liability. The term foreign partner means any
partner of the partnership who is not a U.S. person within the meaning of section 7701(a)(30).
Thus, a partner of the partnership is a foreign partner if the partner is a nonresident alien

-30individual, foreign partnership, foreign corporation, foreign estate or trust, as those terms are
defined under section 7701 and the regulations thereunder, or a foreign government within the
meaning of section 892 and the regulations thereunder. For purposes of this section, a partner
that is treated as a U.S. person for all income tax purposes (by election or otherwise, see e.g.,
sections 953(d), 1504(d)) will not be a foreign partner, provided the partner has provided the
partnership a valid Form W-9, "Request for Taxpayer Identification Number and Certification,"

or if the partnership uses other means to determine that the partner is not a foreign partner (see
paragraph (c)(3) of this section). A partner that is treated as a U.S. person only for certain

specified purposes is considered a foreign partner for purposes of section 1446, and a partnership
must pay a withholding tax on the portion of ECTI allocable to that partner. For example, a
partnership must generally pay 1446 tax on ECTI allocable to a foreign corporate partner that
has made an election under section 897(i).

(2) Forms W-8BEN, W-8IMY, and W-9—(i) In general. Except as otherwise provided in
this paragraph (c)(2) or paragraph (c)(3) of this section, a partnership must determine whether a

partner is a foreign partner, and the partner's tax classification (e.g., corporate or non-corpora
by obtaining from the partner a Form W-8BEN, "Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding," Form W-8IMY, "Certificate of Foreign
Intermediary, Flow-Through Entity, or Certain U.S. Branches for United States Tax
Withholding," or a Form W-9, as applicable. Specifically, a foreign partner that is a nonresident

alien individual, a foreign estate or trust (other than a grantor trust described in this paragrap

-31(c)(2)), a foreign corporation, or a foreign government should provide a valid Form W-8BEN. A
partner that is a foreign partnership should provide a valid Form W-8IMY. A partner that is a

U.S. person (other than a grantor trust described in this paragraph (c)(2)), including a domestic

partnership, should provide a valid Form W-9. An entity that is disregarded as an entity separate
from its owner under §301.7701-3 of this chapter may not submit a Form W-8BEN, W-8IMY, or
Form W-9. See §§301.7701-1 through 301.7701-3 of this chapter for determining the U.S.

Federal tax classification of a partner. To the extent that a grantor or another person is treate

the owner of any portion of a trust under subpart E of subchapter J of the Internal Revenue Code,
such trust shall not provide a Form W-8BEN or Form W-9 to the partnership, except to the

extent that such trust is providing documentation on behalf of the grantor or other person treate

as the owner of a portion of such trust as required by this paragraph (c)(2). Instead, if such tr

is a foreign trust, the trust shall submit Form W-8IMY to the partnership identifying itself as a
grantor trust and shall provide such documentation (e.g., Forms W-8BEN, W-8IMY, or W-9)
and information pertaining to its owner(s) to the partnership that permits the partnership to
reliably associate (within the meaning of §1.1441-1 (b)(2)(vii)) such portion of the trust's
allocable share of partnership ECTI with the grantor or other person that is the owner of such
portion of the trust. If such trust is a domestic trust, the trust shall furnish the partnership
statement under penalty of perjury that the trust is, in whole or in part, a grantor trust and

identifying that portion of the trust that is treated as owned by a grantor or another person und
subpart E of subchapter J of the Internal Revenue Code. The trust shall also provide such
documentation and information (e.g., Forms W-8BEN, W-8IMY, or W-9) pertaining to its

owner(s) to the partnership that permits the partnership to reliably associate such portion of th

-32-

trust's allocable share of partnership ECTI with the grantor or other person that is the owner

such portion of the trust. With respect to nominees, only nominees described in §1.1446-4(b)(3
holding interests in publicly traded partnerships subject to §1.1446-4 may submit a Form W-9.
See § 1.1446-4 for additional documentation that may be submitted by such a nominee. In all
other cases where a nominee holds an interest in a partnership, the beneficial owner of the
partnership interest, not the nominee, shall submit Form W-8BEN, Form W-8IMY, or Form W9. A partnership that has obtained a valid Form W-8BEN, Form W-8IMY, or Form W-9 from a

partner, nominee, or beneficial owner prior to the due date for paying any 1446 tax may rely o
it to the extent provided in this paragraph (c)(2).

(ii) Effect of Forms W-8BEN, W-8IMY, W-9, and Statement. In general, for purposes of
this section, a partnership may rely on a valid Form W-8BEN, Form W-8IMY, Form W-9,

statement described in §1.1446-4(e)(l), or statement described in this paragraph (c)(2) from a

partner, nominee, beneficial owner, or grantor trust to determine whether that person, benefic
owner, or the owner of a grantor trust, is a domestic or foreign partner or a nominee, and if

person is a foreign partner, to determine whether or not such person is a corporation for U.S.

purposes. To the extent a partnership receives a Form W-8IMY from a foreign grantor trust or a

statement described in this paragraph (c)(2) from a domestic grantor trust, but does not recei
Form W-8BEN, Form W-8IMY, or Form W-9 identifying such grantor or other person, the rules

of paragraph (c)(3) of this section shall apply. Further, a partnership may not rely on a Form
8BEN, Form W-8IMY, Form W-9, or statement described in §1.1446-4(e)(l) or this paragraph

(c)(2), and such form or statement is therefore not valid, if the partnership has actual knowle

-33or has reason to know that any information on the withholding certificate or statement is
incorrect or unreliable and, if based on such knowledge or reason to know, it should pay a 1446

tax in an amount greater than would be the case if it relied on the information or certification
A partnership has reason to know that information on a withholding certificate or statement is

incorrect or unreliable if its knowledge of relevant facts or statements contained on the form o
other documentation is such that a reasonably prudent person in the position of the withholding
agent would question the claims made. See §§1.1441-1 (e)(4)(viii) and 1.1441-7(b)(1) and (2).
If the partnership does not know or have reason to know that a Form W-8BEN, Form W-8IMY,
Form W-9, or statement received from a partner, nominee, beneficial owner, or grantor trust

contains incorrect or unreliable information, but it subsequently determines that it does contai
incorrect or unreliable information, and, based on such knowledge the partnership should pay
1446 tax in an amount greater than would be the case if it relied on the information or
certification, the partnership will not be subject to penalties for its failure to pay the 1446
reliance on such form or statement for any installment payment date prior to the date that the
determination is made. See §§1.1446-1(c)(4) and 1.1446-3 concerning penalties for failure to
pay the withholding tax when a partnership knows or has reason to know that the form or
statement is incorrect or unreliable.
(hi) Requirements for certificates to be valid. Except as otherwise provided in this

paragraph (c), for purposes of this section, the validity of a Form W-9 shall be determined unde
section 3406 and §31.3406(h)-3(e) of this chapter which establish when such form may be
reasonably relied upon. A Form W-8BEN, or Form W-8IMY is only valid for purposes of this

-34-

section if its validity period has not expired, the partner submitting the form has signed it un
penalties of perjury, and it contains all the required information.
(A) When period of validity expires. For purposes of this section, a Form W-8BEN or
W-8IMY submitted by a partner shall be valid until the end of the period of validity determined
for such form under § 1.1441 -1 (e). With respect to a foreign partnership submitting Form W8IMY, the period of validity of such form shall be determined under §1.1441-1(e) as if such
foreign partnership submitted the form required of a nonwithholding foreign partnership. See
§1.1441-l(e)(4)(ii).
(B) Required information for Forms W-8BEN and W-8IMY. Forms W-8BEN and W8IMY submitted under this section must contain the partner's name, permanent address and
Taxpayer Identification Number (TIN), the country under the laws of which the partner is

formed, incorporated or governed (if the person is not an individual), the classification of the

partner for U.S. federal tax purposes (e.g., partnership, corporation), and any other information
required to be submitted by the forms or instructions to Form W-8BEN or Form W-8IMY, as
applicable.
(iv) Partner must provide new withholding certificate when there is a change in
circumstances. The principles of § 1.1441 -1 (e)(4)(ii)(D) shall apply when a change in

circumstances has occurred (including situations where the status of a U.S. person changes) that
requires a partner to provide a new withholding certificate.
(v) Partnership must retain withholding certificates. A partnership or nominee who has
responsibility for paying the withholding tax under this section or §1.1446-4, must retain each
withholding certificate and other documentation received from its direct and indirect partners

-35(including nominees) for as long as it may be relevant to the determination of the withholding
agent's tax liability under section 1461 and the regulations thereunder.

(3) Presumption of foreign status in absence of valid Form W-8BEN. Form W-8IMY,
Form W-9, or statement. Except as otherwise provided in this paragraph (c)(3), a partnership
that does not receive a valid Form W-8BEN, Form W-8IMY, Form W-9, statement described in
§1.1446-4(e)(l), or statement required by paragraph (c)(2) of this section from a partner,
nominee, beneficial owner, or grantor trust, or a partnership that receives a withholding
certificate or statement but has actual knowledge or reason to know that the information on the
certificate or statement is incorrect or unreliable, must presume that the partner is a foreign
person. If the partnership knows that the partner is an individual and not an entity, the

partnership shall treat the partner as a nonresident alien individual. If the partnership knows th

the partner is an entity, the partnership shall treat the partner as a corporation if the entity i
corporation as defined in §301.7701-2(b)(8) of this chapter. In all other cases, the partnership

shall treat the partner as either a nonresident alien individual or a foreign corporation, whichev
classification results in a higher 1446 tax being due, and shall pay the 1446 tax in accordance
with this presumption. The presumption set forth in this paragraph (c)(3) that a partner is a
foreign person (either because a Form W-9 was not furnished by such partner or the partnership
determines that such form is incorrect or unreliable) shall not apply to the extent that the
partnership relies on other means to ascertain the non-foreign status of a partner and the

partnership is correct in its determination that such partner is a U.S. person. A partnership is i
no event required to rely upon other means to determine the non-foreign status of a partner and

-36may demand that a partner furnish a Form W-9. If a certification is not provided in such
circumstances, the partnership may presume that the partner is a foreign partner, and for
purposes of sections 1461 through 1463, will be considered to have been required to pay 1446
tax on such partner's allocable share of partnership ECTI.
(4) Consequences when partnership knows or has reason to know that Form W-8BEN,
Form W-8IMY, or Form W-9 is incorrect or unreliable and does not withhold. If a partnership
knows or has reason to know that a Form W-8BEN, Form W-8IMY, Form W-9, statement

described in §1.1446-4(e)(l), or statement required by paragraph (c)(2) of this section submitted
by a partner, nominee, beneficial owner, or grantor trust contains incorrect or unreliable

information (either because the certificate or statement when given to the partnership contained
incorrect information or because there has been a change in facts that makes information on the
certificate or statement incorrect), and the partnership pays less than the full amount of

withholding tax due on ECTI allocable to that partner, the partnership shall be fully liable und
section 1461 and §1.1461-3 (§1.1461-1 for publicly traded partnerships subject to §1.1446-4),

§1.1446-3, and for all applicable penalties and interest, for any failure to pay the 1446 tax for
period during which the partnership knew or had reason to know that the certificate contained
incorrect or unreliable information and for all subsequent installment periods. If a partner,
nominee, beneficial owner, or grantor trust, submits a new valid Form W-8BEN, Form W-8IMY,
Form W-9, or statement, as applicable, the partnership may rely on that form for paying
installments of 1446 tax beginning with the installment period during which such form is
received.

-37§1.1446-2 Determining a partnership's effectively connected taxable income allocable to foreign
partners under section 704.
(a) In general. A partnership's effectively connected taxable income (ECTI) is generally
the partnership's taxable income as computed under section 703, with adjustments as provided in
section 1446(c) and this section, and computed with consideration of only those partnership
items which are effectively connected (or treated as effectively connected) with the conduct of a
trade or business in the United States. For purposes of determining the section 1446 withholding
tax (1446 tax) under §1.1446-3, partnership ECTI allocable under section 704 to foreign partners
is the sum of the allocable shares of ECTI of each of the partnership's foreign partners as
determined under paragraph (b) of this section. The calculation of partnership ECTI allocable to
foreign partners as set forth in paragraph (b) of this section, and the determination of the
partnership's withholding tax obligation, is a partnership-level computation solely for purposes
of determining the 1446 tax. Therefore, any deduction that is not taken into account in
calculating a partner's allocable share of partnership ECTI (e.g., percentage depletion), but
which is a deduction that under U.S. tax law the foreign partner is otherwise entitled to claim,
can still be claimed by the foreign partner when computing its U.S. tax liability and filing its
U.S. income tax return, subject to any restriction or limitation that otherwise may apply.
(b) Computation—(1) In general. A foreign partner's allocable share of partnership ECTI
for the partnership's taxable year that is allocable under section 704 to a particular foreign
partner is equal to that foreign partner's distributive share of partnership gross income and gain
for the partnership's taxable year that is effectively connected and properly allocable to the
partner under section 704 and the regulations thereunder, reduced by the foreign partner's

-38distributive share of partnership deductions for the partnership taxable year that are connected
with such income under section 873 or 882(c) and properly allocable to the partner under section
704 and the regulations thereunder, in each case, after application of the rules of this section.
For these purposes, a foreign partner's distributive share of effectively connected gross income
and gain and the deductions connected with such income shall be computed by considering

allocations that are respected under the rules of section 704 and §1.704-1(b)(1), including special
allocations in the partnership agreement (as defined in §1.704-l(b)(2)(ii)(h)), and adjustments to
the basis of partnership property described in section 743 pursuant to an election by the
partnership under section 754 (see §1.743-l(j)). The character of effectively connected
partnership items (capital versus ordinary) shall be separately considered only to the extent set
forth in paragraph (b)(3)(v) of this section.
(2) Income and gain rules. For purposes of computing a foreign partner's allocable share
of partnership ECTI under this paragraph (b), the following rules with respect to partnership
income and gain shall apply.
(D Application of the principles of section 864. The determination of whether a
partnership's items of gross income are effectively connected shall be made by applying the
principles of section 864 and the regulations thereunder.
(ii) Income treated as effectively connected. A partnership's items of gross income that
are effectively connected includes any income that is treated as effectively connected income,
including partnership income subject to a partner's election under section 871(d) or section
882(d), any partnership income treated as effectively connected with the conduct of a U.S. trade
or business pursuant to section 897, and any other items of partnership income treated as

-39effectively connected under another provision of the Code, without regard to whether those
amounts are taxable to the partner.
(hi) Exempt income. A foreign partner's allocable share of partnership ECTI does not
include income or gain exempt from U.S. tax by reason of a provision of the Internal Revenue
Code. A foreign partner's allocable share of partnership ECTI also does not include income or
gain exempt from U.S. tax by operation of any U.S. income tax treaty or reciprocal agreement.
In the case of income excluded by reason of a treaty provision, such income must be derived by a

resident of an applicable treaty jurisdiction, the resident must be the beneficial owner of the i
and all other requirements for benefits under the treaty must be satisfied. The partnership must
have received from the partner a valid withholding certificate, that is Form W-8BEN or Form W8IMY (see §1.1446-1 (c)(2)(iii) regarding when a Form W-8BEN or Form W-8IMY is valid for
purposes of this section), containing the information necessary to support the claim for treaty

benefits required in the forms and instructions to those forms. In addition, for purposes of this
section, the withholding certificate must contain the beneficial owner's taxpayer identification
number.
(3) Deduction and losses. For purposes of computing a foreign partner's allocable share
of partnership ECTI under this paragraph (b), the following rules with respect to deductions and
losses shall apply.
(i) Oil and gas interests. The deduction for depletion with respect to oil and gas wells
shall be allowed, but the amount of such deduction shall be determined without regard to
sections 613 and 613 A.

-40(ii) Charitable contributions. The deduction for charitable contributions provided in
section 170 shall not be allowed.
(iii) Net operating losses and other suspended or carried losses. The net operating loss
deduction of any foreign partner provided in section 172 shall not be taken into account.

Further, the partnership shall not take into account any suspended losses (e.g., losses in excess o
a partner's basis in the partnership, see section 704(d)) or any capital loss carrybacks or
carryovers available to a foreign partner.
(iv) Interest deductions. The rules of this paragraph (b)(3)(iv) shall apply for purposes of
determining the amount of interest expense that is allocable to income which is (or is treated as)
effectively connected with the conduct of a trade or business for purposes of calculating the
foreign partner's allocable share of partnership ECTI. In the case of a non-corporate foreign
partner, the rules of §1.861-9T(e)(7) shall apply. In the case of a corporate foreign partner, the
rules of §1.882-5 shall apply by treating the partnership as a foreign corporation and using the
partner's pro-rata share of the partnership's assets and liabilities for these purposes. For these
purposes, the rules governing elections under §1.882-5(a)(7) shall be made at the partnership
level.
(v) Limitation on capital losses. Losses from the sale or exchange of capital assets

allocable under section 704 to a partner shall be allowed only to the extent of gains from the sale
or exchange of capital assets allocable under section 704 to such partner.
(vi) Other deductions. No deduction shall be allowed for personal exemptions
provided in section 151 or the additional itemized deductions for individuals provided in part VII
of subchapter B of the Internal Revenue Code (section 211 and following).

-41(vii) Limitations on deductions. Except as provided in paragraph (b)(3) or (4) of this

section, any limitations on losses or deductions that apply at the partner level when determin
ECTI allocable to a foreign partner shall not be taken into account.
(4) Other rules—(i) Exclusion of items allocated to U.S. partners. In computing ECTI

allocable to a foreign partner, the partnership shall not take into account any item of income,
gain, loss, or deduction to the extent allocable to any partner that is not a foreign partner,
term is defined in §1.1446-1(c) of this section.
(ii) Partnership credits. See §1.1446-3(a) providing that the 1446 tax is computed
without regard to a partner's distrubutive share of the partnership's tax credits.
(5) Examples. The following examples illustrate the application of this section:
Example 1. Limitation on capital losses. PRS partnership has two equal partners, A and
B. A is a nonresident alien individual and B is a U.S. citizen. A provides P R S with a valid Form
W - 8 B E N , and B provides P R S with a valid Form W - 9 . P R S has the following annualized tax
items for the relevant installment period, all of which are effectively connected with its U.S.
trade or business and are allocated equally between A and B: $100 of long-term capital gain,
$400 of long-term capital loss, $300 of ordinary income, and $100 of ordinary deductions.
Assume that these allocations are respected under section 704(b) and the regulations thereunder.
Accordingly, A's allocable share of PRS's effectively connected items includes $50 of longterm capital gain, $200 of long-term capital loss, $150 of ordinary income, and $50 of ordinary
deductions. In determining A's allocable share of partnership ECTI, the amount of the long-term
capital loss that m a y be taken into account pursuant to paragraph (b)(3)(v) of this section is
limited to A's allocable share of gain from the sale or exchange of capital assets. The amount of
partnership E C T I allocable under section 704 to A is $100 ($150 of ordinary income less $50 of
ordinary deductions, plus $50 of capital gains less $50 of capital loss).
Example 2. Limitation on capital losses-special allocations. PRS partnership has two
equal partners, A and B. A and B are both nonresident alien individuals. A and B each provide
P R S with a valid F o r m W - 8 B E N . P R S has the following annualized tax items for the relevant
installment period, all of which are effectively connected with its U.S. trade or business: $200 of
long-term capital gain, $200 of long-term capital loss, and $400 of ordinary income. A and B
have equal shares in the ordinary income, however, pursuant to the partnership agreement,
capital gains and losses are subject to special allocations. The long-term capital gain is allocable
to A , and the long-term capital loss is allocable to B. It is assumed that all of the partnership's
allocations are respected under section 704(b) and the regulations thereunder. Pursuant to

-42paragraph (b)(3)(v) of this section, A's allocable share of partnership E C T I is $400 ($200 of
ordinary income plus $200 of long-term capital gain), and B's allocable share of partnership
E C T I is $200 ($200 of ordinary income).
Example 3. Withholding tax obligation where partner has net operating losses. PRS
partnership has two equal partners, F C , a foreign corporation, and D C , a domestic corporation.
F C and D C provide a valid Form W - 8 B E N and Form W - 9 , respectively, to P R S . Both F C and
P R S are on a calendar taxable year. P R S is engaged in the conduct of a trade or business in the
United States and for its first installment period during its taxable year has $100 of annualized
E C T I that is allocable to F C . A s of the beginning of the taxable year, F C had an unused
effectively connected net operating loss carryover in the amount of $300. The net operating loss
carryover is not taken into account in determining PRS's withholding tax liability for E C T I
allocable under section 704 to F C . P R S must pay 1446 tax with respect to the $100 of E C T I
allocable to F C .
§1.1446-3 Time and manner of calculating and paying over the 1446 tax.
(a) In general—(1) Calculating 1446 tax. This section provides rules for calculating,
reporting, and paying over the section 1446 withholding tax (1446 tax). A partnership's 1446

tax is equal to the amount determined under this section and shall be paid in installments during
the partnership's taxable year (see paragraph (d)(1) of this section for installment payment due

dates), with any remaining tax due paid with the partnership's annual return required to be filed
pursuant to paragraph (d) of this section. For these purposes, a partnership shall not take into
account either a partner's liability for any other tax imposed under any other provision of the
Internal Revenue Code (e.g., section 55 or 884) or a partner's distributive share of the
partnership's tax credits when determining the amount of the partnership's 1446 tax.
(2) Applicable percentage. In the case of a foreign partner that is a corporation, the
applicable percentage is the highest rate of tax specified in section 11(b)(1) for such taxable
year. Except to the extent provided in § 1.1446-5, in the case of a foreign partner that is not

taxable as a corporation (e.g., partnership, individual, trust or estate), the applicable percenta
the highest rate of tax specified in section 1.

-43-

(b) Installment payments-(l) In general. Except as provided in §1.1446-4 for certain
publicly traded partnerships, a partnership must pay its 1446 tax by making installment payments
of the 1446 tax based on the amount of partnership ECTI allocable under section 704 to its

foreign partners, without regard to whether the partnership makes any distributions to its partner
during the partnership's taxable year. The amount of the installment payments are determined in
accordance with this paragraph (b), and the tax must be paid at the times set forth in paragraph

(d) of this section. Subject to paragraph (b)(3) of this section, in computing its first installme
of 1446 tax for a taxable year, a partnership must choose whether it will pay its 1446 tax for the
entire taxable year by using the safe harbor set forth in paragraph (b)(3) of this section, or by
using one of several annualization methods available under paragraph (b)(2)(h) of this section
for computing partnership ECTI allocable to foreign partners. In the case of any underpayment
of an installment payment of 1446 tax by a partnership, the partnership shall be subject to an
addition to tax equal to the amount determined under section 6655, as modified by this section,
as if such partnership were a domestic corporation, as well as any other applicable interest and
penalties. See §1.1446-3(f). Section 6425 (permitting an adjustment for an overpayment of

estimated tax by a corporation) shall not apply to a partnership with respect to the payment of its
1446 tax.
(2) Calculation-(i) General application of the principles of section 6655. Installment
payments of 1446 tax required during the partnership's taxable year are based upon partnership

ECTI for the portion of the partnership taxable year to which they relate, and, except as set forth
in this paragraph (b)(2) or paragraph (b)(3) of this section, shall be calculated using the

-44principles of section 6655. Under the principles of section 6655, the partnership's effectively
connected items are annualized to determine each foreign partner's allocable share of partnership
ECTI under §1.1446-2. Each foreign partner's allocable share of partnership ECTI is then
multiplied by the applicable percentage for each foreign partner. This computation will yield an
annualized 1446 tax with respect to such partner. The installment of 1446 tax due with respect
to a foreign partner's allocable share of partnership ECTI equals the excess of the section
6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that partner (or, if applicable, the
adjusted seasonal amount) for the relevant installment period, over the aggregate of any amounts

paid under section 1446 with respect to that partner in prior installments during the partnership'
taxable year.
(ii) Annualization methods. A partnership that chooses to annualize its income for the
taxable year shall use one of the annualization methods set forth in section 6655(e) and the
regulations thereunder, and as described in the forms and instructions for Form 8804, "Annual
Return for Partnership Withholding Tax (Section 1446)," Form 8805, "Foreign Partner's
Information Statement of Section 1446 Withholding Tax," and Form 8813, "Partnership
Withholding Tax Payment Voucher."
(hi) Partner's estimated tax payments. In computing its installment payments of 1446
tax, a partnership may not take into account a partner's estimated tax payments.
(iv) Partner whose interest terminates during the partnership's taxable year. With respect

to a partner whose interest in the partnership terminates prior to the end of the period for which
the partnership is making an installment payment, the partnership shall take into account the

-45income that is allocable to the partner for the portion of the partnership taxable year that the
person was a partner.
(v) Exceptions and modifications to the application of the principles under section 6655.
To the extent not otherwise modified in §§1.1446-1 through 1.1446-6, or inconsistent with those

rules, the principles of section 6655 apply to the calculation of the installment payments of 1446
tax made by a partnership, except that:
(A) Inapplicability of special rules for large corporations. The principles of section
6655(d)(2), concerning large corporations (as defined in section 6655(g)(2)), shall not apply.
(B) Inapplicability of special rules regarding early refunds. The principles of section
6655(h), applicable to amounts excessively credited or refunded under section 6425, shall not
apply. See paragraph (b)(1) of this section providing that section 6425 shall not apply for
purposes of the 1446 tax.
(C) Period of underpayment. The period of the underpayment set forth in section
6655(b)(2) shall end on the earlier of the 15th day of the 4th month following the close of the

partnership's taxable year (or, in the case of a partnership described in §1.6081-5(a)(l) of this
chapter, the 15th day of the 6th month following the close of the partnership's taxable year), or
with respect to any portion of the underpayment, the date on which such portion is paid.
(D) Other taxes. Section 6655 shall be applied without regard to any references to
alternative minimum taxable income and modified alternative minimum taxable income.
(E) 1446 tax treated as tax under section 11. The principles of section 6655(g)(1) shall
be applied to treat the 1446 tax as a tax imposed by section 11.

-46(F) Prior year tax safe harbor. The safe harbor set forth in section 6655(d)(l)(B)(ii) shall
not apply and instead the safe harbor set forth in paragraph (b)(3) of this section applies.
(3) 1446 tax safe harbor-(i) In general. The addition to tax under section 6655 shall not
apply to a partnership with respect to a current installment of 1446 tax if—
(A) The average of the amount of the current installment and prior installments during

the taxable year is at least 25 percent of the total 1446 tax that would be payable on the amount
of the partnership's ECTI allocable under section 704 to foreign partners for the prior taxable
year;
(B) The prior taxable year consisted of twelve months;
(C) The partnership timely files (including extensions) an information return under
section 6031 for the prior year; and
(D) The amount of ECTI for the prior taxable year is not less than 50 percent of the ECTI
shown on the annual return of section 1446 withholding tax that is (or will be) timely filed for
the current year.
(ii) Permission to change to standard annualization method. Except as otherwise
provided in this paragraph (b)(3), if a partnership chooses to pay its 1446 tax for the first
installment period based upon the safe harbor method set forth in this paragraph (b)(3), the
partnership must use the safe harbor method for each installment payment made during the
partnership's taxable year. Notwithstanding the foregoing, if a partnership paying over 1446 tax

during the taxable year pursuant to this paragraph (b)(3) determines during an installment period
(based upon the standard option annualization method set forth in section 6655(e) and the
regulations thereunder, as modified by the forms and instructions to Forms 8804, 8805, and

-47-

8813) that it will not qualify for the safe harbor in this paragraph (b)(3) because the prior year
ECTI will not meet the 50-percent threshold in paragraph (b)(3)(i)(D) of this section, then the
partnership is permitted, without being subject to the addition to tax under section 6655, to pay
over its 1446 tax for the period in which such determination is made, and all subsequent
installment periods during the taxable year, using the standard option annualization method. A
change pursuant to this paragraph shall be disclosed in a statement attached to the Form 8804 the
partnership files for the taxable year and shall include information to allow the Service to
determine whether the change was appropriate.
(c) Coordination with other withholding rules—(1) Fixed or determinable, annual or
periodical income. Fixed or determinable, annual or periodical income subject to tax under
section 871(a) or section 881 is not subject to withholding under section 1446, and such income
is independently subject to the withholding requirements of sections 1441 and 1442 and the
regulations thereunder.
(2) Real property gains—(i) Domestic partnerships. A domestic partnership that is
otherwise subject to the withholding requirements of sections 1445 and 1446 will be subject to
the payment and reporting requirements of section 1446 only and not section 1445(e)(1) and the
regulations thereunder, with respect to partnership gain from the disposition of a U.S. real

property interest (as defined in section 897(c)), provided that the partnership complies fully with
the requirements under section 1446 and the regulations thereunder, including any reporting
obligations, with respect to dispositions of U.S. real property interests. A partnership that has
complied with such requirements will be deemed to satisfy the withholding requirements of
section 1445 and the regulations thereunder. In the event that amounts are withheld under

-48-

section 1445(a) at the time of the disposition of a U.S. real property interest, such amounts may
be credited against the section 1446 tax.
(ii) Foreign partnerships. A foreign partnership that is subject to withholding under
section 1445(a) during its taxable year may credit the amount withheld under section 1445(a)

against its section 1446 tax liability for that taxable year only to the extent such gain is allo
to foreign partners.
(3) Coordination with section 1443. A partnership that has ECTI allocable under section
704 to a foreign organization described in section 1443(a) shall be required to withhold under
this section.
(d) Reporting and crediting the 1446 tax—(1) Reporting 1446 tax. This paragraph (d) sets

forth the rules for reporting and crediting the 1446 tax paid by a partnership. To the extent tha

1446 tax is paid on behalf of a domestic trust (including a grantor or other person treated as an
owner of a portion of such trust) or a grantor or other person treated as the owner of a portion

a foreign trust, the rules of this paragraph (d) applicable to a foreign trust or its beneficiarie

shall be applied to such domestic or foreign trust and its beneficiaries or owners, as applicable,
so that appropriate credit for the 1446 tax may be claimed by the trust, beneficiary, grantor, or
other person.
(i) Reporting of installment tax payments and notification to partners of installment tax
payments. Each partnership required to make an installment payment of 1446 tax must file Form
8813, "Partnership Withholding Tax Payment Voucher (Section 1446)," in accordance with the
instructions of that form. When making a payment of 1446 tax, a partnership must notify each

foreign partner of the 1446 tax paid on its behalf. A foreign partner generally may credit a 1446

-49tax paid by the partnership on the partner's behalf against the partner's estimated tax that the
partner must pay during the partner's own taxable year. No particular form is required for a
partnership's notification to a foreign partner, but each notification must include the
partnership's name, the partnership's Taxpayer Identification Number (TIN), the partnership's
address, the partner's name, the partner's TIN, the partner's address, the annualized ECTI
estimated to be allocated to the foreign partner, and the amounts of tax paid on behalf of the
partner for the current and prior installment periods during the partnership's taxable year.
(ii) Payment due dates. The 1446 tax is calculated based on partnership ECTI allocable
under section 704 to foreign partners during the partnership's taxable year, as determined under
section 706. Payments of the 1446 tax generally must be made during the partnership's taxable
year in which such income is derived. A partnership must pay to the Internal Revenue Service a
portion of its estimated annual 1446 tax in installments on or before the 15th day of the fourth,
sixth, ninth, and twelfth months of the partnership's taxable year as provided in section 6655.
Any additional amount determined to be due is to be paid with the filing of the annual return of
tax required under this section and clearly designated as for the prior taxable year. Form 8813
should not be submitted for a payment made under the preceding sentence.
(hi) Annual return and notification to partners. Every partnership (except a publicly
traded partnership that has not elected to apply the general withholding tax rules under section
1446) that has effectively connected gross income for the partnership's taxable year allocable
under section 704 to one or more of its foreign partners (or is treated as having paid 1446 tax
under §1.1446-5(a)), must file Form 8804, "Annual Return for Partnership Withholding Tax
(Section 1446)." Additionally, every partnership that is required to file Form 8804 also must file

-50Form 8805, "Foreign Partner's Information Statement of Section 1446 Withholding Tax," and
furnish this form to the Internal Revenue Service and to each of its partners with respect to
which the 1446 tax was paid. Forms 8804 and 8805 are separate from Form 1065, "U.S. Return
of Partnership Income," and the attachments thereto, and are not to be filed as part of the
partnership's Form 1065. A partnership must generally file Forms 8804 and 8805 on or before

the due date for filing the partnership's Form 1065. See §1.6031(a)-1(c) for rules concerning the
due date of a partnership's Form 1065. However, with respect to partnerships described in
§1.6081-5(a)(l), Forms 8804 and 8805 are not due until the 15th day of the sixth month
following the close of the partnership's taxable year. Any additional tax owed under section
1446 for the prior taxable year of the partnership must be paid to the Internal Revenue Service
with the Form 8804.
(iv) Information provided to beneficiaries of foreign trusts and estates. A foreign trust or
estate that is a partner in a partnership subject to withholding under section 1446 shall be
provided Form 8805 by the partnership. The foreign trust or estate must provide to each of its

beneficiaries a copy of the Form 8805 furnished by the partnership. In addition, the foreign trus

or estate must provide a statement for each of its beneficiaries to inform each beneficiary of th
amount of the credit that may be claimed under section 33 (as determined under this section) for

the 1446 tax paid by the partnership. Until an official IRS form is available, the statement from

a foreign trust or estate that is described in this paragraph (d)(l)(iv) shall contain the follow
information—
(A) Name, address, and TIN of the foreign trust or estate;
(B) Name, address, and TIN of the partnership;

-51(C) The amount of the partnership's ECTI allocated to the foreign trust or estate for the
partnership taxable year (as shown on the Form 8805 provided to the trust or estate);
(D) The amount of 1446 tax paid by the partnership on behalf of the foreign trust or
estate;
(E) Name, address, and TIN of the beneficiary of the foreign trust or estate;
(F) The amount of the partnership's ECTI allocated to the trust or estate for purposes of
section 1446 that is to be included in the beneficiary's gross income; and
(G) The amount of 1446 tax paid by the partnership on behalf of the foreign trust or
estate that the beneficiary is entitled to claim on its return as a credit under section 33.
(v) Attachments required of foreign trusts and estates. The statement furnished to each
foreign beneficiary under this paragraph (d)(1) must also be attached to the foreign trust or

estate's U.S. Federal income tax return filed for the taxable year including the installment period
to which the statement relates.
(vi) Attachments required of beneficiaries of foreign trusts and estates. The beneficiary

of the foreign trust or estate must attach the statement provided by the trust or estate, along wit
a copy of the Form 8805 furnished by the partnership to such trust or estate, to its U.S. income
tax return for the year in which it claims a credit for the 1446 tax. See § 1.1446-3 (d)(2)(h) for
additional rules regarding a partner or beneficial owner claiming a credit for 1446 tax.
(vii) Information provided to beneficiaries of foreign trusts and estates that are partners in
certain publicly traded partnerships. A statement similar to the statement required by paragraph
(d)(l)(iv) of this section shall be provided by trusts or estates that hold interests in publicly
traded partnerships subject to §1.1446-4.

-52(2) Crediting 1446 tax against a partner's U.S. tax liability—(i) In general. A

partnership's payment of 1446 tax on the portion of ECTI allocable to a foreign partner relates to
the partner's U.S. income tax liability for the partner's taxable year in which the partner is
subject to U.S. tax on that income. Subject to paragraphs (d)(2)(h) and (hi) of this section, a
partner may claim as a credit under section 33 the 1446 tax paid by the partnership with respect
to ECTI allocable to that partner. The partner may not claim an early refund of these amounts
under the estimated tax rules.
(ii) Substantiation for purposes of claiming the credit under section 33. A partner may
credit the amount paid under section 1446 with respect to such partner against its U.S. income

tax liability only if it attaches proof of payment to its U.S. income tax return for the partner's
taxable year in which the items comprising such partner's allocable share of partnership ECTI
are included in the partner's income. Except as provided in the next sentence, proof of payment
consists of a copy of the Form 8805 the partnership provides to the partner (or in the case of a

beneficiary of a foreign trust or estate, the statement required under paragraph (d)(l)(iv) of thi

section to be provided by such trust or estate and the related Form 8805 furnished to such trust o
estate), but only if the name and TIN on the Form 8805 (or the statement provided by a foreign
trust or estate) match the name and TIN on the partner's U.S. tax return, and such form (or

statement) identifies the partner (or beneficiary) as the person entitled to the credit under sect
33. In the case of a partner of a publicly traded partnership that is subject to withholding on
distributions under §1.1446-4, proof of payment consists of a copy of the Form 1042-S, "Foreign
Person's U.S. Source Income Subject to Withholding," provided to the partner by the
partnership.

-53(iii) Tiered structures including trusts or estates-(A) Foreign trusts and estates. Section
1446 tax paid on the portion of ECTI allocable under section 704 to a foreign trust or estate that

the foreign trust or estate may claim as a credit under section 33 shall bear the same ratio to the
total 1446 tax paid on behalf of the trust or estate as the total ECTI allocable to such trust or

estate and not distributed (or treated as distributed) to the beneficiaries of such trust or estate

and, accordingly not deducted under section 651 or section 661 in calculating the trust or estate's
taxable income, bears to the total ECTI allocable to such trust or estate. Any 1446 tax that a
foreign trust or estate is not entitled to claim as a credit under this paragraph (d)(2) may be
claimed as a credit by the beneficiary or beneficiaries of such trust or estate that includes the
partnership's ECTI (distributed or deemed distributed) allocated to the trust or estate in gross
income under section 652 or section 662 (with the same character as effectively connected
income as in the hands of the trust or estate). The trust or estate must provide each beneficiary
with a copy of the Form 8805 provided to it by the partnership and prepare the statement
required by paragraph (d)(l)(iv) of this section.
(B) Use of domestic trusts to circumvent section 1446. This paragraph (d)(2)(iii)(B) shall
apply if a partnership knows or has reason to know that a foreign person that is the ultimate
beneficial owner of the ECTI holds its interest in the partnership through a domestic trust (and
possibly other entities), and such domestic trust was formed or availed of with a principal
purpose of avoiding the 1446 tax. The use of a domestic trust in a tiered trust structure may have
a principal purpose of avoiding the 1446 tax even though the tax avoidance purpose is
outweighed by other purposes when taken together. In such case, a partnership is required to pay
1446 tax under this paragraph as if the domestic trust was a foreign trust for purposes of section

-541446 and the regulations thereunder. Accordingly, all applicable penalties and interest shall
apply to the partnership for its failure to pay 1446 tax under this paragraph (d)(2)(iii)(B),
commencing with the installment period during which the partnership knew or had reason to
know that this paragraph (d)(2)(iii)(B) applied.
(iv) Refunds to withholding agent. A partnership (or nominee pursuant to § 1.1446-4)
may apply for a refund of the 1446 tax paid only to the extent allowable under section 1464 and
the regulations thereunder.
(v) 1446 tax treated as cash distribution to partners. Amounts paid by a partnership under

section 1446 with respect to a partner are treated as distributed to that partner on the earlies
the day on which such tax was paid by the partnership, the last day of the partnership taxable
year for which the tax was paid, or, the last day during the partnership's taxable year on which
the partner owned an interest in the partnership. Thus, for example, 1446 tax paid by a

partnership after the close of a partnership taxable year that relates to ECTI allocable to a fo
partner for the prior taxable year will be considered distributed by the partnership to the
respective foreign partner on the last day of the partnership's prior taxable year.
(vi) Examples. The following examples illustrate the application of this section:
Example 1. Simple trust that reports entire amount of ECTI. PRS is a partnership that
has two partners, F T , a foreign trust, and A , a U.S. person. F T is a simple trust under section
651. F T and A each provide P R S with a valid Form W - 8 B E N and Form W - 9 , respectively. F T
has one beneficiary, N R A , a nonresident alien individual. In computing its installment
obligation during the 2004 taxable year, P R S has $200 of annualized income, all of which is
ordinary ECTI. The $200 of income will be allocated equally to F T and A under section 704 and
it is assumed that such an allocation will be respected under section 704(b) and the regulations
thereunder. FT's allocable share of E C T I is $100. P R S withholds $35 under section 1446 with
respect to the $100 of E C T I allocable to FT. FT's only income for its tax year is the $100 of
income from P R S . Pursuant to the terms of the trust's governing instrument and local law, the
$100 of E C T I is not included in FT's fiduciary accounting income and the deemed distribution
of the $35 withholding tax paid under paragraph (d)(2)(v) of this section is not included in FT's

-55fiduciary accounting income. Accordingly, the $100 of E C T I is not income required to be
distributed by FT, and F T m a y not claim a deduction under section 651 for this amount. F T
must report the $100 of E C T I in its gross income and m a y claim a credit under section 33 in the
amount of $35 for the 1446 tax paid by PRS. N R A is not required to include any of the E C T I in
gross income and accordingly m a y not claim a credit for any amount of the $35 of 1446 tax paid

by PRS.
Example 2. Simple trust that distributes a portion of ECTI to the beneficiary. Assume
the same facts as in Example 1, except that P R S distributes $60 to FT, which is included in FT's
fiduciary accounting income under local law. F T will report the $100 of E C T I in its gross
income and m a y claim a deduction for the $60 required to be distributed under section 651(a) to
N R A . Pursuant to paragraph (d)(2)(iii) of this section, F T m a y claim a credit under section 33 in
the amount of $14 for the 1446 tax paid by P R S ($40/$100 multiplied by $35). N R A is required
to include the $60 of the E C T I in gross income under section 652 (as ECTI) and m a y claim a
credit under section 33 in the amount of $21 for the 1446 tax paid by P R S ($35 less $14 or
$60/$100 multiplied by $35).
Example 3. Complex trust that distributes entire ECTI to the beneficiary. Assume the

same facts as in Example 1, except that FT is a complex trust under section 661. PRS distrib
$60 to FT, which is included in FT's fiduciary accounting income. FT distributes the $60 of
fiduciary accounting income to NRA and also properly distributes an additional $40 to NRA
from FT's principal. FT will report the $100 of ECTI in its gross income and may deduct the
$60 required to be distributed to NRA under section 661(a)(1) and may deduct the $40

distributed to NRA under section 661(a)(2). FT may not claim a credit under section 33 for an
of the $35 of 1446 tax paid by PRS. NRA is required to include $100 of the ECTI in gross
income under section 662 (as ECTI) and may claim a credit under section 33 in the amount of
$35 for the 1446 tax paid by PRS ($35 less $0).
(e) Liability of partnership for failure to withhold-(l) In general. Every partnership

required to pay a 1446 tax is made liable for that tax by section 1461. Therefore, a partner

that is required to pay a 1446 tax but fails to do so, or pays less than the amount required

this section, is liable under section 1461 for the payment of the tax required to be withhel

-56chapter 3 of the Internal Revenue Code and the regulations thereunder unless the partnership can
demonstrate pursuant to paragraph (e)(2) of this section, to the satisfaction of the Commissioner
or his delegate, that the full amount of effectively connected taxable income allocable to such
partner was included in income on the partner's U.S. Federal income tax return and the full
amount of tax due on such return was paid by such partner to the Internal Revenue Service. See
paragraph (e)(3) of this section and section 1463 regarding the partnership's liability for

penalties and interest even though a foreign partner has satisfied the underlying tax liability. S
§1.1461-3 for applicable penalties when a partnership fails to pay 1446 tax. See paragraph (b) of
this section for an addition to tax under section 6655 when there is an underpayment of 1446 tax.

(2) Proof that tax liability has been satisfied. Proof of payment of tax may be established
for purposes of paragraph (e)(1) of this section on the basis of a Form 4669, "Statement of
Payments Received," or such other form as the Internal Revenue Service may prescribe in
published guidance (see §601.601(d)(2) of this chapter), establishing the amount of tax, if any,
actually paid by the partner on the income. Such partnership's liability for tax, and the
requirement that such partnership file Forms 8804 and 8805 shall be deemed to have been

satisfied with respect to such partner as of the date on which the partner's income tax return was
filed and all tax required to be shown on the return is paid in full.
(3) Liability for interest and penalties. Notwithstanding paragraph (e)(2) of this section,
a partnership that fails to pay over tax under section 1446 is not relieved from liability under
section 6655 or for interest under section 6601. See § 1.1463-1. Such liability may exist even if

there is no underlying tax liability due from a foreign partner on its allocable share of partners

-57ECTI. The addition to tax under section 6655 or the interest charge under section 6601 that is
required by those sections shall be imposed as set forth in those sections, as modified by this
section. For example, under section 6601, interest shall accrue beginning on the last date for
paying the tax due under section 1461 (which is the due date, without extensions, for filing the
Forms 8804 and 8805). The interest shall stop accruing on the 1446 tax liability on the date, and

to the extent, that the unpaid tax liability under section 1446 is satisfied. A foreign partner i
permitted to reduce any addition to tax under section 6654 or 6655 by the amount of any section

6655 addition to tax paid by the partnership with respect to its failure to pay adequate installm
payments of the 1446 tax on ECTI allocable to the foreign partner.
(f) Effect of withholding on partner. The payment of the 1446 tax by a partnership does
not excuse a foreign partner to which a portion of ECTI is allocable from filing a U.S. tax or
informational return, as appropriate, with respect to that income. Information concerning
installment payments of 1446 tax paid during the partnership's taxable year on behalf of a

foreign partner shall be provided to such foreign partner in accordance with paragraph (d) of thi
section and such information may be taken into account by the foreign partner when computing
the partner's estimated tax liability during the taxable year. Form 1040NR, "U.S. Nonresident
Alien Income Tax Return," Form 1065, "U.S. Return of Partnership Income," Form 1120F,
"U.S. Income Tax Return of a Foreign Corporation," or such other return as appropriate, must be

filed by the partner, and any tax due must be paid, by the filing deadline (including extensions)
generally applicable to such person. Pursuant to § 1.1446-3(d), a partner may generally claim a
credit under section 33 for its share of any 1446 tax paid by the partnership against the amount

-58-

income tax (or 1446 tax in the case of tiers of partnerships) as computed in such partner's return

§ 1.1446-4 Publicly traded partnerships.
(a) In general. This section sets forth rules for applying the section 1446 withholding tax
(1446 tax) to publicly traded partnerships. A publicly traded partnership (as defined in
paragraph (b) of this section) that has effectively connected gross income, gain or loss must pay

1446 tax by withholding from distributions to a foreign partner. Publicly traded partnerships that
withhold on distributions must pay over and report any 1446 tax as provided in paragraph (c),
and generally are not to pay over and report the 1446 tax under the rules in § 1.1446-3. However,

under paragraph (g) of this section, a publicly traded partnership may elect not to apply the rule
of this section, and instead, to pay the 1446 tax based on the effectively connected taxable
income (ECTI) allocable under section 704 to foreign partners under the general rules of
§§1.1446-1 through 1.1446-3. The amount of the withholding tax on distributions, other than
distributions excluded under paragraph (f) of this section, that are made during any partnership
taxable year, equals the applicable percentage (defined in paragraph (b)(2) of this section) of
such distributions.
(b) Defmitions-(l) Publicly traded partnership. For purposes of this section, the term
publicly traded partnership has the same meaning as in section 7704 (including the regulations

thereunder), but does not include a publicly traded partnership treated as a corporation under that
section.
(2) Applicable percentage. For purposes of this section, applicable percentage shall have
the meaning as set forth in §1.1446-3(a)(2).

-59(3) Nominee. For purposes of this section, the term nominee means a domestic person
that holds an interest in a publicly traded partnership on behalf of a foreign person.
(4) Qualified notice. For purposes of this section, a qualified notice is a notice given by a

publicly traded partnership regarding a distribution that is attributable to effectively connecte
income, gain or loss of the partnership, and in accordance with the notice requirements with
respect to dividends described in 17 CFR 240.10b-17(b)(1) or (3) issued pursuant to the
Securities Exchange Act of 1934, 15 U.S.C. section 78(a).
(c) Time and manner of payment. The withholding tax required under this section is to
be paid pursuant to the rules and procedures of section 1461, §§1.1461-1, 1.1461-2, and 1.63022. However, the reimbursement and set-off procedures set forth in those regulations shall not
apply. A publicly traded partnership must use Form 1042, "Annual Withholding Tax Return for
U.S. Source Income of Foreign Persons," and Form 1042-S, "Foreign Person's U.S. Source
Income Subject to Withholding," to report withholding from distributions under this section.
See §1.1461-1(b). See §1.1446-3(d)(l)(vii) requiring a foreign trust or estate that holds an
interest in a publicly traded partnership to provide a statement to the beneficiaries of such
foreign trust or estate with respect to the credit to be claimed under section 33. For penalties
additions to the tax for failure to comply with this section, see §§1.1461-1 and 1.1461-3.
(d) Rules for designation of nominees to withhold tax under section 1446. A nominee

that receives a distribution from a publicly traded partnership subject to withholding under this
section, and which is to be paid to (or for the account of) any foreign person, may be treated as
withholding agent under this section. A nominee is treated as a withholding agent under this

section only to the extent of the amount specified in the qualified notice (as defined in paragra

-60(b)(4) of this section) that the nominee receives. Where a nominee is designated as a
withholding agent with respect to a foreign partner of the partnership, then the obligation to

withhold on distributions to such foreign partner in accordance with the rules of this section sh
be imposed solely on the nominee. A nominee under this section shall identify itself as a
nominee by providing Form W-9, "Request for Taxpayer Identification Number and

Certification," to the partnership, along with the statement required by paragraph (e)(1) of this
section. If a nominee furnishes Form W-9 and the statement required by paragraph (e)(1) of this
section to the partnership, but a qualified notice is not received by the nominee from the

partnership, the nominee shall not be a withholding agent subject to the rules of this section an
the partnership shall presume that such nominee is a nonresident alien individual or foreign
corporation, whichever classification results in a higher 1446 tax being due, and pay a
withholding tax consistent with such presumption. A nominee responsible for withholding under

the rules of this section shall be subject to liability under sections 1461 and 6655, as well as f
all applicable penalties and interest, as if such nominee was a partnership responsible for
withholding under this section.
(e) Determining foreign status of partners—(1) In general. Except as provided in
paragraph (d) of this section permitting nominees to submit a Form W-9 to a publicly traded
partnership, the rules of § 1.1446-1 shall apply in determining whether a partner of a publicly
traded partnership is a foreign partner for purposes of the 1446 tax (see §1.1446-4(a)) and a
nominee obligated to withhold under this section shall be entitled to rely on a Form W-8BEN,
"Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding," Form
W-8IMY, "Certificate of Foreign Intermediary, Flow-Through Entity, or Certain U.S. Branches

-61for United States Tax Withholding," or Form W-9, "Request for Taxpayer Identification
Number," received from persons on whose behalf it holds interests in the partnership to the same

extent a partnership is entitled to rely on such forms under those rules. In addition to the rules
stated in §§1.1446-1 through 1.1446-3 with respect to certificates establishing a partner as a
domestic or foreign person, a nominee shall attach a brief statement to the Form W-9 that it
furnishes to the partnership, informing the partnership that the nominee holds interests in the
partnership on behalf of one or more foreign persons, including information that permits the
partnership to determine the partnership interest held on behalf of such foreign persons. A
statement furnished by a nominee pursuant to §1.6031(c)-IT satisfies the requirements of the
previous sentence.
(2) Presumptions regarding payee's status in absence of documentation. The rules of
§1.1446-1(c)(3) shall apply to determine a partner's status in the absence of documentation.

(f) Distributions subject to withholding-(l) In general. Except as provided in this
paragraph (f)(1), a publicly traded partnership must withhold at the applicable percentage with

respect to any actual distribution made to a foreign partner. The amount of a distribution subject
to 1446 tax includes the amount of any 1446 tax required to be withheld on the distribution and,
in the case of a partnership that receives a partnership distribution from another partnership in
which it is a partner (i.e., a tiered structure described in §1.1446-5), any 1446 tax that was
withheld from such distribution. For example, a foreign publicly traded partnership, UTP, owns
an interest in domestic publicly traded partnership, LTP. UTP does not provide LTP any
documentation with respect to its domestic or foreign status. LTP and UTP each have a calendar

-62taxable year. LTP makes a distribution subject to section 1446 of $100 to UTP during its taxable
year beginning January 1, 2004, and withholds 35 percent (the highest rate in section 1) of that
distribution under section 1446. UTP receives a net distribution of $65 which it immediately

redistributes to its partners. UTP has a liability to pay 35 percent of the total actual and deeme
distribution it makes to its foreign partners as a section 1446 withholding tax. UTP may credit
the $35 withheld by LTP against this liability as if it were paid by UTP. When UTP distributes

the $65 it actually receives from LTP to its partners, UTP is treated for purposes of section 1446
as if it made a distribution of $100 to its partners ($65 actual distribution and $35 deemed
distribution). UTP's partners (U.S. and foreign) may claim a credit against their U.S. income tax
liability for their allocable share of the $35 of 1446 tax paid on their behalf.
(2) In-kind distributions. If a publicly traded partnership distributes property other than

money, the partnership shall not release the property until it has funds sufficient to enable the
partnership to pay over in money the required 1446 tax.
(3) Ordering rule relating to distributions. Distributions from publicly traded
partnerships are deemed to be paid out of the following types of income in the order indicated(i) Amounts attributable to income described in section 1441 or 1442 that are not
effectively connected, without regard to whether such amounts are subject to withholding
because of a treaty or statutory exemption;
(ii) Amounts attributable to recurring dispositions of crops and timber that are subject to
withholding under §1.1445-5(c)(3)(iv) of the regulations, which continue to be subject to the
rules of §1.1445-5(c)(3);

-63(iii) Amounts effectively connected with a U.S. trade or business, but not subject to
withholding under section 1446 (e.g., exempt by treaty);
(iv) Amounts subject to withholding under section 1446; and
(v) Amounts not listed in paragraphs (f)(3)(i) through (iv) of this section.
(4) Coordination with section 1445(e)(1). Except as otherwise provided in this section, a
publicly traded partnership that complies with the requirements of withholding under section
1446 and this section will be deemed to have satisfied the requirements of section 1445(e)(1) and
the regulations thereunder. Notwithstanding the excluded amounts set forth in paragraph (f)(3)

of this section, distributions subject to withholding at the applicable percentage shall include t
following—
(i) Amounts subject to withholding under section 1445(e)(1) upon distribution pursuant
to an election under §1.1445-5(c)(3) of the regulations; and
(ii) Amounts not subject to withholding under section 1445 because the distributee is a
partnership or is a foreign corporation that has made an election under section 897(i).
(g) Election to withhold based upon ECTI allocable to foreign partners instead of
withholding on distributions. A publicly traded partnership may elect to comply with the
requirements of §§1.1446-1 through 1.1446-3 (relating to withholding on ECTI allocable to

foreign partners) and §1.1446-5 (relating to tiered partnership structures) instead of the rules o
this section. A publicly traded partnership shall make the election described in this paragraph
(g) by complying with the payment and reporting requirements of §§ 1.1446-1 through 1.1446-3
and by complying with the information reporting requirements of this paragraph (g). The
election is made by attaching a statement to a timely filed Form 8804, "Annual Return for

-64Partnership Withholding Tax (Section 1446)," that is required to be filed by the partnership for

the taxable year, indicating that the partnership is a publicly traded partnership that is electi
pay the 1446 tax under section 1446 based upon ECTI allocable under section 704 to its foreign
partners. Once made, an election under this paragraph (g) may be revoked only with the consent
of the Commissioner.
§1.1446-5 Tiered partnership structures.
(a) In general. The rules of this section shall apply in cases where a partnership (lower-

tier partnership) that has effectively connected taxable income (ECTI), has a partner that is its

a partnership (upper-tier partnership). A partnership that directly or indirectly (through a chai

of partnerships) owns a partnership interest in a lower-tier partnership shall be allowed a cred
against its own section 1446 withholding tax (1446 tax) for the tax paid by the lower-tier
partnership on its behalf. If an upper-tier domestic partnership directly owns an interest in a

lower-tier partnership, the lower-tier partnership is not required to pay a withholding tax with
respect to the upper-tier partnership's allocable share of effectively connected taxable income
(ECTI), regardless of whether the upper-tier domestic partnership's partners are foreign.
(b) Reporting requirements--(l) In general. To the extent that an upper-tier partnership

that is a foreign partnership is a partner in a lower-tier partnership, and the lower-tier partn
has made 1446 tax installment payments on ECTI allocable to the upper-tier partnership, the
upper-tier partnership shall receive a copy of the statements and forms filed by the lower-tier

partnership allocable to its partnership interest in the lower-tier partnership under §§1.1446-1
through 1.1446-3 (e.g., Form 8805, "Foreign Partner's Information Statement of Section 1446
Withholding Tax"). The upper-tier partnership may treat the 1446 tax paid by the lower-tier

-65partnership on its behalf as a credit against its liability to pay 1446 tax, as if the upper-tier
partnership actually paid over the amounts at the time that the amounts were paid by the lowertier partnership. See § 1.1462-1 (b). However, the upper-tier partnership may not obtain a refund
for the amounts paid by the lower-tier partnership, but instead, must file such forms as
prescribed by §1.1446-3 and this section to allow the credits under section 33 to be properly
claimed by the beneficial owners of such income. See § 1.1462-1. The upper-tier partnership
must file Form 8804, "Annual Return for Partnership Withholding Tax (Section 1446)," and
Form 8805, "Foreign Partner's Information Statement of Section 1446 Withholding Tax," with
respect to its 1446 tax obligation, passing the credit for 1446 tax paid by the lower-tier
partnership to its partners.
(2) Publicly traded partnerships. In the case of an upper-tier foreign partnership that is a
publicly traded partnership, the rules of §1.1446-4(c) shall apply.
(c) Look through rules for foreign upper-tier partnerships. For purposes of computing
the 1446 tax obligation of a lower-tier partnership, if an upper-tier partnership owns an interest
in the lower-tier partnership, the upper-tier partnership's allocable share of the lower-tier
partnership's ECTI shall be treated as allocable to the partners of the upper-tier partnership (as
they were direct partners in the lower-tier partnership) to the extent that—
(1) The upper-tier partnership furnishes the lower-tier partnership with a valid Form W8IMY, "Certificate of Foreign Intermediary, Flow Through Entity, or Certain U.S. Branches for
United States Tax Withholding," indicating that it is a look-through foreign partnership for
purposes of section 1446, and

-66(2) The lower-tier partnership can reliably associate (within the meaning of §1.1441l(b)(2)(vii)) the effectively connected partnership items allocable to the upper-tier partnership
with a Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner for U.S. Tax
Withholding," Form W-8IMY, or Form W-9, "Request for Taxpayer Identification Number and
Certification," for each of the upper-tier partnership's partners. The principles of § 1.1441l(b)(2)(vii) shall apply to determine whether a lower-tier partnership can reliably associate
effectively connected partnership items allocable to the upper-tier partnership to the partners of
the upper-tier partnership. The upper-tier partnership shall provide the lower-tier partnership
with a withholding certificate for each partner in the upper-tier partnership and information

regarding the allocation of effectively connected items to the respective partners of the upper-tie
partnership. To the extent the lower-tier partnership receives a valid Form W-8IMY from the

upper-tier partnership but cannot reliably associate the upper-tier partnership's allocable share o
effectively connected partnership items with a withholding certificate for each of the upper-tier
partnership's partners, the lower-tier partnership shall withhold at the higher of the applicable
percentages in section 1446(b). If a lower-tier partnership has not received a valid Form W8IMY from the upper-tier partnership, the lower-tier partnership shall withhold at the higher of
the applicable percentages in section 1446(b). See §1.1446-1(c)(3). The approach set forth in
this paragraph (c) shall not apply to partnerships whose interests are publicly traded. See
§1.1446-4.
(d) Examples. The following examples illustrate the provisions of § 1.1446-5:
Example 1—Sufficient documentation—tiered partnership structure, (i) Nonresident
alien ( N R A ) and foreign corporation (FC) are partners in P R S , a foreign partnership, and share
profits and losses in P R S 70 and 30 percent, respectively. All of PRS's partnership items are
allocated based upon each partner's respective ownership interest and it is assumed that these

-67allocations are respected under section 704(b) and the regulations thereunder. N R A and F C each
furnish P R S with a valid Form W - 8 B E N establishing themselves as a foreign individual and
foreign corporation, respectively. P R S holds a 40 percent interest in the profits, losses and
capital of LTP, a lower-tier partnership. N R A holds the remaining 60 percent interest in profits,
losses and capital of LTP. L T P has $100 of annualized E C T I for the relevant installment period.
P R S has no income other than the income allocated from LTP. P R S provides L T P with a valid
Form W - 8 I M Y indicating that it is a foreign partnership and attaches the valid Form W - 8 B E N s
executed by N R A and F C , as well as a statement describing the allocation of PRS's effectively
connected items among its partners. Further, N R A provides a valid Form W - 8 B E N to LTP.
(ii) LTP must pay 1446 tax on the $60 allocable to its direct partner NRA using the
highest rate in section 1.
(hi) With respect to the effectively connected partnership items that LTP can reliably
associate with N R A through P R S (70 percent of PRS's allocable share, or $28), L T P will pay
1446 tax on N R A ' s allocable share of LTP's partnership E C T I (as determined by looking
through P R S ) using the applicable percentage for non-corporate partners (the highest rate in
section 1).
(iv) With respect to the effectively connected partnership items that LTP can reliably
associate with F C through P R S (30 percent of PRS's allocable share, or $12), L T P will pay 1446
tax on FC's allocable share of LTP's E C T I (as determined by looking through P R S ) using the
applicable percentage for corporate partners.
(v) LTP's payment of the 1446 tax is treated as a distribution to NRA and PRS, its direct
partners, that those partners m a y credit against their respective tax obligations. P R S will report
its 1446 tax obligation with respect to its direct foreign partners, N R A and F C , on the Form 8804
and Form 8805 that it files with the Internal Revenue Service and will credit the amount
withheld by LTP. Thus, P R S will pass along to N R A and F C the credit for the 1446 tax withheld
by L T P which will be treated as a distribution to them.
Example 2—Insufficient documentation—tiered partnership structure. PRS is a domestic
partnership that has two equal partners A and U T P . A is a nonresident alien individual and U T P
is a foreign partnership that has two equal foreign partners, C and D. Neither A nor U T P provide
P R S with a valid Form W - 8 B E N , Form W - 8 I M Y , or Form W-9. Neither C nor D provide U T P
with a valid Form W - 8 B E N , Form W - 8 I M Y , or Form W-9. P R S must presume that U T P is a
foreign person subject to withholding under section 1446 at the higher of the highest rate under
section 1 or 11(b)(1). P R S has also not received any documentation with respect to A. P R S
must presume that A is a foreign person, and, if P R S knows that A is an individual, compute and
pay 1446 tax based on that knowledge.
§1.1446-6 Effective date.

-68Sections 1.1446-1 through 1.1446-5 shall apply to partnership taxable years beginning

after the date that these regulations are published as final regulations in the Federal Registe
Par. 5. Section 1.1461-1 is amended as follows:
1. Paragraph (a)(1) is amended by adding three sentences at the end of the paragraph.
2. The second sentence of paragraph (c)(l)(i) is removed and two sentences are added in
its place.
3. Paragraph (c)(l)(ii)(A)(8) is redesignated as paragraph (c)(l)(ii)(A)(9), and a new
paragraph (c)(l)(ii)(A)(8) is added.
4. The first sentence of paragraph (c)(2)(i) is removed and two sentences are added in its
place.
5. The first sentence of paragraph (c)(3) is removed and two sentences are added in its
place.
6. Paragraph (i) is revised.
The additions and revisions read as follows:
§1.1461-1 Payment and returns of tax withheld.
(a) * * *
(1) * * * with respect to withholding under section 1446, this section shall only apply to

publicly traded partnerships that have not made an election under § 1.1446-4(g). See § 1.1461 -

for penalties applicable to partnerships that fail to withhold under section 1446 on effectivel

connected taxable income allocable to foreign partners, including a publicly traded partnership
that has made an election under § 11446-4(g). The previous two sentences shall apply to

-69partnership taxable years beginning after the date that these regulations are published as final
regulations in the Federal Register.

n\ * * *
(i) * * * Notwithstanding the preceding sentence, any person that withholds or is required
to withhold an amount under sections 1441, 1442, 1443, or §1.1446-4(a) must file a Form 1042S, "Foreign Person's U.S. Source Income Subject to Withholding," for the payment withheld
upon whether or not that person is engaged in a trade or business and whether or not the payment
is an amount subject to reporting. The reference in the previous sentence to withholding under

§1.1446-4 shall apply to partnership taxable years beginning after the date that these regulations
are published as final regulations in the Federal Register.* * *
i 11 i

(A) * * *
(8) A partner receiving a distribution from a publicly traded partnership subject to
withholding under section 1446 and §1.1446-4. This paragraph (c)(l)(ii)(A)(8) shall apply to
partnership taxable years beginning after the date that these regulations are published as final
regulations in the Federal Register.

(2) Amounts subject to reporting—(i) In general. Subject to the exceptions described in
paragraph (c)(2)(h) of this section, amounts subject to reporting on Form 1042-S are amounts
paid to a foreign payee or partner (including persons presumed to be foreign) that are amounts

-70subject to withholding as defined in §1.1441-2(a) or §1.1446-4(a). The reference in the previous
sentence to withholding under §1.1446-4 shall apply to partnership taxable years beginning after

the date that these regulations are published as final regulations in the Federal Register. * * *

(3) Required information. The information required to be furnished under this paragraph

(c)(3) shall be based upon the information provided by or on behalf of the recipient of an amount
subject to reporting (as corrected and supplemented based on the withholding agent's actual
knowledge) or the presumption rules of §§1.1441-l(b)(3), 1.1441-4(a); 1.1441-5(d) and (e);
1.1441-9(b)(3), 1.1446-l(c)(3) or 1.6049-5(d). The reference in the previous sentence to
presumption rules applicable to withholding under section 1446 shall apply to partnership
taxable years beginning after the date that these regulations are published as final regulations
the Federal Register. * * *

(i) Effective date. Unless otherwise provided in this section, this section shall apply to
returns required for payments made after December 31, 2000.
Par. 6. Section 1.1461-2 is amended by:
1. Removing the first sentence of paragraph (a)(1) and adding two sentences in its place.
2. Revising paragraphs (b) and (d).
The revisions and addition read as follows:
§1.1461-2 Adjustments for overwithholding or underwithholding of tax.
(a) Adjustments of overwithheld tax-(l) In general. Except for partnerships or nominees
required to withhold under section 1446, a withholding agent that has overwithheld under

-71chapter 3 of the Internal Revenue Code, and made a deposit of the tax as provided in §1.63022(a) may adjust the overwithheld amount either pursuant to the reimbursement procedure
described in paragraph (a)(2) of this section or pursuant to the set-off procedure described in

paragraph (a)(3) of this section. References in the previous sentence excepting from this section
certain partnerships withholding under section 1446 shall apply to partnership taxable years

beginning after the date that these regulations are published as final regulations in the Federal
Register. * * *

(b) Withholding of additional tax when underwithholding occurs. A withholding agent
may withhold from future payments (or a partner's allocable share of ECTI under section 1446)
made to a beneficial owner the tax that should have been withheld from previous payments (or
paid under section 1446 with respect to a partner's allocable share of ECTI) to such beneficial
owner under chapter 3 of the Internal Revenue Code. In the alternative, the withholding agent
may satisfy the tax from property that it holds in custody for the beneficial owner or property
over which it has control. Such additional withholding or satisfaction of the tax owed may only
be made before the date that the annual return (e.g. Form 1042, Form 8804) is required to be
filed (not including extensions) for the taxable year in which the underwithholding occurred.
See §1.6302-2 for making deposits of tax or §1.1461-l(a) for making payment of the balance due
for a calendar year. See also §§1.1461-1, 1.1461-3, and 1.1446-1 through 1.1446-5 for rules
relating to withholding under section 1446. References in this paragraph (b) to withholding
under section 1446 shall apply to partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.

-72-

(d) Effective date. Unless otherwise provided in this section, this section applies to
payments made after December 31, 2000.
Par. 7. Section 1.1461-3 is added to read as follows.
§1.1461-3 Withholding under section 1446.
For rules relating to the withholding tax liability of a partnership or nominee under

section 1446, see §§1.1446-1 through 1.1446-6. For penalties and additions to the tax for failur
to timely pay the tax required to be paid under section 1446, see sections 6655 (in the case of
publicly traded partnerships that have not made an election under §1.1446-4(g), see section
6656), 6672, and 7202 and the regulations under those sections. For penalties and additions to

the tax for failure to file returns or furnish statements in accordance with the regulations und
section 1446, see sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and the

regulations under those sections. This section shall apply to partnership taxable years beginning

after the date that these regulations are published as final regulations in the Federal Register
Par. 8. Section 1.1462-1 is amended by revising paragraphs (b) and (c) to read as
follows:
§1.1462-1 Withheld tax as credit to recipient of income.

(b) Amounts paid to persons who are not the beneficial owner. Amounts withheld at
source under chapter 3 of the Internal Revenue Code on payments to (or effectively connected
taxable income allocable to) a fiduciary, partnership, or intermediary is deemed to have been
paid by the taxpayer ultimately liable for the tax upon such income. Thus, for example, if a

-73beneficiary of a trust is subject to the taxes imposed by section 1, 2, 3, or 11 upon any portion
the income received from a foreign trust, the part of any amount withheld at source which is
properly allocable to the income so taxed to such beneficiary shall be credited against the
amount of the income tax computed upon the beneficiary's return, and any excess shall be
refunded. See §1.1446-3 for examples applying this rule in the context of a partnership interest
held through a foreign trust or estate. Further, if a partnership withholds an amount under

chapter 3 of the Internal Revenue Code with respect to the distributive share of a partner that is

partnership or with respect to the distributive share of partners in an upper-tier partnership, su
amount is deemed to have been withheld by the upper-tier partnership. See § 1.1446-5 for rules

applicable to tiered partnership structures. References in this paragraph (b) to withholding under
section 1446 shall apply to partnership taxable years beginning after the date that these
regulations are published as final regulations in the Federal Register.
(c) Effective date. Unless otherwise provided in this section, this section applies to
payments made after December 31, 2000.
Par. 9. Section 1.1463-1 is amended by:
1. Adding two sentences at the end of paragraph (a).
2. Revising paragraph (b).
The addition and revision read as follows:
§1.1463-1 Tax paid by recipient of income.
(a) * * * See §1.1446-3(1) for additional rules where the tax was required to be withheld
under section 1446. The reference in the previous sentence to withholding under section 1446

-74-

shall apply to partnership taxable years beginning after the date that these regulations a
published as final regulations in the Federal Register.
(b) Effective date. Unless otherwise provided in this section, this section applies to
failures to withhold occurring after December 31, 2000.
PART 301-PROCEDURE AND ADMINISTRATION
Par. 10. The authority for 26 CFR part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 11. In §301.6109-1 is amended as follows:
1. In paragraph (b)(2)(vi), remove the word "and".

2. In paragraph (b)(2)(vii), remove the period at the end of the paragraph and add "; and"
in its place.
3. Paragraph (b)(2)(viii) is added.
4. In paragraph (c), the first three sentences are revised and a sentence is added at the
end of the paragraph.
The amendments and additions read as follows:
§301.6109-1 Identifying numbers.

/^\ * * *

^2) * * *
(viii) A foreign person that furnishes a withholding certificate described in §1.1446-

1(c)(2) or (3) of this chapter. This paragraph (b)(2)(viii) shall apply to partnership tax

-75beginning after the date these regulations are published as final regulations in the Federal
Register.
(c) Requirement to furnish another's number. Every person required under this title to
make a return, statement, or other document must furnish such taxpayer identifying numbers of

other U.S. persons and foreign persons that are described in paragraph (b)(2)(i), (ii), (hi), (vi
(vh), or (viii) of this section as required by the forms and the accompanying instructions. The
taxpayer identifying number of any person furnishing a withholding certificate referred to in

paragraph (b)(2)(vi) or (viii) of this section shall also be furnished if it is actually known t
person making a return, statement, or other document described in this paragraph (c). If the
person making the return, statement, or other document does not know the taxpayer identifying

number of the other person, and such other person is one that is described in paragraph (b)(2)(i)

(ii), (hi), (vi), (vii), or (viii) of this section, such person must request the other person's n
* * * References in this paragraph (c) to paragraph (b)(2)(viii) of this section shall apply to
partnership taxable years beginning after the date these regulations are published as final
regulations in the Federal Register.

Par. 12. In §301.6721-1, paragraph (g)(4) is revised to read as follows:
§301.6721-1 Failure to file correct information returns.

I O" 1

(4) Other items. The term information return also includes any form, statement, or
schedule required to be filed with the Internal Revenue Service with respect to any amount from

-76which tax is required to be deducted and withheld under chapter 3 of the Internal Revenue Code
(or from which tax would be required to be so deducted and withheld but for an exemption under
the Internal Revenue Code or any treaty obligation of the United States), generally Forms 1042S, "Foreign Person's U.S. Source Income Subject to Withholding," and 8805, "Foreign Partner's
Information Statement of Section
1446 Withholding Tax." The provisions of this paragraph
(g)(4) referring to Form 8805, shall apply to partnership
taxable years beginning after the date these regulations are

-77published as final regulations in the Federal Register.

Robert E. Wenzel
Deputy Commissioner for Services and Enforcement.

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.
September 2, 2003
JS-691
Statement by Secretary of the Treasury John Snow
on the Departure of General Counsel David Aufhauser
"David Aufhauser has served our nation with superb leadership and vision during a
time of great challenge. As Chairman of the National Security Council's Policy
Coordinating Committee on Terrorist Financing, he has helped direct the U.S.
government's efforts to halt the flow of money that funds terror. Since the
September 11th attacks, the U.S. has designated more than 290 individuals and
entities as terrorists and terrorist supporters and, along with our international
partners, has frozen over $136 million in assets worldwide. Under David's
leadership, new alliances have been forged internationally to fight the financing of
terror and more than 80 nations have implemented laws that will help keep money
out of the hands of terrorists.
"Additionally, David has led Treasury's efforts to secure the nation's financial
system against money laundering and the financing of terror through
implementation of the Patriot Act. He has also worked to restore integrity and
confidence to the financial markets as Treasury's representative on the Justice
Department's Corporate Fraud and Abuse Task Force. Finally, he has spearheaded
the hunt for assets belonging to the former Iraqi regime and has worked tirelessly to
secure their return to Iraq for the good of the Iraqi people. President Bush and I are
grateful for his outstanding service to the Treasury Department and to our nation."
Related Documents:
• Letter from David Aufhauser to President Bush

September 2, 2003

The President
The White House
Washington, D.C. 20500
Dear Mr. President:
It is with both pride and regret that I respectfully submit my resignation as
General Counsel of the Department of the Treasury effective September 30, 2003. Pride
because it has been a privilege and an honor to serve in an Administration governed by
principle, clarity and unquestioned purpose. Regret in that I cannot imagine working
with a finer group of people than m y friends at Treasury and the m a n y colleagues
throughout the government that banded together to marshal your campaign against the
financing of terror.
Although I have had many responsibilities, it is the latter that has defined a
significant amount of m y work. Your leadership in this area has altered the international
legal landscape, secured our financial borders and substantially reduced the threat of
harm or death to m a n y innocents. The chance to be a part of that endeavor will leave m e
forever in your debt.
Sincerely,

David D. Aufhauser

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 3, 2003
JS-692
Press Roundtable Transcript with Treasury Secretary Snow
in Beijing, China on September 3, 2003."

S N O W : Thank you very much Mr. Ambassador. Thank you very much for all your
kindness and hospitality during our visit. The ambassador and I have been
spending a great deal of time together, as w e have called upon the economic and
political leaders of your great country.
Let me say that we have had a series of very good meetings, very important
meetings and, to me, very encouraging meetings. So, let m e begin by thanking m y
hosts for inviting m e to Beijing - m e and m y colleagues from the Treasury
Department - to discuss issues of mutual interest to our two countries. I've been to
China many times in the past in a private capacity, as a businessman. This is m y
first opportunity to be here in m y new capacity as a representative of the United
States government. I want to state how much I appreciate the hospitality and the
warmth and the friendship that has been extended to us, to m e and to the Treasury
delegation, throughout the course of our discussions. I a m honored this afternoon
to have the opportunity to continue those discussions with the premier, with Premier
W e n . In all of these discussions I have found the Chinese leaders open, frank and
encouraging of the close ties and the close working relationship between our two
countries.
Early last year when President Bush visited China and met with President Jiang
Zemin, President Bush said, and I want to quote him here because I think his quote
sets the foundation for this relationship. He said, "China and the United States,
both with significant influence in the world, should step up dialogue and
cooperation, properly handle their differences, and work together to move the
constructive and cooperative relations between us further forward." Our talks this
week are fully in keeping with the spirit of President Bush's comments.
One thing is clear and that is economic engagement and extending the
engagement between the United States and China will promote prosperity in both of
our countries and, in addition, for all of our trading partners. Our trade with you
makes your economy stronger. Your trade with us makes our economy stronger.
As our economies are stronger, benefits are extended to the rest of our trading
partners. So just as China benefits from our market, U.S. businesses and
consumers should benefit from China's growth. Clearly, investments and
technology from the United States help to sustain high growth in China.
In recent years, China has made historic strides in reforming its economy and
moving to a market-based system. W e applaud that and urge continued progress.
It's been our view for some time that the best international economic system, the
best for China, and the best for the United States, and the best for the whole trading
world is one based on the principle of free trade, open markets, free capital flows,
and market-based exchange rates, among the major economies. China is now
clearly one of the major economies of the world. It's with these principles in mind,
these ideas in mind, that I a m here to discuss our economic relationship with the
Chinese leaders and to encourage China to continue to take advantage of its strong
growth to accelerate progress in all of these areas. The growth which China has
enjoyed makes it easier to move further in the direction of open markets and
floating exchange rates and free capital flows and to advance these ideas within the
economy of China for the benefit of the Chinese people.
It's important to recognize that the United States is committed to a growing, healthy

and mutually beneficial trade relationship with China. In that regard, it's very
important that China continue its efforts to fully implement the commitments it m a d e
to the World Trade Organization. Progress on market opening should be m a d e for
products such as soy beans, which is important to the United States, of course, but
important to the citizens of China as well. W e also encourage further relaxation of
the ownership rules in the area of financial services.
Another area of concern for me is that U.S. companies continue to lose billions of
dollars because of the piracy of intellectual property. Enforcement of the good
intellectual property laws which China has put in place is essential to our continued
economic relationship.
Another area that is important is the free flow of capital. The free flow of capital is a
fundamental component of our global system of international trade and international
finance. While I applaud and welcome the recent policy changes that allow for
greater capital mobility, it's in China's interest to accelerate these efforts. For
example, it would be beneficial to expand the qualified institutional investor
programs, to increase both portfolio inflows and portfolio outflows. It would also be
advantageous to liberalize the long-term debt transactions, and overall to create
open capital markets. A s w e talked to the Chinese economic leaders w e
emphasized over and over the necessity to develop open capital markets. They
really are the key to the success of a market-based economy.
Finally, let me turn to the subject of exchange rates, because the subject of
exchange rates has also been much in discussion a m o n g us. The establishment of
flexible exchange rates, of a flexible exchange rate regime, would benefit both our
nations as well as our regional and global trading partners. Market-determined
floating currencies are really the key to a well-functioning international financial
system. For the world's major traders, only freely floating currencies bring the
accuracy and the efficiency necessary for the proper pricing account settlement in
capital flows. That's really our central point, that floating rates, market-based,
flexible exchanges create the signals for a well-functioning flow of resources on a
global basis. There's ultimately no substitute for that.
We've learned over the years that rigidities of all kinds, including rigidities in
exchange rate mechanisms, tend to distort the proper functioning of markets. O p e n
competitive markets with little or no interference are essential. They are really
needed to insure that people and investment capital can seek out the best ideas
and opportunities.
How do economies grow? How do they prosper? They grow and prosper by
bringing people with ideas together with people with capital. Then, seeing those
ideas flower in the marketplace, with new products and new services. That's the
engine of growth, and it requires the availability of capital and it requires markets
that m a k e capital available to those entrepreneurs and businesses that generate
the ideas and will employ people and bring people and capital together.
So progress on each of these issues, in our view, will yield long-term benefits for
the peoples of China, the peoples of the United States and the peoples of the
world. This is clearly a win-win situation for China and the United States; a win-win
situation brought about by embracing these ideas of open markets, capital flows,
floating exchange rates.
During my meetings this week I expressed these views with the Chinese economic
leaders. O n the need for currency flexibility, in particular, I w a s encouraged. I w a s
encouraged to hear the reaffirmation of China's longstanding goal to m o v e toward
greater flexibility. In the course of those discussions I w a s repeatedly assured that
interim steps are now being taken and progress in this area will continue.
In order to continue this dialogue, in order to further communications and
understanding between our nations on this issue and other important economic,
financial and trade issues, I yesterday extended an open invitation to host the VicePremier, Huang Ju, and other officials to c o m e to Washington to continue the work
on these important matters.
We also intend to appoint a Treasury Attache at the U.S. Embassy in Beijing where
the Ambassador tells m e that that Treasury person will be well cared for, and
looked after, and will an important part of the Ambassador's team. Let m e conclude

by saying that I look forward to our continued discussions as w e cooperate to
enhance our economic relationship.
So I thank you very much and now look forward to your questions:
QUESTION: When you talk about these interim measures on the currency, what
measures specifically are you talking about, and what concretely do you expect to
leave here with?
SNOW: Well, we have in mind things like expanding the opportunities for capital
flows, expanding the opportunities for ownership of financial assets. W e have in
mind things that are underway already, being expanded and accelerated, removing
s o m e of the burdensome capital requirements in the banking system, capital asset
ratio requirements; and ownership rules, relaxation of ownership rules; a variety of
things in this area.
QUESTION: On currency though, specifically? Interim measures?
SNOW: Right, well these are interim measures that prepare the economy for a
floating exchange rate system, that get it ready for a floating-exchange system.
That was the nature of a lot of our dialogue, the interim steps, putting in place the
interim steps that prepare the way for an effective floating regime.
QUESTION: Do you have a timetable for these interim measures?
SNOW: Well they're underway right now, and we're pleased to see them
underway. W e want to see them accelerate. Our conversation yesterday with the
economic leaders indicated that more is coming, and w e urged that on, w e urged
them on with doing more.
QUESTION: And could you tell us were the Chinese receptive to your ideas, I
m e a n the incentives for them to adopt these moves?
SNOW: The incentives are their own advantage. It's in China's advantage to open
its system up. It's in China's advantage to encourage greater flows both in and
out. It's in China's interest to secure a more market-based set of financial
institutions. And, as China moves down this path, it prepares the way to m o v e to
floating rates. That was the essence; that was an important part of our discussion
yesterday.
QUESTION: Could I ask you to be a little specific about this? Was it in essence
these interim measures attempted to rebalance the demand between the renminbi
and the dollar? Specifically was it to allow more Chinese companies to invest in
U.S. Treasuries, and do they also mention allowing domestic Chinese companies or
funds to invest in stock markets abroad?
SNOW: Yes. It's not. No further actions need to be taken to allow foreign
investment in the United States bond market. It's an open market, so any
restrictions would be local restrictions not U.S. restrictions of course. But w e had
that discussion of opening up opportunities for investments going both ways, in both
the financial arena and in the non-financial arena.
QUESTION: I'd like to ask a question about the trade relations between the two
sides. The American trade deficit with China has attracted much attention from
your side for a long time. As w e know, with the development of trade liberalization
and economic globalization, I think that it's not so important to just talk about
bilateral trade surplus or deficit. For example, China has several thousand billion
dollar U.S. trade surplus with the United States, but she also has an approximately
forty billion U.S. dollar trade deficit with the other Asian countries like Japan and
Malaysia and the Republic of Korea. And this offsets the surplus with the U.S. At
the s a m e time, China has a trade surplus with the United States. She also
purchases a large amount of American debt, which offer a great support to the
American economy. So can w e say that the trade relations between the U.S. and
China are not only just bilateral trade relations, but are also multiparty and mutually
beneficial relations on the global trading system? What w e should do is to develop
this win-win or multi-win trade relations. Do you agree with that?

S N O W : I'm not sure I fully understand the question, but let m e try and respond as
best I do understand it. The United States and China have a good trade
relationship. W e benefit from the opportunity to have low-cost goods from China in
the United States and you benefit from the opportunity to take advantage of U.S.
exports. We'd like to see that trade deficit narrowed though. I think it's
unsustainably large at current levels. O n e way for it to narrow is for the domestic
economy of China to strengthen. Because as it strengthens, then with more
disposable income in China, there will be an increase in the propensity to buy U.S.
goods, and that would be healthy. S o w e are urging the Chinese officials to
continue with their reform strategies, because those reform strategies, if persisted
in, if continued, will clearly create a stronger domestic economy. That's in China's
interest and it's very much in the U.S. interest as well. We're interested in selling
more products and services in China. China will benefit from that, just as you
benefit from access to our markets.
QUESTION: I take it from your choice of language that you would say that China is
not at this m o m e n t ready for a free floating currency. A m I correct in that
assumption, and if they're not ready now, what specifically do they have to do?
H o w long will it take?
SNOW: Well, the objective here is to get a commitment to move to a free-floating
currency. That's what w e want. We'd like to see China operating in a regime of
market-based, floating, flexible exchange rates. And as I said in m y comments, I
w a s encouraged to see the Chinese officials reaffirm that objective, that policy
goal. I w a s also pleased to see them making strides on the interim steps that have
to be put in place. I don't think it's helpful for us to try to talk about a timetable. I do
think it's helpful though to see that reaffirmation of the policy direction, and to see
the progress that's being m a d e in the commitment to further progress on these
interim steps.
QUESTION: Mr. Secretary could you tell us if you discussed at all any specific
sectors of trade, U.S. sectors of trade, textiles, furniture, or shoes or any of the
other sectors where there's been s o m e political pressure in the Unites States to do
something about China trade? Did any of your Chinese hosts discuss any specific
measures that they might take to address any concerns in those specific sectors?
SNOW: Well our discussions were more general I would say than sector-specific,
although the financial sector did receive a good deal of specific attention, because a
focal point of our conversations was moving towards flexibility in exchange rates.
It's the freeing up and opening up of the financial sector which is part and parcel of
moving to fluctuating rates. But w e did talk generally about opening up markets in
other areas, about the intellectual property rights and better enforcement there;
about making the market more open for soybeans; and, as I say, financial services;
and agriculture in general. So there was a general discussion of other areas and a
more specific discussion of financial services.
QUESTION: The National Association of Manufacturers says that China maintains
an artificially low exchange rate that is the single biggest factor in manufacturing job
loss in the U.S. and I'm wondering if you consider the Yuan undervalued. If so by
how much? And what relationship does that have to the loss of jobs in the U.S.?
SNOW: What we're seeking is broad movement to flexibility so that markets can be
allowed to set values. We're placing our confidence in markets. The only way
ultimately to know the answer is to place your confidence in markets. Therefore I'm
encouraged by what I heard. W e want to m a k e sure that you use markets so that
there isn't any artificial propping up of one sector or another, so the U.S.
manufacturers will have a fair opportunity to compete on a level playing field.
QUESTION: I would like to ask: you are going to have a meeting with Premier
W e n Jiabao this afternoon. What are the topics that you are especially interested in
during your meeting with the Premier?
SNOW: It'll be a continuation of the subjects we've reviewed here. I will commend
the Premier on the enormous progress that's being m a d e in this economy. I will
c o m m e n d him on the reforms that are underway. I will reaffirm the importance of
this relationship. I will let him know that w e want to see a win-win relationship
between China and the United States. I will tell him that w e have an enormous
amount to gain together, working together. I will urge him on with the reforms and
indicate specifically our interest in seeing a movement to more open capital flows;

applauding China's W T O commitment, open banking and insurance markets, to
foreign services; indicate that s o m e problems remain. We'd like to see continuing
progress in this area. I'll suggest to him that it's in China's interest to adopt flexible,
risk-based capital requirements for the banking sector. I will indicate our interest in
seeing China m o v e forward and honor the commitments it's m a d e to allowing
branching by non-life insurance companies, financial services companies. I will
urge, as well, continued progress on securities and asset-management, including
importantly allowing a majority ownership by foreign firms.
We see more robust capital markets, more market-based capital markets as an
essential component of the China of the future. In saying that, our position is it's in
China's interest to m o v e in that direction. I will suggest to him our interest in seeing
China m o v e towards a floating rate, a flexible regime of international currencies.
In addition, at some point our conversation will turn to terrorist finance, and I will
c o m m e n d the Premier for China's cooperation in dealing with the threat of terrorist
finance. The United States, with China and other nations of the civilized world, are
committed to dealing with the terrorist threat. A n important component of dealing
with terrorism is dealing with terrorist finance. I want to reaffirm our mutual
commitments to do that. And of course I will thank the Premier on behalf of the
President for the leadership China is showing in dealing with the threat of nuclear
arms on the Korean Peninsula.
QUESTION: I have two questions. One is: many analysts blame this round of the
Japanese economic recession on the Plaza Accord 1985. I want to know: do you
agree with that? Meanwhile I would like to know your opinion on h o w the foreign
exchange rate influence could be used to resolve the trade deficit.
SNOW: Fluctuating exchange rates, if they're really used, provide a mechanism for
the adjustments that need to be m a d e so that imbalances aren't sustained in the
world economy. That's really why w e want to use flexible exchange rates. If a
country has a surplus, and it goes on for quite a while, the fluctuating exchange rate
mechanism will provide for an adjustment process as currencies change values. If
a country is in long-term deficit, the exchange rate mechanism will provide for an
adjustment of currencies which will correct it. The virtue of fluctuating rates is that
the price signals are working to create a healthy and efficient, continuous
adjustment process. Where fluctuating rates, market-based rates, are impeded,
imbalances develop in individual economies and they develop in the world trading
system. S o the world trading system is more efficient. It works better. It works
better under a regime of fluctuating exchange rates. S o that's why w e will be urging
the authorities to m o v e in that direction, and to take the steps that prepare the w a y
for the implementation of a fluctuating, market-based regime of currencies.
I thank you very much for this opportunity to be with you and respond to your
questions.

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 3, 2003
JS-693
Remarks of Peter R. Fisher
Under Secretary for Domestic Finance
To
American Enterprise Institute Conference
Washington, D C
Can Nonfinancial Indicators Succeed Where G A A P Fails?
To improve corporate behavior and to reward corporate performance w e need to
improve the quality and utility of the information that all corporations disclose to
investors. Our existing disclosure framework is not adequate.
Peter Wallison and AEI are to be congratulated for bringing together - once again
- so much talent on such an important topic. I certainly hope that non-financial
indicators of business performance can succeed in providing investors the
information they need and deserve, where G A A P has failed. But I also hope that
w e can improve the state of financial disclosure and, by doing so, provide stronger
incentives for companies to disclose business performance measures.
To succeed, 1 believe that we must acknowledge the insufficiency of the
accountant's mindset, which animates our existing disclosure framework, and
focuses on identifying facts (about the past) that are precisely comparable between
firms. Investors have a different mindset and focus on comprehending the
probabilities of likely and unlikely future deviations from particular desired or
expected outcomes. W e need to remedy this mismatch between what investors are
looking for and what our disclosure regime provides.
There has always been an asymmetry between the information available to
corporate insiders and to outside investors. A principle purpose of any regime of
minimum disclosure standards is to redress this imbalance. The computing,
communications and data management revolution of the last two decades has
significantly increased the information advantage of insiders, giving them access to
timely and detailed data about near-term company prospects in customer order
flow, cost management, revenues and other indicators of performance.
This information needs to be organized and presented to investors on a systematic
basis. S o m e companies are doing this. More need to do this. To provide stronger
incentives for companies to make these business value disclosures w e need to
improve the clarity of financial disclosures.
To do this we need to move beyond the false dichotomy between on- and offbalance sheet. Shareholders and creditors need to know the real economic
leverage being employed, whether through on- or off-balance devices. W e need a
measure of all the contractually obligated liabilities - both on and off-balance sheet
- and a parallel measure of all of the firm's contractually obligated revenues. Tying
these together will give us the firm's contractually-obligated net-present value, a
true indictor of the firm's leverage.
Clearly disclosing this number - which will not include hoped-for or anticipated
revenues, but only those for which there is a customer contract - would create a
strong incentive for companies to disclose more clearly how they plan to generate
the cash flow to close the gap between expenses and revenues and to disclose the
measures of business performance that will indicate the extent of their plan's
success.
To move in this direction, there are two challenges that I think deserve our

attention. The non-linear nature of contingent claims, particularly reflected in
options, poses a significant but manageable technical problem for financial
disclosures. A more general challenge, affecting both financial and non-financial
disclosures, is to squarely confront the subjective nature of risk.
To measure accurately the present value of the future contractually obligated cash
flows w e need to deal with the contingent nature of various assets and liabilities,
particularly options exposures. Simply put, investors need different facts about an
option at different stages in an option's life cycle. This does not c o m e naturally to
the accountant's mindset - of looking for discrete facts directly comparable between
firms - but properly understood it need not be at odds with it either. However, this
information is vital for investors.
Imagine a short list of attributes needed to describe a caterpillar: length, width,
color and number of legs. Perfectly adequate to the task of portraying caterpillars,
these four attributes will not portray very well the features of butterflies. Precise
comparisons of caterpillars and butterflies using just these few attributes m a y well
mislead and confuse. To describe the non-linear process of metamorphosis w e
need something more than a precise comparison of key facts about caterpillars or
even key facts about butter flies.
We are not, however, just interested in observing facts. To carry the analogy to
investors forward, w e are interested in whether these particular caterpillars are
likely to turn into butterflies or whether they are likely to b e c o m e moths. W e are not
principally interested in comparing caterpillars to caterpillars. W e are interested in
those attributes of caterpillars which help us comprehend the probability of the
hoped for transformation into butterflies.
To deal with contingent values, financial disclosures useful to investors need to
include those features that best foreshadow the probabilities of different outcomes
and those that summarize the course of the transformation.
The broader challenge for our disclosure regime is the subjective nature of risk.
Risk is deviation from a particular goal or objective. You cannot understand risk
without first articulating an objective. The "intended", the "desired" or the
"expected" path must be identified before you can think clearly about likely and
unlikely deviations.
In the world of derivative accounting and disclosure, this issue is frequently boiled
d o w n to the question: Is it the asset or is it the hedge? Without a clear statement of
objective it is difficult to answer that question. But if you have a clear understanding
of the objective (or, at least, of the expected outcome) then you can articulate the
risks being managed and, therefore, identify which is the asset and which is the
hedge. For our disclosure regime premised on the accountant's mindset this is a
challenge because it suggests that there is no single correct w a y to disclose a
particular set of contingent cash flows.
Applied to non-financial measures the subjective nature of risk is not complicated
but it m a y be awkward.
While investors are interested in some absolute financial comparisons between
firms (such as earnings per share), they are keenly interested in the performance of
the particular business - that is, of the relative success of one company at
managing deviation from their stated objective compared with the success of other
companies at managing deviation from their stated objectives. The objectives m a y
be quite different but w e ought to be able to compare their ability to m a n a g e relative
to their o w n objectives.
It should be self-evident that investors need information about whether a company
is growing its business as planned or whether it is failing to do so. Accurate
disclosure - of useful financial and non-financial indicators -will require companies
to be more transparent about their objectives and about their deviations from
objectives - that is, to be transparent about their failures - or their "un-successes".
As awkward as this may be for individual companies, for the health of our economy
it is vital that w e do an even better job of rewarding good corporate performance. In

our system of investor-based capitalism this must involve improving the quality and
utility of the information provided to investors.

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
September 03, 2003

202-691-3550

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

September 04, 2003
October 02, 2003
912795NQ0

High Rate: 0.950% Investment Rate 1/: 0.968% Price: 99.926
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 55.47%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

39,691,900
42,333
0

16,957, 760
42, 333
0

39,734,233

17,000, 093

3,451,634

3,451, 634

43,185,867

20,451, 727

Median rate
0.945%: 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 = 39,734,233 / 17,000,093 = 2.34
1/ Equivalent coupon-issue yield.

j S o<w
http://www.publicdebt.treas.gov

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 3, 2003
JS-695
Treasury and IRS Announce over-the-counter Drugs
to be covered by Health Care Flexible Spending Accounts
Today, the Treasury Department and the IRS announced over-the-counter drugs
can be paid for with pre-tax dollars through health care flexible spending accounts.
Treasury and IRS issued guidance clarifying that reimbursements for
nonprescription drugs by an employer health plan are excluded from income. Thus,
reimbursements by health flexible spending arrangements (FSAs) and other
employer health plans for the cost of over-the-counter drugs available without
prescription are not subject to tax if properly substantiated by the employee.
"Flexible Spending Accounts are an important tool in helping people meet their
health care costs," stated Treasury Secretary John Snow. "Since many prescription
drugs have moved to the over-the-counter market, this action today makes paying
for them a little bit easier to swallow."
"Flexible Spending Accounts were established under the tax code to provide
incentives for better health care," said IRS Commissioner Mark W . Everson. "This
action is a sensible expansion and simplification of the program consistent with
existing law."
Drugs are increasingly becoming available over-the-counter without prescription.
Many health plans no longer cover the cost of these drugs as over-the-counter.
While an over-the-counter drug is less expensive than the prescription drug, the
cost to many consumers increases because the price paid by the consumer for the
over-the-counter drug is greater than the co-payment by the consumer when the
drug was covered by insurance. This is especially an issue for individuals who
remedy chronic health problems by regularly taking an over-the-counter medicine.
Revenue Ruling 2003-102 explains that the statutory exclusion for reimbursements
of employee health expenses is broader than the itemized deduction for medical
expenses (which does not apply to nonprescription drugs). Thus, the guidance
clarifies that employer reimbursements of
employee health expenses that are nonprescription drugs, including
reimbursements through health FSAs and Health Reimbursement Arrangements
(HRAs), are excluded from income like other employer reimbursements of
employee health expenses. This will result in savings to consumers with access to
employer plans who may purchase nonprescription drugs. However, for purposes of
the itemized medical expenses deduction, the cost of such over-the-counter drugs
continues to be non-deductible. In addition, the cost of dietary supplements that
are merely beneficial to the employee's health are not excluded from income.
The text of Revenue Ruling 2003-102 follows:

Parti
Section 105. Amounts Received Under Accident and Health Plans
(Also Section 213. - Medical, Dental, etc., Expenses)

Rev. Rul. 2003-102

ISSUE

Are reimbursements by an employer of amounts paid by an employee for
medicines, drugs, or dietary supplements purchased by the employee without a
physician's prescription excludable from gross income under § 105(b) of the
Internal Revenue Code?
FACTS
Employer N sponsors a health flexible spending arrangement (health FSA). The
health F S A provides for the reimbursement of participating employees' medical
care expenses that are not covered by other insurance. Employee A is a
participating employee in Employer N's health FSA.
Employee A purchases an antacid, an allergy medicine, a pain reliever, and a cold
medicine from a pharmacy, none of which are purchased with a physician's
prescription. Employee A purchases these items for personal use, or for the use of
Employee A's spouse or dependents, to alleviate or treat personal injuries or
sickness. Employee A also purchases dietary supplements (e.g., vitamins) without
a physician's prescription to maintain the general health of Employee A, or
Employee A's spouse or dependents. Employee A submits substantiated claims for
all of these expenses, which have been incurred during the current plan year, to
Employer N's health F S A for reimbursement. Employee A is not compensated for
these expenses by insurance or otherwise.
LAW AND ANALYSIS
Section 61(a)(1) provides that, except as otherwise provided in subtitle A, gross
income includes compensation for services, including fees, commissions, fringe
benefits, and similar items.
Section 105(a) provides that amounts received by an employee through accident
or health insurance for personal injuries or sickness are included in gross income to
the extent such amounts (1) are attributable to contributions by the employer that
were not includible in the gross income of the employee or (2) are paid by the
employer.
However, § 105(b) provides an exception to the general rule requiring inclusion in
income. Section 105(b) provides that, except in the case of amounts attributable to
(and not in excess of) deductions allowed under § 213 (relating to medical
expenses) for any prior taxable year, gross income does not include amounts paid,
directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses
incurred by the taxpayer for the medical care (as defined in § 213(d)) of the
taxpayer or the taxpayer's spouse or dependents (as defined in § 152).
Section 105(e) states that amounts received under an accident or health plan for
employees are treated as amounts received through accident or health insurance
for purposes of § 105. Section 1.105-5(a) of the Income Tax Regulations provides
that an accident or health plan is an arrangement for the payment of amounts to
employees in the event of personal injuries or sickness.
Section 213(d)(1) defines "medical care" to include amounts paid for the diagnosis,
cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting
any structure or function of the body.
Section 1.213-1 (e)(1)(ii) states that an expenditure that is merely beneficial to the
general health of an individual, such as an expenditure for a vacation, is not an
expenditure for medical care. Section 1.213-1 (e)(1)(ii) also states that expenditures
for "medicines and drugs" are expenditures for medical care.
Section 1.213-1 (e)(2) states that the term "medicine and drugs" includes only items
that are legally procured and generally accepted as falling within the category of
medicine and drugs. Section 1.213-1 (e)(2) further provides that toiletries (e.g.,
toothpaste), cosmetics (e.g., face creams) and sundry items are not "medicines and
drugs" and that amounts expended for these items are not expenditures for
"medical care."
Rev. Rul. 2003-58, 2003-22 I.R.B. 959, considers whether amounts paid by an
individual for medicines that m a y be purchased without a prescription of a physician

are deductible under § 213. The ruling notes that § 213(b) permits an amount paid
for a medicine or drug to be taken into account for the purposes of the § 213
deduction for medical care expenses only if the medicine or drug is a prescribed
drug or insulin. Section 213(d)(3) defines a "prescribed drug" as a drug or
biological that requires a prescription of a physician for its use by an individual. The
ruling concludes that amounts paid for medicines or drugs that m a y be purchased
without a prescription of a physician are not taken into account pursuant to § 213(b)
and are therefore not deductible under § 213.
Section 105(b) specifically refers to "expenses incurred by the taxpayer for. . .
medical care," as defined in § 213(d). There is no requirement in § 105(b) that the
expense be allowed as a deduction for medical care under § 213(a) or that only
medicines or drugs that require a physician's prescription be taken into account.
Accordingly, the amount expended by Employee A to purchase the antacid, allergy
medicine, pain reliever, and cold medicine without a physician's prescription is an
expenditure for medical care. Employer N's health F S A reimbursement of
Employee A's cost for these items is therefore excludable under § 105(b), even
though the cost would not have been deductible under § 213(a). However, the
dietary supplements (e.g., the vitamins) are merely beneficial to Employee A or
Employee A's spouse or dependents' general good health. Therefore, the cost of
the dietary supplements is not an expense for medical care and is not reimbursable
or excludable under § 105(b).
HOLDING
Reimbursements by an employer of amounts paid by an employee for medicines
and drugs purchased by the employee without a physician's prescription are
excludable from gross income under § 105(b). However, amounts paid by an
employee for dietary supplements that are merely beneficial to the general health of
the employee or the employee's spouse or dependents, are not reimbursable or
excludable from gross income under § 105(b).
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 2003-58 is distinguished.
DRAFTING INFORMATION
The principal author of this revenue ruling is Barbara E. Pie of the Office of Division
Counsel/Associated Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this revenue ruling, contact Ms. Pie at (202) 622-6080
(not a toll-free call).

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 3, 2003
JS-696
Statement of
Assistant Secretary for Financial Institutions W a y n e Abernathy
on the Federal Trade Commission's Identity Theft Survey Report
"The report issued today by the Federal Trade Commission gives vivid evidence of
the serious national problem of identity theft. It is the latest demonstration of the
need for passing legislation this fall to fight this crime. O n June 30, 2003, Treasury
Secretary John S n o w outlined the Administration's program to give important new
tools to consumers and law enforcers. The House of Representatives is poised to
approve this package, and w e are encouraged that the Senate will soon take up
similar legislation.
"As the FTC survey shows, identity theft is a major and growing national problem,
affecting as many as 10 million people during the last year. The financial costs are
alarming, with over $10,000 stolen in the average fraud, American businesses
losing upwards of $50 billion, and the innocent victims spending $5 billion cleaning
up the mess that others have created.
"The Administration has called for legislation that, among other provisions, would
establish a national fraud alert system, improve the accuracy of credit reports,
identify the tell tale signs—or red flags—to alert lenders so they can thwart identity
theft attempts, and put more information in the hands of consumers—including
annual free copies of their credit reports. The proposals would also make it easier
for victims to restore their credit histories and impose penalties if a company puts
false information on credit records.
"The problem is so great, and its impact on consumers so terrible, that we should
not delay giving consumers and law enforcers these important new tools to fight
identity theft."
The F T C report can be found at www.ftc.gov

202-691-3550

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

September 04, 2003
December 04, 2003
912795NZ0

High Rate: 0.970% Investment Rate 1/: 0.988% Price: 99.755
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 98.82%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

35,421,324
1,422,250
225,000

14,353,046
1,422,250
225,000

SUBTOTAL 37,068,5 74 16,000,296 2/
Federal Reserve 5,695,076 5,695,076
TOTAL $ 42,763,650 $ 21,695,372
Median rate 0.965%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.94 0%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 37,068,574 / 16,000,296 = 2.32
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,154,501,000

http://www.publicdebt.treas.gov

3S~(oV

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
September 02, 2003

202-691-3550

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

September 04, 2003
March 04, 2004
912795PN5

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 91.36%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

34,054,590
910,921
150,000

14,939,086
910,921
150,000

SUBTOTAL 35,115,511 16,000,007 2/
Federal Reserve 5,777,302 5,777,302
TOTAL $ 40,892,813 $ 21,777,309
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 = 35,115,511 / 16,000,007 = 2.19
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $678,873,000

http://www.publicdebt.treas.gov

5 C&

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 12-DAY BILLS
Term: 12-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

September 03, 2003
September 15, 2003
912795QG9

High Rate: 0.980% Investment Rate 1/: 1.007% Price: 99.967
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 23.45%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
$

TOTAL

Accepted

57,214, 000
12
0

23,000,400
12
0

57,214,,012

23,000,412

57,214,,012

23,000,412

Median rate
0.970%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.950%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 57,214,012 / 23,000,412 = 2.49
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

(off

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 5, 2003
JS-700
Snow Announces Designation of 10 Jemaah Islamiyah (Jl) Terrorists
In a press conference at the APEC Meeting in Phuket, Thailand, U.S. Treasury
Secretary John S n o w announced that the United States is today designating 10
members of Jemaah Islamiyah, or Jl, a South Asian terrorist group with significant
links to al-Qaida, as Specially Designated Global Terrorists (SDGTs) under
Executive Order 13224. The U.S. is also submitting these individuals to the United
Nations for designation by all U N member states as al-Qaida terrorists.
"This designation is yet another important step in the ongoing effort by the
international community to shut down Jl terrorist operations in Southeast Asia,"
Secretary S n o w stated. "Today's action identifies 10 individuals at the heart of the
Jl network. These terrorists have worked to achieve al-Qaida's terrorist goals in
Southeast Asia. They have plotted to assassinate international leaders, they have
planned and supported attacks such as the Bali bombing - a horrific act that took
the lives of 200 people and wounded 300. W e look forward to working with our
allies in the region to dismantle Jl - to shut down their sources of financing and
support, and to eliminate the threat they present to the people of Southeast Asia."
Today's action follows the previous designation by the U.S. and the United Nations
of Jl as a terrorist organization; the designation and recent capture of key Jl figure
Nurjaman Riduan Isamuddin (a.k.a Hambali); and the designation of M o h a m a d
Iqbal Aburrabman (a.ka. Abu Jibril).
The designation today will immediately freeze all assets belonging to these
terrorists in the U.S. and prohibit transactions with U.S. persons. Within 72 hours, if
there are no objections by the U N 1267 committee, all U N m e m b e r states will be
required to take similar actions.
Since September 11 th 2001, the United States and our allies have designated 305
individuals and entities as terrorists and supporters of terrorism and have frozen
over $136.7 million in assets worldwide.
Further details, including the list of those designated, are provided in the attached
fact sheet.

FACT SHEET
DESIGNATION OF JEMAAH ISLAMIYAH MEMBERS
Jemaah Islamiyah ("Jl") is an al-Qaida linked terrorist group with cells operating in
several countries in Southeast Asia. The Jl's stated goal is to create an Islamic
state comprising Malaysia, Singapore, Indonesia, and the southern Philippines.
Members of Jl have been trained, funded and directed by the al-Qaida leadership to
pursue al-Qaida's terrorist agenda across the region. In December 2001, Singapore
authorities arrested 13 Jl members, eight of w h o m had trained in al-Qaida camps in
Afghanistan, w h o planned to b o m b the U.S. and Israeli Embassies, British and
Australian diplomatic buildings, and U.S. and Singapore defense targets in
Singapore. Members of the group had conducted videotaped surveillance of the
potential targets, and had already acquired explosives in preparation for the
attacks. Singapore police discovered tampered passports, forged immigration
stamps, b o m b making manuals, and al-Qaida-related material in several suspects'
homes. In addition, a copy of a videotape m a d e by certain members of the group
and showing intended targets in Singapore was found in the wreckage of an alQaida leader's house in Afghanistan in December 2001. In April 2003, Indonesian

authorities arrested 19 additional members of Jl as suspects in the Bali bombings of
October 2002. In the h o m e of one of the suspects, police reportedly discovered
documents with plans for the bombings.
The United States designated Jl 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," on October 23,
2002. O n January 24, 2003, two senior Jl leaders, Nurjaman Riduan Isamuddin
(most commonly known as Hambali) and M o h a m a d Iqbal Abdurrahman, a.k.a. Abu
Jibril, were also designated as S D G T s under E.O. 13224. Jl and the two leaders
have been added to the U N 1267 Committee sanctions list. The United States
government has credible evidence that the following Jl members support and/or
commit acts of terrorism on behalf of Jl.
• Yassin Sywal. "Yassin," is an operative who provides support to Jl and al-Qaida in
Southeast Asia. Yassin received training in the al-Qaida-operated Chaldun C a m p in
Afghanistan in the 1980s or 1990s. W h e n he returned to Southeast Asia, he became
involved in sectarian conflicts occurring in Sulawesi, Indonesia. Yassin, w h o is the
son-in-law of Jl co-founder Abdullah Sungkar, collaborated with individuals
associated with Jl and al-Qaida in Southeast Asia, such as suspected al-Qaida
operative Umar Faruq, to recruit and train Muslims for combat in Sulawesi. Yassin
also assisted in importing weapons from the Philippines for use in conflicts in
Indonesia. In addition, Yassin participated in planning and facilitating al-Qaida
terrorist plots in Southeast Asia. In 1999, Yassin attended a planning session with
Faruq to select assassination targets. The targets selected included Indonesian
President Megawati Sukarnoputri and other Indonesian figures. Yassin's role in the
plot w a s to procure weapons for use in the assassinations. Ultimately, the plot w a s
aborted.
• Mukhlis Yunos. An explosives expert, Yunos is the leader of the Special
Operations Group of the Philippines-based Moro Islamic Liberation Front (MILF).
Yunos has acted on behalf of and materially assisted Jl on several occasions.
Yunos assisted Jl m e m b e r Fathur R o h m a n Al-Ghozi in procuring explosives and
weapons for shipment to Indonesia and elsewhere. Yunos also carried out the
December 30, 2000, bombings in Manila, known as the "Rizal Day Bombings," on
behalf of Jl. Yunos received financial assistance from Jl figures Faiz bin Abu Bakar
Bafana and Fathur R o h m a n A1-Ghozi to conduct the Rizal Day bombings, which
killed 22 people and injured more than 100. Yunos also assisted Jl operations chief
Riduan Isomuddin, a.k.a. Hambali, and Jl Singapore cell leader Faiz bin Abu Bakar
Bafana in conducting surveillance of the U.S. and Israeli embassies in the
Philippines. Yunos studied in Pakistan and received military training in Afghanistan.
• Imam Samudra. An Indonesian national, Samudra was arrested on November 21,
2002, in connection with the October 12, 2002, bombings in Bali. Indonesian
authorities have identified Samudra as a m e m b e r of Jl. Samudra moved to
Malaysia in 1990, received military training in Afghanistan between 1991 and 1993,
and took an oath of allegiance, or "bai'at," to Jl leader Abu Bakar Bashir in 1998.
Samudra has provided support and assistance to Jl in at least three b o m b attacks.
Samudra assisted Jl operations chief Hambali in organizing and financing the
bombings of 24 churches in Indonesia, on December 24, 2000, which killed 19
people and injured more than 100. Samudra participated in the b o m b attack on a
Jakarta shopping mall on August 1, 2001, by providing explosives and detonators to
two m e n w h o carried out the attack. Samudra also played a central role in the Bali
b o m b attacks that killed 202 people. Samudra initiated the Bali b o m b plot and
selected the target and time of the bombings. H e also recruited and c o m m a n d e d
the team that executed the Bali blasts. Indeed, Indonesian police found the
following message on Samudra's computer:
We are responsible for the incident in Legian St. Kuta Bali, at Saturday night,
October 12, 2002 also near General Consulate building in Jalan H a y m a n Wuruk
188, Denpasar, Bali at the same night.
• Huda bin Abdul Haq (a.k.a. and hereafter referred to as, "Mukhlas"). Mukhlas is a
senior and influential Jl leader with ties to U s a m a bin Laden. H e w a s reportedly
named head of Jl's "Mantiqi One", or regional network, covering Sumatra,
Singapore, Malaysia and southern Thailand. Mukhlas co-founded a religious school
in Malaysia used as a training ground for Jl operatives and w a s involved
extensively in the Bali bombings. Mukhlas was detained and charged by Indonesian
authorities with planning and supervising the terrorist attacks that occurred in Bali

on October 12, 2002, killing at least 202 people. A 1,046- page case file cites
reports of 200 witnesses linking Mukhlas with the attacks. Mukhlas himself admitted
to being present and in c o m m a n d at the planning meetings for the Bali bombings,
and recruited two of his brothers to help assemble and transport the b o m b s used in
the Bali attacks. A significant sum of money, amounting to approximately U S
$35,000 w a s contributed to the Bali bombings by W a n M m W a n Mat, a leader of the
Jl network in Malaysia. The money c a m e from senior Jl leader Hambali through
W a n M m and was channeled to Mukhlas. The money w a s provided in cash, and
according to claims by Mukhlas, the money was not just used for the bombings in
Bali, but also in other places in Indonesia. Mukhlas admitted that he met with
U s a m a bin Laden in Afghanistan in 1987 and fought the Soviet Union in
Afghanistan as a m e m b e r of U s a m a bin Laden's "International Brigade". According
to Mukhlas "he and other top Jl personnel were careful to nurture ties to bin Laden
and al-Qaida in the years that followed."
• Parlindungan Siregar. 'Parlin Siregar" is an Indonesian engineer identified by
Spanish authorities as a close associate of an al-Qaida cell in Spain. Siregar has
also been involved in al-Qaida training activities in Indonesia, according to the
s a m e authorities. Siregar, w h o studied engineering in Spain, w a s associated with
the Spanish al-Qaida cell led by Barakat Yarkas. Spanish authorities arrested 11
members of that cell in November 2001. During the course of their investigation,
Spanish authorities uncovered evidence indicating that Siregar led an al-Qaida
training c a m p in Sulawesi, Indonesia. Siregar is alleged by Spanish authorities to
have arranged for several hundred al-Qaida operatives from Europe, including
Yarkas, to travel to Indonesia for training.
• Julkipli Salim Y Salamuddin. Salamuddin led combined JI-MILF elements in late
2002, along with MILF leader Solamain Esmael. They were suspected of planning
attacks on U S companies, government facilities, and shopping malls in the South
Central Mindanao area.
• Aris Munandar. Munandar facilitates and provides support to Jl activities in
Southeast Asia. Munandar, a native of Indonesia, is reported to be between 34 and
40 years old. H e is a close associate of Jl leader Abu Bakar Bashir. Munandar is a
graduate of Bashir's Islamic boarding school, Pondok Ngruki, and a m e m b e r of
Majelis Mujahidin Indonesia (MMI), an organization that Bashir helped found and
later directed. H e is also the head of K O M P A K , a non-governmental organization
that produced videos used in the recruitment of Jl members. Munandar is
considered to be Bashir's assistant. As such, Munandar provided direct support and
assistance to activities authorized by Bashir. O n one occasion, Munandar procured
explosives at the request of Bashir for use in Ambon. Munandar also facilitated
recruitment and training for Jl and al-Qaida activities in Indonesia. Munandar,
working with al-Qaida operative U m a r Faruq, is suspected of providing military
training for recruits to join sectarian fighting in Sulawesi.
• Fathur Rohman Al-Ghozi. Al-Ghozi is a Jl member and explosives expert who
received military training at an al-Qaida c a m p on the Afghan-Pakistani border. AlGhozi was involved in conducting surveillance and procuring explosives for the
Hambali-approved Jl plan to attack U.S. and other Western interests in Singapore.
H e admitted to helping plan and finance a series of bombings in the Philippines on
December 30, 2000, that killed 22 people and injured more than 100. H e also
served as a Jl trainer and conducted bomb-making courses in Malaysia and the
Philippines attended by Jl members. Al-Ghozi w a s detained by Philippine
authorities on January 15, 2002, pled guilty to explosives charges in April 2002, and
w a s sentenced to 10-12 years in jail. While under detention, he gave police
information that led to the discovery of more than a ton of explosives, 300
detonators and other bomb-making materials in the Southern Philippines. In an
affidavit, A1-Ghozi admitted he was working with Hambali (an S D G T designated
under E.O. 13224 on January 24, 2003). Al-Ghozi escaped from prison on July 14,
2003 and is currently at large.
• Agus Dwikama. Dwikama is a Jl member and facilitator for al-Qaida in Indonesia.
Dwikama acted as a guide for two al-Qaida leaders during their visit to Indonesia in
June 2002, and reportedly set up an al-Qaida training c a m p in Indonesia. Dwikama
was arrested on March 13, 2002, while attempting to board a flight at the
international airport in Manila, the Philippines. Security personnel discovered bombmaking equipment in his suitcase. Dwikama w a s sentenced to 17 years in jail for
illegal possession of explosives.

• Abdul Hakim Murad. Murad, a Pakistani national, is a licensed commercial pilot
w h o trained in flight schools in the U.S. H e w a s arrested in Manila, the Philippines
in January 1995 in a raid that resulted in the seizure of a laptop computer, a large
quantity of chemicals and other paraphernalia used in the manufacture of
explosives. H e w a s turned over to the U.S. and indicted for conspiring to
simultaneously blow up 12 U.S. commercial airliners while airborne, a project
codenamed Bojinka. According to Philippines and U.S. law enforcement officials,
the key planners of the Bojinka plot were al-Qaida operations directors Khalid
Shaikh M o h a m m a d and Ramzi Yousef. Khalid Shaikh M o h a m m e d w a s indicted as
a co-conspirator of the Bojinka plot in 1996, but avoided standing trial by eluding
law authorities. M o h a m m e d was designated as an S D G T pursuant to E.O. 13224
on October 12, 2001, and was arrested on March 1, 2003, in Pakistan. Murad also
told the FBI, in step-by-step details, of his involvement in preparing the Bojinka plot.
O n September 5, 1996, Abdul Hakim Murad, along with co-defendants Ramzi
Yousef and Wail Khan Main Shah, were convicted on all counts related to the
Bojinka bombing conspiracy.

On-tC'K O t IM BI.IC A IT \ IRS • I54HI r»l-\\S\ I.VAM <i AVIv Mil-:. N - W . • W AS11IN(; I O N . DA .» 202211 •.202 I f.2 2 2<>MI

EMBARGOED UNTIL 11:00 A.M.
September 2, 2003

Contact:

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
September 4, 2003.
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 $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 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

(Ts-7(?/

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED SEPTEMBER 4, 2003
September 2, 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, 700 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NQ 0
Auction date
September 3, 2003
Issue date
September 4 , 2003
Maturity date
October 2 , 2003
Original issue date
April 3, 2003
Currently outstanding
$45,233 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.

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 5, 2003
JS-702
Statement by John Snow, U.S. Secretary of the Treasury
Meeting of the Asia-Pacific Economic Cooperation Forum
Finance Ministers Phuket, Thailand September 5, 2003
In my first meeting with the finance ministers of the Asia-Pacific Economic
Cooperation Forum I come away impressed with the serious interest expressed by
m y colleagues on the important issues w e came to discuss. I thank our hosts from
Thailand for their hospitality and for providing this beautiful setting for our meetings.
Both in group discussions and in bilateral meetings, I took the opportunity
to address issues important to our prosperity and our security. I stressed
our view that the best international economic system - for the United
States, for the Asia-Pacific region, and for the world - is one based on the
principles of free trade, the free flow of capital, and market-based
exchange rates. I also stressed the need for each of us to take steps to
increase economic growth in our domestic economies. Raising productivity
through structural reform and private investment is the most direct route to
raising living standards for our people. I reported that the U.S. economy
is returning to higher levels of growth, but that the global economy
requires Europe and Asia - and Japan in particular - to attain higher levels
of growth as well.
Throughout my meetings we had extensive discussions on the issue of
currencies. I expressed m y long-held view that market-determined floating
currencies, with interventions kept to a minimum, are essential to a
well-functioning international financial system. Only freely floating
currencies bring the accuracy and efficiency necessary for proper pricing,
account settlement and capital flows among our economies. Furthermore,
rigid currency systems, rather than promoting stability, instead increase
the risk that economies cannot properly adjust, thereby escalating the
impact of economic shocks. The management of currencies at unnatural rates
distorts markets, tending toward beggar-thy-neighbor policies, and
encourages protectionism. These are paths w e must avoid.
I was pleased with the reception of this view from my colleagues. Our
agreement that flexible exchange rates are necessary to promote orderly and
balanced external adjustments is significant. This principle is an
essential first step toward the universal acceptance of market-based, freely
floating currencies. W e should move quickly to build upon this initial
foundation of agreement.
The free flow of capital is also a fundamental component of our global
system of international trade and finance. Barriers raise the cost and
limit the freedom of investment capital to seek out the best opportunities.
W e should continue to eliminate restraints on investment capital in order to
maximize our growth opportunities.
Trade among our nations has risen significantly in recent years, and this is
to the benefit of all our economies, but I emphasized that w e must continue
to press for further trade liberalization in the Doha Round W T O
negotiations. Our prosperity is enhanced when all nations have the freedom
to bring to global, competitive markets the best goods and services their
talents and abilities can produce, in compliance with the laws of
international trade.
We also discussed our collective actions to halt the flow of funds to the

agents of terror. I announced that the United States is designating 10
members of Jemaah Islamiyah, or Jl, as terrorists, freezing any assets in
the United States and prohibiting transactions with these individuals. W e
will also be submitting these names to the United Nations for action by all
U N m e m b e r states. I a m encouraging m y colleagues to take bold action
against this terrorist organization and I look forward to working with our
allies in the region to shut down Jl's sources of financing and support, and
to eliminate the threat they pose to the people of Southeast Asia.
We have had a successful series of meeting this week. We have broken new
ground on important issues concerning our economic relations. I look
forward to continue to work with m y counterparts in the region as w e work to put in
place the building blocks of strong, sustainable economic growth.

PRLSS 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.
September 5, 2003
JS-703
Treasury and IRS Issue Guidance on the Additional Bonus
Depreciation Allowance
Today the Treasury Department and the Internal Revenue Service issued
temporary regulations providing detailed rules on the additional first-year or "bonus"
depreciation allowance.
As a result of recent amendments to the Internal Revenue Code, taxpayers may
deduct an additional 30- or 50-percent first-year depreciation allowance for certain
depreciable property. This depreciation allowance is in addition to the amount of
depreciation otherwise allowable in the first year.
In general, the regulations provide the requirements that must be met for
depreciable property to qualify for the additional first-year depreciation deduction.
Further, the regulations instruct taxpayers how to calculate the additional first-year
depreciation deduction and the amount of depreciation otherwise allowable for the
property.
The regulations are effective for property that is acquired by a taxpayer after
September 10, 2001 (for purposes of the additional 30-percent first-year
depreciation allowance), or acquired after May 5, 2003 (for purposes of the
additional 50-percent first-year depreciation allowance), and placed in service
before January 1, 2005 (or, in the case of certain property, placed in service before
January 1, 2006.) The regulations are also effective for N e w York Liberty Zone
property that is acquired by a taxpayer after September 10, 2001, and placed in
service before January 1, 2007 (or, in the case of certain real property, placed in
service before January 1, 2010.)
Related Documents:
• The text of the temporary regulations

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
TD 9091
RIN1545-BC19
Special Depreciation Allowance
AGENCY: Internal Revenue Service (IRS), Treasury
ACTION: Final and temporary regulations.
SUMMARY: This document contains regulations relating to the depreciation of property
subject to section 168 of the Internal Revenue Code (MACRS property) and the
depreciation of computer software subject to section 167. Specifically, these

regulations provide guidance regarding the additional first year depreciation allowanc
provided by sections 168(k) and 1400L(b) for certain MACRS property and computer
software. The regulations reflect changes to the law made by the Job Creation and
Worker Assistance Act of 2002 and the Jobs and Growth Tax Relief Reconciliation Act
of 2003. The text of these temporary regulations also serves as the text of the

proposed regulations set forth in the notice of proposed rulemaking on this subject in
the Proposed Rules section in this issue of the Federal Register.
DATES: Effective Dates: These regulations are effective September 8, 2003.
Applicability Dates: For dates of applicability, see §§1.167(a)-14T(e), 1.168(d)1T(d), 1.168(k)-1T(g), 1.169-3T(g), and 1.1400L(b)-1T(g).

F O R F U R T H E R INFORMATION C O N T A C T : Douglas Kim, (202) 622-3110 (not a tollfree number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 to provide regulations
under sections 168(k) and 1400L(b) of the Internal Revenue Code (Code). Sections

168(k) and 1400L(b) were added to the Code by, respectively, sections 101 and 301

of the Job Creation and Worker Assistance Act of 2002, Public Law 107-147 (116 Sta

21), and were modified by section 201 of the Jobs and Growth Tax Relief Reconcili
Act of 2003, Public Law 108-27 (117 Stat. 752).
Explanation of Provisions
Background
Section 167 allows as a depreciation deduction a reasonable allowance for the

exhaustion, wear, and tear of property used in a trade or business or held for the

production of income. The depreciation allowable for tangible, depreciable propert
placed in service after 1986 generally is determined under section 168 (MACRS

property). The depreciation allowable for computer software that is placed in serv

after August 10, 1993, and is not an amortizable section 197 intangible is determ
under section 167(f)(1).

Section 168(k)(1) allows a 30-percent additional first year depreciation deductio

for qualified property acquired after September 10, 2001, and, in most cases, plac

service before January 1, 2005. Section 168(k)(4) allows a 50-percent additional f

year depreciation deduction for 50-percent bonus depreciation property acquired after
May 5, 2003, and, in most cases, placed in service before January 1, 2005. Section
1400L(b) allows a 30-percent additional first year depreciation deduction for qualified
New York Liberty Zone property (Liberty Zone property) acquired after September 10,
2001, and placed in service before January 1, 2007 (January 1, 2010, in the case of
qualifying nonresidential real property and residential rental property).
Scope
The regulations provide the requirements that must be met for depreciable
property to qualify for the additional first year depreciation deduction provided by
sections 168(k) and 1400L(b). Further, the regulations instruct taxpayers how to
determine the additional first year depreciation deduction and the amount of
depreciation otherwise allowable for this property.
Property Eligible for the Additional First Year Depreciation Deduction
The regulations provide that depreciable property must meet four requirements to
be qualified property under section 168(k)(2) (property for which the 30-percent
additional first year depreciation deduction is allowable) or 50-percent bonus
depreciation property under section 168(k)(4) (property for which the 50-percent
additional first year depreciation deduction is allowable). These requirements are: (1)
the depreciable property must be of a specified type; (2) the original use of the
depreciable property must commence with the taxpayer after September 10, 2001, for
qualified property or after May 5, 2003, for 50-percent bonus depreciation property; (3)
the depreciable property must be acquired by the taxpayer within a specified time

period; and (4) the depreciable property must be placed in service by a specified date.
These requirements are more fully discussed below.
Property of a Specified Type
The regulations provide that qualified property or 50-percent bonus depreciation
property must be one of the following: (1) MACRS property that has a recovery period of
20 years of less; (2) computer software as defined in, and depreciated under, section
167(f)(1); (3) water utility property as defined in section 168(e)(5) and depreciated under
section 168; or (4) qualified leasehold improvement property depreciated under section
168. Because the additional first year depreciation deduction applies to MACRS
property that is depreciated under the general depreciation system (GDS) or would be
depreciated under the GDS but for an alternative depreciation system (ADS) election
made by the taxpayer, the regulations provide that for purposes of determining the
eligibility of MACRS property as qualified property or 50-percent bonus depreciation
property, the recovery period applicable for the MACRS property under section 168(c)
of the GDS is used regardless of any election made by the taxpayer to depreciate the
class of property under the ADS of section 168(g). Further, with respect to qualified
leasehold improvement property, the regulations define those improvements specified in
section 168(k)(3)(B) that are not considered as qualified leasehold improvement
property.
The regulations also provide that qualified property or 50-percent bonus
depreciation property does not include: (1) property excluded from the application of
section 168 as a result of section 168(f); (2) property that is required to be depreciated

under the A D S ; (3) any class of property for which the taxpayer elects not to deduct the
30-percent or 50-percent additional first year depreciation; or (4) qualified New York
Liberty Zone leasehold improvement property as defined in section 1400L(c).
Property is required to be depreciated under the ADS if the property is described
under section 168(g)(1)(A) through (D) or if other provisions of the Code require
depreciation for the property to be determined under the ADS (for example, section
263A(e)(2)(A) or section 280F(b)(1)). Thus, MACRS property for which the taxpayer
makes an election under section 168(g)(7) to depreciate the property under the ADS is
eligible for the additional first year depreciation deduction (assuming all other
requirements are met).
With respect to the election out of the additional first year depreciation deduction,
a taxpayer may elect out of the 30-percent additional first year depreciation deduction
for any class of qualified property. For any class of 50-percent bonus depreciation
property, a taxpayer may elect either to deduct the 30-percent, instead of the 50percent, additional first year depreciation deduction or to deduct no additional first year
depreciation deduction. The regulations provide the rules for making these elections
and also define what is a class of property for purposes of the elections.
Original Use
Pursuant to section 168(k)(2)(A)(ii), the regulations provide that qualified property
is property the original use of which commences with the taxpayer after September 10,
2001. Further, pursuant to section 168(k)(4)(B)(i), the regulations provide that 50percent bonus depreciation property is property the original use of which commences

with the taxpayer after M a y 5, 2003. The regulations provide that the original use
generally means the first use to which the property is put, whether or not that use
corresponds to the use of the property by the taxpayer. Thus, new property initially
used by a taxpayer for personal use and then subsequently converted by the taxpayer
for use in its trade or business satisfies the original use requirement. However, new
property acquired by a taxpayer for personal use and then subsequently acquired by a
different taxpayer for use in its trade or business does not satisfy the original use
requirement.
Likewise, additional capital expenditures incurred by a taxpayer to recondition or
rebuild property acquired or owned by the taxpayer satisfies the original use
requirement. However, the cost of reconditioned or rebuilt property acquired by the
taxpayer does not satisfy the original use requirement. The question of whether
property is reconditioned or rebuilt property is a question of fact. The regulations
provide a safe harbor that property containing used parts will not be treated as
reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the
total cost of the property. See Rev. Rul. 68-111 (1968-1 C.B. 29).
The regulations also provide special rules for certain sale-leaseback transactions
and syndication transactions. If qualified property is originally placed in service after
September 10, 2001, or 50-percent bonus depreciation property is originally placed in
service after May 5, 2003, by a person and the property is involved in a sale-leaseback
transaction described in section 168(k)(2)(D)(ii), the taxpayer-lessor is considered the

original user of the property. Likewise, if qualified property is originally placed in servic

by a lessor after September 10, 2001, or 50-percent bonus depreciation property is
originally placed in service by a lessor after May 5, 2003, and is sold by the lessor or
any subsequent purchaser within three months after the date the property was originally
placed in service by the lessor, and the user of the property does not change during this
three-month period, the purchaser of the property in the last sale is considered the
original user of the property.
The regulations also provide that if in the ordinary course of its business a
taxpayer sells fractional interests in qualified property or 50-percent bonus depreciation
property to unrelated third parties, each first fractional owner of the property is
considered as the original user of its proportionate share of the property. Furthermore,
if a taxpayer uses the qualified property or the 50-percent bonus depreciation property
before all of the fractional interests are sold and the property continues to be held
primarily for sale by the taxpayer, the original use of any fractional interest sold to an
unrelated third party subsequent to the taxpayer's use begins with the first purchaser of
that interest.
Acguisition of Property
Pursuant to section 168(k)(2)(A)(iii), the regulations provide that qualified
property is property: (1) acquired by the taxpayer after September 10, 2001, and before
January 1, 2005, but only if no written binding contract for the acquisition of the property
was in effect before September 11, 2001; or (2) acquired by the taxpayer pursuant to a
written binding contract that was entered into after September 10, 2001, and before
January 1, 2005. Further, pursuant to section 168(k)(4)(B)(ii), the regulations provide

that 50-percent bonus depreciation property is property acquired by the taxpayer after
May 5, 2003, and before January 1, 2005, but only if no written binding contract for the
acquisition of the property was in effect before May 6, 2003.
The regulations define a binding contract as any contract that is enforceable
under State law against the taxpayer or a predecessor, and does not limit damages to a
specified amount. However, a contractual provision that limits damages to an amount
equal to at least 5 percent of the total contract price will not be treated as limiting
damages to a specified amount. Further, the fact that there will be little or no damages
because the contract price does not significantly differ from the fair market value will not
be taken into account in determining whether a contract limits damages.
The regulations also provide that a contract is binding even if the contract is
subject to a condition, as long as the condition is not within the control of either one of
the parties or a predecessor. Further, an option to either acquire or sell property is not
treated as a binding contract.
The regulations also provide that a binding contract does not include a supply
agreement or similar agreement, if the amount and design specifications of the property
to be purchased have not been specified. In this case, the contract is not treated as a
binding contract until both the amount and design specifications are specified.
With respect to self-constructed property, the regulations provide that the
property acquisition requirement is met if a taxpayer manufactures, constructs, or
produces qualified property or 50-percent bonus depreciation property for its own use
and such manufacturing, construction, or production began after, respectively,

September 10, 2001, or M a y 5, 2003, and before January 1, 2005. Further, property
that is manufactured, constructed, or produced for the taxpayer by another person
under a written binding contract that is entered into before the manufacture,
construction, or production of the property begins is considered to be manufactured,
constructed, or produced by the taxpayer.
The regulations also define when construction begins. Construction of qualified
property or 50-percent bonus depreciation property begins when physical work of a
significant nature begins. Physical work does not include preliminary activities such as
planning or designing, securing financing, exploring, or researching. The determination
of when physical work of a significant nature has begun depends on the facts and
circumstances. The regulations, however, provide a safe harbor that physical work of a
significant nature has begun when the taxpayer incurs or pays more than 10 percent of
the total cost of the property (excluding the cost of any land and preliminary activities).
The regulations also provide rules for a contract to acquire, or for the
manufacture, construction, or production of, a component of the larger self-constructed
property. If a binding contract to acquire a component was in effect, or the
manufacture, construction, or production of a component began, before September 11,
2001, for qualified property or before May 6, 2003, for 50-percent bonus depreciation
property, the component does not qualify for the additional first year depreciation
deduction. Similarly, if a binding contract to acquire a component was in effect, or the
manufacture, construction, or production of a component began, before September 11,
2001, for qualified property or before May 6, 2003, for 50-percent bonus depreciation

property, but the manufacture, construction, or production of the larger self-constructed
property began after September 10, 2001, for qualified property, or after May 5, 2003,
for 50-percent bonus depreciation property, and before January 1, 2005, the larger selfconstructed property qualifies for the additional first year depreciation deduction
(assuming all other requirements are met) but the component does not. Additionally, if
the manufacture, construction, or production of the larger self-constructed property
began before September 11, 2001, for qualified property or before May 6, 2003, for 50percent bonus depreciation property, the larger self-constructed property and any
acquired or self-constructed component related to the larger self-constructed property
do not qualify for the 30-percent or 50-percent additional first year depreciation
deduction. However, if the binding contract to acquire the component was entered into,
or the manufacture, construction, or production of the component began, after
September 10, 2001, for qualified property, or after May 5, 2003, for 50-percent bonus
depreciation property, and before January 1, 2005, but the manufacture, construction,
or production of the larger self-constructed property begins after December 31, 2004,
the component qualifies for the additional first year depreciation deduction (assuming all
other requirements are met) but the larger self-constructed property does not.
The regulations provide rules for when certain acquired or self-constructed
property will not meet the acquisition date requirement (disqualified transactions).
When the user of property as of the date on which the property was originally placed in
service, or a related party to the user, acquired, or had a written binding contract in
effect for the acquisition of, the property at any time before September 11, 2001, or

before M a y 6, 2003, as applicable, the property does not qualify for the 30-percent or
50-percent additional first year depreciation deduction. Similarly, property
manufactured, constructed, or produced for the taxpayer or a related party does not
qualify for the 30-percent or 50-percent additional first year depreciation deduction if the
manufacture, construction, or production began at any time before September 11, 2001,
or before M a y 6, 2003, as applicable. For this purpose, persons are related if they have
a relationship specified in section 267(b) or 707(b).
Placed-in-service Date
Pursuant to section 168(k)(2)(A)(iv) and 168(k)(4)(B)(iii), the regulations provide
that qualified property or 50-percent bonus depreciation property is property that is
placed in service by the taxpayer before January 1, 2005. However, the placed in
service date of January 1, 2005, is extended for one year to January 1, 2006, for
property described in section 168(k)(2)(B).
The regulations also provide special rules for sale-leaseback transactions and
syndication transactions. If qualified property is originally placed in service after
September 10, 2001, or 50-percent bonus depreciation property is originally placed in
service after M a y 5, 2003, by a person and is involved in a sale-leaseback transaction
described in section 168(k)(2)(D)(ii), the property is treated as originally placed in
service by the taxpayer-lessor not earlier than the date on which the property is used by
the lessee under the sale-leaseback. Likewise, if qualified property is originally placed
in service by a lessor after September 10, 2001, or 50-percent bonus depreciation
property is originally placed in service by a lessor after M a y 5, 2003, and is sold by the

lessor or any subsequent purchaser within three months after the date the property w a s
originally placed in service by the lessor, and the user of the property does not change
during this three-month period, the property is treated as originally placed in service not
earlier than the date of the last sale by the purchaser of the property in the last sale.
Special rules also are provided for certain nonrecognition transactions. In the
case of a technical termination of a partnership under section 708(b)(1)(B), qualified
property or 50-percent bonus depreciation property placed in service by the terminated
partnership during the taxable year of termination is treated as originally placed in
service by the new partnership on the date the qualified property or the 50-percent
bonus depreciation property is contributed by the terminated partnership to the new
partnership. Additionally, qualified property or 50-percent bonus depreciation property
transferred in a "step-in-the-shoes" transaction described in section 168(i)(7) in the
taxable year the qualified property or the 50-percent bonus depreciation property is
placed in service by the transferor is treated as originally placed in service on the date
the transferor placed the qualified property or the 50-percent bonus depreciation
property in service.
Liberty Zone Property
Generally, the requirements for determining the eligibility of property for the
additional first year depreciation deduction for Liberty Zone property provided by section
1400L(b) are similar to the requirements for the 30-percent additional first year
depreciation deduction for qualified property provided by section 168(k)(1). There are,
however, some differences that are discussed below.

T h e regulations provide that Liberty Zone property includes the s a m e property
that is described as qualified property or 50-percent bonus depreciation property for
purposes of section 168(k). In addition, Liberty Zone property includes nonresidential
real property or residential rental property to the extent such property rehabilitates real
property damaged, or replaces real property destroyed or condemned, as a result of the
terrorist attacks of September 11, 2001. Property is treated as replacing destroyed or
condemned property if, as part of an integrated plan, the property replaces real property
that is included in a continuous area that includes real property destroyed or
condemned. Real property is considered to have been destroyed or condemned only if
an entire building or structure was destroyed or condemned as a result of the terrorist
attacks of September 11, 2001.
While Liberty Zone property includes the same property that is described as
qualified property or 50-percent bonus depreciation property for purposes of section
168(k), only one additional first year depreciation deduction is allowable for the property.
Thus, pursuant to section 1400L(b)(2)(C)(i), the regulations provide that if the 30percent or 50-percent additional first year depreciation deduction under section 168(k)
applies to the property, it is not Liberty Zone property.
Pursuant to section 1400L(b)(2)(A)(ii), property is Liberty Zone property if
substantially all of the use of the property is in the Liberty Zone and the property is used
in the active conduct of a taxpayer's trade or business in the Liberty Zone. The
regulations provide that the term substantially all means 80 percent or more.
In addition to the application of the original use rules for qualified property, the

regulations provide that used property will satisfy the original use requirement for Liberty
Zone property if the used property has not been previously used within the Liberty Zone.
Pursuant to section 1400L(b)(2)(A)(iv), the regulations provide that Liberty Zone
property is property that is acquired by the taxpayer by purchase after September 10,
2001, but only if no written binding contract for the acquisition of the property was in
effect before September 10, 2001. The term by purchase is defined in section 179(d)
and §1.179-4(c). The regulations also provide that the binding contract rules and the
disqualified transactions rules for qualified property apply to Liberty Zone property. The
self-construction rules for qualified property also apply to self-constructed Liberty Zone
property except that the requirement to begin the manufacture, construction, or
production of the qualified property before January 1, 2005, does not apply to Liberty
Zone property.
Finally, the regulations provide that Liberty Zone property generally must be
acquired by a taxpayer after September 10, 2001, and placed in service by the taxpayer
before January 1, 2007. However, qualifying nonresidential real property and
residential rental property must be acquired by a taxpayer after September 10, 2001,
and placed in service by the taxpayer before January 1, 2010.
Computation of Additional First Year Depreciation Deduction and Otherwise Allowable
Depreciation
The allowable additional first year depreciation deduction for qualified property or
Liberty Zone property is equal to 30 percent of the unadjusted depreciable basis (as
defined in §1.168(k)-1T(a)(2)(iii)) of the property. The allowable additional first year

depreciation deduction for 50-percent bonus depreciation property is equal to 50
percent of the unadjusted depreciable basis (as defined in §1.168(k)-1T(a)(2)(iii)) of the
property. For qualified property or 50-percent bonus depreciation property described in
section 168(k)(2)(B) (property having a longer production period), the unadjusted
depreciable basis (as defined in §1.168(k)-1T(a)(2)(iii)) of the property is limited to the
property's basis attributable to manufacture, construction, or production of the property
before January 1, 2005.
The additional first year depreciation deduction is allowed for both regular tax
and alternative minimum tax purposes. However, for alternative minimum tax purposes,
the amount of the additional first year depreciation deduction is based on the
unadjusted depreciable basis of the property for alternative minimum tax purposes. The
amount of the additional first year depreciation deduction is not affected by a taxable
year of less than 12 months for either regular or alternative minimum tax purposes.
Before determining the amount of depreciation otherwise allowable for qualified
property, 50-percent bonus depreciation property, or Liberty Zone property, the taxpayer
must first reduce the unadjusted depreciable basis (as defined in §1.168(k)-1T(a)(2)(iii))
of the property by the amount of the additional first year depreciation deduction allowed
or allowable, whichever is greater (the remaining adjusted depreciable basis). Then,
the remaining adjusted depreciable basis is depreciated using the applicable
depreciation provisions of the Code for the property (that is, section 168 for MACRS
property and section 167(f)(1) for computer software). This amount of depreciation is
allowed for both regular tax and alternative minimum tax purposes, and is affected by a

taxable year of less than 12 months. However, for alternative minimum tax purposes,
the amount of depreciation allowed is determined by calculating the remaining adjusted
depreciable basis of the property for alternative minimum tax purposes and using the
same depreciation method, recovery period, and convention that applies to the property
for regular tax purposes. If a taxpayer uses the optional depreciation tables in Rev.
Proc. 87-57 (1987-2 C.B. 687) to compute depreciation for qualified property, 50percent bonus depreciation property, or Liberty Zone property that is MACRS property,
the regulations also provide that the remaining adjusted depreciable basis of the
property is the basis to which the annual depreciation rates in those tables apply.
Special Rules
The regulations also provide rules for the following situations: (1) qualified
property, 50-percent bonus depreciation property, or Liberty Zone property placed in
service and disposed of in the same taxable year; (2) redetermination of basis of
qualified property, 50-percent bonus depreciation property, or Liberty Zone property; (3)
recapture of additional first year depreciation for purposes of section 1245 and section

1250; (4) a certified pollution control facility that is qualified property, 50-percent bonu
depreciation property, or Liberty Zone property; (5) like-kind exchanges and involuntary
conversions of qualified property, 50-percent bonus depreciation property, or Liberty
Zone property; (6) a change in use of qualified property, 50-percent bonus depreciation
property, or Liberty Zone property; (7) the computation of earnings and profits; (8) the
increase in the limitation of the amount of depreciation for passenger automobiles; and
(9) the step-up in basis due to a section 754 election.

With respect to qualified property, 50-percent bonus depreciation property, or
Liberty Zone property placed in service and disposed of in the same taxable year, the
regulations provide that the additional first year depreciation deduction is not allowed.
This rule is consistent with the general rule in §1.168(d)-1 (b)(3)(ii) for MACRS property
placed in service and disposed of in the same taxable year. However, as previously
discussed, the additional first year depreciation deduction is allowable for qualified
property, 50-percent bonus depreciation property, or Liberty Zone property placed in
service by a terminated partnership in the same taxable year in which a technical
termination of the partnership occurs. In this case, the new partnership, and not the
terminated partnership, claims the additional first year depreciation deduction. Similarly,
the additional first year depreciation deduction is allowable for qualified property, 50percent bonus depreciation property, or Liberty Zone property placed in service by a
transferor in the same taxable year in which the property is transferred in a step-in-theshoes transaction described in section 168(i)(7). In this case, the additional first year
depreciation deduction for the transferor's taxable year in which the property is placed in
service is allocated between the transferor and the transferee on a monthly basis. The
allocation shall be made in accordance with the rules in §1.168(d)-1(b)(7)(ii) for
allocating the depreciation deduction between the transferor and the transferee.
The regulations also provide rules for a redetermination of basis of qualified
property, 50-percent bonus depreciation property, or Liberty Zone property (for
example, due to a contingent purchase price or a discharge of indebtedness). If the
unadjusted depreciable basis of the property is redetermined by the date on which the

property must be last placed in service to meet the placed-in-service date requirement

in section 168(k)(2)(A)(iv), 168(k)(4)(B)(iii), or 1400L(b)(2)(A)(v), the additional first year
depreciation deduction allowable for the property is redetermined. If the
redetermination of basis occurs after that date, the additional first year depreciation
deduction is not redetermined. The regulations instruct taxpayers how to determine the
depreciation adjustment for an increase or decrease in basis. If there is an increase in
basis, the taxpayer claims the additional first year depreciation deduction attributable to
the increase in the taxable year in which the increase occurs. If there is a decrease in
basis, the taxpayer includes in its income the excess additional first year depreciation
deduction attributable to the decrease in the taxable year in which the decrease occurs.
Because the additional first year depreciation deduction is not a ratable method
of computing depreciation, the regulations provide that the additional first year
depreciation deduction is not a straight line method for purposes of section 1250. Thus,
the additional first year depreciation deduction is an accelerated depreciation method
for purposes of determining recapture under section 1250. For purposes of section
1245, all depreciation deductions are subject to recapture.
With respect to a certified pollution control facility that is qualified property, 50percent bonus depreciation property, or Liberty Zone property, the regulations provide

that the additional first year depreciation deduction is allowable in the facility's placed in
service year even if the taxpayer elects to amortize the basis of the facility under section
169 in the placed-in-service year. The regulations also amend the regulations under
section 169 to provide that the amortizable basis under section 169 must be reduced by

the additional first year depreciation deduction allowed or allowable, whichever is
greater, applicable to the facility.
With respect to MACRS property or computer software acquired in a like-kind
exchange under section 1031 or as a result of an involuntary conversion under section
1033, the regulations provide that the carryover basis and the excess basis, if any, of
the acquired MACRS property or acquired computer software are eligible for the
additional first year depreciation deduction if the acquired MACRS property or acquired
computer software is qualified property, 50-percent bonus depreciation property, or
Liberty Zone property. However, if qualified property, 50-percent bonus depreciation
property, or Liberty Zone property is placed in service and then disposed of in an
exchange or involuntary conversion in the same taxable year, the unadjusted
depreciable basis of the exchanged or involuntarily converted property is not eligible for
the additional first year depreciation deduction.
The regulations also provide rules when the use of qualified property, 50-percent
bonus depreciation property, or Liberty Zone property changes in the hands of the same
taxpayer during the placed-in-service year or a subsequent taxable year. The
regulations provide that no additional first year depreciation deduction is allowed for
qualified property, 50-percent bonus depreciation property, or Liberty Zone property
converted to personal use in the placed-in-service year. However, property converted
to business or income-producing use is eligible for the additional first year depreciation
deduction in the taxable year the property is converted to business or income-producing
use (assuming all the requirements are met). With respect to a change in the use of

depreciable property subsequent to the placed-in-service year, the regulations provide
that the change in the use will not affect the determination of whether the property was
eligible for the additional first year depreciation deduction in the taxable year the

property was originally placed-in-service. Thus, if property is not qualified property in it
placed-in-service year and a change in the use in a subsequent taxable year would
result in the property being qualified property, no additional first year depreciation
deduction is allowed for the property. Likewise, if property is qualified property in its
placed-in-service year and a change in the use in a subsequent taxable year would
result in the property no longer being qualified property, the additional first year
depreciation deduction allowable for the property in its placed-in-service year is not
redetermined.
Furthermore, the regulations provide that the additional first year depreciation
deduction is not allowable for purposes of computing earnings and profits. Pursuant to
section 168(k)(2)(E) and (4)(D), the regulations also provide the increase in the
limitation under section 280F(a)(1) of the amount of depreciation for certain passenger
automobiles that are qualified property or 50-percent bonus depreciation property.
Finally, the regulations provide that any increase in basis of qualified property, 50percent bonus depreciation property, or Liberty Zone property due to a section 754
election generally is not eligible for the additional first year depreciation deduction
because any such increase in basis of property does not satisfy the original use
requirement.
Special Analyses

It has been determined that this Treasury decision is not a significant regulatory

action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose on small entities a collection of information
requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 780
of the Code, these temporary regulations will be 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 H. Kim, Office of Associate
Chief Counsel (Passthroughs and Special Industries). 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 1.167(a)-14 is amended by:

1. Revising paragraphs (b)(1) and (e)(2).
2. Revising paragraph heading (e).
3. Adding paragraph (e)(3).
The additions and revisions read as follows:
$1.167(a)-14 Treatment of certain intangible property excluded from section 197.
*****

(b) * * *
(1) In general. [Reserved]. For further guidance, see §1.167(a)-14T(b)(1).
*****

(e) Effective dates * * *
(2) Change in method of accounting. [Reserved]. For further guidance, see
§1.167(a)-14T(e)(2).
(3) Qualified property. 50-percent bonus depreciation property, gualified N e w
York Liberty Zone property, or section 179 property. [Reserved]. For further guidance,
see§1.167(a)-14T(e)(3).
Par. 3. Section 1.167(a)-14T is added to read as follows:
§1.167(a)-14T Treatment of certain intangible property excluded from section 197
(temporary).
(a) For further guidance, see §1.167(a)-14(a).
(b) Computer software--(1) In general. The amount of the deduction for
computer software described in section 167(f)(1) and §1.197-2(c)(4) is determined by
amortizing the cost or other basis of the computer software using the straight line

method described in §1.167(b)-1 (except that its salvage value is treated as zero) and
an amortization period of 36 months beginning on the first day of the month that the
computer software is placed in service. Before determining the amortization deduction
allowable under this paragraph (b), the cost or other basis of computer software that is
section 179 property, as defined in section 179(d)(1)(A)(ii), must be reduced for any
portion of the basis the taxpayer properly elects to treat as an expense under section
179. In addition, the cost or other basis of computer software that is qualified property
under section 168(k)(2) or §1.168(k)-1T, 50-percent bonus depreciation property under
section 168(k)(4) or §1.168(k)-1T, or qualified New York Liberty Zone property under
section 1400L(b) or §1.1400L(b)-1T, must be reduced by the amount of the additional
first year depreciation deduction allowed or allowable, whichever is greater, under
section 168(k) or section 1400L(b) for the computer software. If costs for developing
computer software that the taxpayer properly elects to defer under section 174(b) result
in the development of property subject to the allowance for depreciation under section
167, the rules of this paragraph (b) will apply to the unrecovered costs. In addition, this
paragraph (b) applies to the cost of separately acquired computer software if the cost to
acquire the software is separately stated and the cost is required to be capitalized under
section 263(a).
(b)(2) through (e)(1) For further guidance, see §1.167(a)-14(b)(2) through (e)(1).
(e)(2) Change in method of accounting. See §1.197-2(l)(4) for rules relating to
changes in method of accounting for property to which §1.167(a)-14T applies.
However, see §1.168(k)-1T(g)(4) or 1.1400L(b)-1T(g)(4) for rules relating to changes in

method of accounting for computer software to which the third sentence in §1.167(a)14T(b)(1) applies.
(3) Qualified property, 50-percent bonus depreciation property, Qualified N e w
York Liberty Zone property, or section 179 property. This section also applies to
computer software that is qualified property under section 168(k)(2) or qualified N e w
York Liberty Zone property under section 1400L(b) acquired by a taxpayer after
September 10, 2001, and to computer software that is 50-percent bonus depreciation
property under section 168(k)(4) acquired by a taxpayer after M a y 5, 2003. This section
also applies to computer software that is section 179 property placed in service by a
taxpayer in a taxable year beginning after 2002 and before 2006. This section expires
on September 7, 2006.
Par. 4. Section 1.168(d)-1 is amended by:
1. Revising paragraph (b)(3)(ii).
2. Paragraph heading (d) is revised and the text of paragraph (d) is redesignated
as paragraph (d)(1).
3. Adding paragraph (d)(2).
The additions and revisions read as follows:
§1.168(d)-1 Applicable conventions-half-year and mid-quarter conventions.
*****

(b) * * *
(3) * * *
(ii) [Reserved]. For further guidance, see §1.168(d)-1T(b)(3)(ii).

* *** *

(d) Effective dates-(1) In general. * * *
(2) Qualified property, 50-percent bonus depreciation property, or Qualified N e w
York Liberty Zone property. [Reserved]. For further guidance, see §1.168(d)-1T(d).
Par. 5. Section 1.168(d)-1T is added to read as follows:
$1.168(d)-1T Applicable conventions-half-year and mid-guarter conventions
(temporary).
(a) through (b)(3)(i) For further guidance, see §1.168(d)-1(a) through (b)(3)(i).
(b)(3)(H) The applicable convention, as determined under this section, applies to
all depreciable property (except nonresidential real property, residential rental property,
and any railroad grading or tunnel bore) placed in service during the taxable year,
excluding property placed in service and disposed of in the s a m e taxable year. N o
depreciation deduction is allowed for property placed in service and disposed of during
the s a m e taxable year. However, see §1.168(k)-1T(f)(1) for qualified property or 50percent bonus depreciation property, and §1.1400L(b)-1T(f)(1) for qualified N e w York
Liberty Zone property, that is placed in service in the s a m e taxable year in which either
a partnership is terminated as a result of a technical termination under section
708(b)(1)(B) or the property is transferred in a transaction described in section 168(i)(7).
(b)(3)(iii) through (d)(1) For further guidance, see §1.168(d)-1 (b)(3)(iii) through
(d)(1).
(d)(2) Qualified property, 50-percent bonus depreciation property, or qualified
N e w York Liberty Zone property. This section also applies to qualified property under

section 168(k)(2) or qualified N e w York Liberty Zone property under section 1400L(b)
acquired by a taxpayer after September 10, 2001, and to 50-percent bonus depreciation
property under section 168(k)(4) acquired by a taxpayer after May 5, 2003. This section
expires on September 7, 2006.
Par. 6. Section 1.168(k)-0T is added to read as follows:
§1.168(k)-0T Table of contents (temporary).
This section lists the headings that appear in §1.168(k)-1T.
§1.168(k)-1T Additional first year depreciation deduction (temporary).
(a) Scope and definitions.
(1) Scope.
(2) Definitions.
(b) Qualified property or 50-percent bonus depreciation property.
(1) In general.
(2) Description of qualified property or 50-percent bonus depreciation property.
(i) In general.
(ii) Property not eligible for additional first year depreciation deduction.
(A) Property that is not qualified property.
(B) Property that is not 50-percent bonus depreciation property.
(3) Original use.
(i) In general.
(ii) Conversion to business or income-producing use.
(iii) Sale-leaseback and syndication transactions.
(A) Sale-leaseback transaction.
(B) Syndication transaction.
(C) Sale-leaseback transaction followed by a syndication transaction.
(iv) Fractional interests in property.
(v) Examples.
(4) Acquisition of property,
(i) In general.
(A) Qualified property.
(B) 50-percent bonus depreciation property.
(ii) Definition of binding contract.
(A) In general.
(B) Conditions.
(C) Options.
(D) Supply agreements.
(E) Components.
26

(iii) Self-constructed property.
(A) In general.
(B) W h e n does construction begin.
(C) Components of self-constructed property.
(1) Acquired components.
(2) Self-constructed components.
(iv) Disqualified transactions.
(A) In general.
(B) Related party defined.
(v) Examples.
(5) Placed-in-service date.
(i) In general.
(ii) Sale-leaseback and syndication transactions.
(A) Sale-leaseback transaction.
(B) Syndication transaction.
(C) Sale-leaseback transaction followed by a syndication transaction.
(iii) Technical termination of a partnership.
(iv) Section 168(i)(7) transactions.
(c) Qualified leasehold improvement property.
(1) In general.
(2) Certain improvements not included.
(3) Definitions.
(d) Computation of depreciation deduction for qualified property or 50-percent bonus
depreciation property.
(1) Additional first year depreciation deduction.
(i) In general.
(ii) Property having a longer production period.
(iii) Alternative minimum tax.
(2) Otherwise allowable depreciation deduction.
(i) In general.
(ii) Alternative minimum tax.
(3) Examples.
(e) Election not to deduct additional first year depreciation.
(1) In general.
(i) Qualified property.
(ii) 50-percent bonus depreciation property.
(2) Definition of class of property.
(3) Time and manner for making election.
(i) Time for making election.
(ii) Manner of making election.
(4) Special rules for 2000 or 2001 returns.
(5) Failure to m a k e election.
(f) Special rules.
(1) Property placed in service and disposed27of in the s a m e taxable year.

(i) In general.
(ii) Technical termination of a partnership.
(iii) Section 168(i)(7) transactions.
(iv) Examples.
(2) Redetermination of basis.
(i) Increase in basis.
(ii) Decrease in basis.
(iii) Definition.
(iv) Examples.
(3) Section 1245 and 1250 depreciation recapture.
(4) Coordination with section 169.
(5) Like-kind exchanges and involuntary conversions.
(i) Scope.
(ii) Definitions.
(iii) Computation.
(A) In general.
(B) Year of disposition and year of replacement.
(iv) Sale-leasebacks.
(v) Examples.
(6) Change in use.
(i) Change in use of depreciable property.
(ii) Conversion to personal use.
(iii) Conversion to business or income-producing use.
(A) During the s a m e taxable year.
(B) Subsequent to the acquisition year.
(iv) Depreciable property changes use subsequent to the placed-in-service year.
(v) Examples.
(7) Earnings and profits.
(8) Limitation of amount of depreciation for certain passenger automobiles.
(9) Section 754 election.
(g) Effective date.
(1) In general.
(2) Technical termination of a partnership or section 168(i)(7) transactions.
(3) Like-kind exchanges and involuntary conversions.
(4) Change in method of accounting.
(i) Special rules for 2000 or 2001 returns.
(ii) Like-kind exchanges and involuntary conversions.
Par. 7. Section 1.168(k)-1T is added to read as follows:
§1.168(k)-1T Additional first year depreciation deduction (temporary).
(a) Scope and definitions—(1) Scope. This section provides the rules for

determining the 30-percent additional first year depreciation deduction allowable under
section 168(k)(1) for qualified property and the 50-percent additional first year
depreciation deduction allowable under section 168(k)(4) for 50-percent bonus
depreciation property.
(2) Definitions. For purposes of section 168(k) and this section, the following
definitions apply:
(i) Depreciable property is property that is of a character subject to the allowance
for depreciation as determined under section 167 and the regulations thereunder.
(ii) MACRS property is tangible, depreciable property that is placed in service
after December 31, 1986 (or after July 31, 1986, if the taxpayer made an election under
section 203(a)(1)(B) of the Tax Reform Act of 1986; 100 Stat. 2143) and subject to
section 168, except for property excluded from the application of section 168 as a result
of section 168(f) or as a result of a transitional rule.
(iii) Unadjusted depreciable basis is the basis of property for purposes of section
1011 without regard to any adjustments described in section 1016(a)(2) and (3). This
basis reflects the reduction in basis for the percentage of the taxpayer's use of property
for the taxable year other than in the taxpayer's trade or business (or for the production
of income), for any portion of the basis the taxpayer properly elects to treat as an
expense under section 179, and for any adjustments to basis provided by other
provisions of the Internal Revenue Code and the regulations thereunder (other than
section 1016(a)(2) and (3)) (for example, a reduction in basis by the amount of the
disabled access credit pursuant to section 44(d)(7)). For property subject to a lease,

see section 167(c)(2).
(iv) Adjusted depreciable basis is the unadjusted depreciable basis of the
property, as defined in §1.168(k)-1T(a)(2)(iii), less the adjustments described in section
1016(a)(2) and (3).
(b) Qualified property or 50-percent bonus depreciation propertv-(1) In general.
Qualified property or 50-percent bonus depreciation property is depreciable property
that(i) Meets the requirements in §1.168(k)-1T(b)(2) (description of property);
(ii) Meets the requirements in §1.168(k)-1T(b)(3) (original use);
(iii) Meets the requirements in §1.168(k)-1T(b)(4) (acquisition of property); and
(iv) Meets the requirements in §1.168(k)-1T(b)(5) (placed-in-service date).
(2) Description of gualified property or 50-percent bonus depreciation propertv(i) In general. Depreciable property will meet the requirements of this paragraph (b)(2) if
the property is~
(A) MACRS property (as defined in §1.168(k)-1T(a)(2)(ii)) that has a recovery
period of 20 years or less. For purposes of this paragraph (b)(2)(i)(A) and section
168(k)(2)(B)(i)(ll) and 168(k)(4)(C), the recovery period is determined in accordance
with section 168(c) regardless of any election made by the taxpayer under section
168(g)(7);
(B) Computer software as defined in, and depreciated under, section 167(f)(1)
and the regulations thereunder;
(C) Water utility property as defined in section 168(e)(5) and depreciated under

section 168; or
(D) Qualified leasehold improvement property as defined in paragraph (c) of this
section and depreciated under section 168.
(ii) Property not eligible for additional first year depreciation deduction-(A)
Property that is not qualified property. For purposes of the 30-percent additional first
year depreciation deduction, depreciable property will not meet the requirements of this
paragraph (b)(2) if the property is(I) Described in section 168(f);
(2) Required to be depreciated under the alternative depreciation system of
section 168(g) pursuant to section 168(g)(1)(A) through (D) or other provisions of the
Internal Revenue Code (for example, property described in section 263A(e)(2)(A) or
section 280F(b)(1));
(3) Included in any class of property for which the taxpayer elects not to deduct
the 30-percent additional first year depreciation (for further guidance, see paragraph (e)
of this section); or
(4) Qualified New York Liberty Zone leasehold improvement property as defined
in section 1400L(c)(2).
(B) Property that is not 50-percent bonus depreciation property. For purposes of
the 50-percent additional first year depreciation deduction, depreciable property will not
meet the requirements of this paragraph (b)(2) if the property is~
(I) Described in paragraph (b)(2)(ii)(A)(i), (2), or (4) of this section; or
(2) Included in any class of property for which the taxpayer elects the 30-percent,

instead of the 50-percent, additional first year depreciation deduction or elects not to
deduct any additional first year depreciation (for further guidance, see paragraph (e) of
this section).
(3) Original use-(i) In general. For purposes of the 30-percent additional first
year depreciation deduction, depreciable property will meet the requirements of this
paragraph (b)(3) if the original use of the property c o m m e n c e s with the taxpayer after
September 10, 2001. For purposes of the 50-percent additional first year depreciation
deduction, depreciable property will meet the requirements of this paragraph (b)(3) if the
original use of the property c o m m e n c e s with the taxpayer after M a y 5, 2003. Except as
provided in paragraph (b)(3)(iii) and (iv) of this section, original use m e a n s the first use
to which the property is put, whether or not that use corresponds to the use of the
property by the taxpayer. Thus, additional capital expenditures incurred by a taxpayer
to recondition or rebuild property acquired or owned by the taxpayer satisfies the
original use requirement. However, the cost of reconditioned or rebuilt property
acquired by the taxpayer does not satisfy the original use requirement. The question of
whether property is reconditioned or rebuilt property is a question of fact. For purposes
of this paragraph (b)(3)(i), property that contains used parts will not be treated as
reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the
total cost of the property.
(ii) Conversion to business or income-producing use. If a taxpayer initially
acquires n e w property for personal use and subsequently uses the property in the
taxpayer's trade or business or for the taxpayer's production of income, the taxpayer is

considered as the original user of the property. If a person initially acquires n e w
property for personal use and a taxpayer subsequently acquires the property from the
person for use in the taxpayer's trade or business or for the taxpayer's production of
income, the taxpayer is not considered the original user of the property.
(iii) Sale-leaseback and syndication transactions-(A) Sale-leaseback transaction.
If n e w property is originally placed in service by a person after September 10, 2001 (for
qualified property), or after M a y 5, 2003 (for 50-percent bonus depreciation property),
and is sold to a taxpayer and leased back to the person by the taxpayer within three
months after the date the property w a s originally placed in service by the person, the
taxpayer-lessor is considered the original user of the property.
(B) Syndication transaction. If n e w property is originally placed in service by a
lessor (including by operation of paragraph (b)(5)(ii)(A) of this section) after September
10, 2001 (for qualified property), or after M a y 5, 2003 (for 50-percent bonus
depreciation property), and is sold by the lessor or any subsequent purchaser within
three months after the date the property w a s originally placed in service by the lessor,
and the user of the property after the last sale during the three-month period remains
the s a m e as w h e n the property w a s originally placed in service by the lessor, the
purchaser of the property in the last sale during the three-month period is considered
the original user of the property.
(C) Sale-leaseback transaction followed by a syndication transaction. If a saleleaseback transaction that satisfies the requirements in paragraph (b)(3)(iii)(A) of this
section is followed by a syndication transaction that satisfies the requirements in

paragraph (b)(3)(iii)(B) of this section, the original user of the property is determined in
accordance with paragraph (b)(3)(iii)(B) of this section.
(iv) Fractional interests in property. If, in the ordinary course of its business, a
taxpayer sells fractional interests in property to unrelated third parties, each first
fractional owner of the property is considered as the original user of its proportionate
share of the property. Furthermore, if the taxpayer uses the property before all of the
fractional interests of the property are sold but the property continues to be held
primarily for sale by the taxpayer, the original use of any fractional interest sold to an
unrelated third party subsequent to the taxpayer's use of the property begins with the
first purchaser of that fractional interest. For purposes of this paragraph (b)(3)(iv),
persons are not related if they do not have a relationship described in section 267(b) or
707(b) and the regulations thereunder.
(v) Examples. The application of this paragraph (b)(3) is illustrated by the
following examples:
Example 1. On August 1, 2002, A buys from B for $20,000 a machine that has
been previously used by B in B's trade or business. O n March 1, 2003, A m a k e s a
$5,000 capital expenditure to recondition the machine. The $20,000 purchase price
does not qualify for the additional first year depreciation deduction because the original
use requirement of this paragraph (b)(3) is not met. However, the $5,000 expenditure
satisfies the original use requirement of this paragraph (b)(3) and, assuming all other
requirements are met, qualifies for the 30-percent additional first year depreciation
deduction, regardless of whether the $5,000 is added to the basis of the machine or is
capitalized as a separate asset.
Example 2. C, an automobile dealer, uses some of its automobiles as
demonstrators in order to show them to prospective customers. The automobiles that
are used as demonstrators by C are held by C primarily for sale to customers in the
ordinary course of its business. O n September 1, 2002, D buys from C an automobile
that w a s previously used as a demonstrator by C. D will use the automobile solely for
business purposes. The use of the automobile by C as a demonstrator does not
34

constitute a "use" for purposes of the original use requirement and, therefore, D will be
considered the original user of the automobile for purposes of this paragraph (b)(3).
Assuming all other requirements are met, D's purchase price of the automobile qualifies
for the 30-percent additional first year depreciation deduction for D, subject to any
limitation under section 280F.
Example 3. On April 1, 2000, E acquires a horse to be used in E's thoroughbred
racing business. O n October 1, 2003, F buys the horse from E and will use the horse in
F's horse breeding business. T h e use of the horse by E in its racing business prevents
the original use of the horse from commencing with F. Thus, F's purchase price of the
horse does not qualify for the additional first year depreciation deduction.
Example 4. In the ordinary course of its business, G sells fractional interests in
its aircraft to unrelated parties. G holds out for sale eight equal fractional interests in an
aircraft. O n January 1, 2003, G sells five of the eight fractional interests in the aircraft to
H, an unrelated party, and H begins to use its proportionate share of the aircraft
immediately upon purchase. O n June 1, 2003, G sells to I, an unrelated party to G and
H, the remaining unsold 3/8 fractional interests in the aircraft. H is considered the
original user as to its 5/8 fractional interest in the aircraft and 1 is considered the original
user as to its 3/8 fractional interest in the aircraft. Thus, assuming all other
requirements are met, H's purchase price for its 5/8 fractional interest in the aircraft
qualifies for the 30-percent additional first year depreciation deduction and I's purchase
price for its 3/8 fractional interest in the aircraft qualifies for the 50-percent additional
first year depreciation deduction.
(4) Acguisition of propertv-(i) In general-(A) Qualified property. For purposes of
the 30-percent additional first year depreciation deduction, depreciable property will
meet the requirements of this paragraph (b)(4) if the property is~
(i) Acquired by the taxpayer after September 10, 2001, and before January 1,
2005, but only if no written binding contract for the acquisition of the property was in
effect before September 11, 2001; or
(2) Acquired by the taxpayer pursuant to a written binding contract that was
entered into after September 10, 2001, and before January 1, 2005.
(B) 50-percent bonus depreciation property. For purposes of the 50-percent
additional first year depreciation deduction, depreciable property will meet the
35

requirements of this paragraph (b)(4) if the property is acquired by the taxpayer after
May 5, 2003, and before January 1, 2005, but only if no written binding contract for the
acquisition of the property was in effect before May 6, 2003.
(ii) Definition of binding contract-(A) In general. A contract is binding only if it is
enforceable under State law against the taxpayer or a predecessor, and does not limit
damages to a specified amount (for example, by use of a liquidated damages
provision). For this purpose, a contractual provision that limits damages to an amount
equal to at least 5 percent of the total contract price will not be treated as limiting
damages to a specified amount. In determining whether a contract limits damages, the
fact that there may be little or no damages because the contract price does not
significantly differ from fair market value will not be taken into account. For example, if
a taxpayer entered into an irrevocable written contract to purchase an asset for $100
and the contract contained no provision for liquidated damages, the contract is
considered binding notwithstanding the fact that the asset had a fair market value of $99
and under local law the seller would only recover the difference in the event the
purchaser failed to perform. If the contract provided for a full refund of the purchase
price in lieu of any damages allowable by law in the event of breach or cancellation by
the seller, the contract is not considered binding.
(B) Conditions. A contract is binding even if subject to a condition, as long as the
condition is not within the control of either party or a predecessor. A contract will
continue to be binding if the parties make insubstantial changes in its terms and
conditions or because any term is to be determined by a standard beyond the control of

either party. A contract that imposes significant obligations on the taxpayer or a
predecessor will be treated as binding notwithstanding the fact that insubstantial terms
remain to be negotiated by the parties to the contract.
(C) Options. An option to either acquire or sell property is not a binding contract.
(D) Supply agreements. A binding contract does not include a supply or similar
agreement if the amount and design specifications of the property to be purchased have
not been specified. The contract will not be a binding contract for the property to be
purchased until both the amount and the design specifications are specified. For
example, if the provisions of a supply or similar agreement state the design
specifications of, and the pricing for, the property to be purchased, a purchase order
under the agreement for a specific number of assets is treated as a binding contract.
(E) Components. A binding contract to acquire one or more components of a
larger property will not be treated as a binding contract to acquire the larger property. If
a binding contract to acquire the component does not satisfy the requirements of this
paragraph (b)(4), the component does not qualify for the 30-percent or 50-percent
additional first year depreciation deduction, as applicable.
(iii) Self-constructed propertv-(A) In general. If a taxpayer manufactures,
constructs, or produces property for use by the taxpayer in its trade or business (or for
its production of income), the acquisition rules in paragraph (b)(4)(i) of this section are
treated as met for qualified property if the taxpayer begins manufacturing, constructing,
or producing the property after September 10, 2001, and before January 1, 2005, and
for 50-percent bonus depreciation property if the taxpayer begins manufacturing,

constructing, or producing the property after M a y 5, 2003, and before January 1, 2005.
Property that is manufactured, constructed, or produced for the taxpayer by another
person under a written binding contract (as defined in paragraph (b)(4)(ii) of this section)
that is entered into prior to the manufacture, construction, or production of the property
for use by the taxpayer in its trade or business (or for its production of income) is
considered to be manufactured, constructed, or produced by the taxpayer.
(B) When does construction begin. For purposes of paragraph (b)(4)(iii) of this
section, construction of property begins when physical work of a significant nature
begins. Physical work does not include preliminary activities such as planning or
designing, securing financing, exploring, or researching. The determination of when
physical work of a significant nature begins depends on the facts and circumstances.
For purposes of this paragraph (b)(4)(iii)(B), physical work of a significant nature will not
be considered to begin before the taxpayer incurs (in the case of an accrual basis
taxpayer) or pays (in the case of a cash basis taxpayer) more than 10 percent of the
total cost of the property (excluding the cost of any land and preliminary activities such
as planning or designing, securing financing, exploring, or researching). For example, if
a retail motor fuels outlet is to be constructed on-site, construction begins when physical
work of a significant nature commences at the site; that is, when work begins on the
excavation for footings, pouring the pads for the outlet, or the driving of foundation
pilings into the ground. Preliminary work, such as clearing a site, test drilling to
determine soil condition, or excavation to change the contour of the land (as
distinguished from excavation for footings) does not constitute the beginning of

construction. However, if a retail motor fuels outlet is to be assembled on-site from
modular units constructed off-site and delivered to the site where the outlet will be used,
construction begins when physical work of a significant nature commences at the offsite location.
(C) Components of self-constructed propertv-d) Acguired components. If a
binding contract (as defined in paragraph (b)(4)(ii) of this section) to acquire a
component does not satisfy the requirements of paragraph (b)(4)(i) of this section, the
component does not qualify for the 30-percent or 50-percent additional first year
depreciation deduction, as applicable. A binding contract (as defined in paragraph
(b)(4)(ii) of this section) to acquire one or more components of a larger self-constructed
property will not preclude the larger self-constructed property from satisfying the
acquisition rules in paragraph (b)(4)(iii)(A) of this section. Accordingly, the unadjusted
depreciable basis of the larger self-constructed property that is eligible for the 30percent or 50-percent additional first year depreciation deduction, as applicable
(assuming all other requirements are met), must not include the unadjusted depreciable
basis of any component that does not satisfy the requirements of paragraph (b)(4)(i) of
this section. If the manufacture, construction, or production of the larger selfconstructed property begins before September 11, 2001, for qualified property, or
before May 6, 2003, for 50-percent bonus depreciation property, the larger selfconstructed property and any acquired components related to the larger selfconstructed property do not qualify for the 30-percent or 50-percent additional first year
depreciation deduction, as applicable. If a binding contract to acquire the component is

entered into after September 10, 2001, for qualified property, or after M a y 5, 2003, for
50-percent bonus depreciation property, and before January 1, 2005, but the
manufacture, construction, or production of the larger self-constructed property does not
begin before January 1, 2005, the component qualifies for the additional first year
depreciation deduction (assuming all other requirements are met) but the larger selfconstructed property does not.
(2) Self-constructed components. If the manufacture, construction, or production
of a component does not satisfy the requirements of paragraph (b)(4)(iii)(A) of this
section, the component does not qualify for the 30-percent or 50-percent additional first
year depreciation deduction, as applicable. However, if the manufacture, construction,
or production of a component does not satisfy the requirements of paragraph

(b)(4)(iii)(A) of this section, but the manufacture, construction, or production of the larg
self-constructed property satisfies the requirements of paragraph (b)(4)(iii)(A) of this
section, the larger self-constructed property qualifies for the 30-percent or 50-percent
additional first year depreciation deduction, as applicable (assuming all other
requirements are met) even though the component does not qualify for the 30-percent
or 50-percent additional first year depreciation deduction. Accordingly, the unadjusted
depreciable basis of the larger self-constructed property that is eligible for the 30percent or 50-percent additional first year depreciation deduction, as applicable
(assuming all other requirements are met), must not include the unadjusted depreciable
basis of any component that does not qualify for the 30-percent or 50-percent additional
first year depreciation deduction. If the manufacture, construction, or production of the

larger self-constructed property began before September 11, 2001, for qualified
property, or before May 6, 2003, for 50-percent bonus depreciation property, the larger
self-constructed property and any self-constructed components related to the larger
self-constructed property do not qualify for the 30-percent or 50-percent additional first
year depreciation deduction, as applicable. If the manufacture, construction, or
production of a component begins after September 10, 2001, for qualified property, or
after May 5, 2003, for 50-percent bonus depreciation property, and before January 1,
2005, but the manufacture, construction, or production of the larger self-constructed
property does not begin before January 1, 2005, the component qualifies for the
additional first year depreciation deduction (assuming all other requirements are met)
but the larger self-constructed property does not.
(iv) Disgualified transactions-(A) In general. Property does not satisfy the
requirements of this paragraph (b)(4) if the user of the property as of the date on which
the property was originally placed in service (including by operation of paragraph
(b)(5)(ii), (iii), and (iv) of this section), or a related party to the user, acquired, or had

written binding contract (as defined in paragraph (b)(4)(ii) of this section) in effect for t
acquisition of, the property at any time before September 11, 2001 (for qualified
property), or before May 6, 2003 (for 50-percent bonus depreciation property). In
addition, property manufactured, constructed, or produced for the taxpayer or a related
party does not satisfy the requirements of this paragraph (b)(4) if the manufacture,
construction, or production of the property for the taxpayer or a related party began at
any time before September 11, 2001 (for qualified property), or before May 6, 2003 (for

50-percent bonus depreciation property).
(B) Related party defined. For purposes of this paragraph (b)(4)(iv), persons are
related if they have a relationship specified in section 267(b) or 707(b) and the
regulations thereunder.
(v) Examples. The application of this paragraph (b)(4) is illustrated by the
following examples:
Example 1. On September 1, 2001, J, a corporation, entered into a written
agreement with K, a manufacturer, to purchase 20 new lamps for $100 each within the
next two years. Although the agreement specifies the number of lamps to be
purchased, the agreement does not specify the design of the lamps to be purchased.
Accordingly, the agreement is not a binding contract pursuant to paragraph (b)(4)(ii)(D)
of this section.
Example 2. Same facts as Example 1. On December 1, 2001, J placed a
purchase order with K to purchase 20 new model X P C 5 lamps for $100 each for a total
amount of $2,000. Because the agreement specifies the number of lamps to be
purchased and the purchase order specifies the design of the lamps to be purchased,
the purchase order placed by J with K on December 1, 2001, is a binding contract
pursuant to paragraph (b)(4)(ii)(D) of this section. Accordingly, the cost of the 20 lamps
qualifies for the 30-percent additional first year depreciation deduction.
Example 3. Same facts as Example 1 except that the written agreement
between J and K is to purchase 100 model X P C 5 lamps for $100 each within the next
two years. Because this agreement specifies the amount and design of the lamps to be
purchased, the agreement is a binding contract pursuant to paragraph (b)(4)(ii)(D) of
this section. Accordingly, because the agreement was entered into before September
11, 2001, any lamp acquired by J under this contract does not qualify for the additional
first year depreciation deduction.
Example 4. On September 1, 2001, L began constructing an electric generation
power plant for its own use. O n November 1, 2002, L ceases construction of the power
plant prior to its completion. Between September 1, 2001, and November 1, 2002, L
incurred $3,000,000 for the construction of the power plant. O n M a y 6, 2003, L
resumed construction of the power plant and completed its construction on August 31,
2003. Between M a y 6, 2003, and August 31, 2003, L incurred another $1,600,000 to
complete the construction of the power plant and, on September 1, 2003, L placed the
power plant in service. None of L's total expenditures of $4,600,000 qualify for the
additional first year depreciation deduction because, pursuant to paragraph (b)(4)(iii)(A)
42

of this section, L began constructing the power plant before September 11, 2001.
Example 5. Same facts as Example 4 except that L began constructing the
electric generation power plant for its o w n use on October 1, 2001. L's total
expenditures of $4,600,000 qualify for the additional first year depreciation deduction
because, pursuant to paragraph (b)(4)(iii)(A) of this section, L began constructing the
power plant after September 10, 2001, and placed the power plant in service before
January 1, 2005. Accordingly, the additional first year depreciation deduction for the
power plant will be $1,380,000, computed as $4,600,000 multiplied by 30 percent.
Example 6. On August 1, 2001, M entered into a written binding contract to
acquire a n e w turbine. The n e w turbine is a component part of a n e w electric
generation power plant that is being constructed on M's behalf. The construction of the
new electric generation power plant c o m m e n c e d in November 2001, and the n e w
electric generation power plant w a s completed in November 2002. Because M entered
into a written binding contract to acquire a component part (the n e w turbine) prior to
September 11, 2001, pursuant to paragraph (b)(4)(iii)(C) of this section, the component
part does not qualify for the additional first year depreciation deduction. However,
pursuant to paragraphs (b)(4)(iii)(A) and (C) of this section, the n e w plant constructed
for M will qualify for the 30-percent additional first year depreciation deduction because
construction of the n e w plant began after September 10, 2001, and before M a y 6, 2003.
Accordingly, the unadjusted depreciable basis of the n e w plant that is eligible for the 30percent additional first year depreciation deduction must not include the unadjusted
depreciable basis of the n e w turbine.
Example 7. Same facts as Example 6 except that M entered into the written
binding contract to acquire the n e w turbine on September 30, 2002, and construction of
the n e w plant c o m m e n c e d on August 1, 2001. Because M began construction of the
new plant prior to September 11, 2001, pursuant to paragraphs (b)(4)(iii)(A) and (C) of
this section, neither the n e w plant constructed for M nor the turbine will qualify for the
additional first year depreciation deduction because self-construction of the n e w plant
began prior to September 11, 2001.
Example 8. On September 1, 2001, N began constructing property for its own
use. O n October 1, 2001, N sold its rights to the property to O, a related party under
section 267(b). Pursuant to paragraph (b)(4)(iv) of this section, the property is not
eligible for the additional first year depreciation deduction because N and O are related
parties and construction of the property by N began prior to September 11, 2001.
Example 9. On September 1, 2001, P entered into a written binding contract to
acquire property. O n October 1, 2001, P sold its rights to the property to Q, a related
party under section 267(b). Pursuant to paragraph (b)(4)(iv) of this section, the property
is not eligible for the additional first year depreciation deduction because P and Q are
related parties and a written binding contract for the acquisition of the property w a s in
43

effect prior to September 11, 2001.
Example 10. Prior to September 11, 2001, R began constructing an electric
generation power plant for its own use. O n M a y 1, 2003, prior to the completion of the
power plant, R transferred the rights to own and use this power plant to S, an unrelated
party, for $6,000,000. Between M a y 6, 2003, and June 30, 2003, S, a calendar-year
taxpayer, incurred another $1,200,000 to complete the construction of the power plant
and, on August 1, 2003, S placed the power plant in service. Because R and S are not
related parties, the transaction between R and S will not be a disqualified transaction
pursuant to paragraph (b)(4)(iv) of this section. Accordingly, S's total expenditures of
$7,200,000 for the power plant qualify for the additional first year depreciation
deduction. S's additional first year depreciation deduction for the power plant will be
$2,400,000, computed as $6,000,000 multiplied by 30 percent, plus $1,200,000
multiplied by 50 percent. The $6,000,000 portion of the total $7,200,000 unadjusted
depreciable basis qualifies for the 30-percent additional first year depreciation deduction
because that portion of the total unadjusted depreciable basis w a s acquired by S after
September 10, 2001, and before M a y 6, 2003. However, because S began construction
to complete the power plant after M a y 5, 2003, the $1,200,000 portion of the total
$7,200,000 unadjusted depreciable basis qualifies for the 50-percent additional first
year depreciation deduction.
Example 11. On September 1, 2001, T acquired and placed in service
equipment. O n October 15, 2001, T sells the equipment to U, an unrelated party, and
leases the property back from U in a sale-leaseback transaction. Pursuant to paragraph
(b)(4)(iv) of this section, the equipment does not qualify for the additional first year
depreciation deduction because T, the user of the equipment, acquired the equipment
prior to September 11, 2001.
(5) Placed-in-service date-(i) In general. Depreciable property will meet the
requirements of this paragraph (b)(5) if the property is placed in service by the taxpayer
before January 1, 2005, or, in the case of property described in section 168(k)(2)(B), is
placed in service by the taxpayer before January 1, 2006.
(ii) Sale-leaseback and syndication transactions-(A) Sale-leaseback transaction.
If qualified property is originally placed in service after September 10, 2001, or 50percent bonus depreciation property is originally placed in service after May 5, 2003, by
a person and sold to a taxpayer and leased back to the person by the taxpayer within

three months after the date the property w a s originally placed in service by the person,
the property is treated as originally placed in service by the taxpayer-lessor not earlier
than the date on which the property is used by the lessee under the leaseback.
(B) Syndication transaction. If qualified property is originally placed in service
after September 10, 2001, or 50-percent bonus depreciation property is originally placed
in service after May 5, 2003, by a lessor (including by operation of paragraph
(b)(5)(ii)(A) of this section) and is sold by the lessor or any subsequent purchaser within
three months after the date the property was originally placed in service by the lessor,
and the user of the property after the last sale during this three-month period remains
the same as when the property was originally placed in service by the lessor, the
property is treated as originally placed in service by the purchaser of the property in the
last sale during the three-month period but not earlier than the date of the last sale.
(C) Sale-leaseback transaction followed by a syndication transaction. If a saleleaseback transaction that satisfies the requirements in paragraph (b)(5)(ii)(A) of this
section is followed by a syndication transaction that satisfies the requirements in
paragraph (b)(5)(ii)(B) of this section, the placed-in-service date of the property is
determined in accordance with paragraph (b)(5)(ii)(B) of this section.
(iii) Technical termination of a partnership. For purposes of this paragraph (b)(5),
in the case of a technical termination of a partnership under section 708(b)(1)(B),
qualified property or 50-percent bonus depreciation property placed in service by the
terminated partnership during the taxable year of termination is treated as originally
placed in service by the new partnership on the date the qualified property or the 50-

percent bonus depreciation property is contributed by the terminated partnership to the
new partnership.
(iv) Section 168(0(7) transactions. For purposes of this paragraph (b)(5), if
qualified property or 50-percent bonus depreciation property is transferred in a
transaction described in section 168(i)(7) in the same taxable year that the qualified
property or the 50-percent bonus depreciation property is placed in service by the
transferor, the transferred property is treated as originally placed in service on the date
the transferor placed in service the qualified property or the 50-percent bonus
depreciation property, as applicable. In the case of multiple transfers of qualified
property or 50-percent bonus depreciation property in multiple transactions described in
section 168(i)(7) in the same taxable year, the placed in service date of the transferred
property is deemed to be the date on which the first transferor placed in service the
qualified property or the 50-percent bonus depreciation property, as applicable.
(c) Qualified leasehold improvement propertv-(1) In general. For purposes of
section 168(k), qualified leasehold improvement property means any improvement,
which is section 1250 property, to an interior portion of a building that is nonresidential
real property if~
(i) The improvement is made under or pursuant to a lease by the lessee (or any
sublessee) of the interior portion, or by the lessor of that interior portion;
(ii) The interior portion of the building is to be occupied exclusively by the lessee
(or any sublessee) of that interior portion; and
(iii) The improvement is placed in service more than 3 years after the date the

building w a s first placed in service by any person.
(2) Certain improvements not included. Qualified leasehold improvement
property does not include any improvement for which the expenditure is attributable to:
(i) The enlargement of the building;
(ii) Any elevator or escalator;
(iii) Any structural component benefiting a common area; or
(iv) The internal structural framework of the building.
(3) Definitions. For purposes of this paragraph (c), the following definitions apply:
(i) Building has the same meaning as that term is defined in §1.48-1 (e)(1).
(ii) Common area means any portion of a building that is equally available to all
users of the building on the same basis for uses that are incidental to the primary use of
the building. For example, stairways, hallways, lobbies, common seating areas, interior
and exterior pedestrian walkways and pedestrian bridges, loading docks and areas, and
rest rooms generally are treated as common areas if they are used by different lessees
of a building.
(iii) Elevator and escalator have the same meanings as those terms are defined
in§1.48-1(m)(2).
(iv) Enlargement has the same meaning as that term is defined in §1.4812(c)(10).
(v) Internal structural framework has the same meaning as that term is defined in
§1.48-12(b)(3)(i)(D)(iii).
(vi) Lease has the same meaning as that term is defined in section 168(h)(7). In

addition, a commitment to enter into a lease is treated as a lease, and the parties to the
commitment are treated as lessor and lessee. However, a lease between related
persons is not considered a lease. For purposes of the preceding sentence, related
persons are(A) Members of an affiliated group (as defined in section 1504 and the
regulations thereunder); and
(B) Persons having a relationship described in section 267(b) and the regulations
thereunder. For purposes of applying section 267(b), the language "80 percent or
more" is used instead of "more than 50 percent."
(vii) Nonresidential real property has the same meaning as that term is defined in
section 168(e)(2)(B).
(viii) Structural component has the same meaning as that term is defined in
§1.48-1 (e)(2).
(d) Computation of depreciation deduction for gualified property or 50-percent
bonus depreciation property-d) Additional first year depreciation deduction-(i) In
general. Except as provided in paragraph (f)(5) of this section, the allowable additional
first year depreciation deduction for qualified property is determined by multiplying the
unadjusted depreciable basis (as defined in §1.168(k)-1T(a)(2)(iii)) of the qualified
property by 30 percent. Except as provided in paragraph (f)(5) of this section, the
allowable additional first year depreciation deduction for 50-percent bonus depreciation
property is determined by multiplying the unadjusted depreciable basis (as defined in
§1.168(k)-1T(a)(2)(iii)) of the 50-percent bonus depreciation property by 50 percent.

Except as provided in paragraph (f)(1) of this section, the 30-percent or 50-percent
additional first year depreciation deduction is not affected by a taxable year of less than
12 months. See paragraph (f)(1) of this section for qualified property or 50-percent
bonus depreciation property placed in service and disposed of in the same taxable year.
See paragraph (f)(5) of this section for qualified property or 50-percent bonus
depreciation property acquired in a like-kind exchange or as a result of an involuntary
conversion.
(ii) Property having a longer production period. For purposes of paragraph
(d)(1)(i) of this section, the unadjusted depreciable basis (as defined in §1.168(k)1T(a)(2)(iii)) of qualified property or 50-percent bonus depreciation property described in
section 168(k)(2)(B) is limited to the property's unadjusted depreciable basis attributable
to the property's manufacture, construction, or production after September 10, 2001 (for
qualified property), or May 5, 2003 (for 50-percent bonus depreciation property), and
before January 1, 2005.
(iii) Alternative minimum tax. The 30-percent or 50-percent additional first year
depreciation deduction is allowed for alternative minimum tax purposes for the taxable
year in which the qualified property or the 50-percent bonus depreciation property is
placed in service by the taxpayer. The 30-percent or 50-percent additional first year
depreciation deduction for alternative minimum tax purposes is based on the unadjusted
depreciable basis of the property for alternative minimum tax purposes.
(2) Otherwise allowable depreciation deduction. Before determining the amount
otherwise allowable as a depreciation deduction for the qualified property or the 50-

percent bonus depreciation property for the placed-in-service year and any subsequent
taxable year, the taxpayer must determine the remaining adjusted depreciable basis of
the qualified property or the 50-percent bonus depreciation property. This remaining
adjusted depreciable basis is equal to the unadjusted depreciable basis of the qualified
property or the 50-percent bonus depreciation property reduced by the amount of the
additional first year depreciation allowed or allowable, whichever is greater. The
remaining adjusted depreciable basis of the qualified property or the 50-percent bonus
depreciation property is then depreciated using the applicable depreciation provisions
under the Internal Revenue Code for the qualified property or the 50-percent bonus
depreciation property. The remaining adjusted depreciable basis of the qualified
property or the 50-percent bonus depreciation property that is MACRS property is also
the basis to which the annual depreciation rates in the optional depreciation tables apply
(for further guidance, see section 8 of Rev. Proc. 87-57 (1987-2 C.B. 687) and
§601.601 (d)(2)(ii)(b) of this chapter). The depreciation deduction allowable for the
remaining adjusted depreciable basis of the qualified property or the 50-percent bonus
depreciation property is affected by a taxable year of less than 12 months.
(ii) Alternative minimum tax. For alternative minimum tax purposes, the
depreciation deduction allowable for the remaining adjusted depreciable basis of the
qualified property or the 50-percent bonus depreciation property is based on the
remaining adjusted depreciable basis for alternative minimum tax purposes. The
remaining adjusted depreciable basis of the qualified property or the 50-percent bonus
depreciable property for alternative minimum tax purposes is depreciated using the

s a m e depreciation method, recovery period (or useful life in the case of computer
software), and convention that apply to the qualified property or the 50-percent bonus
depreciation property for regular tax purposes.
(3) Examples. This paragraph (d) is illustrated by the following examples:
Example 1. On March 1, 2003, V, a calendar-year taxpayer, purchased and
placed in service qualified property that costs $1 million and is 5-year property under
section 168(e). V depreciates its 5-year property placed in service in 2003 using the
optional depreciation table that corresponds with the general depreciation system, the
200-percent declining balance method, a 5-year recovery period, and the half-year
convention. For 2003, V is allowed a 30-percent additional first year depreciation
deduction of $300,000 (the unadjusted depreciable basis of $1 million multiplied by .30).
Next, V must reduce the unadjusted depreciable basis of $1 million by the additional
first year depreciation deduction of $300,000 to determine the remaining adjusted
depreciable basis of $700,000. Then, V's depreciation deduction allowable in 2003 for
the remaining adjusted depreciable basis of $700,000 is $140,000 (the remaining
adjusted depreciable basis of $700,000 multiplied by the annual depreciation rate of .20
for recovery year 1).
Example 2. On June 1, 2003, W, a calendar-year taxpayer, purchased and
placed in service 50-percent bonus depreciation property that costs $126,000. The
property qualifies for the expensing election under section 179 and is 5-year property
under section 168(e). W did not purchase any other section 179 property in 2003. W
makes the election under section 179 for the property and depreciates its 5-year
property placed in service in 2003 using the optional depreciation table that corresponds
with the general depreciation system, the 200-percent declining balance method, a 5year recovery period, and the half-year convention. For 2003, W is first allowed a
$100,000 deduction under section 179. Next, W must reduce the cost of $126,000 by
the section 179 deduction of $100,000 to determine the unadjusted depreciable basis of
$26,000. Then, for 2003, W is allowed a 50-percent additional first year depreciation
deduction of $13,000 (the unadjusted depreciable basis of $26,000 multiplied by .50).
Next, W must reduce the unadjusted depreciable basis of $26,000 by the additional first
year depreciation deduction of $13,000 to determine the remaining adjusted depreciable
basis of $13,000. Then, W's depreciation deduction allowable in 2003 for the remaining
adjusted depreciable basis of $13,000 is $2,600 (the remaining adjusted depreciable
basis of $13,000 multiplied by the annual depreciation rate of .20 for recovery year 1).
(e) Election not to deduct additional first year depreciation-^ 1) In general. If a
taxpayer makes an election under this paragraph (e), the election applies to all qualified

property or 50-percent bonus depreciation property, as applicable, that is in the s a m e
class of property and placed in service in the same taxable year. The rules of this
paragraph (e) apply to the following elections provided under section 168(k):
(i) Qualified property. A taxpayer may make an election not to deduct the 30percent additional first year depreciation for any class of property that is qualified
property placed in service during the taxable year. If this election is made, no additional
first year depreciation deduction is allowable for the property placed in service during
the taxable year in the class of property.
(ii) 50-percent bonus depreciation property. For any class of property that is 50percent bonus depreciation property placed in service during the taxable year, a
taxpayer may make an election(A) To deduct the 30-percent, instead of the 50-percent, additional first year
depreciation. If this election is made, the allowable additional first year depreciation
deduction is determined as though the class of property is qualified property under
section 168(k)(2);or
(B) Not to deduct any additional first year depreciation. If this election is made,
no additional first year depreciation deduction is allowable for the class of property.
(2) Definition of class of property. For purposes of this paragraph (e), the term
class of property means:
(i) Except for the property described in paragraphs (e)(2)(H) and (iv) of this
section, each class of property described in section 168(e) (for example, 5-year
property);

(ii) Water utility property as defined in section 168(e)(5) and depreciated under
section 168;
(iii) Computer software as defined in, and depreciated under, section 167(f)(1)
and the regulations thereunder; or
(iv) Qualified leasehold improvement property as defined in paragraph (c) of this
section and depreciated under section 168.
(3) Time and manner for making election-(i) Time for making election. Except as
provided in paragraph (e)(4) of this section, any election specified in paragraph (e)(1) of
this section must be made by the due date (including extensions) of the Federal tax
return for the taxable year in which the qualified property or the 50-percent bonus
depreciation property, as applicable, is placed in service by the taxpayer.
(ii) Manner of making election. Except as provided in paragraph (e)(4) of this
section, any election specified in paragraph (e)(1) of this section must be made in the
manner prescribed on Form 4562, "Depreciation and Amortization," and its instructions.
The election is made separately by each person owning qualified property or 50-percent
bonus depreciation property (for example, for each member of a consolidated group by
the common parent of the group, by the partnership, or by the S corporation). If Form
4562 is revised or renumbered, any reference in this section to that form shall be
treated as a reference to the revised or renumbered form.
(4) Special rules for 2000 or 2001 returns. For the election specified in

paragraph (e)(1)(i) of this section for qualified property placed in service by the taxpayer
during the taxable year that included September 11, 2001, the taxpayer should refer to

the guidance provided by the Internal Revenue Service for the time and manner of
making this election on the 2000 or 2001 Federal tax return for the taxable year that
included September 11, 2001 (for further guidance, see sections 3.03(3) and 4 of Rev.
Proc. 2002-33 (2002-1 C.B. 963), Rev. Proc. 2003-50 (2003-29 I.R.B. 119), and
§601.601 (d)(2)(ii)(b) of this chapter).
(5) Failure to make election. If a taxpayer does not make the applicable election
specified in paragraph (e)(1) of this section within the time and in the manner prescribed
in paragraph (e)(3) or (4) of this section, the amount of depreciation allowable for that
property under section 167(f)(1) or under section 168, as applicable, must be
determined for the placed-in-service year and for all subsequent taxable years by taking
into account the additional first year depreciation deduction. Thus, any election
specified in paragraph (e)(1) of this section shall not be made by the taxpayer in any
other manner (for example, the election cannot be made through a request under
section 446(e) to change the taxpayers method of accounting).
(f) Special rules-(1) Property placed in service and disposed of in the same
taxable vear-(i) In general. Except as provided in paragraphs (f)(1)(H) and (iii) of this
section, the additional first year depreciation deduction is not allowed for qualified
property or 50-percent bonus depreciation property placed in service and disposed of
during the same taxable year.
(ii) Technical termination of a partnership. In the case of a technical termination
of a partnership under section 708(b)(1)(B), the additional first year depreciation
deduction is allowable for any qualified property or 50-percent bonus depreciation

property placed in service by the terminated partnership during the taxable year of
termination and contributed by the terminated partnership to the new partnership. The
allowable additional first year depreciation deduction for the qualified property or the 50percent bonus depreciation property shall not be claimed by the terminated partnership
but instead shall be claimed by the new partnership for the new partnership's taxable
year in which the qualified property or the 50-percent bonus depreciation property was
contributed by the terminated partnership to the new partnership. However, if qualified
property or 50-percent bonus depreciation property is both placed in service and
contributed to a new partnership in a transaction described in section 708(b)(1)(B) by
the terminated partnership during the taxable year of termination, and if such property is
disposed of by the new partnership in the same taxable year the new partnership
received such property from the terminated partnership, then no additional first year
depreciation deduction is allowable to either partnership.
(iii) Section 168(0(7) transactions. If any qualified property or 50-percent bonus
depreciation property is transferred in a transaction described in section 168(i)(7) in the
same taxable year that the qualified property or the 50-percent bonus depreciation
property is placed in service by the transferor, the additional first year depreciation
deduction is allowable for the qualified property or the 50-percent bonus depreciation
property. The allowable additional first year depreciation deduction for the qualified
property or the 50-percent bonus depreciation property for the transferor's taxable year
in which the property is placed in service is allocated between the transferor and the
transferee on a monthly basis. This allocation shall be made in accordance with the

rules in §1.168(d)-1 (b)(7)(H) for allocating the depreciation deduction between the
transferor and the transferee. However, if qualified property or 50-percent bonus
depreciation property is both placed in service and transferred in a transaction
described in section 168(i)(7) by the transferor during the same taxable year, and if
such property is disposed of by the transferee (other than by a transaction described in
section 168(i)(7)) during the same taxable year the transferee received such property
from the transferor, then no additional first year depreciation deduction is allowable to
either party.
(iv) Examples. The application of this paragraph (f)(1) is illustrated by the
following examples:
Example 1. X and Y are equal partners in Partnership XY, a general partnership.
O n February 1, 2002, Partnership X Y purchased and placed in service n e w equipment
at a cost of $30,000. O n March 1, 2002, X sells its entire 50 percent interest to Z in a
transfer that terminates the partnership under section 708(b)(1)(B). A s a result,
terminated Partnership X Y is d e e m e d to have contributed the equipment to n e w
Partnership XY. Pursuant to paragraph (f)(1 )(ii) of this section, n e w Partnership XY, not
terminated Partnership XY, is eligible to claim the 30-percent additional first year
depreciation deduction allowable for the equipment for the taxable year 2002 (assuming
all other requirements are met).
Example 2. On January 5, 2002, BB purchased and placed in service new office
desks for a total amount of $8,000. O n August 20, 2002, B B transferred the office
desks to Partnership B C in a transaction described in section 721. B B and Partnership
B C are calendar-year taxpayers. Because the transaction between B B and Partnership
B C is a transaction described in section 168(i)(7), pursuant to paragraph (f)(1)(iii) of this
section the 30-percent additional first year depreciation deduction allowable for the
desks is allocated between B B and Partnership B C in accordance with the rules in
§1.168(d)-1 (b)(7)(H) for allocating the depreciation deduction between the transferor and
the transferee. Accordingly, the 30-percent additional first year depreciation deduction
allowable for the desks for 2002 of $2,400 (the unadjusted depreciable basis of $8,000
multiplied by .30) is allocated between B B and Partnership B C based on the number of
months that B B and Partnership B C held the desks in service. Thus, because the
desks were held in service by B B for 7 of 12 months, which includes the month in which
B B placed the desks in service but does not include the month in which the desks were
56

transferred, B B is allocated $1,400 (7/12 x $2,400 additional first year depreciation
deduction). Partnership B C is allocated $1,000, the remaining 5/12 of the $2,400
additional first year depreciation deduction allowable for the desks.
(2) Redetermination of basis. If the unadjusted depreciable basis (as defined in
§1.168(k)-1T(a)(2)(iii)) of qualified property or 50-percent bonus depreciation property is
redetermined (for example, due to contingent purchase price or discharge of
indebtedness) by January 1, 2005 (or January 1, 2006, for property described in section
168(k)(2)(B)), the additional first year depreciation deduction allowable for the qualified
property or the 50-percent bonus depreciation property is redetermined as follows:
(i) Increase in basis. For the taxable year in which an increase in basis of
qualified property or 50-percent bonus depreciation property occurs, the taxpayer shall
claim an additional first year depreciation deduction for qualified property by multiplying
the amount of the increase in basis for this property by 30 percent or, for 50-percent
bonus depreciation property, by multiplying the amount of the increase in basis for this
property by 50 percent. For purposes of this paragraph (f)(2)(i), the 30-percent
additional first year depreciation deduction applies to the increase in basis if the
underlying property is qualified property and the 50-percent additional first year
depreciation deduction applies to the increase in basis if the underlying property is 50percent bonus depreciation property. To determine the amount otherwise allowable as
a depreciation deduction for the increase in basis of qualified property or 50-percent
bonus depreciation property, the amount of the increase in basis of the qualified
property or the 50-percent bonus depreciation property must be reduced by the
additional first year depreciation deduction allowed or allowable, whichever is greater,

for the increase in basis and the remaining increase in basis of(A) Qualified property or 50-percent bonus depreciation property (except for
computer software described in paragraph (b)(2)(i)(B) of this section) is depreciated
over the recovery period of the qualified property or the 50-percent bonus depreciation
property, as applicable, remaining as of the beginning of the taxable year in which the
increase in basis occurs, and using the same depreciation method and convention
applicable to the qualified property or 50-percent bonus depreciation property, as
applicable, that applies for the taxable year in which the increase in basis occurs; and
(B) Computer software (as defined in paragraph (b)(2)(i)(B) of this section) that is
qualified property or 50-percent bonus depreciation property is depreciated ratably over
the remainder of the 36-month period (the useful life under section 167(f)(1)) as of the
beginning of the first day of the month in which the increase in basis occurs.
(ii) Decrease in basis. For the taxable year in which a decrease in basis of
qualified property or 50-percent bonus depreciation property occurs, the taxpayer shall
include in the taxpayer's income the excess additional first year depreciation deduction
previously claimed for the qualified property or the 50-percent bonus depreciation
property. This excess additional first year depreciation deduction for qualified property
is determined by multiplying the amount of the decrease in basis for this property by 30
percent. The excess additional first year depreciation deduction for 50-percent bonus
depreciation property is determined by multiplying the amount of the decrease in basis
for this property by 50 percent. For purposes of this paragraph (f)(2)(H), the 30-percent
additional first year depreciation deduction applies to the decrease in basis if the

underlying property is qualified property and the 50-percent additional first year
depreciation deduction applies to the decrease in basis if the underlying property is 50percent bonus depreciation property. Also, if the taxpayer establishes by adequate
records or other sufficient evidence that the taxpayer claimed less than the additional
first year depreciation deduction allowable for the qualified property or the 50-percent
bonus depreciation property before the decrease in basis or if the taxpayer claimed
more than the additional first year depreciation deduction allowable for the qualified
property or the 50-percent bonus depreciation property before the decrease in basis,
the excess additional first year depreciation deduction is determined by multiplying the
amount of the decrease in basis by the additional first year depreciation deduction
percentage actually claimed by the taxpayer for the qualified property or the 50-percent
bonus depreciation property, as applicable, before the decrease in basis. To determine
the amount includible in the taxpayer's income for the excess depreciation previously
claimed (other than the additional first year depreciation deduction) resulting from the
decrease in basis of the qualified property or the 50-percent bonus depreciation
property, the amount of the decrease in basis of the qualified property or the 50-percent
bonus depreciation property must be adjusted by the excess additional first year
depreciation deduction includible in the taxpayer's income (as determined under this
paragraph) and the remaining decrease in basis of(A) Qualified property or 50-percent bonus depreciation property (except for
computer software described in paragraph (b)(2)(i)(B) of this section) is included in the
taxpayer's income over the recovery period of the qualified property or the 50-percent

bonus depreciation property, as applicable, remaining as of the beginning of the taxable
year in which the decrease in basis occurs, and using the same depreciation method
and convention of the qualified property or 50-percent bonus depreciation property, as
applicable, that applies in the taxable year in which the decrease in basis occurs; and
(B) Computer software (as defined in paragraph (b)(2)(i)(B) of this section) that is
qualified property or 50-percent bonus depreciation property is included in the
taxpayer's income ratably over the remainder of the 36-month period (the useful life
under section 167(f)(1)) as of the beginning of the first day of the month in which the
decrease in basis occurs.
(iii) Definition. For purposes of this paragraph (f)(2)(A) An increase in basis occurs in the taxable year an amount is taken into
account under section 461; and
(B) A decrease in basis occurs in the taxable year an amount would be taken into
account under section 451.
(iv) Examples. The application of this paragraph (f)(2) is illustrated by the
following examples:
Example 1. (i) On May 15, 2002, CC, a cash-basis taxpayer, purchased and
placed in service qualified property that is 5-year property at a cost of $200,000. In
addition to the $200,000, C C agrees to pay the seller 25 percent of the gross profits
from the operation of the property in 2002. O n M a y 15, 2003, C C paid to the seller an
additional $10,000. C C depreciates the 5-year property placed in service in 2002 using
the optional depreciation table that corresponds with the general depreciation system,
the 200-percent declining balance method, a 5-year recovery period, and the half-year
convention.
(ii) For 2002, CC is allowed a 30-percent additional first year depreciation
deduction of $60,000 (the unadjusted depreciable basis of $200,000 multiplied by .30).
In addition, CC's depreciation deduction for 2002 for the remaining adjusted depreciable
60

basis of $140,000 (the unadjusted depreciable basis of $200,000 reduced by the
additional first year depreciation deduction of $60,000) is $28,000 (the remaining
adjusted depreciable basis of $140,000 multiplied by the annual depreciation rate of .20
for recovery year 1).
(iii) For 2003, CC's depreciation deduction for the remaining adjusted depreciable
basis of $140,000 is $44,800 (the remaining adjusted depreciable basis of $140,000
multiplied by the annual depreciation rate of .32 for recovery year 2). In addition,
pursuant to paragraph (f)(2)(i) of this section, C C is allowed an additional first year
depreciation deduction for 2003 for the $10,000 increase in basis of the qualified
property. Consequently, C C is allowed an additional first year depreciation deduction of
$3,000 (the increase in basis of $10,000 multiplied by .30). Also, C C is allowed a
depreciation deduction for 2003 attributable to the remaining increase in basis of $7,000
(the increase in basis of $10,000 reduced by the additional first year depreciation
deduction of $3,000). The depreciation deduction allowable for 2003 attributable to the
remaining increase in basis of $7,000 is $3,111 (the remaining increase in basis of
$7,000 multiplied by .4444, which is equal to 1/remaining recovery period of 4.5 years at
January 1, 2003, multiplied by 2). Accordingly, for 2003, CC's total depreciation
deduction allowable for the qualified property is $50,911.
Example 2. (i) On May 15, 2002, DD purchased and placed in service qualified
property that is 5-year property at a cost of $400,000. To purchase the property, D D
borrowed $250,000 from Bank2. O n M a y 15, 2003, Bank2 forgives $50,000 of the
indebtedness. D D m a k e s the election provided in section 108(b)(5) to apply any portion
of the reduction under section 1017 to the basis of the depreciable property of the
taxpayer. D D depreciates the 5-year property placed in service in 2002 using the
optional depreciation table that corresponds with the general depreciation system, the
200-percent declining balance method, a 5-year recovery period, and the half-year
convention.
(ii) For 2002, DD is allowed a 30-percent additional first year depreciation
deduction of $120,000 (the unadjusted depreciable basis of $400,000 multiplied by .30).
In addition, DD's depreciation deduction allowable for 2002 for the remaining adjusted
depreciable basis of $280,000 (the unadjusted depreciable basis of $400,000 reduced
by the additional first year depreciation deduction of $120,000) is $56,000 (the
remaining adjusted depreciable basis of $280,000 multiplied by the annual depreciation
rate of .20 for recovery year 1).
(iii) For 2003, DD's deduction for the remaining adjusted depreciable basis of
$280,000 is $89,600 (the remaining adjusted depreciable basis of $280,000 multiplied
by the annual depreciation rate of .32 for recovery year 2). However, pursuant to
paragraph (f)(2)(H) of this section, D D must include in its taxable income for 2003 the
excess depreciation previously claimed for the $50,000 decrease in basis of the
qualified property. Consequently, D D must include in its taxable income for 2003 the
61

excess additional first year depreciation of $4,500 (the decrease in basis of $50,000
multiplied by .30). Also, D D must include in its taxable income for 2003 the excess
depreciation attributable to the remaining decrease in basis of $45,500 (the decrease in
basis of $50,000 reduced by the excess additional first year depreciation of $4,500).
The amount includible in taxable income for 2003 for the remaining decrease in basis of
$45,500 is $20,222 (the remaining decrease in basis of $45,500 multiplied by .4444,
which is equal to 1/remaining recovery period of 4.5 years at January 1, 2003, multiplied
by 2). Accordingly, for 2003, DD's total depreciation deduction allowable for the
qualified property is $64,878 ($89,600 minus $4,500 minus $20,222).
(3) Section 1245 and 1250 depreciation recapture. For purposes of section 1245
and the regulations thereunder, the additional first year depreciation deduction is an
amount allowed or allowable for depreciation. Further, for purposes of section 1250(b)
and the regulations thereunder, the additional first year depreciation deduction is not a
straight line method.
(4) Coordination with section 169. The additional first year depreciation

deduction is allowable in the placed-in-service year of a certified pollution control facilit
(as defined in §1.169-2(a)) that is qualified property or 50-percent bonus depreciation
property, even if the taxpayer makes the election to amortize the certified pollution
control facility under section 169 and the regulations thereunder in the certified pollution
control facility's placed-in-service year.
(5) Like-kind exchanges and involuntary conversions-(0 Scope. The rules of this
paragraph (f)(5) apply to acquired MACRS property or acquired computer software that
is eligible for the additional first year depreciation deduction under section 168(k) at the
time of replacement provided the time of replacement is after September 10, 2001, and
before January 1, 2005, or, in the case of acquired MACRS property or acquired
computer software that is qualified property, or 50-percent bonus depreciation property,

described in section 168(k)(2)(B), the time of replacement is after September 10, 2001,
and before January 1, 2006.
(ii) Definitions. For purposes of this paragraph (f)(5), the following definitions
apply:
(A) Acguired MACRS property is MACRS property in the hands of the acquiring
taxpayer that is acquired in a transaction described in section 1031(a), (b), or (c) for
other MACRS property or that is acquired in connection with an involuntary conversion
of other MACRS property in a transaction to which section 1033 applies.
(B) Exchanged or involuntarily converted MACRS property is MACRS property
that is transferred by the taxpayer in a transaction described in section 1031(a), (b), or
(c), or that is converted as a result of an involuntary conversion to which section 1033
applies.
(C) Acquired computer software is computer software (as defined in paragraph
(b)(2)(i)(B) of this section) in the hands of the acquiring taxpayer that is acquired in a
like-kind exchange under section 1031 or as a result of an involuntary conversion under
section 1033.
(D) Exchanged or involuntarily converted computer software is computer
software (as defined in paragraph (b)(2)(i)(B) of this section) that is transferred by the
taxpayer in a like-kind exchange under section 1031 or that is converted as a result of
an involuntary conversion under section 1033.

(E) Time of disposition is when the disposition of the exchanged or involuntarily
converted MACRS property or the exchanged or involuntarily converted computer
software, as applicable, takes place.
(F) Time of replacement is the later of:
(I) when the property received in the exchange or involuntary conversion is
placed in service; or
(2) the time of disposition of involuntarily converted property.
(G) Carryover basis is the lesser of:
(i) the basis in the acquired MACRS property or acquired computer software, as
applicable and as determined under section 1031(d) or 1033(b) and the regulations
thereunder; or
(2) the adjusted depreciable basis of the exchanged or involuntarily converted
MACRS property or the exchanged or involuntarily converted computer software, as
applicable.
(H) Excess basis is any excess of the basis in the acquired MACRS property or
acquired computer software, as applicable and as determined under section 1031(d) or
1033(b) and the regulations thereunder, over the carryover basis as determined under
paragraph (f)(5)(ii)(G) of this section.
(I) Remaining carryover basis is the carryover basis as determined under
paragraph (f)(5)(ii)(G) of this section reduced by(I) The percentage of the taxpayer's use of property for the taxable year other
than in the taxpayer's trade or business (or for the production of income); and

(2) Any adjustments to basis provided by other provisions of the C o d e and the
regulations thereunder (including section 1016(a)(2) and (3)) for periods prior to the
disposition of the exchanged or involuntarily converted property.
(J) Remaining excess basis is the excess basis as determined under paragraph
(f)(5)(ii)(H) of this section reduced byCD The percentage of the taxpayer's use of property for the taxable year other
than in the taxpayer's trade or business (or for the production of income);
(2) Any portion of the basis the taxpayer properly elects to treat as an expense
under section 179; and
(3) Any adjustments to basis provided by other provisions of the Code and the
regulations thereunder.
(iii) Computation-(A) In general. Assuming all other requirements are met, the
remaining carryover basis for the year of replacement and the remaining excess basis,
if any, for the year of replacement for the acquired MACRS property or the acquired
computer software, as applicable, are eligible for the additional first year depreciation
deduction. The 30-percent additional first year depreciation deduction applies to the
remaining carryover basis and the remaining excess basis, if any, of the acquired
MACRS property or the acquired computer software if the time of replacement is after
September 10, 2001, and before May 6, 2003, or if the taxpayer made the election
provided in paragraph (e)(1)(ii)(A) of this section. The 50-percent additional first year
depreciation deduction applies to the remaining carryover basis and the remaining
excess basis, if any, of the acquired MACRS property or the acquired computer

software if the time of replacement is after M a y 5, 2003, and before January 1, 2005, or
before January 1, 2006, for 50-percent bonus depreciation property described in section
168(k)(2)(B). The additional first year depreciation deduction is computed separately for
the remaining carryover basis and the remaining excess basis. Rules similar to the
rules provided in paragraph (d) of this section apply to property described in section
168(k)(2)(B) and for alternative minimum tax purposes.
(B) Year of disposition and year of replacement. The additional first year
depreciation deduction is allowable for the acquired MACRS property or acquired
computer software in the year of replacement. However, the additional first year
depreciation deduction is not allowable for the exchanged or involuntarily converted
MACRS property or the exchanged or involuntarily converted computer software if the
MACRS property or computer software, as applicable, is placed in service and disposed
of in an exchange or involuntary conversion in the same taxable year.
(iv) Sale-leaseback transaction. For purposes of this paragraph (f)(5), if MACRS
property or computer software is sold to a taxpayer and leased back to a person by the
taxpayer within three months after the time of disposition of the MACRS property or
computer software, as applicable, the time of replacement for this MACRS property or
computer software, as applicable, shall not be earlier than the date on which the
MACRS property or computer software, as applicable, is used by the lessee under the
leaseback.
(v) Examples. The application of this paragraph (f)(5) is illustrated by the
following examples:

Example 1. (i) In December 2002, EE, a calendar-year corporation, acquired for
$200,000 and placed in service Canopy V1, a gas station canopy. Canopy V1 is
qualified property under section 168(k)(1) and is 5-year property under section 168(e).
E E depreciated Canopy V1 under the general depreciation system of section 168(a) by
using the 200-percent declining balance method of depreciation, a 5-year recovery
period, and the half-year convention. E E elected to use the optional depreciation tables
to compute the depreciation allowance for Canopy V1. O n January 1, 2003, Canopy V1
was destroyed in a fire and w a s no longer usable in EE's business. O n June 1, 2003, in
a transaction described in section 1033(a)(2), E E acquired and placed in service
Canopy W 1 with all of the $160,000 of insurance proceeds E E received due to the loss
of Canopy V1. Canopy W 1 is 50-percent bonus depreciation property under section
168(k)(4) and is 5-year property under section 168(e).
(ii) For 2002, EE is allowed a 30-percent additional first year depreciation
deduction of $60,000 for Canopy V1 (the unadjusted depreciable basis of $200,000
multiplied by .30), and a regular M A C R S depreciation deduction of $28,000 for Canopy
V1 (the remaining adjusted depreciable basis of $140,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the additional first year
depreciation deduction allowable for Canopy W 1 equals $56,000 (.50 of Canopy W1's
remaining carryover basis of $112,000 (Canopy V1's remaining adjusted depreciable
basis of $140,000 minus 2002 regular M A C R S depreciation deduction of $28,000).
Example 2. (i) Same facts as in Example 1, except EE elected not to deduct the
additional first year depreciation for 5-year property placed in service in 2002. E E
deducted the additional first year depreciation for 5-year property placed in service in
2003.
(ii) For 2002, EE is allowed a regular MACRS depreciation deduction of $40,000
for Canopy V1 (the unadjusted depreciable basis of $200,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the additional first year
depreciation deduction allowable for Canopy W 1 equals $80,000 (.50 of Canopy W1's
remaining carryover basis of $160,000 (Canopy V1's unadjusted depreciable basis of
$200,000 minus 2002 regular M A C R S depreciation deduction of $40,000).
Example 3. (i) In December 2001, FF, a calendar year corporation, acquired for
$10,000 and placed in service Computer X2. Computer X 2 is qualified property under
section 168(k)(1) and is 5-year property under section 168(e). FF depreciated
Computer X 2 under the general depreciation system of section 168(a) by using the 200percent declining balance method of depreciation, a 5-year recovery period, and the
half-year convention. FF elected to use the optional depreciation tables to compute the
67

depreciation allowance for Computer X2. O n January 1, 2002, FF acquired Computer
Y 2 by exchanging Computer X 2 and $1,000 cash in a transaction described in section
1031(a). Computer Y 2 is qualified property under section 168(k)(1) and is 5-year
property under section 168(e).
(ii) For 2001, FF is allowed a 30-percent additional first year depreciation
deduction of $3,000 for Computer X 2 (unadjusted basis of $10,000 multiplied by .30),
and a regular M A C R S depreciation deduction of $1,400 for Computer X 2 (the remaining
adjusted depreciable basis of $7,000 multiplied by the annual depreciation rate of .20
for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the 30-percent additional
first year depreciation deduction for Computer Y 2 is allowable for the remaining
carryover basis of $5,600 (Computer X2's unadjusted depreciable basis of $10,000
minus additional first year depreciation deduction allowable of $3,000 minus 2001
regular M A C R S depreciation deduction of $1,400) and for the remaining excess basis of
$1,000 (cash paid for Computer Y2). Thus, the 30-percent additional first year
depreciation deduction for the remaining carryover basis equals $1,680 ($5,600
multiplied by .30) and for the remaining excess basis equals $300 ($1,000 multiplied by
.30), which totals $1,980.
Example 4. (i) In September 2002, GG, a June 30 year-end corporation,
acquired for $20,000 and placed in service Equipment X3. Equipment X 3 is qualified
property under section 168(k)(1) and is 5-year property under section 168(e). G G
depreciated Equipment X 3 under the general depreciation system of section 168(a) by
using the 200-percent declining balance method of depreciation, a 5-year recovery
period, and the half-year convention. G G elected to use the optional depreciation tables
to compute the depreciation allowance for Equipment X3. In December 2002, G G
acquired Equipment Y 3 by exchanging Equipment X 3 and $5,000 cash in a transaction
described in section 1031(a). Equipment Y 3 is qualified property under section
168(k)(1) and is 5-year property under section 168(e).
(ii) Pursuant to paragraph (f)(5)(iii)(B) of this section, no additional first year
depreciation deduction is allowable for Equipment X 3 and, pursuant to §1.168(d)1T(b)(3)(ii), no regular depreciation deduction is allowable for Equipment X3.
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the 30-percent additional
first year depreciation deduction for Equipment Y 3 is allowable for the remaining
carryover basis of $20,000 (Equipment X3's unadjusted depreciable basis of $20,000)
and for the remaining excess basis of $5,000 (cash paid for Equipment Y3). Thus, the
30-percent additional first year depreciation deduction for the remaining carryover basis
equals $6,000 ($20,000 multiplied by .30) and for the remaining excess basis equals
$1,500 ($5,000 multiplied by .30), which totals $7,500.

Example 5. (i) S a m e facts as in Example 4. G G depreciated Equipment Y 3
under the general depreciation system of section 168(a) by using the 200-percent
declining balance method of depreciation, a 5-year recovery period, and the half-year
convention. G G elected to use the optional depreciation tables to compute the
depreciation allowance for Equipment Y3. O n July 1, 2003, G G acquired Equipment Z1
by exchanging Equipment Y 3 in a transaction described in section 1031(a). Equipment
Z1 is 50-percent bonus depreciation property under section 168(k)(4) and is 5-year
property under section 168(e).
(ii) For the taxable year ending June 30, 2003, the regular MACRS depreciation
deduction allowable for the remaining carryover basis of Equipment Y 3 is $2,800 (the
remaining carryover basis of $14,000 multiplied by the annual depreciation rate of .20
for recovery year 1) and for the remaining excess basis of Equipment Y 3 is $700 (the
remaining excess basis of $3,500 multiplied by the annual depreciation rate of .20 for
recovery year 1), which totals $3,500.
(iii) For the taxable year ending June 30, 2004, pursuant to paragraph (f)(5)(iii)(A)
of this section, the 50-percent additional first year depreciation deduction allowable for
Equipment Z1 is $7,000 (.50 of Equipment Z1's remaining carryover basis of $14,000
(Equipment Y3's total unadjusted depreciable basis of $25,000 minus the total
additional first year depreciation deduction of $7,500 minus the total regular M A C R S
depreciation deduction of $3,500).
(6) Change in use-(i) Change in use of depreciable property. The determination
of whether the use of depreciable property changes is made in accordance with section
168(i)(5) and regulations thereunder.
(ii) Conversion to personal use. If qualified property or 50-percent bonus
depreciation property is converted from business or income-producing use to personal
use in the same taxable year in which the property is placed in service by a taxpayer,
the additional first year depreciation deduction is not allowable for the property.
(iii) Conversion to business or income-producing use-(A) During the same
taxable year. If, during the same taxable year, property is acquired by a taxpayer for
personal use and is converted by the taxpayer from personal use to business or
income-producing use, the additional first year depreciation deduction is allowable for
69

the property in the taxable year the property is converted to business or incomeproducing use (assuming all of the requirements in paragraph (b) of this section are
met). See paragraph (b)(3)(H) of this section relating to the original use rules for a
conversion of property to business or income-producing use.
(B) Subseguent to the acguisition year. If property is acquired by a taxpayer for
personal use and, during a subsequent taxable year, is converted by the taxpayer from
personal use to business or income-producing use, the additional first year depreciation
deduction is allowable for the property in the taxable year the property is converted to
business or income-producing use (assuming all of the requirements in paragraph (b) of
this section are met). For purposes of paragraphs (b)(4) and (5) of this section, the
property must be acquired by the taxpayer for personal use after September 10, 2001
(for qualified property), or after May 5, 2003 (for 50-percent bonus depreciation
property), and converted by the taxpayer from personal use to business or incomeproducing use by January 1, 2005. See paragraph (b)(3)(H) of this section relating to
the original use rules for a conversion of property to business or income-producing use.
(iv) Depreciable property changes use subseguent to the placed-in-service vear(A) If the use of qualified property or 50-percent bonus depreciation property changes in
the hands of the same taxpayer subsequent to the taxable year the qualified property or
the 50-percent bonus depreciation property, as applicable, is placed in service and, as a
result of the change in use, the property is no longer qualified property or 50-percent
bonus depreciation property, as applicable, the additional first year depreciation
deduction allowable for the qualified property or the 50-percent bonus depreciation

property, as applicable, is not redetermined.
(B) If depreciable property is not qualified property or 50-percent bonus
depreciation property in the taxable year the property is placed in service by the

taxpayer, the additional first year depreciation deduction is not allowable for the property
even if a change in the use of the property subsequent to the taxable year the property
is placed in service results in the property being qualified property or 50-percent bonus
depreciation property in the taxable year of the change in use.
(v) Examples. The application of this paragraph (f)(6) is illustrated by the
following examples:
Example 1. (i) On January 1, 2002, HH, a calendar year corporation, purchased
and placed in service several n e w computers at a total cost of $100,000. H H used
these computers within the United States for 3 months in 2002 and then moved and
used the computers outside the United States for the remainder of 2002. O n January 1,
2003, H H permanently returns the computers to the United States for use in its
business.
(ii) For 2002, the computers are considered as used predominantly outside the
United States in 2002 pursuant to §1.48-1(g)(1)(i). A s a result, the computers are
required to be depreciated under the alternative depreciation system of section 168(g).
Pursuant to paragraph (b)(2)(ii)(A)(2) of this section, the computers are not qualified
property in 2002, the placed-in-service year. Thus, pursuant to (f)(6)(iv)(B) of this
section, no additional first year depreciation deduction is allowed for these computers,
regardless of the fact that the computers are permanently returned to the United States
in 2003.
Example 2. (i) On February 8, 2002, M, a calendar year corporation, purchased
and placed in service n e w equipment at a cost of $1,000,000 for use in its California
plant. The equipment is 5-year property under section 168(e) and is qualified property
under section 168(k). M depreciates its 5-year property placed in service in 2002 using
the optional depreciation table that corresponds with the general depreciation system,
the 200-percent declining balance method, a 5-year recovery period, and the half-year
convention. O n June 4, 2003, due to changes in N's business circumstances, M
permanently m o v e s the equipment to its plant in Mexico.
(ii) For 2002, M is allowed a 30-percent additional first year depreciation
71

deduction of $300,000 (the adjusted depreciable basis of $1,000,000 multiplied by .30).
In addition, N's depreciation deduction allowable in 2002 for the remaining adjusted
depreciable basis of $700,000 (the unadjusted depreciable basis of $1,000,000 reduced
by the additional first year depreciation deduction of $300,000) is $140,000 (the
remaining adjusted depreciable basis of $700,000 multiplied by the annual depreciation
rate of .20 for recovery year 1).
(iii) For 2003, the equipment is considered as used predominantly outside the
United States pursuant to §1 -48-1(g)(1)(i). A s a result of this change in use, the
adjusted depreciable basis of $560,000 for the equipment is required to be depreciated
under the alternative depreciation system of section 168(g) beginning in 2003.
However, the additional first year depreciation deduction of $300,000 allowed for the
equipment in 2002 is not redetermined.
(7) Earnings and profits. The additional first year depreciation deduction is not
allowable for purposes of computing earnings and profits.
(8) Limitation of amount of depreciation for certain passenger automobiles. For a
passenger automobile as defined in section 280F(d)(5), the limitation under section
280F(a)(1)(A)(i) is increased by(i) $4,600 for qualified property acquired by a taxpayer after September 10, 2001,
and before May 6, 2003; and
(ii) $7,650 for qualified property or 50-percent bonus depreciation property
acquired by a taxpayer after May 5, 2003.
(9) Section 754 election. In general, for purposes of section 168(k) any increase
in basis of qualified property or 50-percent bonus depreciation property due to a section
754 election is not eligible for the additional first year depreciation deduction. However,
if qualified property or 50-percent bonus depreciation property is placed in service by a
partnership in the taxable year the partnership terminates under section 708(b)(1)(B),
any increase in basis of the qualified property or the 50-percent bonus depreciation

property due to a section 754 election is eligible for the additional first year depreciation
deduction.
(g) Effective date-(1) In general. Except as provided in paragraphs (g)(2) and
(3) of this section, this section applies to qualified property under section 168(k)(2)
acquired by a taxpayer after September 10, 2001, and to 50-percent bonus depreciation
property under section 168(k)(4) acquired by a taxpayer after May 5, 2003. This section
expires on September 7, 2006.
(2) Technical termination of a partnership or section 168(0(7) transactions. If
qualified property or 50 percent bonus depreciation property is transferred in a technical
termination of a partnership under section 708(b)(1)(B) or in a transaction described in
section 168(i)(7) for a taxable year ending on or before September 8, 2003, and the
additional first year depreciation deduction allowable for the property was not
determined in accordance with paragraph (f)(1)(H) or (iii) of this section, as applicable,
the Internal Revenue Service will allow any reasonable method of determining the
additional first year depreciation deduction allowable for the property in the year of the
transaction that is consistently applied to the property by all parties to the transaction.
(3) Like-kind exchanges and involuntary conversions. If a taxpayer did not claim
on a federal tax return for a taxable year ending on or before September 8, 2003, the
additional first year depreciation deduction for the remaining carryover basis of qualified
property or 50-percent bonus depreciation property acquired in a transaction described
in section 1031(a), (b), or (c), or in a transaction to which section 1033 applies and the
taxpayer did not make an election not to deduct the additional first year depreciation

deduction for the class of property applicable to the remaining carryover basis, the
Internal Revenue Service will treat the taxpayer's method of not claiming the additional
first year depreciation deduction for the remaining carryover basis as a permissible
method of accounting and will treat the amount of the additional first year depreciation
deduction allowable for the remaining carryover basis as being equal to zero, provided
the taxpayer does not claim the additional first year depreciation deduction for the
remaining carryover basis in accordance with paragraph (g)(4)(H) of this section.
(4) Change in method of accounting-(i) Special rules for 2000 or 2001 returns. If
a taxpayer did not claim on the Federal tax return for the taxable year that included
September 11, 2001, any additional first year depreciation deduction for a class of
property that is qualified property and did not make an election not to deduct the
additional first year depreciation deduction for that class of property, the taxpayer
should refer to the guidance provided by the Internal Revenue Service for the time and
manner of claiming the additional first year depreciation deduction for the class of
property (for further guidance, see section 4 of Rev. Proc. 2002-33 (2002-1 C.B. 963),
Rev. Proc. 2003-50 (2003-29 I.R.B. 119), and §601.601 (d)(2)(ii)(b) of this chapter).
(ii) Like-kind exchanges and involuntary conversions. If a taxpayer did not claim
on a federal tax return for any taxable year ending on or before September 8, 2003, the
additional first year depreciation deduction allowable for the remaining carryover basis
of qualified property or 50-percent bonus depreciation property acquired in a transaction
described in section 1031(a), (b), or (c), or in a transaction to which section 1033
applies and the taxpayer did not make an election not to deduct the additional first year

depreciation deduction for the class of property applicable to the remaining carryover
basis, the taxpayer m a y claim the additional first year depreciation deduction allowable
for the remaining carryover basis in accordance with paragraph (f)(5) of this section
either:
(A) by filing an amended return (or a qualified amended return, if applicable (for
further guidance, see Rev. Proc. 94-69 (1994-2 C.B. 804) and §601.601 (d)(2)(ii)(b) of
this chapter)) on or before December 31, 2003, for the year of replacement and any
affected subsequent taxable year; or,
(B) by following the applicable administrative procedures issued under §1.4461(e)(3)(H) for obtaining the Commissioner's automatic consent to a change in method of
accounting (for further guidance, see Rev. Proc. 2002-9 (2002-1 C.B. 327) and
§601.601 (d)(2)(ii)(b) of this chapter).
Par. 8. Section 1.169-3 is amended by:
1. Revising paragraphs (a) and (b)(2).
2. Adding paragraph (g).
The additions and revisions read as follows:
§1.169-3 Amortizable basis.
* ****

(a) [Reserved]. For further guidance, see §1.169-3T(a).
* ****

(b) * * *
(2) [Reserved]. For further guidance, see §1.169-3T(b)(2).

* *** *

(g) Effective date for gualified property, 50-percent bonus depreciation property,
and qualified New York Liberty Zone property. [Reserved]. For further guidance, see
§1.169-3T(g).
Par. 9. Section 1.169-3T is added to read as follows:
51.169-3T Amortizable basis (temporary).
(a) In general. The amortizable basis of a certified pollution control facility for the
purpose of computing the amortization deduction under section 169 is the adjusted
basis of the facility for purposes of determining gain (see part II (section 1011 and
following), subchapter O, chapter 1 of the Internal Revenue Code), as modified by
paragraphs (b), (c), and (d) of this section. The adjusted basis for purposes of
determining gain (computed without regard to these modifications) of a facility that
performs a function in addition to pollution control, or that is used in connection with
more than one plant or other property, or both, is determined under §1.169-2(a)(3). For
rules as to additions and improvements to such a facility, see paragraph (f) of this
section. Before computing the amortization deduction allowable under section 169, the
adjusted basis for purposes of determining gain for a facility that is placed in service by
a taxpayer after September 10, 2001, and that is qualified property under section
168(k)(2) or §1.168(k)-1T, 50-percent bonus depreciation property under section
168(k)(4) or §1.168(k)-1T, or qualified New York Liberty Zone property under section
1400L(b) or §1.1400L(b)-1T must be reduced by the amount of the additional first year
depreciation deduction allowed or allowable, whichever is greater, under section 168(k)

or section 1400L(b), as applicable, for the facility.
(b) Limitation on post-1968 construction, reconstruction, or erection. (1)For
further guidance, see §1.169-3(b)(1).
(2) If the taxpayer elects to begin the 60-month amortization period with the first
month of the taxable year succeeding the taxable year in which the facility is completed
or acquired and a depreciation deduction is allowable under section 167 (including an

additional first-year depreciation allowance under former section 179; for a facility that is
acquired by the taxpayer after September 10, 2001, and that is qualified property under
section 168(k)(2) or §1.168(k)-1T or qualified New York Liberty Zone property under
section 1400L(b) or §1.1400L(b)-1T, the additional first year depreciation deduction
under section 168(k)(1) or 1400L(b), as applicable; and for a facility that is acquired by
the taxpayer after May 5, 2003, and that is 50-percent bonus depreciation property
under section 168(k)(4) or §1.168(k)-1T, the additional first year depreciation deduction
under section 168(k)(4)) with respect to the facility for the taxable year in which it is
completed or acquired, the amount determined under paragraph (b)(1) of this section
shall be reduced by an amount equal to the amount of the depreciation deduction
allowed or allowable, whichever is greater, multiplied by a fraction the numerator of
which is the amount determined under paragraph (b)(1) of this section, and the
denominator of which is the facility's total cost. The additional first-year allowance for
depreciation under former section 179 will be allowable only for the taxable year in
which the facility is completed or acquired and only if the taxpayer elects to begin the
amortization deduction under section 169 with the taxable year succeeding the taxable

year in which such facility is completed or acquired. For a facility that is acquired by a
taxpayer after September 10, 2001, and that is qualified property under section
168(k)(2) or §1.168(k)-1T or qualified New York Liberty Zone property under section
1400L(b) or §1.1400L(b)-1T, see §1.168(k)-1T(f)(4) or §1.1400L(b)-1T(f)(4), as
applicable, with respect to when the additional first year depreciation deduction under
section 168(k)(1) or 1400L(b) is allowable. For a facility that is acquired by a taxpayer
after May 5, 2003, and that is 50-percent bonus depreciation property under section
168(k)(4) or §1.168(k)-1T, see §1.168(k)-1T(f)(4) with respect to when the additional
first year depreciation deduction under section 168(k)(4) is allowable.
(c) through (f) For further guidance, see §1.169-3(c) through (f).
(g) Effective date for gualified property, 50-percent bonus depreciation property,
and gualified New York Liberty Zone property. This section applies to a certified

pollution control facility. This section also applies to a certified pollution control facili
that is qualified property under section 168(k)(2) or qualified New York Liberty Zone
property under section 1400L(b) acquired by a taxpayer after September 10, 2001, and
to a certified pollution control facility that is 50-percent bonus depreciation property
under section 168(k)(4) acquired by a taxpayer after May 5, 2003. This section expires
on September 7, 2006.
Par. 10. Section 1.1400L(b)-1T is added to read as follows:
$1.1400L(b)-1T Additional first year depreciation deduction for gualified New York
Liberty Zone property (temporary).
(a) Scope. This section provides the rules for determining the 30-percent

additional first year depreciation deduction allowable under section 1400L(b) for
qualified New York Liberty Zone property.
(b) Definitions. For purposes of section 1400L(b) and this section, the definitions
of the terms in §1.168(k)-1T(a)(2) apply and the following definitions also apply:
(1) Building and structural components have the same meanings as those terms
are defined in §1.48-1(e).
(2) New York Liberty Zone is the area located on or south of Canal Street, East
Broadway (east of its intersection with Canal Street), or Grand Street (east of its
intersection with East Broadway) in the Borough of Manhattan in the City of New York,
New York.
(3) Nonresidential real property and residential rental property have the same
meanings as those terms are defined in section 168(e)(2).
(4) Real property is a building or its structural components, or other tangible real
property except property described in section 1245(a)(3)(B) (relating to depreciable

property used as an integral part of a specified activity or as a specified facility), sectio
1245(a)(3)(D) (relating to single purpose agricultural or horticultural structure), or
section 1245(a)(3)(E) (relating to a storage facility used in connection with the
distribution of petroleum or any primary product of petroleum).
(c) Qualified New York Liberty Zone property-(1) In general. Qualified New York
Liberty Zone property is depreciable property that—
(i) Meets the requirements in §1.1400L(b)-1T(c)(2) (description of property);
(ii) Meets the requirements in §1.1400L(b)-1T(c)(3) (substantial use);

(iii) Meets the requirements in §1.1400L(b)-1T(c)(4) (original use);
(iv) Meets the requirements in §1.1400L(b)-1T(c)(5) (acquisition of property by
purchase); and
(v) Meets the requirements in §1.1400L(b)-1T(c)(6) (placed-in-service date).
(2) Description of gualified New York Liberty Zone propertv-(i) In general.
Depreciable property will meet the requirements of this paragraph (c)(2) if the property
is~
(A) Described in §1.168(k)-1T(b)(2)(i); or
(B) Nonresidential real property or residential rental property depreciated under
section 168, but only to the extent it rehabilitates real property damaged, or replaces
real property destroyed or condemned, as a result of the terrorist attacks of September
11, 2001. Property is treated as replacing destroyed or condemned property if, as part
of an integrated plan, the property replaces real property that is included in a continuous
area that includes real property destroyed or condemned. For purposes of this section,
real property is considered as destroyed or condemned only if an entire building or
structure was destroyed or condemned as a result of the terrorist attacks of September
11, 2001. Otherwise, the real property is considered damaged real property. For
example, if certain structural components (for example, walls, floors, and plumbing
fixtures) of a building are damaged or destroyed as a result of the terrorist attacks of
September 11, 2001, but the building is not destroyed or condemned, then only costs
related to replacing the damaged or destroyed structural components qualify under this
paragraph (c)(2)(i)(B).

(ii) Property not eligible for additional first year depreciation deduction.
Depreciable property will not meet the requirements of this paragraph (c)(2) if (A) Section 168(k) or §1.168(k)-1T applies to the property; or
(B) The property is described in section §1.168(k)-1T(b)(2)(ii).
(3) Substantial use. Depreciable property will meet the requirements of this
paragraph (c)(3) if substantially all of the use of the property is in the New York Liberty
Zone and is in the active conduct of a trade or business by the taxpayer in New York
Liberty Zone. For purposes of this paragraph (c)(3), "substantially all" means 80
percent or more.
(4) Original use. Depreciable property will meet the requirements of this
paragraph (c)(4) if the original use of the property commences with the taxpayer in the
New York Liberty Zone after September 10, 2001. The original use rules in §1.168(k)1T(b)(3) apply for purposes of this paragraph (c)(4). In addition, used property will
satisfy the original use requirement in this paragraph (c)(4) so long as the property has
not been previously used within the New York Liberty Zone.
(5) Acguisition of property by purchase-(i) In general. Depreciable property will
meet the requirements of this paragraph (c)(5) if the property is acquired by the
taxpayer by purchase (as defined in section 179(d) and §1.179-4(c)) after September
10, 2001, but only if no written binding contract for the acquisition of the property was in
effect before September 11, 2001. For purposes of this paragraph (c)(5), the rules in
§1.168(k)-1T(b)(4)(ii) (binding contract), the rules in §1.168(k)-1 T(b)(4)(iii) (selfconstructed property), and the rules in §1.168(k)-1T(b)(4)(iv) (disqualified transactions)

apply. For purposes of the preceding sentence, the rules in § 1.168(k)-1T(b)(4)(iii) shall
be applied without regard to 'and before January 1, 2005.'
(ii) Exception for certain transactions. For purposes of this section, the new

partnership of a transaction described in §1.168(k)-1 T(f)(1 )(ii) (technical termination of a
partnership) or the transferee of a transaction described in §1.168(k)-1T(f)(1)(iii)
(section 168(i)(7) transactions) is deemed to acquire the depreciable property by
purchase.
(6) Placed-in-service date. Depreciable property will meet the requirements of
this paragraph (c)(6) if the property is placed in service by the taxpayer on or before
December 31, 2006. However, nonresidential real property and residential rental
property described in paragraph (c)(2)(i)(B) of this section must be placed in service by
the taxpayer on or before December 31, 2009. The rules in §1.168(k)-1T(b)(5)(ii)
(relating to sale-leaseback and syndication transactions), the rules in §1.168(k)1T(b)(5)(iii) (relating to a technical termination of a partnership under section
708(b)(1)(B)), and the rules in §1.168(k)-1T(b)(5)(iv) (relating to section 168(i)(7)
transactions) apply for purposes of this paragraph (c)(6).
(d) Computation of depreciation deduction for gualified New York Liberty Zone
property. The computation of the allowable additional first year depreciation deduction
and the otherwise allowable depreciation deduction for qualified New York Liberty Zone
property is made in accordance with the rules for qualified property in §1.168(k)1T(d)(1)(i)and(2).

(e) Election not to deduct additional first year depreciation-d) In general. A
taxpayer may make an election not to deduct the 30-percent additional first year
depreciation for any class of property that is qualified New York Liberty Zone property
placed in service during the taxable year. If a taxpayer makes an election under this
paragraph (e), the election applies to all qualified New York Liberty Zone property that is
in the same class of property and placed in service in the same taxable year, and no
additional first year depreciation deduction is allowable for the class of property.
(2) Definition of class of property. For purposes of this paragraph (e), the term
class of property means(i) Except for the property described in paragraphs (e)(2)(H), (iv), and (v) of this
section, each class of property described in section 168(e) (for example, 5-year
property);
(ii) Water utility property as defined in section 168(e)(5) and depreciated under
section 168;
(iii) Computer software as defined in, and depreciated under, section 167(f)(1)
and the regulations thereunder;
(iv) Nonresidential real property as defined in paragraph (b)(3) of this section
and as described in paragraph (c)(2)(B) of this section; or
(v) Residential rental property as defined in paragraph (b)(3) of this section and
as described in paragraph (c)(2)(B) of this section
(3) Time and manner for making election-(i) Time for making election. Except as
provided in paragraph (e)(4) of this section, the election specified in paragraph (e)(1) of

this section must be m a d e by the due date (including extensions) of the federal tax
return for the taxable year in which the qualified New York Liberty Zone property is
placed in service by the taxpayer
(ii) Manner of making election. Except as provided in paragraph (e)(4) of this
section, the election specified in paragraph (e)(1) of this section must be made in the
manner prescribed on Form 4562, "Depreciation and Amortization," and its instructions.
The election is made separately by each person owning qualified New York Liberty
Zone property (for example, for each member of a consolidated group by the common
parent of the group, by the partnership, or by the S corporation). If Form 4562 is
revised or renumbered, any reference in this section to that form shall be treated as a
reference to the revised or renumbered form.
(4) Special rules for 2000 or 2001 returns. For the election specified in
paragraph (e)(1) of this section for qualified New York Liberty Zone property placed in
service by the taxpayer during the taxable year that included September 11, 2001, the
taxpayer should refer to the guidance provided by the Internal Revenue Service for the
time and manner of making this election on the 2000 or 2001 federal tax return for the
taxable year that included September 11, 2001 (for further guidance, see sections
3.03(3) and 4 of Rev. Proc. 2002-33 (2002-1 C.B. 963), Rev. Proc. 2003-50 (2003-29
I.R.B. 119), and §601.601 (d)(2)(ii)(b) of this chapter).
(5) Failure to make election. If a taxpayer does not make the election specified in
paragraph (e)(1) of this section within the time and in the manner prescribed in
paragraph (e)(3) or (e)(4) of this section, the amount of depreciation allowable for that

property under section 167(f)(1) or under section 168, as applicable, must be
determined for the placed-in-service year and for all subsequent taxable years by taking
into account the additional first year depreciation deduction. Thus, the election
specified in paragraph (e)(1) of this section shall not be made by the taxpayer in any
other manner (for example, the election cannot be made through a request under
section 446(e) to change the taxpayers method of accounting).
(f) Special rules-(1) Property placed in service and disposed of in the same
taxable year. Rules similar to those provided in §1.168(k)-1T(f)(1) apply for purposes of
this paragraph (f)(1).
(2) Redetermination of basis. If the unadjusted depreciable basis (as defined in
§1.168(k)-1T(a)(2)(iii)) of qualified New York Liberty Zone property is redetermined (for
example, due to contingent purchase price or discharge of indebtedness) on or before
December 31, 2006 (or on or before December 31, 2009, for nonresidential real
property and residential rental property described in paragraph (c)(2)(i)(B) of this
section), the additional first year depreciation deduction allowable for the qualified New
York Liberty Zone property is redetermined in accordance with the rules provided in
§1.168(k)-1T(f)(2).
(3) Section 1245 and 1250 depreciation recapture. The rules provided in
§1.168(k)-1T(f)(3) apply for purposes of this paragraph (f)(3).
(4) Coordination with section 169. Rules similar to those provided in §1.168(k)1T(f)(4) apply for purposes of this paragraph (f)(4).
(5) Like-kind exchanges and involuntary conversions. This paragraph (f)(5)

applies to acquired M A C R S property (as defined in §1.168(k)-1 T(f)(5)(ii)(A)) or acquired
computer software (as defined in §1.168(k)-1 T(f)(5)(ii)(C)) that is eligible for the
additional first year depreciation deduction under section 1400L(b) at the time of
replacement provided the time of replacement is after September 10, 2001, and on or
before December 31, 2006, or in the case of acquired MACRS property or acquired
computer software that is qualified New York Liberty Zone property described in
paragraph (c)(2)(i)(B) of this section, the time of replacement is after September 10,
2001, and on or before December 31, 2009. The rules and definitions similar to those
provided in §1.168(k)-1T(f)(5) apply for purposes of this paragraph (f)(5).
(6) Change in use. Rules similar to those provided in §1.168(k)-1 T(f)(6) apply for
purposes of this paragraph (f)(6).
(7) Earnings and profits. The rule provided in §1.168(k)-1T(f)(7) applies for
purposes of this paragraph (f)(7).
(8) Section 754 election. Rules similar to those provided in § 1.168(k)-1 T(f)(9)
apply for purposes of this paragraph (f)(8).
(g) Effective date-(1) In general. Except as provided in paragraphs (g)(2) and
(3) of this section, this section applies to qualified New York Liberty Zone property
acquired by a taxpayer after September 10, 2001. This section expires on September
7, 2006.
(2) Technical termination of a partnership or section 168(0(7) transactions. If
qualified New York Liberty Zone property is transferred in a technical termination of a
partnership under section 708(b)(1)(B) or in a transaction described in section 168(i)(7)

for a taxable year ending on or before September 8, 2003, and the additional first year
depreciation deduction allowable for the property was not determined in accordance
with paragraph (f)(1) of this section, the Internal Revenue Service will allow any
reasonable method of determining the additional first year depreciation deduction
allowable for the property in the year of the transaction that is consistently applied to the
property by all parties to the transaction.
(3) Like-kind exchanges and involuntary conversions. If a taxpayer did not claim
on a federal tax return for a taxable year ending on or before September 8, 2003, the
additional first year depreciation deduction for the remaining carryover basis of qualified
New York Liberty Zone property acquired in a transaction described in section 1031(a),
(b), or (c), or in a transaction to which section 1033 applies and the taxpayer did not
make an election not to deduct the additional first year depreciation deduction for the
class of property applicable to the remaining carryover basis, the Internal Revenue
Service will treat the taxpayer's method of not claiming the additional first year
depreciation deduction for the remaining carryover basis as a permissible method of
accounting and will treat the amount of the additional first year depreciation deduction
allowable for the remaining carryover basis as being equal to zero, provided the
taxpayer does not claim the additional first year depreciation deduction for the
remaining carryover basis in accordance with paragraph (g)(4)(H) of this section.
(4) Change in method of accounting ~(i) Special rules for 2000 or 2001 returns.
If a taxpayer did not claim on the federal tax return for the taxable year that included
September 11, 2001, any additional first year depreciation deduction for a class of

property that is qualified N e w York Liberty Zone property and did not m a k e an election
not to deduct the additional first year depreciation deduction for that class of property,
the taxpayer should refer to the guidance provided by the Internal Revenue Service for
the time and manner of claiming the additional first year depreciation deduction for the
class of property (for further guidance, see section 4 of Rev. Proc. 2002-33 (2002-1
C.B. 963), Rev. Proc. 2003-50 (2003-29 I.R.B. 119), and §601.601 (d)(2)(ii)(b) of this
chapter).
(ii) Like-kind exchanges and involuntary conversions. If a taxpayer did not claim
on a federal tax return for any taxable year ending on or before September 8, 2003, the
additional first year depreciation deduction allowable for the remaining carryover basis
of qualified New York Liberty Zone property acquired in a transaction described in
section 1031(a), (b), or (c), or in a transaction to which section 1033 applies and the
taxpayer did not make an election not to deduct the additional first year depreciation
deduction for the class of property applicable to the remaining carryover basis, the
taxpayer may claim the additional first year depreciation deduction allowable for the
remaining carryover basis in accordance with paragraph (f)(5) of this section either(A) By filing an amended return (or a qualified amended return, if applicable (for
further guidance, see Rev. Proc. 94-69 (1994-2 C.B. 804) and §601.601 (d)(2)(ii)(b) of
this chapter)) on or before December 31, 2003, for the year of replacement and any
affected subsequent taxable year; or,
(B) By following the applicable administrative procedures issued under §1.4461(e)(3)(H) for obtaining the Commissioner's automatic consent to a change in method of

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

Bureau of m e

Public )ebf
u nsi

ir or mi

Public Debt Announces Activity for Securities in the STRIPS Program for A
2003
FOR IMMEDIATE RELEASE
September 5. 2 0 0 3
The Bureau of the Public Debt announced activity for the month of August 2003, of securities within the Separate Trading of Registered
Interest and Principal of Securities program (STRIPS).
In T h o u s a n d s
Principal Outstanding (Eligible Securities)

$2,396,789,307

Held in Unstripped Form

$2,223,515,972

Held in Stripped Form

$173,273,335

Reconstituted in August

$21,116,884

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 new 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

-fS 7°^
http://www.publicdebt.treas.gov/com/com0903s.htm

5/19/2005

PR CSS R O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
September 5, 2003
JS-705
Statement by Treasury Secretary John Snow
As a result of the President's leadership, the recession has ended, our economy is
beginning to recover, and we are seeing positive signs. But, today's unemployment
numbers mean we need to do more to strengthen the environment for job creation.
This Administration won't be satisfied until every American who wants to work can
find a job. That is why we are working so closely with Congress to implement the
President's specific steps to build employer confidence and create momentum to
hire new workers.

orini K or N BLIC A F F A I K S • 1500 ci- \^sv I.VAM i AXIIMJI:. \.\\. • HVAMIINGTU-V n.i .» 20:211 • (2112: fni-iwu

EMBARGOED UNTIL 11:00 A.M.
September 4, 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 $30,000
million to refund an estimated $34,647 million of publicly held 13-week and 26-week
Treasury bills maturing September 11, 2 003, and to pay down approximately $4,647
million. Also maturing is an estimated $15,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced September 8, 2003.
The Federal Reserve System holds $15,085 million of the Treasury bills maturing
on September 11, 2 003, 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 9, 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 $1,038 million into the 13-week bill and $802 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.
0O0

Attachment

yfi'KH>

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED SEPTEMBER 11, 2003
September 4, 2003
Offering Amount $15,000 million
Maximum Award (3 5% of Offering Amount)
$ 5,250
Maximum Recognized Bid at a Single Rate .... $ 5,250
NLP Reporting Threshold
$ 5,250
NLP Exclusion Amount
$ 6,200
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

million
million
million
million

91-day bill
912795 PA 3
September 8, 2003
September 11, 2003
December 11, 2003
June 12, 2003
$24,230 million
$1,000

$15,000
$ 5,250
$ 5,250
$ 5,250
None

million
million
million
million

182-day bill
912795 PP 0
September 8, 2003
September 11, 2003
March 11, 2004
September 11, 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.

PRESS 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® Reader®.
September 5, 2003
JS-706
Treasury And IRS Issue Proposed Regulations On The Tax Treatment Of
Services Under The Transfer Pricing Rules
Today, the Treasury Department and the IRS issued proposed regulations on the
tax treatment of services transactions, including services transactions related to
intangible property, under the related party transfer pricing rules. The transfer
pricing rules generally provide that the results of transactions between related
parties must be consistent with the results that would have occurred had the
transaction been between unrelated persons dealing at arm's length.
"The proposed transfer pricing regulations provide significant and much-needed
guidance relating to the treatment of related-party cross-border services
transactions," stated Treasury Assistant Secretary for Tax Policy Pamela Olson.
"The proposed regulations preserve aspects of the current rules that provide
reduced administrative and compliance burdens for low-margin services. At the
same time, the proposed regulations will bring the current rules more into line with
the arm's length standard and eliminate aspects of the current rules that have
proved problematic. Modernizing the regulations also addresses a number of the
concerns regarding the transfer of valuable intangibles outside the United States for
less than arm's length consideration that have arisen in the context of the
discussion of corporate inversions. The proposed regulations ensure that taxpayers
cannot characterize a transfer of intangible property as a provision of services in
order to reach inappropriate results."
The current regulations regarding related party services transactions were issued in
1968, and are the only significant part of the 1968 related party transfer pricing
regulations that was not addressed by updated regulations issued in 1994 and
1995. The related party services regulations are being updated to reflect legal
developments and developments in the economy and in business practices since
the regulations were issued in 1968, as well as to address aspects of the
regulations that have been particularly difficult to administer.
The proposed regulations provide guidance on the transfer pricing methods to be
used to determine the arm's length price in a services transaction. The transfer
pricing methods provided generally are consistent with current regulations
applicable to transfers of tangible and intangible property and are consistent with
international standards in this area. The proposed regulations provide a new
transfer pricing method for low-margin services, such as routine back-office
services, that would require a less robust analysis than would be required under the
general transfer pricing rules. The proposed regulations provide guidance intended
to coordinate and harmonize the rules applicable to services related to intangibles
with the transfer pricing rules applicable to transfers of intangible property.
-30Related Documents:
• The Text Of The Proposed Regulations

q[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 31
[REG-146893-02]
[REG-115037-00]
RIN 1545-BB31, 1545-AY38
Treatment of Services Under Section 482
Allocation of Income and Deductions from Intangibles
AGENCY: Internal Revenue Service (IRS), Treasury
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that provide guidance
regarding the treatment of controlled services transactions under section 482 and

allocation of income from intangibles, in particular with respect to contributions

controlled party to the value of an intangible that is owned by another controlled

These proposed regulations potentially affect controlled taxpayers within the mean

section 482. The proposed regulations provide updated guidance that is necessary t

reflect economic and legal developments since the issuance of the current guidance
document also provides a notice of public hearing on these proposed regulations.
DATES: Written or electronic comments must be received December 9, 2003. Outlines

of topics to be discussed at the public hearing scheduled for January 14, 2004, at
must be received by December 23, 2003.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-146893-02 and REG115037-00), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station,

/ (A, 6 fil?

federal financing bank
W A S I -IkGTOM, D C 2Q22i

FEDERAL FINANCING BANK
2003 PRESS RELEASE
September 2003
FFB holdings of obligations issued, sold or guaranteed by other Federal
agencies totaled $35.5 billion on September 30, 2003, posting a decrease of
$875.2 million from the level on August 31, 2003. This net change was the result
of decreases in holdings of agency assets of $750.0 million and in holdings of
government-guaranteed loans of $125.2 million. The FFB made 36
disbursements and received 16 prepayments during the month of September.
The FFB also priced 14 refinancings and extended the maturities of 168 loans
guaranteed by the Rural Utilities Service ("RUS") during the month.
During the fiscal year 2003, the FFB holdings of obligations issued, sold or
guaranteed by other Federal agencies posted a net decrease of $4,059.7 million
from the level on September 30, 2002. This net change was the result of
decreases in holdings of agency debt of $3,840.6 million and in holdings of
agency assets of $1,220.0 million, and an increase in holdings of governmentguaranteed loans of $1,000.8 million.
Below are tables presenting FFB September loan activity and FFB holdings
as of September 30, 2003.
PRINT

FEDERAL FINANCING BANK
September 2003 ACTIVITY
Borrower
A G E N C Y DEBT
U.S. POSTAL SERVICE

vTtT- 7o7

Date

Amount
of Advance

Final
Maturity

Interest
Rate

Semiinnually or
Quarterly

Page 2 of 8

U.S. Postal Service

9/04

$2,523,437,000.00|

9/18/2003

1.102%

Semi-Annually

U.S. Postal Service

9/18

$2,523,437,000.00

9/24/2003

1.030%

Semi-Annually

U.S. Postal Service

9/24

$2,523,437,000.00

10/1/2003

1.000%

Semi-Annually

GOVERNMENT-GUARANTEED
| ftAMQ

G E N E R A L SERVICES ADMINISTRATION
San Francisco Bldg Lease

9/16

$2,075,082.56

8/1/2005

1.698%

Semi-Annually

San Francisco O B

9/16

$97,868.87

8/1/2005

1.698%

Semi-Annually

9/09

$396,006.81

1/2/2032

5.094%

Semi-Annually

A & N Electric #868

9/02

$1,113,000.00

12/31/2036

5.141%

Quarterly

Ravalli #641

9/02

$1,000,000.00

12/31/2029

5.020%

Quarterly

E. Iowa Coop. #807

9/03

$3,600,000.00

12/31/2008

3.697%

Quarterly

Lake Region Elec. #737

9/03

$200,000.00

12/31/2030

5.184%

Quarterly

Mille Lacs Electric #769

9/03

$462,000.00

12/31/2035

5.255°s

Quarterly

Roanoke Electric M e m . #820

9/03

$700,000.00

12/31/2036

5.266%

Quarterly

Tri-County Elec. Coop. #646

9/08

$2,800,000.00

1/2/2035

5.076%

Quarterly

Chariton Valley #524

9/11

$400,000.00

12/31/2029

4.899%

Quarterly

Vernon Electric Coop. #2008

9/11

$668,000.00

12/31/2036

5.054%

Quarterly

Farmer's Rural Elec. #2046

9/12

$5,000,000.00

12/31/2003

0.969%

Quarterly

Midwest Electric #610

9/12

$1,666,000.00

1/3/2034

5.055%

Quarterly

Mountrail-Williams #665

9/12

$1,162,000.00

1/2/2035

5.075%

Quarterly

Morgan County Elec. #710

9/12

$185,000.00

12/31/2009

2.845%

Quarterly

Morgan County Elec. #759

9/12

$1,000,000.00

12/31/2035

5.092%

Quarterly

Southside Electric #786

9/12

$475,000.00

12/31/2035

'5.092%

Quarterly

Adams Rural Electric #706

9/15

$500,000.00

12/31/2003

0.973%

Quarterly

Polar Telecommunications #2056

9/15

$1,346,000.00

12/31/2003

0.972%

Quarterly

Upper Cumberland Elec. #2049

9/16

$8,500,000.00

12/31/2037

5.097%

Quarterly

York Electric Coop. #848

9/16

$5,000,000.00

12/31/2031

4.973%

Quarterly

Arkansas Valley Elec Coop #895

9/17

$6,000,000.00

12/31/2036

5.090%

Quarterly

Douglas Electric #725

9/17

$90,000.00

12/31/2035

5.072%

Quarterly

Carroll Elec. #618

9/22

$300,000.00

1/3/2034

4.901%

Quarterly

Flint Elec. #2016

9/22

$6,000,000.00

1/3/2034

4.903%

Quarterly

Jackson Energy #794

9/22

$7,348,000.00

12/31/2003

0.960%

Quarterly

Washington Electric #655

9/22

$350,000.00

1/2/2035

4.920%

Quarterly

Ironton Telephone Co. #2051

9/23

$2,956,000.00

12/31/2003

0.962%

Quarterly

San Carlos Apache Tele. #729

9/25

$195,000.00

1/2/2024

4.676%

Quarterly

Grundy Elec.Coop. #744

9/29

$500,000.00

12/31/2003

0.942%

Quarterly

Medina Electric #2050

9/29

$2,000,000.00

9/30/2004

1.209%

Quarterly

Pine Belt Cellular, Inc. #2061

9/29

$1,731,632.00

12/31/2019

4.109%

Quarterly

DEPARTMENT OF EDUCATION
Tuskegee Univ.
R U R A L UTILITIES S E R V I C E

Page 3 of 8

Quarterly

*Amicalola Electric #664

9/30

$6,772,390.66

12/31/2003

0.968%

*Atlantic Telephone M e m . #805

9/30

$5,852,576.00

12/31/2003

0.968%

Quarterly

*Bailey County Elec. #856

9/30

$1,896,000.00

12/31/2003

0.966%

Quarterly

*Bailey County Elec. #856

9/30

$615,000.00

12/31/2003

0.966%

Quarterly

*Basin Electric #425

9/30

$12,744,828.72

12/31/2003

1.093%

Quarterly

*Big Sand Elec. #540

9/30

$758,747.68

12/31/2003

0.968%

Quarterly

*Big Sand Elec. #540

9/30

$569,060.75

12/31/2003

0.968%

Quarterly

*Big Sand Elec. #540

9/30

$951,346.02

12/31/2003

0.968%

Quarterly

*Big Sand Elec. #540

9/30

$2,212,580.15

12/31/2003

0.968%

Quarterly

*Blue Grass Energy #674

9/30

$1,949,185.09

12/31/2003

0.968%

Quarterly

*Blue Grass Energy #674

9/30

$4,966,931.45

12/31/2003

0.968%

Quarterly

*Brazos Electric #917

9/30

$2,389,382.24

9/30/2008

2.755%

Quarterly

*Brazos Electric #917

9/30

$1,828,193.74

9/30/2008

2.755%

Quarterly

*Brazos Electric #917

9/30

$1,490,140.49

9/30/2008

2.755%

Quarterly

*Brazos Electric #917

9/30

$1,127,240.08

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,491,907.36

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$191,489.09

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,713,427.62

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,602,256.14

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$400,999.02

9/30/2010

3.210%

Quarterly

*Brazos Electric #917

9/30

$816,665.77

9/30/2010

3.210%

Quarterly

*Brazos Electric #917

9/30

$13,316.95

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$352,120.39

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$330,301.23

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$2,765,658.07

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$732,649.26

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$804,150.15

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$1,228,388.64

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$309,722.67

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$714,394.25

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$932,777.56

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$621,171.16

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$357,140.02

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$667,702.24

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$813,773.38

9/30/2013

3.701%

Quarterly

*Brazos Electric #917

9/30

$262,416.53

9/30/2013

3.701%

Quarterly

*Brazos Electric #917

9/30

$190,451.59

9/30/2013

3.701%

Quarterly

*Brazos Electric #917

9/30

$1,690,131.70

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,965,785.09

9/30/2010

3.251%

Quarterly

*Brazos Electric #844

9/30

$4,614,000.00

10/2/2023

4.820%

Quarterly

*Brazos Electric #844

9/30

$5,000,000.00

9/30/2013

3.988%

Quarterly

2003 - September F F B Activity

Page 4 of 8

*Brazos Electric #844

9/30

$5,000,000.00

9/30/2013

3.988%

*Brazos Electric #844

9/30

$5,000,000.00

10/2/2023

4.820%

Quarterly

*Brazos Electric #844

9/30

$5,000,000.00

10/2/2023

4.820%

Quarterly

*Brown County Elec. #687

9/30

$242,211.92

12/31/2003

0.968%

Quarterly

*Brown County Elec. #687

9/30

$581,308.63

12/31/2003

0.968%

Quarterly

*Brown County Elec. #687

9/30

$290,701.17

12/31/2003

0.968%

Quarterly

*Citizens Elec. #742

9/30

$2,659,200.62

12/31/2035

4.861%

Quarterly

*Citizens Elec. #878

9/30

$3,000,000.00

12/31/2031

4.774%

Quarterly

*Clark Energy Coop. #611

9/30

$2,854,038.03

12/31/2003

0.968%

Quarterly

*Clark Energy Coop. #611

9/30

$1,896,580.17

12/31/2003

0.968%

Quarterly

*Clark Energy Coop. #611

9/30

$4,232,592.25

12/31/2003

0.968%

Quarterly

*Clark Energy Coop. #611

9/30

$3,539,698.98

12/31/2003

0.968%

Quarterly

*Clark Energy Coop. #611

9/30

$2,563,960.74

12/31/2003

0.968%

Quarterly

Cumberland Valley #668

9/30

$4,069,160.36

12/31/2003

0.968%

Quarterly

*Cooper Valley Tel. #648

9/30

$965,505.55

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$1,792,480.84

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$412,919.09

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$199,019.57

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$235,289.48

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$171,119.62

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$253,889.44

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$209,065.60

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$1,420,725.36

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$265,052.89

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$523,017.97

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$380,957.25

12/31/2003

0.968%

Quarterly

*East River Power #453

9/30

$370,545.38

12/31/2003

1.093%

Quarterly

*East River Power #453

9/30

$182,741.70

12/31/2003

1.093%

Quarterly

*East River Power #601

9/30

$3,223,773.96

12/31/2003

0.968%

Quarterly

*East River Power #601

9/30

$4,273,864.72

9/30/2008

2.861%

Quarterly

*East River Power #793

9/30

$624,419.98

12/31/2003

0.968%

Quarterly

*Fairfield Elec. #684

9/30

$3,132,999.79

12/31/2003

0.968%

Quarterly

*Farmer's Telephone #459

9/30

$21,048.02

12/31/2003

1.093%

Quarterly

*Farmer's Telephone #459

9/30

$200,760.12

12/31/2003

1.093%

Quarterly

*Fleming-Mason Energy #644

9/30

$2,473,499.62

12/31/2003

0.968%

Quarterly

*Fleming-Mason Energy #644

9/30

$1,331,884.39

12/31/2003

0.968%

Quarterly

*Fleming-Mason Energy #644

9/30

$1,427,019.01

12/31/2003

0.968%

Quarterly

*Fleming-Mason Energy #644

9/30

$2,092,961.21

12/31/2003

0.968%

Quarterly

*Fleming-Mason Energy #644

9/30

$1,331,884.39

12/31/2003

0.968%

Quarterly

*Fleming-Mason Energy #644

9/30

$2,885,965.43

12/31/2003

0.968%

Quarterly

*Fleming-Mason Energy #644

9/30

$2,860,016.50

12/31/2003

0.968%

Quarterly

http://www.treas.gov/ffb/Dress releases/2003-seDtember-activirvhtml

Quarterly

2003 - September F F B Activity

Page 5 of 8

*Freebom-Mower Coop. #736

9/30

$730,866.54

12/31/2003

0.968%

Quarterly

*Freeborn-Mower Coop. #736

9/30

$487,258.68

12/31/2003

0.968%

Quarterly

*Freebom-Mower Coop. #736

9/30

$196,076.58

9/30/2010

3.467%

Quarterly

*Freebom-Mower Coop. #736

9/30

$197,332.55

9/30/2010

3.467%

Quarterly

*Farmers Telephone #476

9/30

$9,543,716.93

12/31/2003

1.093%

Quarterly

*Farmers Telephone #476

9/30

$7,109,387.88

12/31/2003

1.093%

Quarterly

*FTC Communications #709

9/30

$2,523,335.55

12/31/2003

0.968%

Quarterly

*FTC Communications #709

9/30

$3,227,113.39

12/31/2003

0.968%

Quarterly

*Grady Electric #690

9/30

$3,086,676.08

12/31/2003

0.968%

Quarterly

*Grady Electric #746

9/30

$3,188,109.81

12/31/2003

0.968%

Quarterly

*Grayson Aural Elec. #619

9/30

$1,141,615.21

12/31/2003

0.968%

Quarterly

*Grayson Rural Elec. #619

9/30

$570,807.62

12/31/2003

0.968%

Quarterly

*Grayson Rural Elec. #619

9/30

$951,346.02

12/31/2003

0.968%

Quarterly

*Grayson Rural Elec. #619

9/30

$1,232,498.03

12/31/2003

0.968%

Quarterly

*Grayson Rural Elec. #619

9/30

$973,546.39

12/31/2003

0.968%

Quarterly

*Grayson Rural Elec. #619

9/30

$2,465,527.86

12/31/2003

0.968%

Quarterly

*Greenbelt Elec. #743

9/30

$1,716,536.69

12/31/2003

0.968%

Quarterly

*Greenbelt Elec. #743

9/30

$495,515.48

12/31/2003

0.968%

Quarterly

*Grundy Elec.Coop. #744

9/30

$1,226,196.09

12/31/2003

0.968%

Quarterly

*Grundy Elec. Coop. #744

9/30

$981,088.94

12/31/2003

0.968%

Quarterly

*Habersham Electric M e m . #2001

9/30

$6,900,000.00

12/31/2036

4.879%

Quarterly

*Habersham Electric M e m . #2001

9/30

$4,400,000.00

12/31/2036

4.879%

Quarterly

*Harrison County #532

9/30

$947,477.17

12/31/2003

0.968%

Quarterly

*Harrison County #532

9/30

$852,729.47

12/31/2003

0.968%

Quarterly

*Harrison County #532

9/30

$953,869.49

12/31/2003

0.968%

Quarterly

'Harrison County #532

9/30

$1,555,437.31

12/31/2003

0.968%

Quarterly

*Harrison County #532

9/30

$1,674,618.05

12/31/2003

0.968%

Quarterly

*Hudson Valley Datanet #833

9/30

$5,000,000.00

12/31/2003

0.966%

Quarterly

*Hudson Valley Datanet #833

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

*lnter-County Energy #592

9/30

$1,421,215.75

12/31/2003

0.968%

Quarterly

*lnter-County Energy #592

9/30

$1,894,954.36

12/31/2003

0.968%

Quarterly

*lnter-County Energy #592

9/30

$2,470,072.99

12/31/2003

0.968%

Quarterly

*lnter-County Energy #592

9/30

$210,247.46

12/31/2003

0.968%

Quarterly

*lnter-County Energy #850

9/30

$4,000,000.00

12/31/2003

0.966%

Quarterly

*lnter-County Energy #850

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

*Jackson Energy #794

9/30

$3,948,330.53

12/31/2003

0.968%

Quarterly

Mackson Energy #794

9/30

$2,961,247.90

12/31/2003

0.968%

Quarterly

*Jackson Energy #794

9/30

$4,639,288.38

12/31/2003

0.968%

Quarterly

*Jackson Energy #794

9/30

$1,974,165.27

12/31/2003

0.968%

Quarterly

*Jackson Energy #794

9/30

$2,467,706.59

12/31/2003

0.968%

Quarterly

*Jackson Energy #794

9/30

$1,974,225.15

12/31/2003

0.968%

Quarterly

http://www.treas.gov/ffb/press releases/2003-september-activity.html

5/19/2005

Page 6 of 8

*Johnson County Elec. #482

9/30

$1,520,568.10

12/31/2003

1.093%

Quarterly

+Kansas Elec. Power #904

9/30

$34,391,134.28

12/31/2015

3.616%

Quarterly

+Kansas Elec. Power #904

9/30

$1,539,095.69

1/3/2017

3.737%

Quarterly

+Kansas Elec. Power #904

9/30

$785,236.16

1/3/2017

3.737%

Quarterly

+Kansas Elec. Power #904

9/30

$3,709,458.59

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$784,568.52

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$1,208,089.24

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$426,766.63

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$1,338,715.69

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$764,249.90

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$4,541,016.73

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$1,410,300.01

12/31/2018

3.958%

Quarterly

+Kansas E1ec. Power #904

9/30

$902,460.56

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$753,964.63

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$689,151.64

12/31/2018

3.958%

Quarterly

Ticking Valley Elec. #522

9/30

$2,604,614.75

12/31/2003

0.968%

Quarterly

Ticking Valley Elec. #854

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

*Magnolia Electric #560

9/30

$4,744,194.89

12/31/2003

1.093%

Quarterly

*North Carolina R S A 3 Tel #2009

9/30

$9,600,000.00

12/31/2003

0.966%

Quarterly

*New Horizon Elec. #791

9/30

$2,051,000.00

12/31/2003

0.968%

Quarterly

*Noun Rural Elec. #528

9/30

$1,793,574.28

12/31/2003

0.968%

Quarterly

*Noun Rural Elec. #577

9/30

$2,447,333.56

12/31/2003

0.968%

Quarterly

*Noun Rural Elec. #577

9/30

$2,447,333.56

12/31/2003

0.968%

Quarterly

*Noun Rural Elec. #840

9/30

$4,000,000.00

12/31/2003

0.966%

Quarterly

*North Central Elec. #638

9/30

$1,462,617.47

1/2/2035

4.843%

Quarterly

*Northstar Technology #811

9/30

$1,807,661.89

12/31/2003

0.968%

Quarterly

*Northstar Technology #811

9/30

$985,912.07

12/31/2003

0.968%

Quarterly

*Owen Electric #525

9/30

$1,897,600.04

12/31/2003

0.968%

Quarterly

*Owen Electric #525

9/30

$1,893,767.79

12/31/2003

0.968%

Quarterly

*Owen Electric #525

9/30

$955,440.21

12/31/2003

0.968%

Quarterly

*Owen Electric #525

9/30

$1,926,753.21

12/31/2003

0.968%

Quarterly

*Pennyrile Elec. #513

9/30

$5,802,451.99

12/31/2003

1.093%

Quarterly

*Pennyrile Elec. #513

9/30

$5,492,715.24

12/31/2003

1.093%

Quarterly

*PRTCommunications #798

9/30

$4,802,000.00

12/31/2003

0.968%

Quarterly

*PRTCommunications #798

9/30

$1,800,000.00

12/31/2003

0.968%

Quarterly

*Runestone Electric Ass. #886

9/30

$1,500,000.00

12/31/2003

0.966%

Quarterly

*San Miguel Electric #919

9/30

$7,302,416.60

12/31/2003

0.968%

Quarterly

*San Miguel Electric #919

9/30

$7,667,622.89

12/31/2003

0.968%

Quarterly

*Socorro Elec. #869

9/30

$1,652,000.00

12/31/2003

0.966%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$933,644.60

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$933,644.60

12/31/2003

0.968%

Quarterly

Page 7 of 8

*Surry-Yadkin Elec. #534

9/30

$466,822.30|

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$933,644.60

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$933,644.60

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$948,952.24

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$955,129.92

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$2,206,437.04

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #852

9/30

$1,000,000.00

12/31/2003

0.966%

Quarterly

*Thumb Electric #767

9/30

$468,522.46

1/3/2034

4.861%

Quarterly

'United Elec. Coop. #870

9/30

$12,000,000.00

12/31/2003

0.966%

Quarterly

*Upsala Coop. Tele. #429

9/30

$285,962.22

1/2/2018

4.023%

Quarterly

*Upsala Coop. Tele. #429

9/30

$6,567.80

1/2/2018

4.023%

Quarterly

*Upsala Coop. Tele. #429

9/30

$19,063.95

1/2/2018

4.023%

Quarterly

*Upsala Coop. Tele. #429

9/30

$83,090.24

1/2/2018

4.023%

Quarterly

*Upsala Coop. Tele. #429

9/30

$78,966.04

1/2/2018

4.023%

Quarterly

*Upsala Coop. Tele. #429

9/30

$90,087.12

1/2/2018

4.023%

Quarterly

*Upsala Coop. Tele. #429

9/30

$57,209.60

1/2/2018

4.023%

Quarterly

*Webster Electric #705

9/30

$2,154,148.24

12/31/2003

0.968%

Quarterly

*West Plains Elec. #501

9/30

$2,231,750.74

12/31/2003

1.093%

Quarterly

Return To top

FEDERAL FINANCING BANK HOLDINGS
September 2003
(in millions of dollars)
FEDERAL
Monthly
Fiscal Year
BANK
FINANCING
Net Change
Net Change
HOLDINGS
September 30,
August 31, 2003 9/1/03- 9/30/03 10/1/02- 9/30/03
2003

Program

Agency Debt:
U.S. Postal Service
Subtotal*

$7,273.4
$7,273.4

$0.0
$0.0

($3,840.6)
($3,840.6)

Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal*

$805.0
$1,830.0
$4,270.2
$6,905.2

$855.0
$2,530.0
$4,270.2
$7,655.2

($50.0)
($700.0)
$0.0
($750.0)

($145.0)
($1,075.0)
$0.0
($1,220.0)

$1,688.4

$1,706.1

($17.6)

($234.1)

$79.3

$79.1

$0.2

$10.7

$2.l

$2.8

$0.6

($2.9)

Govt-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
D H U D - C o m m . Dev. Block Grant

Page 8 of 8

DHUD-Public Housing Notes

$1,133.2

$0.0

($74.1)

General Services Administration+

$2,147.1

$2,150.1

($3.0)

($58.5)

$9.6

$0.0

($1.8)

$607.5

$0.0

($173.3)

$15,618.2

$15,720.7

($102.5)

$1,560.0

$77.3

$79.0

($1.7)

($25.1)

$3.1
$21,366.0
$35,544.6

$3.1
$21,491.2
$36,419.0

$0.0
($125.2)
($875.2)

($0.2)
$1,000.8
($4,059.7)

DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Devel. Cos.
DOT-Section511
Subtotal*
Grand total*

Return To top

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

JS-708: Treasury Announces Appointment of Deputy Assistant Secretary of Public Affairs

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 8, 2003
JS-708
Treasury Announces Appointment of Deputy Assistant Secretary
of Public Affairs
The U.S. Treasury Department is pleased to announce today the appointment of
Mr. Salvatore "Tony" Fratto to the position of Deputy Assistant Secretary of Public
Affairs. In his new position, Mr. Fratto will be responsible for media relations for the
Department of the Treasury, including 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.
Since March 2001, Mr. Fratto has served in the Treasury Office of Public Affairs,
first as a public affairs specialist and more recently as the Director of the office. In
these positions, he has held primary responsibility for the Department's
communications regarding international finance and development issues, as well as
overseen the day to day activities and budget of the office.
Prior to his experience at the Treasury Department, Mr. Fratto has served in a
variety of communication and government positions, such as communications
specialist for the Bush-Cheney 2000 campaign, Vice President of Government
Affairs for the Pittsburgh Regional Alliance, Director of Community and Economic
Affairs for Pennsylvania Governor T o m Ridge, and Communications Director for
Senator Rick Santorum (R-PA).
Mr. Fratto earned his bachelors degree in economics from the University of
Pittsburgh, and attended the University of Pittsburgh Graduate School of Public and
International Affairs.

Page 1 of 1

202-691-3550

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

September 11, 2003
December 11, 2003
912795PA3

High Rate: 0.935% Investment Rate 1/: 0.951% Price: 99.764
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 21.02%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

31,440,005
1,419,689
125,000

13,455,405
1,419,689
125,000

SUBTOTAL 32,984,694 15,000,094 2/
Federal Reserve 5,565,270 5,565,270
TOTAL $ 38,549,964 $ 20,565,364
Median rate 0.925%: 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 = 32,984,694 / 15,000,094 = 2.20
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,126,837,000

T"""V

^1(1^\

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
September 08, 2003

202-691-3550

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

September 11, 2003
March 11, 2004
912795PP0

High Rate: 1.010% Investment Rate 1/: 1.033% Price: 99.489
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 60.78%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

35,958,655
1,071,634
175,000

13,753,409
1,071,634
175,000

SUBTOTAL 37,205,289 15,000,043 2/
Federal Reserve 5,460,737 5,460,737
TOTAL $ 42,666,026 $ 20,460,780
Median rate 1.000%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.980%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 37,205,289 / 15,000,043 = 2.48
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $861,523,000

http://www.publicdebt.treas.gov

DEPARTMENT

THE

EW S

TREASURY
( l l ' U l ' K O r i ' l IU.!( A I ' K M H S • I 5ntl 1'HNSSSVIA V M A

TREASURY

I.M I.. \ . W . • H \ S III N (. I U N . !>.*.• 2w22» «(2U2I t,22-29t,it

CONTACT:

EMBARGOED UNTIL 11:00 A.M.
September 8, 2003

Office of Financing
202/691-3550

TREASURY OFFERS 5-YEAR NOTES AND 9-YEAR 11-MONTH 4 1/4% NOTES
The Treasury will auction $16,000 million of 5-year notes and $13,000 million of
9-year 11-month 4 1/4% notes to raise new cash.
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.
The auctions being announced today will be conducted in the single-price auction
format. All competitive and noncompetitive awards will be at the highest yield of
accepted competitive tenders. The allocation percentage applied to bids awarded at
the highest yield will be rounded up to the next hundredth 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 Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the notes are given in the attached offering highlights.
oOo
Attachment

Jf> 1i

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC OF
5-YEAR NOTES AND 9-YEAR 11-MONTH 4 1/4% NOTES TO BE ISSUED SEPTEMBER 15, 2003
September 8, 2003
Offering Amount
Maximum Award (35% of Offering Amount)..•.
Maximum Recognized Bid at a Single Yield..
NLP Reporting Threshold
NLP Exclusion Amount

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

Description of Offering
Term and type of security

5-year notes

Series H-2008
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Amount currently outstanding
Yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest payable by investor

$13,000 million
$ 4,550 million
$ 4,550 million
$ 4,550 million
$ 6,300 million

million
million
million
million

91282 8 BK 5
September 10, 2003
September 15, 2003
September 15, 2003
September 15, 2008
Determined based on the highest
accepted competitive bid
Not applicable
Determined at auction
March 15 and September 15
$1,000
None

Premium or discount Determined at auction

9-year 11-month 4 1/4% notes
(reopening)
D-2013
912828 BH 2
September 11, 2003
September 15, 2003
August 15, 2003
August 15, 2013
4 1/4%
$20,521 million
Determined at auction
February 15 and August 15
$1,000
$3.58016 per $1,000 (from
August 15 to Sept. 15, 2003)
Determined at auction

STRIPS Information:
Minimum amount required $1,000
Corpus CUSIP number
Due date(s) and CUSIP number (s)
for additional TINT(s)

912820 JG 3

$1,000
912820 JE 8

See chart below

Not applicable

5-Year Note Due Dates and CUSIP Numbers for TINTS
2004

2005

2006

2007

2008

March 15

912833 ZP 8

912833 ZR 4

912833 ZT 0

912833 ZV 5

912833 ZX 1

September 15

912833 ZQ 6

912833 ZS 2

912833 ZU 7

912833 ZW 3

912833 ZY 9

The following rules apply to all securities mentioned above:
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:
be expressed as a yield with three decimals, e.g., 7.123%.
(D Must
Net long position (NLP) for each bidder must be reported when the sum of the total bid amount,
(2)
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
Competitive tenders

Prior to 12:00 noon eastern daylight saving time on auction day
Prior to 1:00 p.m. eastern daylight saving time on auction day

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.

oriltT. ()K IM B U T A F T U R S • 1500 l'l\NSYI.\A\l\ \\ I M I-;. N.W. • W A S H I N G T O N . [>.(_'.• 2022M • <1[)2 I «2l-2*Mi

EMBARGOED UNTIL 11:00 A.M.
September 8, 2003

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $11,000 million to
refund an estimated $15,000 million of publicly held 4-week Treasury bills maturing
September 11, 2003, and to pay down approximately $4,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuiryDirect will not be accepted.
The Federal Reserve System holds $15,085 million of the Treasury bills maturing
on September 11, 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

7/Z

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED SEPTEMBER 11, 2003
September 8, 2003
Offering Amount $11,000
million
Maximum Award (35% of Offering Amount) . . . $ 3,850
million
Maximum Recognized Bid at a Single Rate. . $ 3,850 million
NLP Reporting Threshold
$ 3,850 million
NLP Exclusion Amount
$11,500 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NR 8
Auction date
September 9, 2003
Issue date
September 11, 2003
Maturity date
October 9, 2003
Original issue date
April 10, 2003
Currently outstanding
$44 ,024 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.

o n it I. or IMBI.IC UT\IUS • 1500

EMBARGOED U N T I L 11:00 A.M.
September 8, 2003

PINNSVIAAM

\, v\ isi i;, \.W. • WASH IYG TON, l>.< .• 2022li • .2l*2ifi22.2">MJ

CONTACT: Office of Financing
202/691-3550

TREASURY OFFERS CASH M A N A G E M E N T B I L L S
The Treasury will auction approximately $10,000 million of 4-day
Treasury cash m a n a g e m e n t b i l l s to b e issued September 1 1 , 2 0 0 3 .
Tenders for Treasury cash m a n a g e m e n t b i l l s to b e h e l d on the b o o k - e n t r y
records of Treasury-Direct w i l l n o t b e accepted.
U p to $1,000 m i l l i o n in noncompetitive b i d s from Foreign a n d International M o n e t a r y A u t h o r i t y (FIMA) accounts b i d d i n g through the Federal
Reserve Bank of N e w York w i l l b e included within the offering amount of
the auction. These noncompetitive b i d s will have a limit of $100 m i l l i o n
per account and w i l l b e accepted in the order of smallest to l a r g e s t , u p
to the aggregate award limit of $1,000 million.
N o t e : The closing times for receipt of noncompetitive and competitive
tenders w i l l b e a t 11:00 a.m. and 11:30 a.m. eastern d a y l i g h t saving t i m e ,
respectively.
The allocation p e r c e n t a g e applied to b i d s a t the h i g h e s t d i s c o u n t rate
will b e rounded u p to the n e x t hundredth of a whole p e r c e n t a g e p o i n t , e.g.,
17.13%.
This offering of Treasury securities is governed b y the terms and c o n ditions set forth in the U n i f o r m Offering Circular for the Sale a n d Issue of
Marketable B o o k - E n t r y Treasury B i l l s , N o t e s , and B o n d s (31 C F R Part 3 5 6 , as
amended).
Details a b o u t the n e w security are given in the attached offering
highlights.

0O0
Attachment

<P 7>3

HIGHLIGHTS OF TREASURY OFFERING
OF 4-DAY CASH MANAGEMENT BILLS
September 8, 2003
Offering Amount $10,000 million
Maximum Award (35% of Offering Amount) . . $ 3,500 million
Maximum Recognized Bid at a Single Rate . $ 3,500 million
NLP Reporting Threshold
$ 3,500 million
NLP Exclusion Amount
$ 8,100 million
Description of Offering:
Term and type of security
4-day Cash Management Bill
CUSIP number
912795 QG 9
Auction date
September 10, 2003
Issue date
September 11, 2003
Maturity date
September 15, 2003
Original issue date
September 3, 2003
Currently outstanding
$23,000 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., 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
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue
date.

JS-714: Asst. Secretary Abernathy's Testimony on F H L B s before Sen. Banking Subcom... Page 1 of 5

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 9, 2003
JS-714
Testimony of
W a y n e A. Abernathy
Assistant Secretary of the Treasury for Financial Institutions
Before the Subcommittee on Financial Institutions
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, D C
Thank you, Chairman Bennett and Ranking Member Johnson and members of the
Subcommittee for this opportunity to testify today on the Federal H o m e Loan Bank
(FHLBank) System. The Department of the Treasury is keenly interested in the
operations of the Federal H o m e Loan Bank System because of the important
responsibility that the Congress has placed with the Federal H o m e Loan Banks to
enhance the liquidity of financial institutions, particularly as the Federal H o m e Loan
Bank members meet such important community needs as promoting home
ownership.
The housing finance market in the United States is the broadest, deepest, and most
successful housing finance market in the world. That market is supported by a
complex financial services infrastructure, which includes depository institutions,
mortgage brokers, mortgage bankers, mortgage insurers, and a variety of other
capital market intermediaries. Prominent among capital market intermediaries that
make up that infrastructure are the housing government sponsored enterprises
(GSEs) - Fannie Mae, Freddie Mac, and the FHLBank System.
The FHLBank System has had a long history of supporting housing finance in
America. Congress created the FHLBank System in 1932 in response to a
Depression-era liquidity crisis in housing finance. The FHLBank Act directs the
FHLBanks to make loans called advances to eligible members. Advances
traditionally served the role of providing thrifts access to reliable long-term funding
for mortgage lending and as a source of liquidity to help thrifts finance deposit
outflows without calling or selling their mortgages. Over time, Congress has
expanded the System's membership base beyond thrifts, but the primary function of
advances has remained relatively constant. Today, financial markets and our
nation's housing finance system bear little resemblance to the one that existed
when the FHLBank System was created.
It is in that light that I would like to focus on three topics this morning: the need for
the FHLBanks to voluntarily register with the Securities and Exchange Commission
(SEC) under the terms of the Securities Exchange Act of 1934; the FHLBank Act
and the activities of the FHLBank System; and Treasury's current detailed review of
the FHLBank System.
Voluntary Registration with the SEC under the 1934 Act
The observance of good, fundamental practices of corporate governance is a high
priority of this Administration. Foremost among such practices is regular,
comparable, quality disclosure of corporate financial conditions. A key part of that
commitment is improving the quality of corporate disclosure requirements by the
GSEs, which is why for more than a year the Administration has been urging all
G S E s to comply with the same corporate disclosure requirements of the Securities
Exchange Act of 1934, as interpreted and applied by the S E C . Investors in G S E
securities should have access to the same corporate disclosures as they have for
other companies who publicly offer their securities for investment.
We are pleased that Fannie Mae has complied with this request to voluntarily

JS-714: Asst. Secretary Abernathy's Testimony on F H L B s before Sen. Banking Subcom...
register and made its first disclosures under the 1934 Act in the first quarter of
2003. Freddie M a c has also agreed to register with the S E C , though w e are
disappointed to learn that Freddie M a c m a y not be registering until sometime in
2004. The sooner that they register with the S E C the better for them and their
investors, though w e fully concur with their intention that such registration and the
financial disclosures that this step entails fully meet the high standards that are
required.
The Administration has continued to urge the FHLBanks to move forward with
voluntary registration with the S E C under the 1934 Act. S o m e have argued that the
structure of the FHLBank System and the unique characteristics of the FHLBanks in
comparison to Fannie M a e and Freddie M a c lessen the need for registration under
the 1934 Act. Certainly there are differences: when the FHLBank System w a s
created in 1932, it was created with geographically-limited regional banks. Each
regional H o m e Loan Bank is cooperatively owned by its members, and its capital
stock is not publicly traded. The twelve FHLBanks raise funds in the capital
markets by issuing consolidated obligations for which they are jointly and severally
liable. All of these facts are important and must b e — a n d I believe can be—taken
into account.
However, the differences between the FHLBanks and the other GSEs do not
change the fundamental fact that the FHLBanks are significant participants in our
capital markets by any measure, and that investors should have the s a m e
information regarding the condition of the H o m e Loan Banks as they have for other
significant capital market participants. The facts m a k e this case dramatically:
At the end of June, the FHLBanks had outstanding consolidated obligations of $712
billion, of which bonds with original maturity of one year or longer constituted $556
billion of the total.
The individual FHLBanks are each large financial institutions. As of year-end 2002,
the largest H o m e Loan Bank (the FHLBank of San Francisco) had $135 billion in
total assets, the smallest (the FHLBank of Topeka) had $33 billion in total assets,
while the average among the 12 banks was $58 billion in total assets. Even the
smallest Federal H o m e Loan Bank would rank among the top 40 commercial banks
in the United States.
Federal Home Loan Bank registration under the Securities Exchange Act of 1934 is
an important step in increasing the transparency of the FHLBanks' financial
information to investors. The recent problems of Freddie M a c and a credit rating
agency's revision of its outlook for one of the Federal H o m e Loan Banks from
stable to negative illustrate the need for investors to have a more accurate picture
of the G S E s ' financial operations. Following Federal H o m e Loan Bank registration
under the 1934 Act, investors would have access to the FHLBanks' financial
information through the s a m e forms and methods as those that apply to other
companies that sell publicly traded securities. Investors would benefit from the
added oversight of the S E C , both in terms of reviewing the Federal H o m e Loan
Banks' financial disclosures and through the uniform enforcement of current
standards. And investors would have the basis for making comparable evaluations
of the financial conditions of the variety of institutions competing for their investment
dollars. Our system of securities regulation should offer investors nothing short of
that standard.
The continued operation of the FHLBanks outside of the SEC-administered
corporate disclosure regime is inconsistent with our objective of a sound and
resilient financial system. W e understand that the FHLBanks have s o m e remaining
concerns with how certain aspects of their business operation would be treated if
they registered under the 1934 Act. I would remind them and all concerned that the
Federal H o m e Loan Banks are not the only corporate institutions in America that
have unique characteristics. It w a s specifically in order to deal with the variety of
corporations in the nation—while still preserving a high standard of comparable
disclosures—that the S E C w a s given its exemptive authority under the securities
statutes. Given the flexibilities that the S E C has to address the individual
circumstances of the various registrants under the 1934 Act, w e are confident that
the Federal H o m e Loan Banks' concerns can be worked out with the S E C .
We appreciate the discussions that several of the banks have had with the SEC
earlier in the year, and w e look forward to those discussions being renewed in the
immediate future, within a context of acceptance of the public interest that would be

Page 2 of 5

JS-714: Asst. Secretary Abernathy's Testimony on F H L B s before Sen. Banking Subcom...
served by the Federal Home Loan Banks registering under the terms of the
Securities Exchange Act of 1934. W e understand that the Board of Directors of the
Federal H o m e Loan Bank of
Cincinnati recently announced the Bank will be taking the next step in the process
of voluntary registration with the S E C . In a recent letter to Secretary Snow,
Housing and Urban Development Secretary Martinez, and Federal Housing
Finance Board Chairman Korsmo, the Board of Directors of the Federal H o m e Loan
Bank of San Francisco expressed their goal "to enable the Federal H o m e Loan
Banks to become role models for corporate transparency."
That is our goal as well, to which Federal H o m e Loan Bank registration under the
Securities Exchange Act of 1934 is essential.
Multi-District Membership, In Context
In chartering each of the housing GSEs, Congress described the markets to be
served by these G S E s , the financial activities these G S E s should undertake, and
created a regulatory structure to oversee the G S E s and their activities. While there
have been and continue to be debates over a number of H o m e Loan Bank activities
and how these activities fit within the statutory confines of the Federal H o m e Loan
Bank Act, one current issue - the question of multi-district membership - raises
particular concern. The Federal Housing Finance Board (Finance Board) has
received a number of petitions requesting that Federal H o m e Loan Bank members
be permitted to join more than one Federal H o m e Loan Bank. The Finance Board
has analyzed this issue, obtained outside legal counsel on its authority to authorize
multi-district membership, and solicited views from interested parties.
All of that is well and good and appropriate. A lively discussion of policies and
programs is healthy. But the appropriate forum for the resolution of these issues
must be kept in mind. As the Treasury Department has written in a comment letter
to the Finance Board, regardless of whether allowing multidistrict membership is
wise, a plain reading of the statute finds little room to conclude that the Finance
Board has the legal authority to approve it. It provides:
An institution eligible to become a member under this section may become a
m e m b e r only of, or secure advances from, the Federal H o m e Loan Bank of the
district in which is located the institution's principal place of business, or of the bank
of a district adjoining such district, if demanded by convenience and then only with
the approval of the Board.
This view is reinforced by the comments of Assistant Legislative Counsel Mr. John
O'Brien (a principal drafter of the Federal H o m e Loan Bank Act) in response to
questions regarding the Federal H o m e Loan Act at a Senate hearing in 1932.
[I]t was not the desire, say, for members in South Carolina to borrow of a New York
bank, because it would mean too great a concentration at the N e w York bank. If
the N e w York bank happened to do better than a South Carolina bank, all members
would go there. There is the opportunity in the bill for a m e m b e r whose principal
place of business is in one district to belong to a bank in the adjoining district, but
outside of that there is no provision. It is impossible under the terms of the bill for a
company doing business in N e w York to belong to a South Carolina bank.
12 U.S.C. § 1424(b).
Id. (citing Hearings on S. 2959 concerning creation of the FHLBank System), 72nd
Cong., 1st Sess (1932), at 199.
To say this is not to render a policy point of view. There are compelling arguments
on both sides of the question with regard to the advisability of multi-district
membership. Clearly our financial system has changed dramatically since the
System w a s established in 1932 and the predecessor to the current regulator
created the 12 banks, and determined their locations and boundaries. In the
intervening years, however, Congress has revised the governing statutes on
several occasions. It is to the Congress that these arguments should be offered
and where any change in the statute will have to be made.
To some, multi-district membership represents a natural progression in the
modernization of the FHLBank System. W e would only add our view that if multidistrict membership is considered, it should be done within the general context of

Page 3 of 5

JS-714: Asst. Secretary Abernathy's Testimony on F H L B s before Sen. Banking Subcom...
evaluating the Federal Home Loan Bank System's charter.
Treasury's Review of the FHLBank System
Perhaps the time for such a review is near. Earlier this year I requested the Office
of Financial Institutions Policy at the Treasury Department to conduct an in-house
review of the Federal H o m e Loan Bank System, with particular - but not exclusive consideration of the effect of the changes enacted as part of the Gramm-LeachBliley Act of 1999 (GLBA). A s I announced at that time, the review would
consider—
• how these changes have affected the ability of the Federal Home Loan Banks to
meet their statutory mission;
• implications for the financial strength of the Banks individually and the system in
general;
• how the business operations of the Banks contribute to accomplishing their
statutory mission;
• issues regarding governance structure and management, including executive
compensation;
• effect of new capital structures on operations; and
• other issues regarding the strength of the system and the structure of federal
oversight.
We are now about four months into that process, nearing completion of the first
phase. In the first phase, the staff conducted a general review of the literature,
discussions, debates, and developments to put a sharper focus to the questions to
be examined. N o w they are preparing to go into greater detail. The initial step in
the second phase will be to discuss specific topics with the Finance Board.
Some of the issues we will be looking at in greater detail include:
Capital Structure - GLBA significantly changed the capital structure of the Federal
H o m e Loan Banks and provided greater flexibility in the development of capital
plans. What are the similarities and differences among the various capital plans?
H o w have the risk-based capital requirements been implemented? H o w will new
capital plans impact the banks' investment portfolios?
Membership - GLBA eliminated mandatory membership requirements for Federal
savings associations and permitted broader access to FHLBank membership for
community financial institutions (insured depository institutions with less than $500
million in total assets). What has been the impact of these changes in membership
participation? Have those changes affected governance of the H o m e Loan Banks?
Advances and Collateral - GLBA provided community financial institutions with a
broader range of eligible collateral for FHLBank advances. The Finance Board
reports that as of June 30, 2003, expanded collateral from community financial
institutions represents approximately $10.6 billion of the $486 billion in outstanding
advances. H o w has this provision been implemented by the FHLBanks and what
factors impact community financial institutions use of the broader range of eligible
collateral?
In addition to evaluating these specific legislative changes, over the last decade the
activities of the Federal H o m e Loan Banks have evolved in many ways. S o m e
specific activities that w e will be focusing on include:
Balance Sheet Developments - How have key activities (advances, investments,
and mortgage purchases) of the System and the individual H o m e Loan Banks
evolved over the last decade, and what does this imply for the future of the
System?
Advance Usage - What are the characteristics of FHLBank advance users? What
types of advances are most commonly used by System members? What impact is
it having on the activities of the members and their ability to serve their customers?
Again I would like to emphasize that Treasury's review of the Federal Home Loan
Bank System is part of what w e normally do at Treasury, and what I envision for our
current review is a more specific look at how the changes m a d e to the FHLBank

Page 4 of 5

JS-714: Asst. Secretary Abernathy's Testimony on F H L B s before Sen. Banking Subcom...
System as part of GLBA have been implemented. Treasury is not primarily a
regulatory agency. W e see as part of our important function, however, providing
executive branch oversight of the activities of the independent financial regulators,
and this study is part of meeting that responsibility.
And before I leave this subject, with regard to regulatory oversight of the FHLBank
System, I would like to c o m m e n d Finance Board Chairman Korsmo for the
increased emphasis he has placed on safety and soundness oversight, in particular
the emphasis he has placed on the supervision and examination function. In recent
years, many observers have pointed to weaknesses in the Finance Board's
supervision of the Federal H o m e Loan Banks. Chairman Korsmo has given major
focus to strengthening the examination process, doubling examination staff on the
way to tripling it. I have no doubt that even further increases will be m a d e as
necessary.
As another related aside, I would like to raise a point about a legislative proposal
regarding the membership of privately-insured credit unions in Federal H o m e Loan
Banks. A s part of that proposal, private insurers of credit union deposits would be
required to submit annual audit reports to the National Credit Union Administration
(NCUA).
In addition, upon the NCUA's request, the appropriate state supervisory agency
would be required to provide the N C U A with examination reports of private deposit
insurers. W e are concerned that the provisions related to the N C U A could give the
false impression that the N C U A has oversight authority over the private deposit
insurers of credit unions and that the Federal Government s o m e h o w stands behind
the private insurers. Not only would that be a terribly false impression potentially
harmful to depositors, but it would also remove s o m e of the market discipline that is
so essential to the successful functioning of any private insurance program.
Conclusion
The Federal Home Loan Bank System presents policymakers with issues that
deserve continued attention. The System has historically played an important role
in our nation's housing finance markets. W e must continue to evaluate the System
to ensure that it is achieving the objectives set forth by Congress, meeting the
needs of our communities that might not otherwise be met.
Thank you again for providing me with the opportunity to discuss these important
issues with the Subcommittee today.

Page 5 of 5

202-691-3550

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

September 11, 2003
October 09, 2003
912795NR8

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
7.55%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

38,757,850
39,795
0

Accepted
$

10,960,475
39,795
0

SUBTOTAL

38,797,645

11,000,270

Federal Reserve

4,059,329

TOTAL

42,856,974

15,059,599

Median rate
0.900%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.890%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 38,797,645 / 11,000,270 = 3.53
1/ Equivalent coupon-issue yield.

http ://www.pubIicdebt.treas.gov

<fS-K

JS-716: Secretary Snow's G S E Testimony before House Financial Services Committee

Page 1 of 5

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 10, 2003
JS-716
Testimony of
John W . S n o w
Secretary of the Treasury
Before the Committee on Financial Services
United States House of Representatives
Washington, D.C.
September 10, 2003
Thank you Chairman Oxley, Ranking Member Frank, and members of the
Committee for inviting Secretary Martinez and m e to appear before you today. This
Committee has a strong record of interest in the effective supervision and regulation
of government sponsored enterprises.
There is a general recognition that the supervisory system for housing-related
government sponsored enterprises (GSEs) neither has the tools, nor the stature, to
deal effectively with the current size, complexity, and importance of these
enterprises. A s w e attempt to remedy this situation, w e must be mindful that w e
have two core objectives that should guide us: a sound and resilient financial
system, and increased homeownership opportunities for less advantaged
Americans.
To serve both of these objectives we need to devote careful attention to the
resilience of our system of housing finance. That system is the envy of the world,
but w e cannot be complacent. I a m here to outline the Administration's
recommendations for important improvements that w e can make to the oversight of
our housing finance system. Secretary Martinez will discuss in particular the
measures that the Administration would like to see implemented to reinforce the
focus on the objective of increasing homeownership opportunities.
Recommendation
The Administration recommends that Congress enact legislation to create a new
Federal agency to regulate and supervise the financial activities of our housingrelated government sponsored enterprises. Housing finance is so important to our national economy that we need a strong,
world-class regulatory agency to oversee the prudential operations of the G S E s and
the safety and soundness of their financial activities consistent with maintaining
healthy national markets for housing finance.
Such legislation should fulfill this underlying purpose and not be merely an exercise
in moving existing agencies from one part of the government to another.
We should keep our eye on the crucial task of getting the regulatory organization
right. In addition to the housing goals which Secretary Martinez will discuss, the
legislative objective should be to create a strong, credible, and well-resourced
supervisor with all of the powers needed to do its job.
It is of central importance in this endeavor that Congress provide the new agency
with a clear mandate. This mandate should be to oversee the prudential operations
of the enterprises and the safety and soundness of their financial activities in order
to foster liquid, efficient, competitive, and resilient national housing financial
markets, including secondary mortgage markets.
Powers of the N e w Agency

JS-716: Secretary Snow's G S E Testimony before House Financial Services Committee
This new agency's powers should be comparable in scope and force to those of
other world-class financial supervisors, fully sufficient to carry out the agency's
mandate. This means that the agency should have general regulatory, supervisory,
and enforcement powers with respect to the enterprises, including responsibility for
ongoing prudential review of G S E activities in keeping with the terms of their
charter, with the evaluation of n e w activities being m a d e in consultation with the
Secretary of Housing and Urban Development. With respect to
conservatorship/receivership powers, the new agency should have all of the
authority necessary to direct the liquidation of assets and otherwise to direct an
orderly wind down. However, rescinding a G S E charter would require an act of
Congress.
Taking into account the particular nature and unique mission of the enterprises as
chartered by the Congress, the powers of the n e w agency should meet the
following standards, which are widely recognized as essential for effective financial
supervision. The agency must have an integrated package of clear authorities,
including the following:
• The agency should possess operational independence and adequate resources,
including provision for ongoing supervision, and powers to address compliance with
laws as well as safety and soundness concerns.
• The agency should have authority for and supervisory practices that consist of
s o m e form of both on-site and off-site supervision.
• The agency should have the authority to review and reject any proposals to
transfer significant ownership or controlling interests to other parties.
• The agency should have the authority to establish and enforce the criteria for
acquisitions, new lines of business, or investments by the G S E and for ensuring
that corporate affiliations or structures do not expose the G S E to undue risks or
hinder effective supervision.
• An essential element of supervision is the ability of the agency to supervise the
consolidated G S E organization. The agency should decide which prudential
requirements will be applied on an enterprise-only (solo) basis, which ones will be
applied on a consolidated basis, and which ones will be applied on both bases.
• The agency should have the authority to ensure that the GSE has in place
systems that accurately measure, monitor, and adequately control market risks; the
agency should have powers to impose specific limits and/or a specific capital
charge on market risk exposures, if warranted.
• The agency should have at its disposal adequate supervisory measures to bring
about timely corrective action when a G S E fails to meet prudential requirements,
including when there are regulatory violations.
• The agency should have independent litigation authority and related powers.
• The agency should set prudent and appropriate minimum capital adequacy
requirements for the G S E . Such requirements should reflect the risks that the G S E
undertakes, and should define the components of capital, bearing in mind the ability
of the G S E to absorb losses.
Capital
The regulator should also have authority with regard to capital for the GSEs. A key
issue is the setting of appropriate levels for risk-based capital. The current statute
establishes the standard for the basic, minimum capital, the resources that are
reserved for the general, indefinable, perhaps unforeseen risks that are present
with any financial enterprise.
The statute also treats, in some detail, the question of risk-based capital. We do
not propose any changes at this time to the risk based capital regulation that is n o w
in place. That rule took ten years to develop and is in only its first year of
operation. Capital is the fundamental element of the financial condition of an
enterprise, and the capital standards should not become the subject of frequent

Page 2 of 5

JS-716: Secretary Snow's G S E Testimony before House Financial Services Committee
change. There is a need for stability in capital standards. There is some degree of
flexibility in the current risk-based capital rule to deal with changes in the risk profile
of the enterprises, at least with regard to the near term.
Having said this, I am in no way proposing a moratorium on making any
adjustments to risk-based capital. The existing statutes place a clear responsibility
on G S E supervisors to ensure that each G S E retains adequate capital to support its
risks and they give supervisors the power and duty to require capital changes as
risks change. W e expect the supervisors to m a k e full and proper use of that
authority as need arises.
But ultimately, the new agency should have more flexible authority to adjust riskbased capital standards for G S E s than what is currently provided in the law. Broad
authority over capital standards and the ability to change them as appropriate are of
vital importance to a credible, world class financial regulator. Capital standards
need to be flexible enough to employ the best regulatory thinking, conscious of the
enterprises' o w n measures of risk, adequate to ensure that the enterprises operate
in a safe and sound manner, with capital and reserves sufficient to support the risks
that arise in their business. W e believe that legislation should provide the n e w
agency with this more flexible authority.
Duties
The new agency must have the duty to exercise its authorities for a number of
essential tasks, such as the following:
• An essential part of the agency's responsibility must be the evaluation of a GSE's
policies, practices, and procedures related to the extension of credit and the making
of investments and the ongoing management of the credit and investment
portfolios, including G S E s ' fulfillment of their missions.
• The agency should satisfy itself that the G S E establishes and adheres to
adequate policies, practices, and procedures for evaluating the quality of assets
and the adequacy of loan loss provisions and loan loss reserves.
• The agency should satisfy itself that the G S E has management information
systems that enable the management to identify concentrations within the portfolio,
and the agency should set prudential limits to restrict G S E exposure to single
counterparties or groups of related counterparties.
• The agency should satisfy itself that the G S E has in place a comprehensive risk
management process (including appropriate board and senior management
oversight) to identify, measure, monitor, and control all other material risks and,
where appropriate, to hold capital against these risks. The agency should
determine that the G S E has adequate and well-tested business resumption plans
for all major systems, with remote site facilities, to protect against disruptive events.
• The agency should determine that the GSE has in place internal controls that are
adequate for the nature and scale of its business. These should include clear
arrangements for delegating authority and responsibility; separation of the functions
that involve committing the enterprise, paying away its funds, and accounting for its
assets and liabilities; reconciliation of these processes; safeguarding its assets, and
appropriate independent internal or external audit and compliance functions to test
adherence to these controls as well as applicable laws and regulations.
• The agency should determine that the G S E has adequate policies, practices, and
procedures in place, including strict rules for identifying customers/counterparties,
that promote high ethical and professional standards in the financial sector and
prevent the enterprise being used, intentionally or unintentionally, by criminal
elements.
• The agency should have a m e a n s of collecting, reviewing, and analyzing
prudential reports and statistical returns from G S E s on a solo and consolidated
basis.
• The agency should have a m e a n s of independent validation of supervisory
information either through on-site examinations or use of external auditors.
• The agency should satisfy itself that each G S E maintains adequate records drawn
up in accordance with consistent accounting policies and practices that enable the
agency to obtain a true and fair view of the financial condition of the enterprise and
the profitability of its business, and that the enterprise publishes on a regular basis
financial statements that fairly reflect its condition.
• The agency should set risk-based capital standards and review and change them
as prudent.
• The agency and
investments,
should
acquisitions.
exercise authority over n e w lines of business, n e w types of

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JS-716: Secretary Snow's G S E Testimony before House Financial Services Committee
Application to All GSEs
In my remarks, I have not limited myself to one group of housing GSEs. The
importance of our housing finance markets requires that all of the housing G S E s be
included in a program of world-class supervision. W e see the need for this for the
Federal H o m e Loan Banks just as w e see it for Fannie M a e and Freddie Mac.
We recognize the development of a consensus for action on how to provide that
supervisory system for Fannie M a e and for Freddie M a c and are ready to work with
Congress on a new agency for their supervision. A similar consensus m a y not exist
with regard to the Federal H o m e Loan Banks, but w e look forward to working with
Congress, the H o m e Loan Banks, and other interested parties to achieve a
resolution of these matters.
Location of the New Agency
Today we recommend that Congress create a new regulatory agency that is strong,
credible, possessing all of the standards and duties for effective financial
supervision as I have outlined above. The Administration is prepared to consider
placing the agency within a cabinet department, if Congress considers the
additional benefits of stature and policy support that can c o m e from such an
arrangement to be valuable.
Any such arrangement would need to protect the independence of the agency over
specific matters of supervision, enforcement, and access to the federal courts. The
agency should be structured like other financial institution regulators currently
embedded in cabinet departments. But to provide real value, placing the n e w
agency within a cabinet department should draw upon the resources of that
department for depth of policy guidance. At a minimum, the new agency should be
required to clear new regulations and congressional testimony through the
department.
In addition, while the agency should be adequately funded by assessments on its
regulated entities, without going through the appropriations process, the agency
budget and fee assessments should be subject to review by the Administration to
avoid any long-term temptation to gold-plate agency operations and to ensure an
appropriate allocation of resources among the agency's responsibilities.
In the context of this combination of operational independence and policy oversight,
the Administration would be willing to support proposals to establish the n e w
agency as a bureau of the Treasury.
Corporate Governance
In addition, good corporate governance, as we all have come to recognize, requires
that there be great clarity that the people running large companies are there to
serve the interests of the shareholders and that their incentives and loyalties be
clearly aligned in this way. O n e m a n cannot serve two masters. Fannie M a e and
Freddie M a c are large, experienced, publicly-traded enterprises that have grown
significantly and taken important places in our capital markets. Reflecting on that
fact, the Congress should consider whether the statutory requirement for
presidential appointment of members to publicly-traded G S E boards of directors
has become obsolete, and w e would support their elimination.
Before I conclude, I wish to make one more essential point. We are pleased with
the action of Fannie M a e to register under the Securities Exchange Act of 1934.
Such registration operates as an important window into the operations of that G S E
to see how it is promoting its mission in keeping with the highest standards of
corporate disclosure. This is consistent with our view that G S E s should serve as
models of good corporate governance and disclosure, not as exceptions from these
standards.
We all regret that Freddie Mac has not yet been able to fulfill its pledge to come into
compliance with registration under the 1934 Act, but w e look forward to their doing
so in the near future. Secretary Martinez and I recently joined with Federal Housing
Finance Board Chairman John Korsmo in calling upon the Federal H o m e Loan
Banks also to come into compliance with the 1934 Act, as administered by the
Securities and Exchange Commission. Their doing so will be a crucial immediate

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JS-716: Secretary Snow's G S E Testimony before House Financial Services Committee
step in regularizing their important participation in our nation's capital markets.
Conclusion
Treasury will continue, in a study, to review GSEs and the secondary mortgage
markets, and the operation of the regulatory system that supervises the G S E s to
ensure that they are subject to proper standards of capital, corporate governance,
and other levels of conduct, and in general serve the objectives I described in the
beginning of m y remarks. W e will keep you posted on the results of our studies.
In conclusion, let us consider once again our purpose here this morning. It is to
discuss how best to promote the strength and resilience of our housing finance
markets, in order to increase our progress in advancing h o m e ownership
throughout the nation. The housing-related government sponsored enterprises
were created by Congress to assist in that mission. Our aim must be to give them
the caliber of supervisor that the importance of their mission requires.

Page 5 of 5

JS-717: U.S. Abstains on IDB loan proposal for Camisea Gas Project in Peru

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 10, 2003
JS-717
Statement to the Board of Executive Directors of the Inter-American
Development Bank by Jose A. Fourquet, United States Executive Director, on
the Proposal for a loan for Camisea Project in Peru
The US is abstaining on IDB financing of the Camisea gas project. We wanted to be
able to vote in favor of this project, and went to unprecedented lengths to work with
the IDB, the project sponsors, and the Government of Peru to strengthen its
environmental and social protections. W e greatly appreciate the efforts and
patience of IDB Management and staff, the project sponsors, and the Government
of Peru to work with us to address these risks. W e are encouraged by recent
actions by the Government of Peru, project sponsors, and the IDB to improve the
project. W e applaud the government's commitment to improve the marine reserve
area.
The United States strongly supports President Toledo and his goals for increasing
Peru's economic growth and improving the standard of living for Peru's people. The
Camisea project offers profound economic benefits for Peru, forecast to boost
Peru's economic growth by nearly 1 % per year over its thirty-year expected
operation. Regardless of our vote, our expectation is that the Camisea project, now
7 0 % constructed, will be completed soon, bringing these benefits to the people of
Peru. W e look forward to continuing to work with Peru in the sound development of
its hydrocarbon industry.
Our decision is based in part on indications that private financing may be available
on favorable terms. In addition, unfortunately, the IDB's involvement was
constrained because it was unable to formally apply its environmental policies to
the upstream component of the project, and was able to begin serious engagement
with the downstream sponsors only after the project's design was completed. W e
are also concerned that tight completion deadlines became a serious obstacle to
mitigating environmental risks and encouraged the sponsors to expedite
construction sometimes in advance of receiving government approvals. Finally, w e
have not been able to allay doubts about the adequacy of the environmental
assessment conducted for the project.
We will continue to work diligently with the international community to improve
environmental processes and standards that apply to projects supported by official
financing. Looking ahead, this project highlights the pressing need for the IDB to
establish a policy to improve consultation with and address the needs of indigenous
peoples. W e want to work with the IDB on the application of its environmental
oversight to facilities that are closely related to projects being funded.
In closing, I want to reiterate my government's profound gratitude for the hard work
done by IDB management and staff, the Government of Peru, and project sponsors
to improve the Camisea project. W e applaud commitments made and are prepared
to help bilaterally with Peru's efforts to improve the quality of the natural
environment in Paracas Bay. In fact, the United States is committed to provide
roughly $2 million over the coming two years to help with these efforts. W e will
continue to support wherever possible, well-designed initiatives to increase Peru's
economic growth, including in the IDB.

RESS R O O M

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 10, 2003
JS-718
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 $80,596 million as of the end of that week, compared to $80,467 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)

Am gust 29, 2003

September 5, 2003

80,467

80,596

TOTAL
1. Foreign Currency Reserves

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

7,287

13,477

20,764

7,344

13,437

20,781
0

Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS

11,924

2,707

14,631

12,023

2,699

14,722

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

b.ii. Of which, banks located abroad

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

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

2. IMF Reserve Position

22,506

22,520

3. Special Drawing Rights (SDRs) 2

11,523

11,530

4. Gold Stock3

11,043

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 29, 2003
Euro
1. Foreign currency loans and securities

Yen

September 5, 2003

TOTAL

Euro

Yen

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

SS lit

TOTAL
0

2. a. Short positions
2.b. Long positions

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
August 29, 2003
Euro
1. Contingent liabilities in foreign currency

Yen

Sentember 5, 2003

TOTAL

Euro

Yen

TOTAL

La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2 Foreign currency securities with embedded
0
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
( S O M A ) 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.

RESS R O O M

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 10, 2003
JS-718a
U.S. International Reserve Position

I. Official U.S. Reserve Assets (in US millions)
August 29, 2003

September 5, 2003

80,467

80,596

TOTAL
1. Foreign Currency Reserves

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

7,287

13,477

20,764

7,344

13,437

20,781
0

Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS

11,924

2,707

14,631

12,023

2,699

14,722

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

b.ii. Of which, banks located abroad

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

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

2. IMF Reserve Position2

22,506

22,520

3. Special Drawing Rights (SDRs) 2

11,523

11,530

4. Gold Stock3

11,043

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
August 29, 2003
Euro

Yen

TOTAL

September 5, 2003
Euro

1. Foreign currency loans and securities
^
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

Ss - 7/fc*

Yen

TOTAL
u

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

III. Contingent Short-Term Net Drains on Foreign Currency Assets
August 29, 2003
Euro

Yen

September 5, 2003

TOTAL
0

1. Contingent liabilities in foreign currency

Euro

Yen

TOTAL
0

1 .a. Collateral guarantees o n 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 otherfinancialinstitutions
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.

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

FOR IMMEDIATE RELEASE
September 10, 2003

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Interest Rate:
Series:
CUSIP No:

Issue Date:
Dated Date:
Maturity Date:

3 1/8%
H-2008
912828BK5

High Yield:

Price:

3.230%

September 15, 2003
September 15, 2003
September 15, 2008

99.519

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 97.60%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

39,344, 023
133, 471
0

Federal Reserve
$

39,477,.494

15,866, 800
133, 471
0
16,000, 271 1/

39,477, 494

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

16, 000,,271

Median yield
3.210%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
3.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 39,477,494 / 16,000,271 = 2.47
1/ Awards to TREASURY DIRECT = $71,228,000

http://www.publicdebt.treas.gov

7/f

JS-720: U.S. Treasury Secretary John W . Snow to Visit Middle East Region September 1...

FROM THE OFFICE OF PUBLIC AFFAIRS
September 10, 2003
JS-720
U.S. Treasury Secretary John W. Snow to Visit Middle East Region September
14-24, 2003
On September 14, Treasury Secretary John W. Snow will depart the United States
for a ten-day tour through the Middle East and South/Central Asia. The trip will
include visits to Israel, Saudi Arabia, Afghanistan, Pakistan, and the United Arab
Emirates, and meetings with top political, financial and business leaders in each
country.
In Israel and the West Bank, Secretary Snow will support President Bush's vision
for peace by emphasizing steps that Israelis and Palestinians can take to
strengthen and improve the lives of their peoples. H e will meet with key Israeli and
Palestinian leaders to discuss the economic situation, encourage cooperation for
mutual prosperity and urge action in the fight against terrorism.
In Saudi Arabia, the Secretary will advance U.S.-Saudi cooperation in the financial
war on terror and Saudi support for the reconstruction of Afghanistan and Iraq, as
well as aid to the Palestinian people. A s part of war on terrorism, Saudi Arabia has
taken significant steps to prevent the abuse of charities to finance terror.
In Afghanistan, Secretary Snow will highlight President Bush's commitment to
reconstruction, and he will review U.S. efforts to build the Afghani private sector,
including its financial systems, trade relations, and business environment.
In Pakistan, Secretary Snow will discuss the need for continued economic reforms
and pro-growth policies that will strengthen this key ally in the war on terror. H e will
also emphasize Pakistan's support for reconstruction in Afghanistan and Iraq, and
progress in combating terrorist financing. While there, the Secretary will tour a
newly registered hawala. Pakistan has been an important partner in the war on
terrorist financing and in the effort to regulate hawalas and prevent their abuse by
terrorists.
In the final leg of the trip, Secretary Snow will attend the annual meetings of the
World Bank and the International Monetary Fund in Dubai.
During three days in Dubai, both in group discussions and in bilateral meetings,
S n o w will continue to press the themes he has pressed during his previous trips to
Europe and Asia to encourage domestic led growth and job creation.
He will stress our view that the best international economic system - for the United
States, for Asia, for Europe and for the world - is one based on the principles of
free trade, the free flow of capital, and market-based exchange rates.
He will stress the need for each individual nation to take steps to increase economic
growth in our domestic economies. Raising productivity through structural reform
and private investment is the most direct route to raising living standards for our
people. H e will repeat what he has said time and again that the number one issue
facing the global economy is the need for more engines of growth.
During his talks, he will report that as a result of President Bush's leadership, the
U.S. economy is returning to higher levels of growth, but that the global economy
requires Europe and Asia to attain higher levels of growth as well.
The Secretary's discussions on terrorist financing will follow significant recent

Page 1 of 2

JS-720: U.S. Treasury Secretary John W . Snow to Visit Middle East Region September 1...
progress in this area. Following the designation of several Hamas related charities
and political leaders by the U.S. Treasury last month, the European Union has
reached consensus on the designation of the political arm of H a m a s as a terrorist
organization and the Palestinian Authority and the United Kingdom have taken
action to freeze accounts of charities funding Hamas.

Page 2 of 2

JS-721: Progress in the W a r on Terrorist Financing

Page

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®.
September 11, 2003
JS-721
Progress in the War on Terrorist Financing
The opening salvo in the war on terrorism was launched with a stroke of a pen on
September 23, 2001 when President Bush signed Executive Order 13224, freezing
the assets of terrorists and their supporters and authorizing the Secretaries of
Treasury and State to identify, designate and freeze the U.S.-based assets of those
who financially facilitate terrorism. President Bush's action began an unprecedented
international campaign to deter and dismantle the sources of terrorist financing.
Related Documents:
• Progress in the W a r on Terrorist Financing

Progress in the War on Terrorist Financing
September 11, 2003

OVERVIEW
The opening salvo in the war on terrorism was launched with a stroke of a pen on
September 23, 2001 w h e n President Bush signed Executive Order 13224, freezing the
assets of terrorists and their supporters and authorizing the Secretaries of Treasury and
State to identify, designate and freeze the U.S.-based assets of those w h o financially
facilitate terrorism. President Bush's action began an unprecedented international
campaign to deter and dismantle the sources of terrorist financing.
In the nearly two years since the September 11 attacks, those efforts have left few places
for terrorists and their supporters to hide their money. T h e U.S. and our international
partners have seized or frozen nearly $200 million in terrorist-related assets and have
designated 315 individuals and organizations as terrorists or as part of terrorist support
networks. Pipelines of terrorist financing that once tunneled millions of dollars to
terrorists have been dismantled. Several key fundraisers and facilitators have been
identified and arrested around the world, further limiting sources of m o n e y for terrorists.
The fight to stop the financing of terror is virtually without borders. Nearly every
country in the world has expressed support in the war on terrorist financing ~ 173 nations
have implemented orders to freeze terrorist assets, more than 100 countries have
introduced n e w legislation tofightterroristfinancing,and 84 countries have established
Financial Intelligence Units to share information.
The 9/11 hijackers took advantage of a financial system that afforded them the ability to
transmit and receive m o n e y with relative anonymity and to find thefinancialresources to
carry out their plots. But, the past two years have yielded tremendous progress in
securing thefinancialsystem against terrorist financing and in shining the light of
international scrutiny on sectors of thefinancialsystem previously untouched by
regulation or oversight. Designations and freezing of assets, structural changes to
financial systems around the world, and the cooperation of international partners have
helped to dry up sources offinancialsupport for terrorism and have restricted the ability
of terrorists to operate. Our efforts and the world's focus have m a d e it more difficult for
terrorists to succeed in their attacks. The war on terrorist financing, like the war on terror
as a whole, is a long fight. While there is still m u c h work to be done, the progress m a d e
since thefirst9/11 will hopefully help to prevent the next.

Designation and Freezing of Assets
Executive Order 13224 gave the
Secretaries of State and Treasury the
authority to designate individuals
and organizations as terrorists and
terrorist supporters - freezing their
U.S. assets, prohibiting financial
transactions with U.S. persons, and
publicly shaming those designated
b y notifying the world of their
involvement in terrorism.
International cooperation has
broadened the net of designations to
encompass not just the U.S., but
jurisdictions globally. Through
bilateral cooperation and multilateral
action by the United Nations, 173
countries have implemented
blocking orders to freeze the assets
of terrorists.
In a world interconnected by a vast
financial w e b , the ability to ostracize
terrorists and their supporters and
banish them from the international
financial system deters those w h o
would fund acts of terror and
cripples the ability of terrorists to
operate on a global scale. B y
freezing assets and dismantling key
nodes of terrorist financing,
designation provides an
extraordinary tool to starve terrorists
of the financing to carry out their
plans, helping to prevent terrorist
attacks before they happen.

Since September 11, 2001:
>

>
>

1439 accounts, containing more than $136.7
million in assets, frozen worldwide - including
$36.6 million in the U.S.
More than $60 million in additional terrorist
related assets seized by authorities globally.
315 individuals and organizations listed as
Specially Designated Global Terrorists (SDGTs)
under Executive Order 13224.
Countless millions in additional funds
prevented from flowing to terrorists by disruption
of terrorist financing networks, deterrence of
donors, and international efforts to secure the
world financial system from the financing of
terror.
Several major sources of terrorist financing
dismantled:
o In August, 2003, Sec. S n o w announced
the U.S. designation of several charities
funding H a m a s and several members of
Hamas' senior leadership. In the weeks
since, the E U has now reached
consensus to designate the political wing
of Hamas. Several other jurisdictions,
including the Palestinian Authority and
the U.K., have also taken action to freeze
assets of H a m a s related charities.
o In support of previous action by
European partners, the U.S. designated
the Al-Aqsa International Foundation,
a major source of funding to H a m a s in
April of 2003, helping to shut-down the
German based charity.
o The Somali based al-Barakaat network
once provided funding and transferred
money too and from al-Qaida. The U.S.
and our international partners took action
to designate al-Barakaat and close down
their operations in November of 2001.
o Three major U.S. based charities
providing funding to terrorists, the Global
Relief Foundation, Benevolence
International Foundation and Holy
Land Foundation for Relief and
Development were designated and
shuttered in December of 2001.

International Cooperation
The same international financial
system that allows c o m m e r c e to
flow freely between nations also
provides terrorists a w a y to
m o v e m o n e y around the globe
in seconds. Terrorism is a
global problem, and therefore
our effort to disrupt its
financing must extend beyond
borders ~ to block the m o n e y
wherever it is hidden and to
track it d o w n wherever it flees.

Since September 11, 2001:
>
>
>
>
>

209 countries have offered their support in the
financial war on terror.
173 countries have issued blocking orders freezing
terrorist assets.
100 countries have passed new laws, strengthening
their safeguards against terrorist financing.
80 countries have established Financial Intelligence
Units to share information on terrorist financing.
The U N Security Council has approved Resolutions
1372 and 1390 that compel action by member states
to combat terrorist financing.
The Financial Action Task Force (FATF) has
issued 8 Special Recommendations on Terrorist
Financing and revisions to the 40 Recommendations
on Money Laundering, incorporating international
standards to prevent terrorist financing.

Major bombings in Indonesia,
Saudi Arabia, and Iraq
underscore the global nature of
the terrorist threat. T o respond
_
^
to such a threat requires the
'
|
cooperation of all nations and the focus of the international community. A n
unprecedented 209 of the 219 countries in the world have expressed support for the
global effort tofightterrorist financing. This level of support is perhaps one of the most
significant success stories in the terrorist financing effort.
The United Nations has adopted Security Council resolutions requiring all members to
freeze assets of any al-Qaida and Taliban related financial target listed by the U N and to
take actions to prevent the financing of terror. The Financial Action Task Force ( F A T F ) ,
an international body devoted to the development and promotion of policies aimed at
combating m o n e y laundering and terrorist financing, has issued important standards that
outline steps that countries should take to bolster defenses against terrorist financing and
m o n e y laundering.
Countries around the world are implementing new laws to secure their financial systems
against terrorist financing and are working together to identify and disrupt the financing
of terror. M o r e than 80 countries have established Financial Intelligence Units to share
information and 173 countries have implemented blocking orders to freeze terrorist
assets.

Securing the Financial System and
Preventing the Abuse of Charities
Cutting off terrorists from the international financial system is fundamental to our efforts
to disrupt their activities. Enhanced safeguards are making it more difficult for terrorists
to m o v e m o n e y through formal financial systems and are exposing them to greater risk of
detection w h e n they do. A s a result, terrorists are crippled in their ability to m o v e m o n e y
and to operate on a global scale. In addition, the worldwide attention on the abuse of
charities by terrorist groups has resulted in unprecedented actions to secure charitable
giving.
Protection of the U.S. financial system begins with a robust regulatory regime that
enhances the ability offinancialinstitutions to deny access to terrorists and m o n e y
launderers. Over the past two years, w e have expanded dramatically the protections
afforded our domestic financial system through the implementation of important antim o n e y laundering and anti-terrorist financing provisions of the U.S.A P A T R I O T Act.
For example, we have issued regulations to facilitate the sharing of critical information
related to the financing of terrorism ~ between law enforcement andfinancialinstitutions
and a m o n g financial institutions themselves. Regulations have enhanced the financial
audit trail by ensuring that basic customer information is collected, customer identity is
verified, and increased due diligence is performed for high risk accounts. Finally, w e
have extended, and are continuing to extend, the reach of our anti-money laundering and
anti-terrorist financing regulatory regime to additional categories offinancialinstitutions
to reflect the reality that terrorist financiers m a y resort to non-traditional means of
moving their assets.
Our efforts to protect the financial system, however, cannot stop at our shores. To fight
terrorist financing, all countries must take steps to safeguard their financial sectors from
abuse by terrorists. The world has recognized this reality.
Immediately following the September 11th attacks, the Financial Action Task Force
( F A T F ) held an Extraordinary Session in Washington D.C. to issue the "Eight Special
Recommendations on Terrorist Financing." These Eight Recommendations - which
address such issues as wire transfers, charities, alternate remittance systems, and asset
freezing - have been recognized as the international standard for terrorist financing.
The FATF followed this up in June of this year with a major revision of the "Forty
Recommendations on M o n e y Laundering" that require additional steps to secure financial
systems against terrorist financing. The revised Forty Recommendations expand the
definition of m o n e y laundering, enlarge the scope of institutions to which anti-money
laundering controls must be applied, articulate specific customer identification measures
that financial institutions should take, provide for enhanced scrutiny of certain high risk
categories of customers, prohibit shell banks, and tighten controls on correspondent
banking.

Countries throughout the world are working to put these important measures into place
and the F A T F has joined forces with the I M F and World B a n k on a global program to
assess compliance with these standards by countries throughout the world.
The United States government is also working closely with domestic and international
partners to deal with the threat of terrorist financing through charities. In N o v e m b e r
2002, the Treasury Department released voluntary best practices for charities, which
provide guidelines that e m p o w e r charities to reduce the risk of abuse of their
organizations to fund terror. The Treasury Department is actively reaching out to the
charitable community in an effort to work together to prevent terrorist financing through
charitable institutions. These guidelines, combined with our outreach efforts, have
launched a reassessment of h o w charities conduct business and the steps they should take
to safeguard the giving for their donors.
The international community, through the FATF, has also set forth international best
practices that set the standard for h o w governments should approach the problem of
terrorist financing through charities. Countries around the world have taken important
steps to increase the oversight and regulation of charities and to take actions against those
involved in the funding of terror. Over the past two years, the U.S. and our international
partners have taken action against 23 such charities.

JS-722: Statement of Secretary John W . Snow on House Passage of Fair Credit Reporting... Page 1 of 1

PR CSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 11, 2003
JS-722
Statement of Secretary John W. Snow
on House Passage of Fair Credit Reporting Act Legislation
On June 30, I outlined an Administration proposal with far-reaching consequences
for all Americans. It would broaden the availability of credit, give consumers greater
access to their credit records, and equip consumers and law enforcers with
important new tools in the fight against identity theft.
Last night, by an overwhelming bipartisan vote, the House of Representatives
approved legislation to implement our proposal. I congratulate the House on this
prompt action. Americans need these tools, and the House has acted without delay.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 11, 2003
JS-723
MEDIA ADVISORY
Secretary S n o w to Hold Pre-Trip Press Conference
Treasury Secretary John Snow will hold a press conference today in advance of his
trip to Israel, Saudi Arabia, Afghanistan, Pakistan and UAE. The press conference
will be held at 2:30 P M at the Treasury Building. Secretary Snow will make an
opening statement and then be available for questions.
Please click on the attached link to read the announcement outlining the
Secretary's trip treas.gov/press/releases/js720.htm
Members of the media who do not hold either Treasury or White House credentials
should contact Frances Anderson at 202-622-2960 for clearance into the Treasury
Building as soon as possible. Late requests will not be accepted.
Secretary John Snow
Pre-trip Press Conference
2:30 P M
U.S. Department of the Treasury
Media R o o m 4121
1500 Pennsylvania Avenue
Washington, D C

JS-724: Statement by Treasury Secretary John Snow regarding the Agreement by Argenti... Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 11,2003
JS-724
Statement by Treasury Secretary John Snow regarding the
Agreement by Argentina and IMF management
We welcome the agreement between IMF management and the Government of
Argentina on a medium-term program. The United States expects to support the
program when it is submitted to the IMF Executive Board for approval next week.
With strong implementation by Argentina of the program's macroeconomic
framework and reform measures, and with a good faith effort to reach prompt
agreement on a comprehensive debt restructuring, the program can help Argentina
lay the basis for sustained growth and rising living standards.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 11, 2003
JS-725
Snow opening statement at today's press conference
Today marks two years since our nation suffered the brutal terrorist attacks of
September 11. Like every American, I will never forget the magnitude of this
deliberate attack on our country. O n that day, and in its aftermath, w e saw the
greatness of Americans in the heroism of those who laid down their lives to save
others, the compassion of those who helped those they had never met, and in the
generosity of millions of Americans who acted with service and kindness.
September 11th will forever be a day of prayer and remembrance. Across the
country, Americans will honor the 11th with memorial services, moments of silence,
the ringing of bells, and candlelight vigils. To remember the events of that terrible
morning and how Americans responded in N e w York City, at the Pentagon, and in
the skies over Pennsylvania—President Bush proclaimed today "Patriot Day."
We will always remember the more than 3,000 innocent people who lost their lives
that day, including two members of the Treasury family who showed courage and
fortitude on that day—Secret Service Master Special Officer Craig Miller and IRS
Technical Advisor Dave Bernard. To remember Miller and Bernard, as well as the
other victims of the attack, the Treasury Department observed a moment of silence
today at 8:46 a m eastern time.
I am proud of the Treasury employees who have taken on new responsibilities
since the attacks to lead the effort to disrupt and dismantle terrorist financing. I
issued a report yesterday detailing the Department's efforts undertaken in the war
on terror since September 11. W e have enjoyed success in the war on terrorism,
but much more remains to be done. This leads m e to the trip I a m about to embark
on.
On Sunday, I depart for a ten-day tour through Israel, Saudi Arabia, Afghanistan,
Pakistan, and the United Arab Emirates.
Here is a brief overview of the objectives of this trip.
In Israel and the West Bank, I will support President Bush's vision for peace by
emphasizing steps that Israelis and Palestinians can take to strengthen and
improve the lives of their peoples. I will meet with key Israeli and Palestinian
leaders to discuss the economic situation, encourage cooperation for mutual
prosperity and urge action in the fight against terrorism.
The U.S. remains fully committed to working with Israeli and Palestinian, and Arab
partners toward a vision outlined by President Bush of two states living side by side
in peace and security. W e still believe strongly that two states living side by side in
peace is a hopeful vision for the future of the Middle East.
One of the essential tenets of the President's vision is that people need to be
responsible for creating the conditions necessary for peace to prevail. Probably the
most - "the" most important condition for peace to prevail is for all parties to fight
off terror, to dismantle organizations whose intent is to destroy the vision of peace.
In Saudi Arabia, I will advance U.S.-Saudi cooperation in the financial war on terror
and Saudi support for the reconstruction of Afghanistan and Iraq, as well as aid to
the Palestinian people. As part of war on terrorism, Saudi Arabia has taken
significant steps to prevent the abuse of charities to finance terror.
In Afghanistan, I will highlight President Bush's commitment to reconstruction, and
will review U.S. efforts to build the Afghani private sector, including its financial
systems, trade relations, and business environment.
In Pakistan, I will discuss the need for continued economic reforms and pro-growth

JS-725: S n o w opening statement at today's press conference
policies that will strengthen this key ally in the war on terror. I will emphasize
Pakistan's support for reconstruction in Afghanistan and Iraq, and progress in
combating terrorist financing. While there, I will also tour a newly registered
hawala. Pakistan has been an important partner in the war on terrorist financing
and in the effort to regulate hawalas and prevent their abuse by terrorists.
In the final leg of the trip, I will attend the annual meetings of the World Bank and
the International Monetary Fund in Dubai.
During three days in Dubai, both in group discussions and in bilateral meetings, I
will continue to press the themes I have pressed during his previous trips to Europe
and Asia to encourage domestic led growth and job creation.
I will stress our view that the best international economic system - for the United
States, for Asia, for Europe and for the world - is one based on the principles of
free trade, the free flow of capital, and market-based exchange rates.
I will stress the need for each individual nation to take steps to increase economic
growth in our domestic economies. Raising productivity through structural reform
and private investment is the most direct route to raising living standards for our
people. I will repeat what I have said has said time and again that the number one
issue facing the global economy is the need for more engines of growth.
During my talks, I will report that as a result of President Bush's leadership, the U.S.
economy is returning to higher levels of growth, but that the global economy
requires Europe and Asia to attain higher levels of growth as well.
In Dubai, our discussions on terrorist financing will follow significant recent progress
in this area. Following the designation of several H a m a s related charities and
political leaders by the U.S. Treasury last month, the European Union has reached
consensus on the designation of the political arm of H a m a s as a terrorist
organization and the Palestinian Authority and the United Kingdom have taken
action to freeze accounts of charities funding Hamas.

Page 2 of 2

JS-726: Treasury and IRS Issue Final Regulations for Split-Dollar Life Insurance Arrange... Page 1 of 2

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®.
September 11, 2003
JS-726
Treasury and IRS Issue Final Regulations for Split-Dollar Life Insurance
Arrangements
Today, the Treasury Department and the IRS issued final regulations on the tax
treatment of split-dollar life insurance arrangements. The regulations provide
comprehensive tax rules for split-dollar life insurance arrangements that are entered
into or materially modified after September 17, 2003.
"The regulations provide tax rules that reflect the underlying economics of splitdollar life insurance arrangements," stated Treasury Assistant Secretary for Tax
P a m Olson. "Under these rules, companies cannot use split-dollar life insurance
arrangements to provide tax-free compensation to their executives. By insuring that
split-dollar arrangements are appropriately taxed, the regulations curb a backdoor
form of executive compensation and promote greater transparency."
A split-dollar life insurance arrangement involves two parties agreeing to split the
premiums and/or benefits of a life insurance policy. These arrangements are often
used for executive compensation or for gifts among family members.
The final regulations provide that the tax treatment of split-dollar life insurance
arrangements will be determined under one of two sets of rules, depending on w h o
owns the policy. If the executive owns the policy, the employer's premium payments
are treated as loans to the executive. Consequently, unless the executive is
required to pay the employer market-rate interest on the loan, the executive will be
taxed on the difference between market-rate interest and the actual interest.
If the employer is the owner, the employer's premium payments are treated as
providing taxable economic benefits to the executive. The economic benefits
include the executive's interest in the policy cash value and current life insurance
protection.
In its report on the Enron Corporation, the Joint Committee on Taxation
recommended the finalization of these regulations.
The regulations provide similar loan and economic benefit rules for split-dollar life
insurance arrangements between family members or other parties, such as
corporations and their shareholders.
Notice 2002-8, which was issued on January 3, 2002, included certain transition
rules for split-dollar arrangements entered into prior to January 28, 2002. Those
transition rules expire on December 31, 2003.
Treasury and IRS also released today a revenue ruling stating that certain prior
administrative guidance on split-dollar life insurance arrangements is now obsolete.
-30Related Documents:
• Final Regulations
• Split-Dollar Life Insurance Arrangements

Parti
Section 61.—Gross Income

26 C F R 1.61-22: Taxation of split-dollar life insurance arrangements.
(Also: §§ 83; 301; 316; 2503; 2511; 2512; 7805; 7872; 1.83-3; 1.83-6; 1.301-1; 1.316-1;
25.2503-1; 25.2511-1; 25.2512-6; 301.7805-1; 1.7872-15.)

Rev. Rul. 2003-105
Treasury Decision 9092 provides comprehensive final regulations (under
§§ 1.61-22, 1.83-3(e), 1.83-6(a)(5), 1.301-1(q), and 1.7872-15 of the Income Tax
Regulations) regarding the federal income, gift, and employment taxation of split-dollar
life insurance arrangements (as defined in § 1.61-22(b)(1) or (2)). These regulations
apply to any split-dollar life insurance arrangement that is entered into after September
17, 2003 and to any split-dollar life insurance arrangement entered into on or before
September 17, 2003 that is materially modified after September 17, 2003. See § 1.61220).
The revenue rulings listed below are obsolete to the extent described below.
Rev. Rul. 79-50, 1979-1 C.B. 139
Rev. Rul. 78-420, 1978-2 C.B. 67

Rev. Rul. 66-110, 1966-1 C.B. 12 (except as provided in Section III,
Paragraph 3 of Notice 2002-8, 2002-1 C.B. 398, and Notice 2002-59,
2002-36 I.R.B. 481)
Rev. Rul. 64-328, 1964-2 C.B. 11.
In the case of any split-dollar life insurance arrangement entered into on or
before September 17, 2003, taxpayers m a y continue to rely on these revenue rulings to
the extent described in Notice 2002-8, but only if the arrangement is not materially
modified after September 17, 2003.
DRAFTING INFORMATION
The principal author of this revenue ruling is Elizabeth K. Kaye of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue ruling, contact Elizabeth K. Kaye on (202) 622-4920 (not a tollfree call).

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 C F R Parts 1,31, and 602
[TD 9092]
RIN 1545-BA44
Split-Dollar Life Insurance Arrangements
A G E N C Y : Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
S U M M A R Y : This document contains final regulations relating to the income,
employment, and gift taxation of split-dollar life insurance arrangements. The final
regulations provide needed guidance to persons who enter into split-dollar life insurance
arrangements.
D A T E S : Effective Date: These regulations are effective September 17, 2003.
Applicability Dates: For dates of applicability of the final regulations, see §§1.6122Q), 1-83-3(e), 1.83-6(a)(5)(ii), 1.301-1 (q)(4), and 1.7872-15(n).
F O R F U R T H E R I N F O R M A T I O N C O N T A C T : Concerning the section 61 regulations,
please contact Elizabeth Kaye at (202) 622-4920; concerning the section 83
regulations, please contact Erinn Madden at (202) 622-6030; concerning the section
301 regulations, please contact Krishna Vallabhaneni at (202) 622-7550; concerning the
section 7872 regulations, please contact Rebecca Asta at (202) 622-3930; and
concerning the application of these regulations to the Federal gift tax, please contact
Lane D a m a z o at (202) 622-3090.

/0) j).;.

JS-727: MEDIA ADVISORY: TREASURY, IRS AND STATES TO ANNOUNCE NE... Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 12, 2003
JS-727
MEDIA ADVISORY:
T R E A S U R Y , IRS A N D STATES T O A N N O U N C E N E W PARTNERSHIP
T O FIGHT ABUSIVE TAX A V O I D A N C E O N TUESDAY;
N E W YORK, CALIFORNIA, O T H E R STATE OFFICIALS A T T E N D
The Treasury Department, the Internal Revenue Service and tax officials from nine
states will announce the details of a new agreement between state and federal tax
officials to fight abusive tax avoidance schemes. The event will be at 11 a.m.
Tuesday, September 16 at the Department of Treasury Media Room (Room 4121)
at the Main Treasury Building at 1500 Pennsylvania Avenue N W , Washington, DC.
Abusive transactions to avoid taxes, according to private estimates, deprive state
and federal governments of billions of dollars annually.
Appearing at the announcement will be IRS Commissioner Mark W. Everson,
Treasury Assistant Secretary for Tax Policy Pamela F. Olson, IRS Small
Business/Self-Employed Division Commissioner Dale F. Hart, a representative of
the Federation of Tax Administrators as well as officials from California, Louisiana,
Maryland, Massachusetts, New Jersey, New York, Ohio, Virginia and the District of
Columbia.
The event will be featured in a live Webcast available through www.ustreas.gov
The news conference will be held at the Treasury Department's press room (Room
4121). The room will be available for camera set up beginning at 10:00 a.m. Please
note: seating at the event is limited.
News media wishing to attend the event should contact IRS Media Relations or
Treasury Public Affairs as early as possible.
Media without Treasury or White House press credentials should contact Treasury's
Office of Public Affairs at (202) 622-2960 with the following information: name,
Social Security number and date of birth. This information may also be faxed to
(202)622-1999.

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EMBARGOED UNTIL 11:00 A.M.
September 11, 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 $28,000
million to refund an estimated $34,270 million of publicly held 13-week and 26-week
Treasury bills maturing September 18, 2003, and to pay down approximately $6,270
million. Also maturing is an estimated $18,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced September 15, 2003.
The Federal Reserve System holds $15,471 million of the Treasury bills maturing
on September 18, 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 16, 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 $1,071 million into the 13-week bill and $620 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 1W

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED SEPTEMBER 18, 2003
September 11, 2003
Offering Amount $14,000 million $14,000 million
Maximum Award (35% of Offering Amount)
$
Maximum Recognized Bid at a Single Rate
$
NLP Reporting Threshold
$
NLP Exclusion Amount
$
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples

4,900
4,900
4,900
6,300

million
million
million
million

91-day bill
912795 PB 1
September 15, 2003
September 18, 2003
December 18, 2003
June 19, 2003
$24,3 62 million
$1,000

$ 4,900 million
$ 4,900 million
$ 4,900 million
None

182-day bill
912795 PQ 8
September 15, 2003
September 18, 2003
March 18, 2004
September 18, 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 competxtxve 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. "TreaauryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

Ori'H I O r IM'BI.IC A K I - M R S • 1500 I M S N S V I A \Sf V AYI-'.M I , V\V. • W A S H INC T O N . [>.<.• 2022U •(202: 6222<>MJ

EMBARGOED UNTIL 11:00 A.M.
September 15, 2003

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $9,000 million to refund
an estimated $18,000 million of publicly held 4-week Treasury bills maturing
September 18, 2003, and to pay down approximately $9,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TxeasuiryDlrect will not be accepted.
The Federal Reserve System holds $15,471 million of the Treasury bills maturing
on September 18, 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

J6 7^f

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED SEPTEMBER 18, 2003
September 15, 2003
Offering Amount $ 9,000 million
Maximum Award (35% of Offering Amount) . . . $ 3,150 million
Maximum Recognized Bid at a Single Rate..$ 3,150 million
NLP Reporting Threshold
$ 3,150 million
NLP Exclusion Amount
$10 ,800 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NS 6
Auction date
September 16, 2003
Issue date
September 18 , 2003
Maturity date
October 16, 2003
Original issue date
April 17, 2003
Currently outstanding
$41,561 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, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
September 15, 2003

202-691-3550

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

September 18, 2003
December 18, 2003
912795PB1

High Rate: 0.930% Investment Rate 1/: 0.947% Price: 99-765
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 57.15%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

31,626,906
1,450,509
125,000

12,424,779
1,450,509
125,000

SUBTOTAL 33,202,415 14,000,288 2/
Federal Reserve 5,726,793 5,726,793
TOTAL $ 38,929,208 $ 19,727,081
Median rate 0.920%: 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 = 33,202,415 / 14,000,288 = 2.37
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,170,424,000

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
September 15, 2003

202-691-3550

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

September 18, 2003
March 18, 2004
912795PQ8

High Rate: 0.995% Investment Rate 1/: 1.017% Price: 99.497
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 53.35%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

25,995,580
910,809
150,000

12,939,518
910,809
150,000

SUBTOTAL 27,056,389 14,000,327 2/
Federal Reserve 5,350,859 5,350,859
TOTAL $ 32,407,248 $ 19,351,186
Median rate 0.985%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.950%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 27,056,389 / 14,000,327 = 1.93
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $681,854,000

http://www.publicdebt.treas.gov

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 15,2003
JS-732
Testimony of the Honorable Peter R. Fisher
Under Secretary for Domestic Finance
U.S. Department of the Treasury
Before the Subcommittee on Financial Management, the Budget,
and International Security
Committee on Governmental Affairs
United States Senate
T H E ADMINISTRATION'S P R O P O S A L F O R
A C C U R A T E L Y M E A S U R I N G P E N S I O N LIABILITIES

Chairman Fitzgerald, Ranking Member Akaka, and Subcommittee members I a m
pleased to appear before you with Pension Benefit Guaranty Corporation (PBGC)
Executive Director Steven Kandarian to discuss defined benefit pension pians.
Executive Director Kandarian will discuss the current financial situation of the
P B G C while I will discuss the Administration's proposals for strengthening the longterm health of the defined benefit pension system. A strong pension system
requires that w e not only make pension benefits more secure for America's working
m e n and w o m e n but that w e also make certain the system that insures these
benefits remains financially sound.
To begin, we must be clear on our objective: we all want to improve the retirement
security for the nation's workers and retirees by strengthening the financial health of
the voluntary defined benefit system that they rely upon. PBGC's current estimate
suggests that pension plans in aggregate are underfunded by more than $350
billion. T o achieve our objective, pension funding must improve. That will not
happen until the existing pension funding rules arefixed.The Administration has
been working with Congress to analyze the existing funding rules and develop
additional proposals to improve and strengthen them.
Making Americans' pensions more secure is a big job that wiil require
comprehensive reform of the pension system. The Administration proposal that w e
released on July 8 is the necessary first step in the reform process but it is only the
first step. Before I outline that proposal in detail, I would like to summarize briefly
the case for comprehensive reform and list some of the topics that w e believe
reform should address.
Reform Issues
Americans have a broadly shared interest in adequate funding of employerprovided defined benefit pensions. Without adequate funding, the retirement
income of America's workers will be insecure. This by itself is a powerful reason to
pursue improvements in our pension system.
At the same time, we must remember that the defined benefit pension system is a
voluntary system. Firms offer defined benefit pensions to their workers as an
employee benefit, as a form of compensation. Our pension rules should thus be
structured in ways that encourage, rather than discourage, employer participation.

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 2 of

Key aspects of the current system frustrate participating employers while also
failing to produce adequate funding. W e thus have multiple incentives to improve
our pension system, and to thus better ensure both the availability and the viability
of worker pensions. W e o w e it to the nation's workers, retirees, and companies to
roll up our sleeves and to create a system that more clearly and effectively funds
pension benefits. Major areas that require our prompt attention include:
1. Funding Rules
Our complicated system of funding rules has been constructed, in part, to dampen
the volatility of firms' funding contributions. Yet current ruies fail to do so. After
years of making few or no contributions at all, m a n y firms are facing precipitous
increases in their annual funding requirements. This outcome is frustrating to
business and it has failed to provide adequate funding for workers and retirees.
Improvements to funding rules should mitigate volatility, foster more consistent
contributions, and increase flexibility for firms to fund up their plans in good times.
Specific issues in the funding rules that need to be examined include:
a. Volatility Caused by the Minimum Funding Backstop. The current minimum
funding backstop, known as the deficit reduction contribution, causes minimum
contributions of underfunded plans to be excessively volatile from year to year.
b. Funding Target. The existing funding target is based on current liability, a
measure with no clear or consistent meaning. W e will seek to develop a better
target.
c. Contribution Deductibiiity. Together, minimum funding rules and limits on
m a x i m u m deductible contributions require sponsors to m a n a g e their funds within a
narrow range. Raising the limits on deductible contributions would allow sponsors
to build larger surpluses to provide a better cushion for bad times.
d. Asset Measurement. Under existing rules, assets can be measured as multiyear averages rather than current values. Pension funding levels can only be set
appropriately if both asset and liability measures are current and accurate. Failure
to accurately measure assets and liabilities contributes to funding volatility.
e. Credit Balances, if a sponsor makes a contribution in any given year that
exceeds the minimum required contribution, the excess plus interest can be
credited against future required contributions. These credit balances mere
accounting entries - do not fall in value even if the assets that back them lose
value. Credit balances allow seriously underfunded plans to avoid making
contributions, often for years, and contribute to funding volatility.
f. Benefit Amortization. The amortization period for new benefits can be up to 3 0
years long. This m a y be excessive. W e will also look at other statutorily defined
amortization periods.
2. Actuarial Assumptions
We also intend to examine how the application of actuarial assumptions in the
current funding rules m a y contribute to funding volatility and to inaccurate
measurement of pension liabilities. For example, companies do not want to be
surprised to find they have inadequately funded their plans because the mortality
tables used in the funding rules are outdated or because those rules fail to account
for lump s u m payments. W e will examine:
a. Mortality Tables. In order to ensure that liabilities are measured accurately
mortality estimates need to be m a d e from the most up to date and accurate tables
available. O n September 3, 2003 the Treasury and the Internal Revenue Service
released to the press Notice 2003-62, a request for comments on the mortality
tables used in determining current liabilities. The notice, which will be published in
the Federal Register on September 22, invites comments on methods of projecting
mortality and on factors, in addition to age and year of birth, that might be
appropriately reflected in any n e w tables that m a y be adopted.
b. Retirement Assumptions. Retirement assumptions m a d e by plan actuaries need
to reflect the actual retirement behavior of those covered by the plan.
c. L u m p S u m s . Liability computations for minimum funding purposes need to
include reasonable estimates of expected future lump s u m withdrawals that are
determined by methodologies that are broadly consistent with other estimates of

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 3 of 9

plan obligations.
3. Other Issues
Three other issues also deserve review:
a. Extent of Benefit Coverage. It may be advisable to limit or eliminate guarantees
of certain benefits that typically are not funded, such as shutdown benefits.
b. Multi-employer Plan Problems. Multi-employer plans operate under a different
set of rules than single-employer plans. Despite these regulatory differences, the
s a m e principles of accuracy and transparency should apply to multi-employer
plans, and w e will be reviewing the best ways to accomplish this.
c. P B G C Premiums. PBGC's premium structure should be re-examined to see
whether it can better reflect the risk posed by various plans to the pension system
as a whole.
Although comprehensive reform needs prompt attention, the necessary first step is
to develop a more precise measurement of pension liabilities. Fixing the pension
funding rules won't help unless w e give our immediate attention to ensuring that w e
are accurately measuring the pension liabilities on which those rules rely. Our most
immediate task then is replacing the 30-year Treasury rate used in measuring
pension liabilities for minimum funding purposes
I think that we all agree that any permanent change in pension discounting rules
should not contribute to future pension plan underfunding. In making the
recommendations that I a m about to describe, the Administration is seeking to
measure accurately pension liabilities, in order to provide the necessary foundation
for reform of the funding rules, which then will help ensure that pension promises
m a d e are pension promises kept.
We face two near-term concerns that must be addressed in getting to a permanent
replacement of the current discount rate.
First, firms that sponsor defined benefit plans already are budgeting their pension
contributions for the next several years. Near-term changes to the current rules
that would increase pension contributions above current expectations could disrupt
these firms' existing short-term plans.
Second, many underfunded plans are already facing sharp increases in their
required pension funding contributions. Thus, while w e must ultimately ensure that
liabilities are measured accurately and thatfirmsappropriately fund the pension
promises they have made, an abrupt change from the current system could do
more short-term harm than good by triggering plan freezes or terminations.
There are two other reform tasks that the Administration recommends for
immediate attention. First, the transparency of information pertaining to pension
plan funding needs to be increased. Under current law most workers and retirees
are not provided with timely information about the funding of their pension plans.
W e propose to remedy this by requiring that each year sponsors disclose to
participants the value of their pension plan's assets and the level of liabilities
measured on both an ongoing yield curve basis and a termination basis.
The Administration also proposes that certain financial data already collected by
the P B G C from companies sponsoring pension plans with more than $50 million of
underfunding should be m a d e public. Publicly available information would include
the assets, liabilities and funding ratios of the underfunded plan, but not confidential
employer financial information. This data is more timely and accurate than what is
publicly available under current law.
Second, the Administration proposes to restrict benefit increases for certain
underfunded plans whose sponsors are financially troubled. W h e n firms with below
investment grade credit ratings increase pension benefit promises, the costs of
these added benefits stand a good chance of being passed on to the pension

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 4 of 9

insurance system, frustrating the benefit expectations of workers and retirees and
penalizing employers w h o have adequately funded their plans. Under the
Administration's proposal, if a plan sponsored by a firm with a below investment
grade credit rating has a funding ratio below 50 percent of termination liability,
benefit improvements would be prohibited, the plan would be frozen (no accruals
resulting from additional service, age or salary growth), and lump s u m payments
would be prohibited unless the employer contributes cash or provides security to
fully fund these added benefits. W h e n a plan sponsor files for bankruptcy the
P B G C ' s guarantee limits would also be frozen.
The Importance of the Discount Rate in Pension Funding
To determine minimum required funding contributions, a plan sponsor must
compute the present value of the plan participants' accrued future benefit
payments, which is known as the plan's current liability. The present value of a
benefit payment due during a particular future year is calculated by applying a
discount factor to the dollar amount of that payment. This discount factor converts
the dollar value of the future payment to today's dollars. Current liability is simply
the s u m of all these discounted future payments.
Pension liabilities must be accurately measured to ensure that pension plans are
adequately funded to protect workers' and retirees' benefits and to ensure that
minimum funding rules do not impose unnecessary financial burdens on plan
sponsors. Liability estimates that are too low will lead to plan underfunding,
potentially undermining benefit security. Pension plan liability estimates that are too
high lead to higher than necessary minimum contributions, reducing the likelihood
that sponsors will continue to operate defined benefit plans.
Computing pension liabilities is basically a two step process. In the first step, the
plan actuary estimates the payments that will be m a d e to retirees each year in the
future. The pension plan's actuary makes these estimates based on the plan's
terms, and estimates of h o w long current employees will work before retirement and
receive benefits in retirement. Estimating the future stream of payments involves
considerable judgment on the part of the actuary.
Step two, converting the value of future payments to today's dollars, is, by
comparison, simple and rather mechanical. T o convert payments in a future year to
present dollars, the estimated payments are simply adjusted by the appropriate
discount rate. Although s o m e discounting schemes use the s a m e discount rate to
compute the present value of payments for all future years, it is no more difficult to
compute the present value using different discount rates for each future year.
Choosing the right rate is the key to accurate pension discounting. The wrong rate
leads to inaccurate estimates of liabilities that can be either too high or too low.
Therefore, the primary goal of the Administration's proposal to replace the 30-year
Treasury rate can be s u m m e d up in one word: accuracy. Withoutfirstaccurately
measuring a plan's pension liabilities, the minimum funding rules cannot ensure that
thefirmis setting aside sufficient funds to m a k e good on its pension promises to its
workers. Accurate liability measures also provide a firm's investors with valuable
information about the pension contributions that will be m a d e from the firm's
earnings. Accurate liability measures allow workers and retirees to monitor the
health of their pension plans. Finally, accurate liability measures allow the P B G C
as pension insurer to better monitor the health of the overall pension system.
Pension Discounting under Current Law
Since 1987, federal law has required that pension liabilities that determine minimum
pension contributions be computed using the interest rate on the 30-year Treasury
bond. Liabilities computed using this discount rate have become less accurate over
time, as financial conditions have changed. In the late 1980s, inflation w a s at
higher levels than today. A s the inflation rate has declined, the term structure of
interest rates has changed. Congress recognized this and in 2002 passed
legislation that temporarily changed the discount rate to provide funding relief to

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 5 of 9

plan sponsors. This temporaryfixexpires at the end of this year.
Dissatisfaction with the continued use of the 30-year rate, even on an interim basis,
has been expressed by many members of Congress and pension sponsors. This
dissatisfaction and the recognition that the 30-year rate is no longer an accurate
discount rate m a k e it imperative that a replacement be promptly enacted.
The Administration's Proposal for Accurately Measuring Pension Liabilities
The Administration believes that corporate bond rates, not Treasury rates, should
be the basis for the pension discount methodology. Three key issues need to be
addressed in selecting a permanent replacement for the 30-year Treasury rate: the
time structure of a pension plan's future benefit payments; the appropriateness of
smoothing the discount rate; and the appropriate relationship between the discount
rate and the computation of lump sum payments.
The proposal I will now set forth deals with each of these issues.
1. Pension discount rates should be based on market determined interest rates for
similar obligations.
The terms of pension contracts are not market determined because pensions are
not bought and sold in an open market and pension sponsors do not compete with
one another for participants. However, group annuity contracts, which are very
similar to employer sponsored pensions, are sold in a competitive market by
insurance companies. Group annuity contracts obligate the seller to provide a
stream of annual cash payments, in exchange for a competitively priced premium,
to individuals covered by the policy. W e take the view, as Congress has in the
past, that pension discount rates should reflect the risk embodied in assets held by
insurance companies to m a k e group annuity payments. These assets consist
largely of bonds issued by firms with high credit ratings. Furthermore, the
insurance companies issuing the group annuity contracts also have high credit
ratings.
Therefore, the Administration proposes that the new pension discount rate
be based upon an index of interest rates on high-grade corporate bonds.
2. Pension discount rates should be designed to ensure that liabilities reflect the
timing of future benefit payments.
Each pension plan has a unique schedule of future benefit payments - or cash flow
profile - that depends on the characteristics of the work force covered by the plan.
These characteristics include the percent of participants that are retired, the age of
current workers covered by the plan, the percent receiving lump s u m s and whether
the covered work force has been growing or shrinking over time. Plans with more
retirees and older workers, more lump sum payments, and shrinking workforces will
m a k e a higher percentage of their pension payments in the near future, while plans
with younger workers, fewer retirees, fewer lump sums, and growing workforces will
make a higher percentage of payments in later years.
One approach to liability computation applies the same discount rate to all future
payments regardless of when they occur. This approach produces inaccurate
liability estimates because it ignores a basic reality of financial markets: that the
rate of interest earned on an investment or paid on a loan varies with the length of
time of the investment or the loan, if a consumer goes to a bank to buy a
Certificate of Deposit, he will expect to receive a higher rate on a five-year C D than
on a one-year C D . Likewise, that s a m e consumer w h o borrows money to buy a
house expects to pay a higher interest rate for a 30-year than a 15-year mortgage.
Pension discount rates must recognize this simple financial reality. Pension
payments due next year should be discounted at a different, and typically lower,
rate than payments due 20 years from now. W h y is this important? Pension plans
covering mostly retired workers that use a 20-year interest rate to discount all their

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 6 of 9

benefit payments will understate their true liabilities. This will lead to plan
underfunding that could undermine retiree pension security, especially for workers
w h o are nearing retirement age. Proper matching of interest rates to payment
schedules cannot be accomplished using any single discount rate.
Computing liabilities by matching interest rates on zero-coupon bonds that mature
on the s a m e date that benefit payments are due is not complicated. Once expected
pension cash flows are calculated by the actuary it is no more difficult to discount
benefit payments on a spreadsheet with an array of different interest rates than it is
if only one discount rate is used.
It is also important to understand that the discount rate used does not change the
actual obligation - the liability is what it is. Choosing the proper discount rate gives
us an accurate measure in today's dollars of future benefit payments; it does not
change those payments. But if w e don't measure that value properly today, plans
m a y not have sufficient funds set aside in the future to make good on those pension
promises.
The Administration proposes that benefit payments made in future years be
discounted to today's dollars using discount rates taken from a corporate
bond yield curve (a table or graph that illustrates the interest rates o n bonds
that mature at different dates in the future). Liabilities would be computed by
using interest rates on bonds that mature on a specific date in the future to
discount benefit payments due to be m a d e that s a m e year.
Furthermore, implementation of the yield curve would be phased in over five
years. The phase-in would start with the use of a single long-term corporate
bond rate as r e c o m m e n d e d in H R 1776 (proposed by Congressmen Portman
and Cardin) for the first two years, in the third year a phase-in to the
appropriate yield curve discount rate would begin. The yield curve would be
fully applicable by the fifth year. 1
This phase-in period would provide some short term funding relief for sponsors, but
achieve the desired level of accuracy at the end of five years.
3. Pension discount rates should be based on current financial conditions.
Pension liability computations should reflect the current market value of future
benefit payments this is a key component of accuracy. Plan sponsors and
investors are interested in the current value of liabilities in order to determine the
demands pension liabilities will place on the company's future earnings. Workers
and retirees are interested in the current value of liabilities so that they can
determine whether their plans are adequately funded.
Some argue that discount rates should be averaged (smoothed) over long periods
of time. Under current law they are smoothed over four years. Such smoothing is
intended to reduce the volatility of liability measures and helps m a k e contribution
requirements more predictable. Unfortunately current smoothing rules reduce the
accuracy of liability measures while failing to achieve stability in annual
contributions. Smoothing can mask changes in pension plan solvency of which
workers and retirees should be aware. A s I mentioned earlier, w e would like to
work with Congress to identify permanent reforms of the funding rules that would
reduce volatility in annual contributions, without the corollary effect of reducing
measurement accuracy.
The Administration proposes to decrease smoothing gradually during the 5
year phase-in. In years one and two, four year smoothing is maintained.
Smoothing is reduced in years three and four and finally, in year five, set at a
90-day moving average to eliminate the impact of day-to-day market
volatility. This will provide an appropriately current measure of interest rates.
4. Pension discount rates should apply to annuities and lump sum payments in a
consistent and neutral manner.

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 7 of 9

Retirees and departing workers in s o m e plans can opt to receive a single payment
for their pension benefits rather than regular payments over their lifetimes. The
value of these so-called lump sum payments is the present value of the worker's
expected retirement annuity. Using different discount rates for annuities and lump
sums creates an economic incentive for choosing one form of payment over the
other.
The Administration proposes that the yield curve used to measure pension
liabilities also be used to compute lump s u m payments so as to reflect
accurately the life expectancy of retirees in the amounts that they will
receive. In order to minimize the disruption of plans of workers w h o will
receive benefits in the immediate future, lump s u m s would be computed
using the 30-year Treasury rate as under current law in years one and two. In
the third year a phase-in to the appropriate yield curve discount rate would
begin. By the fifth year lump s u m s will be computed using the yield curve.
Workers receiving lump sums, especially those in their 50's, 60's and older, would
be better off under the Administration proposal than under an alternative that would
compute lump sums using a single long term corporate interest rate. Workers
electing lump sums at relatively younger ages would have a higher proportion of
their future payments discounted at long-term interest rates than workers retiring at
relatively older ages. This is appropriate given the different time frames over which
they had been expecting to receive their benefits. While moving from the 30-year
Treasury rate to any corporate bond based rate will result in lower lump sum
payments for younger workers w h o leave their jobs, under the yield curve approach
older workers closer to retirement age will be little affected by the change.
However, some workers who will soon be leaving their jobs have been anticipating
taking their pension benefits in the form of a lump sum with the expectation that
those benefits would be computed using the 30-year Treasury rate. Computing
lump sums using the yield curve rather than the 30-year Treasury rate m a y result in
lower lump s u m payments for those w h o leave at a young age. The Administration
proposal is for the benefits of younger and older workers alike to be consistently
and accurately valued, whether a lump sum or a traditional annuity benefit.
Concluding Observations
In closing I would like to make a few general observations about the
Administration's proposed permanent discount rate for pension liabilities.
Because discounting pension payments using a yield curve is already considered a
best practice in financial accounting, large sponsors are almost certainly making
these computations now or know how to make them.2 Sponsors certainly know
what their expected future pension cash flows are.
The mechanics of discounting future pension cash flows are in fact quite simple.
This is true whether one uses a single rate to discount all payments or uses
different rates to discount payments m a d e in each year. Such calculations, which
can be done with a simple spreadsheet, should not pose serious problems even for
small plans let alone plans sponsored by large, financially sophisticated firms.
Yield curves used to discount pension benefit payments have been available for a
number of years. O n e example of such a pension yield curve is the one developed
by Salomon Brothers in 1994 for the Securities and Exchange Commission.
Monthly Salomon Brothers yield curves dating back to January 2002 can be found
on the Society of Actuaries w e b site at http://www.soa.org/sections/pendis.html.
W e envision that the Treasury Department would adopt a similar methodology.
Using this widely accepted approach, w e would develop and publish a yield curve
reflecting interest rates for high-quality zero-coupon call adjusted corporate bonds
of varying maturities.
The adjustments that we would anticipate making - through a rulemaking process
subject to public comment - would only be to reflect accurately the time structure of
the yield curve. The procedure w e envision would involve two types of

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 8 of 9

adjustments: (1) standardizing the corporate rates as zero coupon, call adjusted
rates; and (2) extrapolating the shape of the corporate yield curve using the shape
of the Treasury yield curve because of the thinness of the market for corporate
bonds of s o m e durations, especially long-term bonds. The yield curve rates would
not be adjusted to reflect expenses, mortality or any other actuarial or
administrative concerns. The high-grade corporate rates used to construct the
curve will only be adjusted so that they accurately reflect the time structure of
benefit payments.
As I mentioned, the Treasury would undertake this process using a formal notice
and comment rulemaking process to ensure market transparency and to
incorporate input from all interested parties in final development of the yield curve.
Although the groundwork is well established, w e certainly plan to work with all
stakeholders to finalize the methodological details of the ultimate yield curve.
While we believe that important near-term considerations warrant beginning the
transition by allowing plans to use a long-term corporate bond index for the first two
years, staying there would result in greater underfunding over time than w e face
today. Such an outcome would be counterproductive and harmful, and would
certainly m o v e the defined benefit system in the wrong direction. Most importantly,
it would put workers' pensions at greater risk.
Some have alleged that there would be adverse macroeconomic consequences to
using a yield curve. Such critics allege that the economy would suffer because the
resulting increased pension contributions would deplete funds from the economy.
That argument is, w e submit, incorrect. A firm's pension contributions are invested
by the plan for the future benefit of the plan's participants. Those contributions go
right back into the economy as savings. They are not withdrawn from the
economy. Pension funds are a significant source of capital investment in our
economy-investment that creates jobs and growth. And again, an accurate
measurement of liabilities is necessary to ensure appropriate funding of pension
promises to America's workers.
The macroeconomic effect we should be worried about is that which would result if
plan sponsors failed to fund the pension promises that America's workers are
depending upon for their retirement security. This is w h y the Administration is
urging that pension liabilities be accurately measured and w h y w e intend to provide
Congress with further recommendations to fix the pension funding rules. Only if our
pension liabilities are accurately measured will w e be able to have an informed
dialogue about such comprehensive reforms.
Some have alleged that this proposal would place sponsors of plans with older
workforces at a disadvantage by requiring them to put more money into their plans
than they would under alternative proposals. The fact of the matter is that more
money is needed in those plans to ensure that older workers receive the benefits
they have earned through decades of hard work. These obligations of employers to
our older workers exist whether our measurement system accurately recognizes
them or not. W e think that older workers have the s a m e right to well funded
pensions that younger workers have and that they should not be systematically
disadvantaged by the funding rules.
Finally, we should also not overlook other positive consequences of more accurate
pension liability measures. W e live in an era when Americans are rightly demanding
increased accuracy and transparency in corporate accounting. Surely this is the
standard w e should pursue for the pension systems on which Americans' workers
depend. Uncertainty about the size of pension liabilities has negative effects on
sponsor stock prices. Increased accuracy of pension liability measurement will
greatly reduce that uncertainty w h e n such measures become available to the public
under the enhanced disclosure measures that w e are proposing. W e see all of
these recommendations as working together to clarify our pension funding
challenges, better informing the public, employers and policy makers about what
must be done to ensure adequate worker retirement security.
As I stated at the outset, the Administration's permanent discount rate replacement
proposal is designed to strengthen American's retirement security by producing

JS-732: The Honorable Peter R. Fisher Before the Subcommittee on Financial Manageme... Page 9 of 9

accurate measures of pension liabilities. And accurate measurement is the
essentialfirststep in ensuring that pension promises m a d e are pension promises
kept.
1- In years 1 and 2 pension liabilities for minimum funding purposes would be
computed using a discount rate that falls within a corridor of between 90 and 105
percent of a 4 year weighted average of the interest rate on a long-term highly-rated
corporate bond. In years 3 and 4, pension liabilities would be an average of that
calculated using a long-term corporate rate and that using a yield curve. In year 3,
the corporate rate would receive a 2/3 weight and the yield curve a 1/3 weight. In
year 4 the weights would be switched and in year five liabilities would be computed
using the yield curve.
2 - See Financial Accounting Standard 87.

JS-733: Kemarks of Cireg z,erzan Before the National Association of State Credit Union S... Page 1 of 4

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
September 10, 2003
JS-733
Remarks of Greg Zerzan
Deputy Assistant Secretary for Financial Institutions
Before the National Association of State Credit Union Supervisors
Vail, Colorado
Thank you very much for having me here today to address some of America's
leaders in the credit union industry. Representing both the C E O s of state credit
unions as well as the supervisors which regulate them, N A S C U S provides a unique
forum for participants in this industry to meet together and discuss important ideas
that affect not only state-chartered credit unions, but our nation's economic health
as a whole.
As you well know, state and federally chartered credit unions play an important role
in providing financial services to Americans w h o participate in all aspects of our
national life. From teachers, to unions, to our policemen and firemen, to small
businessmen and w o m e n across our country, credit unions allow individuals w h o
share a c o m m o n bond to c o m e together and create their own associations to meet
their financial services needs. S o m e of America's credit unions rank a m o n g the
largest financial services providers in their communities; others play a role not
unlike that of the old Bailey Building and Loan Association in the movie "It's a
Wonderful Life." In either case, credit unions play a vital role in ensuring
competitiveness in America's financial services industry by providing valuable
options for Americans to choose where to place their deposits, and increasing
opportunities to obtain credit.
State-chartered credit unions play a uniquely important role in this process. The
dual banking system, which allows institutions to choose whether to be chartered at
the state or federal level, increases both our opportunities to access financial
services and the likelihood that individuals will find creative new ways to provide
those opportunities. The state-chartering system allows us to be more innovative
with the range of financial services offered to consumers, and allows us to tailor our
particular regulatory structures in a way that most meets the needs of our local
communities. The best example of this is the frequency with which credit unions
are able to switch their charters between the state and federal levels.
I want to thank you for the leadership which you have shown in providing
Americans with financial opportunities. I once had a visit with the President of one
of our credit unions, w h o told m e that her business wasn't simply a w a y to m a k e a
living, but rather it w a s a vocation. This person's credit union happened to be
located in one of America's poorest neighborhoods; most of her members, she told
m e , had not only never had a loan before; not only never owned their o w n homes;
m a n y had never even been in a bank. By providing these m e n and w o m e n with
access to financial services, she w a s taking a step towards improving their lives
and thus improving their community.
And I know that her story was not atypical. I'm sure many of you recognize in her
story your o w n experiences in fulfilling a mission to improve the lives of everyday
Americans by providing them with the means to take their financial well-being into
their o w n hands. This critical role, which credit unions play such an important part
in filling, is invaluable to improving our country.
Of course, in Washington we are also very concerned with improving the quality of
life for all Americans. President Bush has taken the lead in the fight to provide
Americans with control of their o w n economic well-being, and that leadership is
invaluable at this time in our nation's history.

JS-733: Remarks of Greg zerzan Before the National Association of State Credit Union S... Page 2 of 4
Tomorrow marks the second anniversary of the cowardly attacks of September 11.
But even before the terrorists struck, our economy was in recession due to the burst
of the market bubble and a general weakening in demand. The attacks of 9-11,
occurring in the very heart of America's financial sector, threatened to completely
derail the economy and throw chaos into our economic life.
President Bush responded to this threat with vigor. He proposed tax cuts which
s o m e in Washington couldn't wait to attack, saying "now is not the right time." But
the President's response was straight-forward: if our economy is slow, the answer
is to allow people to keep more of their own money. The President knew that w e
weren't going to climb out of a recession by having the government spend the
people's money; w e would get out of recession by stimulating growth through
allowing the taxpayers to keep more of what they earn.
I don't think I need to tell you who was right in the tax cut debate; the results speak
for themselves. Under the President's leadership our economy has begun to grow;
w e have seen promising results over the last few quarters in the G D P , business
spending, and continued strength in housing starts and consumer spending. Real
wages have also increased. Under the President's leadership w e have emerged
from recession. Although w e are not out of the woods yet, and fragility still exists in
s o m e sectors of the recovery, w e are well on our way to meeting the President's
goal that every American w h o wants a job should be able to get one.
Towards this end, the President recently announced his economic plan, entitled "A
Full Agenda for the Creation of Jobs in America." The President's plan
demonstrates a rock solid commitment to expanding growth and opportunities in the
labor market.
The President's plan has six points to build employer confidence and create
m o m e n t u m to hire new workers by:
* Making Health Care Costs More Affordable and Predictable. Health insurance
costs for employers have been rising by 10 percent per year since 2000, causing
businesses to hire fewer workers and too many families to go without insurance.
President Bush proposes to allow small businesses to pool together to purchase
health coverage for workers at lower rates; expand medical savings accounts to
give workers more control over their health care insurance and costs; and reduce
frivolous and excessive lawsuits against doctors and hospitals that drive up
insurance costs for workers and businesses.
* Reducing the Lawsuit Burden on Our Economy. President Bush has proposed,
and the House has approved, measures that would allow more class action and
mass tort lawsuits to be moved into Federal court - so that trial lawyers have a
harder time shopping for a favorable court. The President's reforms would also
ensure that, in a class action lawsuit, most of the benefits of a settlement will
actually go to the people w h o were injured. These reforms will help businesses
focus on creating jobs, rather than fighting junk lawsuits.
* Ensuring an Affordable, Reliable Energy Supply. Businesses depend on
affordable and reliable energy. Energy shortages, price spikes, and blackouts
disrupt the economy and discourage businesses from planning with confidence and
adding new workers. President Bush has proposed a comprehensive national
energy plan to upgrade the Nation's electrical grid, promote energy efficiency,
increase domestic energy production, and provide enhanced conservation efforts,
all while protecting the environment.
* Streamlining Regulations and Reporting Requirements. Government has a
responsibility to ensure that its regulatory actions are reasonable and affordable.
Too often, government regulations and compliance burdens discourage, rather than
promote, job creation. The President will continue to work to simplify and
streamline regulations, along with ensuring that well-intentioned compliance
requirements do not have the unintended effect of killing jobs. The Administration
also recently streamlined tax reporting requirements for small businesses, helping
2.6 million small businesses save 61 million hours of unproductive work.
* Opening New Markets for American Products. American workers can compete
with anyone in the world when given a chance. Unfortunately, foreign taxes and
tariffs drive up the costs of American products in too many countries, making our

JS-733: Remarks of Greg Zerzan Before the National Association of State Credit Union S... Page 3 of 4
products more expensive and less competitive than those produced elsewhere. For
example, in Chile, s o m e kinds of American-made heavy machinery (such as motor
graders) produced by American workers cost $11,200 more than those produced in
the European Union or Canada solely because of tariffs.
President Bush recently signed into law new free trade agreements with Chile and
Singapore that will enable U.S. manufacturers to compete on a level playing field
and he will continue to work to open new markets to American products.
* Enabling Families and Businesses to Plan for the Future with Confidence.
To make important spending, saving, and investment decisions, America's families
and businesses need to be able to plan for the future. Right now, s o m e key
elements of the tax relief passed by Congress and signed into law by President
Bush - such as the increase in the child tax credit, the elimination of the death tax,
and the new incentives for small business investment - will expire in a few years.
For example, a married couple with two children and an annual income of $40,000
would face a $922 tax increase (112% increase) in 2005 if these and similar
provisions in the Jobs and Growth Act are not m a d e permanent.
As the President has said, these specific steps will help us build on our economic
recovery and move on to the next stage of economic progress - the sustained
expansion of employment.
Ironically, one of the sources of fragility in our economy is the perverse
consequence of our own industriousness. American productivity has increased at a
rate never before seen in human history. A s an example, the President recently
noted that in 1970 it took 40 hours of labor to produce a car; it now takes 18. The
sweeping technological innovation of the last thirty years, particularly in the area of
computing and data processing, has meant that our workers can out-produce and
out-compete workers everywhere else. Greater productivity means less expensive
products and lower business costs; it also means that s o m e workers will be
temporarily displaced while they learn new skills in order to take on new jobs
created by the technological revolution. W e are moving towards a society where
human capital, in the form of human knowledge, is truly the greatest source of
wealth. O n e need not think back very far in human history to remember when
human labor was viewed as not only cheap, but humans themselves were thought
of as expendable. O n e of the greatest fruits of the American creed, which values
the individual and his or her rights above all else, is that it has resulted in an
economic system where the m a n or w o m a n at his or her desk is indeed the most
valuable resource in the entire organization. It is difficult to fully express what a
radical change this is from all that has come before us, and difficult to fully predict
what new opportunities it will present our posterity.
Of course, we cannot discuss the economy without taking into account the
uncertainty that remains stemming from the continued threat of terror attacks. 9-11
reminded us again that w e live in a world where many people despise us and our
way of life; despise freedom and are envious of the blessings which liberty
provides. This Administration has m a d e combating terror its top priority. Even as
w e meet here today, there are thousands of American fighting m e n and w o m e n
placing themselves in harm's way so that the American way of life will survive.
These heroes' sacrifice makes what w e do possible, and it is impossible to
overstate their courage or the debt of gratitude w e o w e them.
Likewise, the President has mobilized the Federal government to prevent terror
here at home. The creation of the Department of Homeland Security w a s a critical
step in reorganizing the government to focus our resources on stopping terror.
Likewise, the Terrorism Risk Insurance Program, which is run out of the Treasury
Department, exists to provide a temporary federal backstop in the terrorism
insurance market. Thanks to this program, businesses across America are ensured
that they have access to insurance for this new type of threat to their operations.
This Administration remains committed to providing both economic and personal
security to all Americans. The challenges w e have faced since President Bush took
office have been the most daunting to face our country in generations, but the
President remains committed to ensuring that our economy is strong and our
homes and families are secure. You in this room play an important role in meeting
this challenge. Your leadership in your communities, in providing access to credit
and financial services to your members, in providing prudent supervision of your
institutions, is what allows us to own our own homes, run our own businesses and

JS-733: Remarks of Greg Zerzan Before the National Association of State Credit Union S... Page 4 of 4
provide a better future for our children. Thank you for your dedication, and thank
you for allowing m e to visit with you today.

JS-734: John B. Taylor Senate Banking, Housing, and Urban Affairs Committee

F R O M T H E O F F I C E O F PUBLIC A F F A I R S
September 16, 2003
JS-734
Financial Reconstruction in Iraq:
Strategy and Tactics
John B. Taylor
Under Secretary of the Treasury for International Affairs
Senate Banking, Housing, and Urban Affairs Committee
Subcommittee on International Trade and Finance
Senate Banking, Housing, and Urban Affairs Committee
Subcommittee on International Trade and Finance
Chairman Hagei, Ranking Member Bayh, other members of the Subcommittee,
thank you for inviting m e to testify on the financial reconstruction of Iraq. Given the
importance of trade and finance for Iraq's reconstruction, this Subcommittee is an
ideal forum for this discussion. And the presence of m y colleagues, Under
Secretary Larson and Chairman Merrill, further underscores the importance of
active government-wide participation in the reconstruction effort.
When I last testified on this subject, on June 4 before the Senate Committee on
Foreign Relations, I stressed that "the international community and the Iraqi people
face an enormous task in the reconstruction of the Iraqi economy. A quarter
century of repression and economic mismanagement under Saddam Hussein cut
the size of the economy to only a small fraction of what it w a s before his regime
took over, in 1979 G D P in Iraq w a s $128 billion...by 2001 it had declined to $40
billion." I also stressed the strategy of financial reconstruction—-the contingency
plans developed in advance of the military conflict—and the tactics followed on the
ground since the conflict began. I would like to stress these same issues in m y
testimony today, with emphasis on the additional information w e have obtained on
the state of the Iraqi economy and on what has happened on the ground during the
summer months.
Much has been accomplished in the financial area since the fall of Saddam
Hussein's repressive regime, and many potentialfinancialcatastrophes have been
avoided. In m y view, months of advance planning by the United States government
before Saddam's fall as well as the dedicated work of the Coalition Provisional
Authority and the Iraqi people since Saddam's fall are responsible for these
accomplishments.
Starting late last year, we began developing a strategy for financial reconstruction
based on the information w e had at the time. The strategy addressed such issues
as (1) payments to Iraqi workers and pensioners, (2) the currency, (3) the banking
system, (4) Iraq's international debt, (5) an assessment of reconstruction costs, and
(6) the international fundraising efforts. I want to review how that strategy is playing
out today. But before doing so I must emphasize that an important part of our
advance planning has been the selection of people to participate in the financial
reconstruction effort. W e began selectingfinancialexperts in January; the first
wave of people w a s deployed to Kuwait in March and to Baghdad in April. Early on
w e decided that a financial coordinator w a s essential and w e are very grateful to
Peter McPherson w h o took leave from the Presidency of Michigan State University
and has served most ably in this position, advising Ambassador Bremer and the
rest of the Coalition Provisional Authority.
A Strategy for Paying Workers and Pensioners

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JS-734: John B. Taylor Senate Banking, Housing, and Urban Affairs Committee

It w a s clear that w e had to have a strategy for paying Iraqi workers and pensioners
after the fall of S a d d a m Hussein, and thus w e crafted a strategy well in advance of
his fall. Keeping workers on the payroll with stable purchasing power would be
essential to prevent severe hardship and economic collapse. But how many
workers were there and how much should they be paid? What currency should be
used to m a k e the payments? Where would the funds c o m e from? Would the
payments system be in good enough condition after the conflict to actually m a k e
payments? H o w could w e prevent hyperinflation and a sharp depreciation of the
currency, which would further impoverish people? After all, one of the reasons for
the terrible economic performance under S a d d a m w a s that he resorted to the
printing press to finance his spending, causing high inflation and a drop in the dinar
to about 1/5000th of its former value.
Starting late last year we developed such a payments strategy, which was
approved interagency after much valuable discussion and debate about alternative
strategies. The strategy called for paying workers and pensioners in U.S. dollars on
an interim basis. This w a s not doliarizing the economy, because the strategy called
for the continued use of local currencies—such as the Saddam dinar in the center
and south and the Swiss dinar in the north—and their eventual replacement by a
new national currency, as described below. Using U.S. dollars on an interim basis
would create stability and would help prevent a collapse of the dinar.
Finding a way to secure the funds to make these payments in advance of the
conflict proved to be a challenge. After much discussion and debate, w e decided
that the best approach w a s to use Iraqi regime assets that were frozen at U.S.
commercial banks back in 1990 at the time of the first Gulf War. In order to use the
assets for this purpose, they had to be "Vested" for the use of the Iraqi people. Our
estimates were that there w a s about $1.7 billion that could be vested in the United
States and that this amount would probably be sufficient to last until a new currency
could be issued in Iraq. A vesting strategy was worked out and approved by
interagency legal experts. Under this plan the President would call for the vesting
of the assets in the Federal Reserve Bank of N e w York near the time that the
military conflict began.
To make such a strategy operational, many tactical issues and contingencies had to
be considered. For example, the plan called for the military on the ground to issue
public statements—worked out with the Departments of Defense and Treasury—
that the dinar would continue to be accepted as a means of payment after the fall of
the Saddam regime. The plan also called for the first wave of financial advisers into
Baghdad to assess the payments system's capability for making dollar payments.
Another essential operational issue concerned the actual shipping of the currency
to Iraq, and a plan for making the payments to workers and pensioners on the
ground had to be developed. W e estimated that enough currency in the right
denominations w a s in storage in the N e w York Fed's warehouse in East Rutherford,
N e w Jersey, and w e determined that it w a s feasible to ship the currency by tractor
trailer to Andrews Air Force Base, load it on military aircraft, and fly it to C a m p
Arifjan in Kuwait for the last leg into Iraq. Many tons of currency were involved
because of the need for small denominations: one-dollar or five-dollar bills. O n the
ground, the military would assist in the actual shipment of the currency around the
country. Financial experts would develop lists of eligible workers and pensioners
w h o would be paid. The currency would be distributed to Iraqis w h o would then
actually m a k e the payments. In s o m e cases, the currency would be paid at the
state owned enterprises or government ministries. In other cases, pensioners
would c o m e to local banks to receive payments.
I am pleased to say that this strategy along with all its tactical details has been
carried out with great success. O n March 20, at the start of the conflict, President
Bush issued an order calling for the vesting of the frozen assets. A s a result,
approximately $1.7 billion w a s vested in the N e w York Fed. With these funds at the
N e w York Fed, the first shipment of currency from the Fed's East Rutherford, N e w
Jersey warehouse to C a m p Arifjan w a s m a d e on April 13. Even as major combat
operations were winding down, a mechanism for shipment of cash and distribution
of emergency payments w a s established and began to function. Thanks to this
system, w e were able to m a k e monthly emergency payments to dock workers, rail

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JS-734: John B. Taylor Senate Banking, Housing, and Urban Affairs Committee

workers, power plant workers, and others essential to restoring basic services. W e
soon transitioned to regular civil service salary and pension payments to over 2
million Iraqis.
Despite tremendous logistical challenges, the system of payments has worked
well. Our financial experts in Baghdad consider this to be a major force for stability
in the country, as well as a significant spur to economic growth. A s of this date all
but $64 million of the vested assets has been shipped to Iraq where they have been
used principally to support salary and pension payments to the Iraqi people. T h e
Department of Defense's logistical support has been crucial in this enormous
undertaking.
Throughout this period there has been no collapse of the currency, no
hyperinflation, and no serious glitch in the payments process itself. In sum, this
major and essential success in the reconstruction w a s due in large part to preconflict planning and to adjustments that were m a d e as w e implemented the plan
and learned from
experience.
A New Unified Currency for Iraq
As I indicated, the payments strategy called for the use of U.S. dollars on an
interim basis only. Our goal w a s for the Iraqi people to choose a new national
currency to replace the S a d d a m dinar and the Swiss dinar, and to provide the
necessary financial and logistical assistance to do so. A stable unified currency is
an essential part of a market economy and therefore one of the key parts of
financial reconstruction.
I am happy to say that this part of the financial reconstruction strategy is on track as
well. Last July 7, after consulting with representatives from the Central Bank, the
finance ministry, and other interested Iraqis in the north and the south, the Coalition
Provisional Authority announced that a n e w currency would be issued starting in
October. The n e w currency would replace the old currencies atfixedrates that
were also announced. Hence, the Coalition Provisional Authority and Iraqi officials
in the Central Bank and the finance ministry are about to begin one of the most
important parts of thefinancialreconstruction to date: issuing a n e w currency to
replace the Iraqi currencies that are n o w circulating. The new currency is a key
component in the effort to establish a stablefinancialsystem.
The new currency bears the designs of the old Iraqi, or Swiss, dinar and is being
produced at printing facilities around the world on schedule. There will be six
denominations to replace the current two denominations. About 2200 tons of
currency will be shipped from printing facilities in England, Spain, and other
countries. A sufficient supply of n e w notes will be available when they are
introduced.
The exchange period will begin on October 15 and last until January 15. A public
education campaign is underway in Iraq to ensure that the Iraqi people are well
informed about the n e w currency and are prepared for the currency exchange. T h e
new currency will improve the ease of transactions, since it will be issued in more
denominations than are currently available, and will have built-in security features
that will enhance public confidence by making the notes more difficult to
counterfeit.
Restoring and Revitalizing the Banking Sector
We knew well before hostilities began that strengthening and modernizing Iraq's
financial sector would be central to achieving overall economic reconstruction, and
that a thorough on-the-ground assessment of Iraq'sfinancialsector would be
needed as soon as conditions allowed. Thanks to extensive pre-war planning,
Treasury w a s able to position advisors in Iraq'sfinanceministry, Central Bank and
two main commercial banks even as hostilities were winding down.

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JS-734: John B. Taylor Senate Banking, Housing, and Urban Affairs Committee

The challenges they faced to perform seemingly simple tasks, such as schedule a
meeting with Iraqi bankers, were enormous due to security concerns, the lack of
working phones or faxes, and language barriers. Despite these difficulties, I a m
pleased to report s o m e major successes.
One of the most important is the reopening of most of the branches of Iraq's two
large state-owned banks - Rafidain and Rasheed - which enabled cash-strapped
Iraqi families to gain access to their savings. Opening these branches w a s no
small feat. M a n y of the banks' branches were damaged and w e were fearful of a
bank run once the banks reopened. D u e to careful planning, individual Iraqis n o w
have access to their deposits and there were no bank runs.
The initial assessments conducted by our advisors have provided much insight into
the operations of Rafidain and Rasheed banks. A s our pre-planning analyses
indicated, these banks did not function independently of the former regime. W e
now know that these banks were not permitted to m a k e loans based on commercial
viability and a borrower's ability to repay, but instead on the ability of the borrower
to fulfill a Ba'athist party political objective. The Coalition Provisional Authority, with
the support of Treasury, is hard at work reviewing ideas for restructuring the two
major state-owned banks.
Analyses of Iraq's private banks are almost complete. While these banks are small
in relation to the two large state-owned banks, they will play a role in Iraq's future.
W e know that remittances through these banks are starting to occur. Remittances
by Iraqis overseas will soon form a large pool of resources in Iraq that will finance
investment and consumption. According to s o m e estimates, about 4 million Iraqis
live abroad, and in recent years they have transferred over $1 billion per year to
relatives in Iraq.
In addition to strengthening specific banks, the financial system more broadly including the relevant laws and regulations - will require significant work to ensure
that an efficient and effective system for financial intermediation is achieved. In
consultation with the International Monetary Fund, w e are working with the Iraqi
Governing Council, other Iraqi officials, and the Iraq Bankers' Association on a
revision of Iraq's Central Bank law and commercial banking law. Creating a sound
supervisory and regulatory regime is also critical to establishing a strong financial
system. W e have reached out to countries in the region, including Jordan,
Bahrain, and the U A E , w h o have offered to provide technical training to Central
Bank and commercial bank employees.
As work proceeds on these broad objectives, some initial bank lending has started,
with the focus on loans directed towards Iraqi small- and medium-sized
enterprises. Additionally, the Treasury has approached the International Finance
Corporation, the private sector arm of the World Bank, about setting up a facility in
Iraq to provide loans to micro-, small- and medium-sized businesses. This would
be a multilateral facility modeled after other highly successful programs in Russia,
Central Asia and Southeast Europe.
One major initiative that is now getting off the ground is the creation of the Trade
Bank of Iraq. This Iraqi-staffed institution will facilitate imports to and exports from
Iraq by putting in place the people and systems needed for the country to trade
more efficiently and on a larger scale with the rest of the world. Currently, trade is
taking place at the retail level. In Baghdad's markets one can find consumer goods
- from refrigerators to satellite disks - imported from neighboring countries. But in
order for Iraq's reconstruction to m o v e forward as quickly as possible, and for
private sector activity to take off, there needs to be an efficient system for importing
a broad range of capital goods and services.
Our goal is for Iraqi banks to provide trade finance services. But as the process of
strengthening Iraqi banks goes forward, there is an immediate need to do this. T h e
Trade Bank of Iraq is intended to fill that gap.
Following a competitive bidding process, the CPA is negotiating a contract with a
consortium of international banks which will facilitate the operations of the Trade
Bank. Additionally, the Trade Bank will be the entity by which Export Credit
Agencies around the world support trade with Iraq. There is precedent in creating

Page 4 of 6

JS-734: John B. Taylor Senate Banking, Housing, and Urban Affairs Committee

institutions such as the Trade Bank in post-war Japan and Germany. Those
institutions evolved and took on functions akin to export-import banks, although h o w
the Trade Bank evolves will be up to the Iraqi people.
Iraq's international Debt
Early on we recognized that dealing with Iraq's substantial foreign debt problem
would be crucial to the country's medium-term economic health. W e therefore
developed a strategy to resolve this problem.
First, using the financial information we had, we ensured that Iraq would not have to
service its debt following the end of the war and during the critical reconstruction
phase. D e m a n d s for repayment would have greatly reduced the resources
available to a n e w Iraqi government. Therefore, w e secured recognition from the
G 7 that Iraq would not service its external debt at least through the end of 2004.
Subsequently, the Paris Club group of official creditors stated their expectation that
Iraq would not m a k e payments over this time period.
Next we sought to obtain the best possible data on Iraq's foreign debt and its
economic condition. Without any reliable data, it would be difficult to reach an
international consensus on a debt strategy. W e began collecting data by sending
several technical assistance advisors to Iraq to review the government's debt
records once the war ended. At the s a m e time, w e worked intensively through the
Paris Club and the International Monetary Fund to obtain data from creditors.
We have made significant progress. The latest available information indicates that
Iraq's external debt amounts to at least $70 billion and is probably closer to $100 to
$120 billion. Paris Club m e m b e r s report that they are owed roughly $40 billion -$21 billion in principal and roughly an equivalent amount in late interest. The IMF
has polled non-Paris Club governments and, as of September 10, reports creditor
claims of $28 billion in principal and interest. Since 20 governments have yet to
respond to the IMF poll, thisfigureis likely to increase.
With better data in hand, we can now proceed with our strategy and work out a
long-term solution to Iraq's debt problem. W e will continue to work with other
creditors toward the objective of achieving a substantial restructuring of Iraq's debt
that will permit the Iraqi government to channel resources into reconstruction
activities.
Assessment of Reconstruction Costs and International Fundraising Efforts
We also knew at the outset that one of the major priorities following the conflict
would be to produce a comprehensive assessment of reconstruction costs in Iraq.
W e recognized that w e could not focus solely on the costs of repairing the d a m a g e
inflicted during the short conflict. S a d d a m Hussein's total disregard for the welfare
of his population likely meant that the needs of the Iraqi people - and the cost of
reversing decades of economic decline -would be substantial.
Because of the extent of Iraq's isolation from the international community, we had
little reliable information regarding the extent to which critical investments had been
neglected. W e were concerned that the absence of economic data and other
information would m a k e the job of producing a timely needs assessment especially
challenging. W e engaged early with our fellow shareholders and with senior
officials from the World Bank and the International Monetary Fund to create a
process for making a needs assessment as soon as the environment w a s
permissible. A s a result of these discussions, these institutions acted quickly to
develop the scope of the assessment, divide up responsibility for different sectors,
and recruit the necessary staff.
We expect that the cost for reconstruction will be in the range of $50 to $75 billion.
This estimate covers critical infrastructure needs in electricity, public works,
transport, telecommunications, health, education and agricultural sectors, a m o n g
others. But it excludes the annual expenses that have been identified by the

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JS-734: John B. Taylor Senate Banking, Housing, and Urban Affairs Committee

Coalition Provisional Authority to cover the government operating budget.
Clearly, this is a cost that will need to be shared widely, and underscores the
importance of a major donor effort for Iraq. In June, w e established a "Core Group"
of donors, consisting of Japan, the E C and the United Arab Emirates, to consult
regularly with the U N , World Bank, IMF and C P A , on the planning and preparation
for the donor conference. The m e m b e r s of this group are engaging intensively with
other potential donors to urge them to pledge generously at the donor meeting in
Madrid on October 24. W e believe our o w n substantial contribution of $20 billion as reflected in the President's forthcoming supplemental request - will be critical to
leveraging support from other governments.
In addition, we are encouraging the international financial institutions to commit
their o w n resources to the people of Iraq. A s you are aware, the IMF and World
Bank recalled their staff following the bombing of U N headquarters where they were
also housed. However, these institutions remain actively engaged on Iraq, and are
continuing to work with C P A and Iraqi officials, providing technical assistance and
finalizing the needs assessment. The World Bank - in conjunction with the U N - is
also completing the design of a multi-donor trust fund that would pool bilateral
donations and m a k e them available for priority needs identified by these agencies
in their needs assessments, in addition to these vital contributions, w e have m a d e
good progress in our discussions with the IMF and the World Bank on identifying
the type and amounts of resources that could be m a d e available to the Iraqi people
once the conditions for lending are in place.
In a related exercise, we are reaching out to Export Credit Agencies (ECAs) around
the world, encouraging them to follow the U.S. Ex-lm Bank's efforts to support
investments in Iraq by insuring repayments. M a n y other governments have
responded positively to this effort, including Japan and the United Kingdom.
Through credit facilities such as the one proposed by Ex-lm Bank, credit agencies
will be able to provide short-term export credits worth several billion dollars.
Initiatives like this will be very important for supporting trade, facilitating commercial
activity and spurring growth in Iraq.
Countries other than the U.S. have been identifying and freezing assets of the
Hussein regime in accordance with U N Security Council Resolution 1483. Over $1
billion of such assets has been identified and frozen. W e are working hard to
encourage countries that have frozen assets to transfer those funds to the
Development Fund for Iraq (DFI), where they will assist in the reconstruction of the
country. W e have already had s o m e success in these efforts, including a transfer
of approximately $98 million to the DFI announced by Japan on August 29.
Conclusion
Achieving a stable and productive economy is central to our goal of a unified and
prosperous Iraq. W e have m a d e considerable progress on financial reconstruction
over the last several months, thanks to extensive advance planning and the work of
many dedicated professionals from the U.S., Coalition partners, and Iraq. Our
activities will only intensify in the coming months. While the challenges are
formidable, w e are well on the w a y to establishing a vibrant economy that creates
opportunities for all Iraqis to achieve a better future for themselves and their
children.

Page 6 of 6

JS-735: Statement by P a m Olson Announcement of N e w Partnership to Combat Abusive ... Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
September 16, 2003
JS-735
Statement by
Treasury Assistant Secretary for Tax Policy P a m Olson
on A n n o u n c e m e n t of N e w Partnership
to C o m b a t Abusive Tax Avoidance Transactions
Good Morning. Thank you for joining us. I would like to thank the Federation of Tax
Administrators and the States for being here today. Many of you traveled great
distances to do so.
We are here today to announce an important new partnership between the
Treasury Department, the Internal Revenue Service and the States in the fight
against abusive tax scams and abusive tax avoidance transactions. This
partnership will aid the federal government and the states in their efforts to ensure
that all taxpayers pay their fair share, protecting the integrity of our tax systems.
In the past few years, the Treasury Department has worked closely with the IRS to
ensure that the IRS has the necessary information and tools to fully and fairly
enforce the tax laws and to combat abusive tax scams and transactions. By joining
forces with the states, w e take another important step in those efforts.
Through this partnership, the IRS and participating states will exchange information
regarding abusive tax avoidance transactions, expanding the w e b of information
that has given the IRS traction in its effort to stem the spread of abusive tax
avoidance transactions. Working together, the IRS and state tax authorities will
significantly reduce the opportunities for taxpayers and promoters to avoid
detection.
This partnership will also allow the states and the federal government to make
better use of our collective resources. W e can be more efficient with the resources
w e have, reducing duplicative efforts and identifying more promoters and more
taxpayers w h o have participated in abusive tax avoidance transactions.
Sharing resources will also enhance our education and outreach efforts. One of the
best ways to combat abusive tax scams and transactions is to prevent taxpayers
from engaging in them in the first place. By better educating taxpayers about the
risks of abusive scams and transactions, w e can prevent taxpayers from
participating in them and deter promoters from selling them. The federal/state
partnership means our education and outreach efforts will reach an even larger
audience of taxpayers and potential promoters.
We believe the fruits of these efforts will restore faith in the tax system. When
s o m e taxpayers g a m e the tax system, the honest taxpayers w h o foot the bill lose
confidence in the tax system and in the government. The partnership w e are
announcing today is aimed at restoring that faith by ensuring that everyone pays
the taxes they owe.
I would like to thank everyone who worked so hard to make this partnership a
reality. W e look forward to working with you in the future.

JS-73 5: Statement by P a m Olson Announcement of N e w Partnership to Combat Abusive ... Page 2 of 2

Now, 1 would like to introduce IRS Commissioner Everson.
Related Documents:
• IR2003-111 IRS and States Announce Partnership to Target Abusive Tax
Avoidance Transactions
• Comments of IRS Commissioner Mark W . Everson
• Comments of Dale F. Hart Commissioner of Small Business/Self-Emploved
Division
• Statemetn of State Tax Officials
• Text of Abusive Tax Avoidance Transation (ATAT) Memorandum of
Agreement

PREPARED REMARKS
COMMISSIONER OF INTERNAL REVENUE
MARK W. EVERSON
ATAT MOU SIGNING CEREMONY PRESS CONFERENCE
TREASURY DEPARTMENT
SEPTEMBER 16, 2003
Abusive tax avoidance transactions are a cancer. They mock honest taxpayers who
pay what they owe and stick law-abiding citizens with a bigger tax bill. Abusive
schemes erode confidence in the fairness of our tax system.

And these abusive schemes are not just the IRS' problem. They are not just the
States' problem. They are a shared problem demanding the unified approach we're
announcing today.

The inauguration of this partnership agreement sends a strong message to those
promoting and using abusive tax avoidance transactions. We're closing in on you
from all sides. The States and the Federal Government are now fighting as allies.

This agreement marks a milestone in state and federal cooperation. From today
forward, we will work together combating abusive tax schemes. We will share
information and coordinate case management. This agreement effectively extends
the resources of the IRS.

From the IRS perspective, this is another important component in our renewed
focus on strengthening the integrity of our tax system through enhanced

enforcement activities. Service plus enforcement equals compliance. The IRS must
help people understand their tax obligations. But when people don't meet their tax
obligations, we must ensure fairness. People should pay what they owe. We will
enforce the law with particular vigor in the corporate arena and for high-income
individuals who enter into abusive shelters to game the system.

I want to make one additional point. I believe that the privacy of taxpayer
information is a cornerstone of taxpayer rights. The information shared under this
agreement will be strictly limited to that pertaining to abusive transactions.

To wrap up, I would like to thank Dale Hart for leading this effort on behalf of the
IRS. And I would like to thank Stephen Cordi, who is here on behalf of the
Federation of Tax Administrators, which played an important role in reaching this
agreement.

Steve is also here in his role with the Maryland Comptroller of the Treasury. I'd
also like to acknowledge seven other tax administrators for their efforts on this
agreement:
1) Marcy Jo Mandel from California.
2) Kimberly Lewis Robinson from Louisiana.
3) Alan LeBovidge from Massachusetts.
4) Dominic Louis Vitale from New Jersey
5) Kenneth Thorsen from Virginia

6) Phil Brand from Washington, D.C.
7) And Arthur Roth, who has just retired as Commissioner of New York
Department of Taxation and Finance.

Thank you for your efforts. Now, I'll turn this over to Dale Hart for more detail
the agreement.

Prepared Remarks
Dale F. Hart
Commissioner, Small Business/Self-Employed Division
Internal Revenue Service
IRS/State A T A T M O U Event
Treasury Department
September 16, 2003
The agreement we are announcing today is a testament to the positive
impact that partnering between the IRS and the State tax organizations can have
on good tax administration. This agreement to jointly address abusive schemes
and transactions is the culmination of a ten-month partnership by a joint IRS and
State team. In particular, I'd like to take this opportunity to express m y sincere
thanks to officials from the N e w York Tax Commission w h o co-chaired the team,
as well as State tax administrators from Arizona, California and North Carolina,
for their contributions to the team. Their assistance and expertise, as well as the
support of our respected colleagues at the Federation of Tax Administrators, has
fortified m y belief in the value of FedState partnerships when dealing with the
most complex tax administration issues.
This new agreement increases cooperation between the IRS, the majority
of States and the District of Columbia, plus it enables us to leverage our
resources and expertise across the board.
I would now like to highlight a few of the major provisions of this
cooperative effort.
A major change resulting from this agreement will be the up-front
exchange of information around identified schemes and abusive transactions.
This will allow us to leverage and focus our limited resources and reduce
duplication of efforts. This is a different approach from many of our past
partnerships, where w e have not always taken such a collaborative approach in
dealing with compliance challenges c o m m o n to both IRS and the States.

Another component of the n e w agreement, which will further increase
efficiency in the use of federal and State resources, involves a plan to establish a
method for the sharing of leads for possible examination by the States. This
approach will leverage our ability to identify those involved in these schemes,
and take appropriate actions to bring these individuals into compliance with both
the State and federal taxes they have chosen to avoid paying.
A final key element I would like to mention involves partnerships on
outreach and education efforts. Informing the public about the dangers and the
consequences of participating in these schemes is a vital aspect of our strategy.
W e recognize that in teaming together with the States in our counter-marketing
efforts, w e can reach the m a x i m u m audience and perhaps prevent others from
being lured into these schemes and scams.
In closing, I want to emphasize that the States and the IRS are committed
to the s a m e thing: effective, fair tax administration. This initiative fosters that
goal by proactively partnering to deal with those w h o choose to not participate in
paying their fair share. For those honest people w h o file and pay their taxes, the
establishment of this united compliance front by the IRS and the States against
the growing problem of abusive schemes is good news. It's a smart, c o m m o n
sense approach and the latest in the government's ongoing efforts to ensure the
fairness of the American tax system.
Now, I'd like to invite Steve Cordi, President of the Federation of Tax
Administrators, and Deputy Comptroller for the state of Maryland to share his
comments.

Alabama
Mike Mason
Director of Tax Policy
Alabama Department of Revenue
With Alabama's current fiscal condition, we welcome the opportunity to work with the IRS in this
initiative. The combined resources of federal and state can strengthen the aggressive
identification and elimination of tax avoidance schemes.

Arizona
J. Elliott Hibbs
Director
Arizona Department of Revenue
Arizona is excited about signing the Abusive Tax Avoidance Transactions (ATAT) Memorandum
of Understanding ( M O U ) for several reasons. Abusive tax schemes cost the state of Arizona
several million dollars each year. The M O U will allow the Department of Revenue ( D O R ) to take
a more aggressive approach against taxpayers that are purchasing abusive tax avoidance
products to evade paying their fair share of Arizona income tax. Partnering with IRS will provide
auditor training opportunities, audit leads and joint taxpayer education.
Abusive tax avoidance schemes create inequities in the Arizona tax system, undermine the
Arizona tax system and weaken Arizona tax revenues. D O R is determined and eager to pursue
those taxpayers that are not paying their fair share of Arizona income tax; joining forces with the
IRS is just the beginning.

California
Steve Westly
California State Controller and Chair of the
Franchise Tax Board
This agreement is a "win-win" for State and Federal government and a "lose-lose" for tax cheats.
It will help us find and prosecute more tax evaders without adding to our costs.

District of Columbia
Phil Brand
Deputy Chief Financial Officer
Office of Tax and Revenue
Washington, District of Columbia
The District of Columbia Office of Tax and Revenue (OTR) is pleased to be part of the effort
combating the abuse of tax shelters. O T R intends to work vigorously with IRS and our
counterparts in the states to collectively deal with those w h o attempt to avoid or evade taxes.

Iowa
Michael Ralston
Director
Iowa Department of Revenue
Michael Ralston, director of the Iowa Department of Revenue, said, "Participating in the Abusive
Tax Avoidance Transaction effort with the Internal Revenue Service will improve tax
administration at both the federal and state levels. Resources will be better utilized to result in
additional compliance and more revenue for the State of Iowa. The Iowa Department of Revenue
is committed to allocating resources for this project."

"Working with the IRS is something w e do every day," continued Ralston. "This partnership
benefits taxpayers through more effective use of resources, and w e look forward to this n e w
partnering initiative."

Illinois
Brian Hamer
Director
Illinois Department of Revenue
"Illinois is pleased to be part of this joint effort to crack down on tax evasion," said Illinois
Revenue Director Brian Hamer, noting that Illinois has already seen benefits from the federal
crackdown on abusive shelters. In recent months two individual taxpayers had c o m e forward,
filed amended returns, and paid Illinois $2.3 million, after they became aware of IRS efforts
involving tax shelters. "I'm confident that this concerted joint effort will identify further abuse,
assure that taxpayers fully pay the tax they owe, and ease the tax burden on other taxpayers,"
Hamer said.

Louisiana
Cynthia Bridges
Secretary
Louisiana Department of Revenue
It has been estimated that Louisiana lost between $44 million and $94 million in 2001 as a result
of corporate tax sheltering. This A T A T M e m o r a n d u m of Understanding is another example of
Louisiana's cooperative partnership with the IRS to eliminate abusive tax avoidance schemes.

Maryland
Steve Cordi
Deputy Comptroller and President of the
Federation of Tax Administrators
This partnership takes FedState cooperation to a new level beyond simply sharing data and joint
customer service projects to real compliance. Taxpayers not complying with federal laws are
most certainly not complying with state laws. W e hope to recover unpaid state taxes but more
importantly, if w e don't partner with the IRS to confront abusive tax schemes, w e lose the trust of
our compliant taxpayers, and that's a big deal.

Massachusetts
Alan LeBovidge
Commissioner of Revenue
"This sort of cooperation is really the wave of the future," said Alan LeBovidge, commissioner of
revenue for Massachusetts. "As businesses get more and more complex, the only w a y to m o v e
forward is to foster cooperation a m o n g government agencies."
Massachusetts, which closed a number of tax loopholes earlier this year, has a goal of making
everyone pay their fair share of taxes. The m e m o r a n d u m of understanding with the IRS will help
the Commonwealth evaluate s o m e of the more sophisticated tax avoidance schemes employed
by businesses, LeBovidge said.

Minnesota
Dan Salomone
Commissioner
Minnesota Department of Revenue
The State of Minnesota is pleased to be part of this collaborative effort to identify and combat
abusive tax avoidance transactions. Minnesota has garnered a national reputation for the
management of its tax system, in part because of the close working relationship between the
Minnesota Department of Revenue and the Internal Revenue Service.
I am confident that the new initiatives that will spring from the memorandum of understanding will
increase the fairness of our tax system, help us maintain quality public services, and reduce
future tax burdens on compliant taxpayers.

Missouri
Todd Iveson
Deputy Director of Taxation and Collection
Missouri Department of Revenue
Missouri is in a tough budget time when every dollar counts. The agreement between our state
and the IRS will help identify individuals w h o are not filing and not paying their fair share of taxes.
The program will allow federal and state auditors to team up from the start, using joint strategies,
procedures, and audit techniques to find abusive taxpayers. W e are very excited about this n e w
program and look forward to working more closely with the IRS.
Missouri's tax amnesty program runs until October 31, 2003. During amnesty, individuals can
pay eligible unpaid state taxes that were due on or before December 31, 2002, without paying
interest or penalties. Delinquent taxpayers should consider coming forward n o w to file and/or pay
any unpaid taxes, before the IRS and Missouri team up and find them. Individuals identified after
the amnesty program will be required to pay the full tax, interest, and penalties and will be subject
to all criminal and civil actions provided by law.

Montana
Linda Francis
Director
Montana Department of Revenue
The cooperative federal-state agreement between the Internal Revenue Service and the State of
Montana to share information on Abusive Tax Avoidance Transactions (ATAT) is a great
opportunity. Working together to identify and bring A T A T participants into compliance, the
Internal Revenue Service and the State of Montana will reduce duplicative efforts and maximize
audit resources.
Governor Judy Martz is very supportive, and believes that entering into this agreement will benefit
Montana citizens by improving government's pursuit of tax scheme participants. The cooperative
effort will enhance Montana's effectiveness in administering the state's tax code and in educating
A T A T participants on tax requirements. Ultimately, this will ensure that all Montana taxpayers are
treated consistently, with everyone paying his or her fair share.

New Jersey
Robert K. Thompson
Director
N e w Jersey Division of Taxation
This is just one more example of the IRS and the New Jersey Division of Taxation working
together to insure that all taxpayers pay their fair share and that the costs of good tax
enforcement is born by those w h o are truly non-compliant. It further highlights the fact that
taxpayers that use high priced tax preparers are held to the s a m e standard as all others.

New York
Arthur J. Roth
Commissioner of Taxation and Finance
New York State Commissioner of Taxation and Finance Arthur J. Roth said, "I was pleased and
honored that N e w York w a s the first state to sign onto this M O U . Because of this important
agreement, w e will no longer have to discuss the 'growing' area of tax schemes and scams. I
now look forward to referring to the 'shrinking' or 'once thriving, but now dying' area of tax
schemes and scams."

North Carolina
Norris Tolson
Secretary
North Carolina Department of Revenue Secretary
The North Carolina Department of Revenue is pleased to be a partner with the Internal Revenue
Service in our continued effort to address tax compliance issues in this state. Our partnership
with the IRS is a vital link in our agency's overall compliance program.
We have worked closely with IRS tax officials during this year to develop procedures for
addressing tax avoidance schemes. Our newly signed M e m o r a n d u m of Understanding with the
IRS targets abusive tax avoidance transactions used by citizens of our state. These abusive
transactions cost the state of North Carolina millions of dollars in lost tax revenue each year.
As the North Carolina Department of Revenue launches its Project Compliance initiative, our
agency is committed to returning more than $40 million in lost revenue to the state's general fund
during this fiscal year. Our initiative is aimed at addressing abusive tax avoidance transactions
and is a key element of our compliance enforcement strategy during this year.
Our efforts focus on fairness for all citizens and proper compliance with our state's tax laws.

Oklahoma
Steve K e m p
Commissioner
Oklahoma Tax Commission
We are very pleased to join forces with the Internal Revenue Service in combating abusive tax
avoidance transactions through information sharing to identify, to examine, and to bring into
compliance with Oklahoma tax laws those w h o participate. W e feel that it is important to identify
and pursue these abusive tax schemes and bring the people that participate in them into
compliance. To allow them to continue places an unfair burden on the honest taxpayer."

Oregon
Elizabeth Harchenko
Director
Oregon Department of Revenue
This agreement reflects the growing commitment between the states and the IRS to work
together to achieve tax compliance. Citizens expect us to coordinate our efforts and to cooperate
in addressing abusive tax shelters. W e must share information and develop strategies together in
order to assure the public that all taxpayers report and pay the taxes they o w e under the law.

Pennsylvania
Gregory C. Fajt
Secretary of Revenue
Commonwealth of Pennsylvania
This Memorandum of Understanding among the Pennsylvania Department of Revenue, other
U.S. states and the Internal Revenue Service gives us all n e w weapons to use against those w h o
seek to avoid paying taxes in violation of the law. The information w e will share under the
agreement announced today will help m y Department ensure that Pennsylvania's tax laws are
enforced fully and fairly, and that those w h o do pay their taxes do not shoulder a greater burden
because of those w h o do not.

South Carolina
Burnett R. Maybank III
Director
South Carolina Department of Revenue
The South Carolina Department of Revenue has always had a cordial and mutually-benefiting
relationship with the Internal Revenue Service. For that reason w e are extremely pleased to enter
into this latest agreement with the IRS, and 39 other states, because it not only enhances our
ability to exchange important tax information regarding corporate tax shelters and other abusive
tax avoidance transactions, but allows us to share resources of all types in our efforts to alleviate
this abuse of the tax system.
A recent Multi-State Tax Commission study estimated South Carolina loses more than $80 million
each year in revenue from illegal business and corporate tax shelters. That is especially critical
when the state desperately needs every legitimate revenue dollar. Such abuse also places
businesses that pay their taxes at an unfair competitive disadvantage to those w h o are not
paying.
We have a common goal with the IRS, and that is to insure our honest and diligent taxpayers are
not burdened by those w h o would use any measure to avoid paying their fair share. This
agreement is yet another tool at our disposal to help us reach that goal.

South Dakota
Gary R. Viken
Secretary
South Dakota Department of Revenue and Regulation
The SD Department of Revenue and Regulation recognizes that improving taxpayer compliance
is key to improving tax revenues for the State of South Dakota. Through our participation in this
information exchange between the Internal Revenue Service and state tax entities, w e will be
able to further maximize our efforts in combating tax avoidance. This expansion of our resources
will enable us to better identify those individuals w h o are not meeting their tax obligations and to
ensure that the State of South Dakota receives the tax revenues that they are owed.

Vermont
T o m Pelham
Commissioner
Vermont Department of Taxes
The Vermont Tax Department looks forward to partnering with the Internal Revenue Service in
this cooperative effort to stamp out abusive tax avoidance transactions.
The bottom line is all taxpayers must pay their fair share of federal and state taxes to fund the
benefits received by living in our great nation and our great state.

Virginia
Kenneth W . Thorson
Tax Commissioner
Virginia Department of Taxation
The IRS' new Abusive Tax Avoidance Transactions (ATAT) program highlights the partnership
between the IRS and State tax officials to address the growing area of tax schemes and scams.
Virginia strongly supports the Internal Revenue Service's program to combat abusive tax
avoidance transactions.
Over the past several years, Virginia strengthened its efforts to protect the integrity of our system
of voluntary tax compliance. Cooperation with the IRS in the program announced today
complements our state-based efforts.
We owe it to honest taxpayers that routinely pay their fair share of taxes to pursue aggressively
those persons w h o improperly seek to avoid this most central civic responsibility. W e look
forward to becoming an ally of the IRS in this important initiative.

Wisconsin
Michael L. Morgan
Wisconsin Revenue Secretary
Wisconsin Department of Revenue
Michael L. Morgan, Wisconsin Revenue Secretary, praised the ATAT partnership saying the effort
will address tax equity while helping his state reduce its delinquent tax balance.
"Wisconsin expects to see tangible benefits from this innovative partnership," said Morgan.
"Together with the federal government w e can improve on the collection of revenues that are
critical to our state and w e can do so with an even greater measure of fairness."

Memorandum of Understanding
Between
Internal Revenue Service
Small Business/Self-Employed Division (SB/SE)
And
fState tax agencvl
Concerning Abusive Tax Avoidance Transactions
1. INTRODUCTION:
This Memorandum of Understanding (MOU) between the Internal Revenue
Service (IRS) Small Business/Self-Employed Division (SB/SE) and the rstate tax
agency n a m e (state tax agency abbreviation)! sets forth the agreement of the
parties with respect to an initiative to facilitate information sharing for tax
administration purposes in conjunction with Abusive Tax Avoidance Transactions
(ATAT).

2. AUTHORITY:
A. Under the terms of this MOU, federal tax returns and return information
related to A T A T will be disclosed by the IRS to rstate tax agencvl pursuant to
Internal Revenue Code (IRC) section 6103(d). This M O U is intended to
facilitate information sharing between the IRS and rstate tax agencvl pursuant
to the existing Agreement on Coordination of Tax Administration between the
IRS and rstate tax agencvl (herewith "Basic Agreement") executed by IRS on
[date], and the Amended Implementing Agreement on Coordination of Tax
Administration between the IRS and rstate tax agencvl (herewith "Amended
Implementing Agreement") executed by the IRS on rdatel. The Basic
Agreement, the A m e n d e d Implementing Agreement, and this M O U constitute
the written request required under IRC 6103(d) for the disclosure of federal
returns and return information related to A T A T from the IRS to the rstate tax
agencvl. The rstate tax agencvl will use the information to be disclosed to
identify, examine, and bring participants in A T A T into compliance with fstatel
tax laws. The (state tax agency) agrees that it will only use the information for
purposes of state tax administration pursuant to IRC 6103(d) and the Basic
Agreement, the A m e n d e d Implementing Agreement, and this M O U . In any
situation where a conflict arises between the provisions of this M O U and the
Basic and Implementing Agreements, the Agreements shall govern.

09/16/2003

2
B. State returns and return information will be disclosed to IRS pursuant to [state
statute!. The information will be used by the IRS to identify, examine, and
bring A T A T participants into compliance with federal tax laws and regulations.

3. PURPOSE:
A. This sharing of ATAT-related information will present a united compliance
front to taxpayers and their representatives, increase audit coverage, and
leverage federal and state resources in the A T A T area.
B. This MOU also serves to facilitate communication between IRS and [state tax
agencvl and the disclosure of returns and return information between IRS and
[state tax agencvl employees w h o deal with A T A T leads, cases, and audits.

4. PARTIES TO AGREEMENT:
A. Parties that will share tax returns and return information include IRS and
[state tax agencvl. IRS and fstate tax agencvl employees authorized to
request and receive tax information will be designated in writing pursuant to
Article [number! of the Amended Implementing Agreement.
B. The SB/SE Compliance Area Director (working with the Headquarters, ATAT
Program Office) and the fhead of state tax agencvl, will designate, in writing,
the names of IRS and state employees w h o will be authorized to request and
receive ATAT-related tax information pursuant to this M O U . The names,
telephone numbers, and addresses of these IRS and fstate agencvl
employees will be attached to this M O U as an addendum within 30 calendar
days of execution of this agreement. A copy of this list will be provided to the
IRS Disclosure Officer. This list will be updated annually, or as needed, by
the SB/SE Compliance Area Director, and headquarters, A T A T Program
Office, and by the [head of state tax agencvl. A copy of the amended list will
be provided to the IRS Disclosure Officer. Amendments to the list of IRS
employees authorized to request and receive tax information m a y be m a d e at
any time by written notification from the IRS SB/SE Compliance Area Director
(working with headquarters, A T A T Program Office) to the [head of the state
agencvl. Amendments to the list of [state agencvl employees m a y be m a d e
at any time by written notification from the fhead of the state agencvl to the
IRS SB/SE Compliance Area Director.
C. IRS and [state agencvl employees who are named on the list described
above will be authorized to request and receive tax information pursuant to
the Basic Agreement, the Amended Implementing Agreement, and this M O U
for the duration of their designation on the list, their participation in this
cooperative effort related to A T A T , and based on their "need to know" the
information as best serves effective tax administration.

09/16/2003

3
5. CONTACTS:
Contacts for the purpose of this MOU will be the IRS SB/SE designee, the IRS
Governmental Liaison for [state], the ' R S Disclosure Officer, and the [state tax
agencvl Disclosure Officer designee (see attached contact list).

6. JOINT OUTREACH:
The IRS and [state tax agencvl will coordinate outreach activities relating to
A T A T issues as appropriate. This m a y include, but is not limited to, joint press
releases, joint dissemination of counter-marketing messages, joint publicity of
A T A T initiatives, and other outreach materials.

7. DUTIES AND RESPONSIBILITIES OF THE IRS:
A. To avoid duplication of efforts, the IRS SB/SE Headquarters, ATAT Program
Office will provide to [state tax agency] a list of participants in a particular
A T A T scheme that m a y be investigated by the State. The list will be provided
after the participants in a particular scheme are identified and the IRS
determines a compliance strategy for the promotion. This list will be updated
semi-annually on or about July 31 and January 31 and provided to rstate tax
agencvl.
B. The IRS will provide to rstate tax agencvl all audit results from ATAT
participant cases conducted by the IRS.
C. The IRS will exchange information on types of ATAT schemes identified at
the federal level with rstate tax agencvl.
D. The IRS will provide audit technique guides, when available, for ATAT
schemes to rstate tax agencvl.
E. IRS employees who request state returns or return information should
complete Form 8796, "Request for Return/Information."
F. Form 8796. "Reguest for Return/Information" to reguest state information or
Form 10475. "State Tax Information Reguest" will be signed and approved by
the SB/SE Compliance Territory Manager.
G. All requests from authorized IRS employees for state information should be
forwarded to the rstate title & addressl for response.
H. The IRS will partner with [state tax agencvl on training and other educational
activities. The IRS will provide [state tax agencvl with opportunities to attend
A T A T training classes or use IRS instructors.

4
I. The IRS m a y initiate communications on an as needed basis to facilitate the
purposes of this M O U .

8. DUTIES AND RESPONSIBILITIES OF [STATE TAX AGENCY]:
A. After receipt of a participant list from the IRS, [state tax agencvl will provide
IRS a list of those participants, [state tax agencvl intends to examine.
B. States will assist IRS in utilizing State databases to further refine participant
lists.
C. Upon completion of state examinations and state assessments of ATAT
cases, the [state tax agencvl will forward the results to the IRS SB/SE Chief,
Planning and Special Programs.
D. [State tax agencvl will provide information on types of ATAT schemes
identified at the state level to the IRS.
E. [State tax agencvl will exchange state audit strategies and procedures
regarding A T A T with the IRS.
F. [State tax agencvl employees who request federal returns or return
information should normally complete Form 8796, "Request for
Return/Information."
G. Requests from rstate tax agencvl employees for federal ATAT information
should be forwarded to the IRS Disclosure Officer.
H. [State tax agencvl will partner with IRS on training and other educational
activities. [State tax agencvl will provide IRS with opportunities to attend
A T A T training classes or use [state tax agencvl instructors.
I. Where appropriate, [state tax agencvl will have members on the IRS crossfunctional A T A T council.
J. [State tax agencvl may initiate communications on an as needed basis to
facilitate the purposes of this M O U .

09/16/2003

9. DISCLOSURE, SAFEGUARDS, AND RECORD KEEPING
REQUIREMENTS:
A. The IRS Disclosure Officer will ensure that all requirements for recordkeeping
and accounting for disclosures are met in accordance with IRC section 6103
and its implementing regulations.
B. In order to comply with the federal safeguards required by IRC section
6103(p)(4), [state tax agencvl employees will maintain federal tax returns and
return information separately, in addition to abiding by the procedures
implementing IRC section 6103(p)(4).
C. IRS employees will maintain state information separately. All records and
documents collected, maintained, or generated by the IRS and/or disclosed to
[state tax agency] under this M O U , and any information collected as a result
of joint correspondence, joint interviews, or IRS administrative summonses,
will be subject to the confidentiality requirements of IRC section 6103(a).
D. All information obtained under this Agreement must be safeguarded in
accordance with the [datel Agreement on Coordination of Tax Administration
(herewith "Basic Agreement"), any revisions, and the A m e n d e d Implementing
Agreement as well as the safeguards described in IRS Publication 1075, Tax
Information Security Guidelines for Federal, State, and Local Agencies.
E. Nothing in this Agreement will cause IRS or [state tax agencvl to disclose
information that is normally protected by governmental, attorney/client, or
attorney work product privileges consistent with applicable laws, or any other
information that is prohibited from disclosure. See IRM Section 11.3.32.17,
Restrictions on disclosure of returns and return information.
F. Neither the IRS nor [state tax agencvl will disclose return information that
would identify a confidential informant or seriously impair any civil or criminal
tax investigation. Voluntary disclosures to the IRS under the guidance of
Internal Revenue C o d e (IRC) 6011 will not be included in the participants lists
provided to the states. States will receive final assessments related to IRC
6011 voluntary disclosures through established channels.
10. LIABILITY:
A. Each party to this Agreement shall be liable for the acts and omissions of its
o w n employees.
B. The IRS shall not be liable for any injury to another party's personnel or
d a m a g e to another party's property unless such injury or d a m a g e is

09/16/2003

6
compensable under the Federal Tort Claims Act, 28 U.S.C. § 1346(b), or
pursuant to other federal statutory authority.
C. [State tax agencvl shall not be liable for any injury to another party's
personnel or damage to another party's property unless such injury or
damage is compensable under the law of the state of [state].
11. THIRD PARTY RIGHTS:
This MOU does not confer any rights or benefits on any third party.
12. AMENDMENT OR TERMINATION OF MOU:
This MOU will become effective on the date of the last signature written below
and will remain in force until terminated by either IRS or [state tax agencvl. If the
IRS or [state tax agencvl wishes to terminate this M O U , a written notice must be
mailed to, or otherwise delivered to, the other party. The M O U will terminate 30
calendar days after the receipt of such notice. This M O U may only be amended
upon the mutual consent of the IRS and [state tax agencvl. A written notice of the
terms of the amendment must be mailed to, or otherwise delivered to, the other
party.
13. LIMITATIONS:
The terms of this MOU are not intended to alter, amend, or rescind any
provisions of Federal law. Any provision of this M O U , which conflicts with
Federal law will be null and void. Nor are the terms of this M O U intended to
alter, amend, or rescind any provisions of the Basic Agreement or the Amended
Implementing Agreement now in effect. In the case of conflict, the provisions of
the Basic Agreement and/or the Amended Implementing Agreement will govern.

09/16/2003

7
APPROVALS:

fNamel, Commissioner
[Name of State Tax Agencvl
Signed at
, this

day of

, 2003.

[Namel, Area Manager
Governmental Liaison and Disclosure
Internal Revenue Service
Signed at
, this

day of

, 2003.

[Name & titlel
SB/SE Director of Compliance
Internal Revenue Service
Signed at
this

day of

, 2003.

09/16/2003

JS-736: U.S. Treasury Secretary John W . Snow Statement following Visit to Saudi Arabi... Page 1 of 1

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 17, 2003
JS-736
U.S. Treasury Secretary John W. Snow Statement following Visit to Saudi
Arabia September 17, 2003
I am pleased to report a fruitful day of discussion in Saudi Arabia, on subjects
ranging from pro-growth economic reforms, to reconstruction efforts in Afghanistan
and Iraq, to the ongoing war on terrorist financing.
Earlier today, I met with Finance Minister Al-Assaf, SAMA Governor Al-Sayari, and
C o m m e r c e Minister Yamani, as well as with Foreign Minister Faisal, and w e
engaged in a constructive dialogue regarding economic reforms that will strengthen
and diversify the Saudi Arabian economy. In particular, I believe Saudi Arabia's
plan for accession to the World Trade Organization sets achievable targets for
attaining an important milestone. W e also discussed reforms underway to open a
variety of industry sectors to foreign investment, which will attract international
capital and best practices to Saudi Arabia, spurring growth and stability. There is
general agreement that the Saudi economy needs to produce more jobs and
investment outside the energy sector, to withstand the uncertainties of global oil
markets and accommodate high population growth.
I am also pleased to say that the Saudi people are continuing their generous aid to
relieve suffering in Afghanistan, which is the next stop on m y tour through the
Middle East. The Saudi Kingdom has been a leader, along with the United States
and Japan, in rebuilding the Kabul-Kandahar-Herat road, and they have pledged to
join the United States in further bolstering reconstruction.
We also discussed Saudi Arabia's contribution to Iraq's reconstruction, and we are
hopeful that the Saudis will choose to take a leadership role in helping its
neighboring nation get onto its feet.
Finally, in our meetings today we discussed our outstanding progress working
together on the fight against terrorist financing. Saudi Arabia has been a strong ally
to the United States in this essential matter. Their close oversight of charities to
guard against money laundering and terrorist financing sets an example to all
countries engaged in the war against terror.
Thank you.

JS-737: Snow and Evans Praise House for Approving Legislation to M a k e Internet Tax M... Page 1 of 1

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 17, 2003
JS-737
Snow and Evans Praise House for Approving Legislation
to Make Internet Tax Moratorium Permanent
Treasury Secretary John Snow and Commerce Secretary Don Evans today praised
the passage of legislation by the U.S. House of Representatives that would
permanently extend the moratorium on taxes on Internet access and multiple or
discriminatory taxes on electronic commerce.
"A permanent moratorium means a permanent victory for American consumers and
businesses. Keeping the Internet free of multiple or discriminatory taxes will help
create an environment for innovation and will help ensure that electronic commerce
remains a vital, and growing, part of our economy."
"The House Leadership deserves much credit for getting this legislation passed.
The Departments of Commerce and Treasury will continue to pursue this issue to
make sure a permanent moratorium is available for President Bush to sign by the
November 1 deadline.

202-691-3550

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

September 18, 2003
October 16, 2003
912795NS6

High Rate: 0,870% Investment Rate 1/: 0.889% Price: 99.932
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 93.21%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
$

Competitive
Noncompetitive
FIMA (noncompetitive)
SUBTOTAL
Federal Reserve

TOTAL

27,966, 482
43, 406
0

Accepted
$

8,956,672
43,406
0

28,009, 888

9,000,078

4,393,,661

4,393,661

32,403,.549

13,393,739

Median rate
0.865%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.090%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 28,009,888 / 9,000,078 = 3.11
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 9-YR 11-MONTH NOTES
This issue is a reopening of a note originally issued August 15, 2003.
Interest Rate: 4 1/4% Issue Date: September 15, 2003
Series:
D-2013
Dated Date:
CUSIP No:
912828BH2
Maturity Date:

August 15, 2003
August 15, 2013

High Yield: 4.340% Price: 99.275
All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 63.42%. All tenders at lower yields were accepted in full.
Accrued interest of $ 3.58016 per $1,000 must be paid for the period
from August 15, 2003 to September 15, 2003.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Accepted

28,937,010
65,252
0

13,000,127 1/

29,002,262

SUBTOTAL

TOTAL

Federal Reserve
$

29,002,262

12,934,875
65,252
0

13,000,127

Median yield
4.313%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
4.240%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 29,002,262 / 13,000,127 = 2.23
1/ Awards to TREASURY DIRECT = $37,342,000

http://www.publicdebt.treas.gov

JS-740: Remarks by Michael A. Dawson Deputy Assistant Secretary

Page 1 of 3

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 3, 2003
JS-740
Remarks by Michael A. Dawson Deputy Assistant Secretary for Critical
Infrastructure Protection and Compliance Policy to The Continuity Planning
Exchange
I would like to begin by thanking you and the Continuity Planning Exchange for this
opportunity to speak to you about critical financial infrastructure protection. I would
also like to thank John Dinuzzo, even though he could not be with us today, for
introducing m e to the Continuity Planning Exchange. Your organization has
accomplished much. It demonstrates that here, in the center of the most ruthlessly
competitive community on earth, w e are, at bottom a community committed to
working together to address c o m m o n problems like business continuity.
Today, I will provide a quick introduction to the work that Treasury is doing, together
with our fellow financial regulators and the private sector, to enhance the resiliency
of our critical financial infrastructure.
I will outline the principles that guide our work. I will then outline the partnerships
that w e have established with our fellow financial regulators and the private sector
to advance our work. I will next describe some of
Guiding Principles
Every thing that w e do at Treasury to protect the critical financial infrastructure is
guided by a few important principles. I will talk about three, although there are
others.
People. First, as the President has said, the highest responsibility of government is
the protection of its citizens. W e are devoted to protecting the critical financial
infrastructure, because it is essential to meeting that responsibility.
For one thing, the most important component of our financial infrastructure is the
people who make it work. W e must protect the safety of the tellers, loan officers,
traders, and technicians that make up our financial infrastructure. Americans trust
these employees with their money. Financial services employees, in turn, trust us
with their lives. W e have a profound obligation to keep these employees safe.
For another thing, Americans depend on the critical financial infrastructure to make
the economy work and grow. As Treasury Secretary Snow has said, the financial
system is the engine of our free enterprise economy. W e have to protect this
engine so that it can continue to support growth in the American economy, so that it
can continue to create jobs for American workers.
Confidence. Second, we work to ensure that Americans - and the world maintain their well-placed confidence in the U.S. financial system. It is hard to
overstate our dependence on the financial infrastructure. W e depend on it to
receive our paychecks; to withdraw cash from an A T M ; to pay for our groceries with
cash, check, debit cards, or credit cards; to finance the purchase of a house or a
car; to save for our children's education; to plan for a secure retirement.
Americans have confidence in our financial infrastructure. And they should. Our
financial infrastructure is the most resilient in the world. Our job is to keep it that
way, to ensure the resiliency of the infrastructure in the face of evolving threats.
Continuity. Third, we are committed to ensuring that our financial institutions
continue to function even during - especially during - times of stress. Of course,
the physical safety of your employees and customers comes first. But absent a

JS-740: Remarks by Michael A. Dawson Deputy Assistant Secretary
specific and credible threat to physical safety, it is important for financial institutions
and markets to continue to operate as close to business-as-usual as possible
There areseveral important reasons for this. O n e is that it is precisely during times
of stress that Americans need the financial system most. During times of stress,
investors need to price the impact of that disruption on assets. The longer they are
prevented from pricing the impact, the more anxiety builds and the worse the
consequences will be, w e believe, w h e n markets eventually re-open.
Competence. A fourth guiding principle is that we want to promote decentralized
decision-making and problem-solving, both as w e prepare for disruptions and as w e
weather them. W e favor a cooperative, public-private partnership as w e work
together to protect our financial infrastructure. In the event of a disruption to the
payment system, for example, w e want the subject matter experts in payments
systems to fix it. W e don't want them to wait for guidance from Treasury on h o w to
fix it. Just fix it. You are in the best position to determine what steps you should
take to protect your employees and your customers. W e will help where w e can,
but w e intend to stand out of the way and let the financial institutions and the
regulators that are closest to the problems find the solutions.
These principles have important implications for national-regional cooperation.
State and local governments are, of course, right here, right now. Financial
institutions are closer to their employees and customers than w e are in
Washington.
Partnerships
The President has established two principle partnerships for enhancing the
resiliency of the critical financial infrastructure.
Shortly after September 11, 2001, the President established the Financial and
Banking Information Infrastructure Committee, the FBIIC. This Committee is n o w
sponsored by the President's Working Group on Financial Markets - an interagency
task force lead by Secretary Snow, Chairman Greenspan, Chairman Donaldson,
and Chairman N e w s o m e -Treasury chairs the FBIIC. Its members include the
Federal Reserve Board, the Securities and Exchange Commission, the Commodity
Futures Trading Commission, the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, the Office of Thrift Supervision, the
National Credit Union Administration, and the Office of Federal Housing Enterprise
Oversight. It includes state authorities as well - the Conference of State Banking
Supervisors, and the National Association of Insurance Commissioners.
One of the things that we use the FBIIC for is as a mechanism to evaluate and
share available threat information. For example, Treasury has installed secure
telecommunications equipment and arranged for appropriate security clearances for
personnel in the members of FBIIC, so that w e can effectively share sensitive and
even classified information. Where appropriate, w e can share information with an
individual institution, in the case of a specific and credible threat against a specific
institution, or with the financial sector more generally.
Another important partnership is the Financial Services Sector Coordinating
Council. The Council is led by Rhonda MacLean, a senior executive with Bank of
America. Treasury appointed Ms. MacLean last June. She has done an
outstanding job. Over two dozen financial services trade associations have joined
the council. A m o n g many other things, the Council has worked to collect and
disseminate considerations for private institutions to bear in mind in the event that
the threat advisory level is at s o m e point in the future raised to red. The Council is
also working to construct a repository of table-top exercises, war-games, and tests.
This repository will provide a central source for the industry to learn what is
happening in the critical financial protection area. In the future, the repository will
be a useful tool as w e m o v e to more coordinated, inter-institutional testing and
planning. Our hope is that w e can improve from the situation w e have today, in
which m a n y well-intentioned exercises are taking place, but without m u c h
coordination between exercises. W e need to improve coordination so that the
exercises build on each other and, overtime, systematically improve the resiliency
of the industry as a whole. The government and the private sector did a good job of
coordinating the planning, preparation, and testing for Y2K. W e hope w e can
that experience
in this
context.
Areplicate
third important
partnership
is the
Financial Services Information Sharing and

Page 2 of 3

JS-740: Remarks by Michael A. Dawson Deputy Assistant Secretary
Analvsis Center the FS/ISAC. Under the leadership of Suzanne Gorman, a senior
executive at theSecurities Industry Automation Corporation, the FS/ISAC has
emerged as a leader in information sharing. For example, m a n y of you will
remember that in January of this year a w o r m called Slammer rocketed around the
internet The FS/ISAC w a s instrumental in alerting the financial services sector to
this threat W e believe that the FS/ISAC w a s largely responsible for the fact that
the financial sector experienced relatively low disruption from the worm.
Each sector has an ISAC, and I am proud of the fact that the Financial Services
ISAC w a s both the first and the best. I a m even more proud of the vision that M s .
Gorman has shown to enhance the value proposition of the FS/ISAC by expanding
its membership base; improving cross-sectoral information sharing; and working to
encourage members to contribute more information, not just receive it. Treasury
w a s pleased to devote resource to the FS/ISAC as it planned these improvements.
W e look forward to supporting the FS/ISAC with a significant financial investment
as it implements its next phase. Already, I a m told by Homeland Security officials
that they regard the FS/ISAC's vision as a model that other ISACs can look to and
learn from.
Programs and Products
We have several programs and products that we have developed with our fellow
financial regulators and the private sector to enhance the resiliency of the critical
financial infrastructure. I will provide just two examples.
Priority Telecommunications Programs. Together with our fellow financial
regulators, w e sponsor critical financial institutions for participation in three priority
telecommunications programs run by the National Communications Services.
These three programs enable key personnel and telecommunications lines to
receive access to priority telecommunications services. If you are interested in
learning more about these services, please contact Brian Peretti
(brian.peretti@do.treas.gov), w h o manages this program in m y office.
Protective Response Plans. We work with certain key financial institutions and
their regulators to develop integrated protective plans. These plans incorporate the
response of local, state, and federal protectors from the local Chief of Police to the
County Sheriff, to the State Police authority, to the FBI, to the United States Secret
Service, and others. W e have conducted one planning exercise and are preparing
to conduct two more over the next six months. Thus far, w e have found that the
exercise vastly improves coordination among local, state, and federal authorities
and w e look forward to replicating it with more institutions in varying locales. W e
limit participation in this program to major institutions and require the institution to
jointly fund the planning exercise. If you are interested in learning more about this
program, please contact Scott Parsons (scott.parsons@do.treas.gov), w h o
manages this program in m y office.
That, in a nutshell, is a quick overview of our efforts to enhance the resiliency of the
critical financial infrastructure. W e undertake these efforts in close partnership with
our fellow financial regulators and with the private sector. W e look forward to
continuing these partnerships as w e work together in the future to ensure that the
U.S. financial infrastructure remains the most resilient in the world.

Page 3 of 3

JS-741: United States Treasury Secretary John W . Snow Statement upon leaving Kabul,...

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 18, 2003
JS-741
United States Treasury Secretary John W. Snow
Statement upon leaving Kabul, Afghanistan
September 18, 2003
My visit to Kabul has offered an enlightening and encouraging perspective on the
reconstruction of Afghanistan. Clearly, this is a crucial time in Afghanistan's postwar economic development. The United States and the international community
are committed to seeing this long-troubled nation through to peace and stability,
and w e redoubling our support for the goals and priorities of President Karzai's
government.
We cannot allow the people of Afghanistan suffer a return to the humanitarian
disaster of the past 20 years, in which a lawless land with the promise of much
more unfortunately became a haven for terrorists and drug traffickers. W e must
reverse this sad history. The reconstruction of a new, democratic Afghanistan must
succeed - for the sake of the Afghan people, for the region and for the world
community. Much hangs in the balance and failure cannot be an option.
During my visit, I held meetings with President Karzai, Finance Minister Ghani,
Central Bank Governor Ahady and other cabinet ministers, and saw several
examples of their leadership and vision for Afghanistan's future. A m o n g their
notable achievements are the new banking laws, the new currency, improvements
in centralizing customs revenue and increasing the transparency and accountability
of the budget process.
Most important for long-term growth and employment opportunities in the country
are the Karzai administration's policies encouraging private sector investment and
productivity. Also, stronger trade and transportation relationships between
Afghanistan and its neighbors, especially Pakistan, will be essential for integrating
Afghanistan's economy with the global economy, and creating opportunity for the
Afghan people.
I want to thank the Karzai government and the people of Afghanistan for their
hospitality today. The American people will stand by you. I look forward to
returning soon to scenes of even greater progress.
Thank you.

Page

JS-742: Treasury Announces Scheduled Events Will Proceed

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Page 1 of 1

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FROIVI T H E OFFICE O F PUBLIC AFFAIRS

September 18, 2003
JS-742
Treasury Announces Scheduled Events Will Proceed
Despite the dosing of federal agencies today in preparation for Hurricane Isabel,
the following events will proceed as scheduled:
The 13 week/26 week bill announcement will occur at 11:00 am EDT.
(www.pubiicdebt.treas.gov)
The results of the TIO auction will be posted to the Financial Management Service's
website at 12:00 p m E D T (www.fms.treas.gov).
The Daily Treasury Statement will be released at 4:00 pm EDT
(www.fms.treas.gov).

JS-743: Treasury Announces Results of P A T R I O T A C T Section 326 Notice of Inquiry

Page 1 of 2

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.
September 18, 2003
JS-743
Treasury Announces Results of PATRIOT ACT Section 326 Notice of inquiry
The U.S. Treasury Department today announced the results of the notice of inquiry
published in the Federal Register July 1, 2003 requesting additional information
pertinent to the final rules published on May 9, 2003 implementing customer
identification requirements for financial institutions under Section 326 of the U S A
PATRIOT Act. After reviewing over 34,000 comments, Treasury found that no new
information had been presented that had not been considered prior to issuing the
final rules. Accordingly, Treasury is recommending no changes to the rules.
The July notice of inquiry sought comment on two specific issues: (1) whether
financial institutions should be required to retain photocopies of identification
documents used to verify customers' identities; and (2) whether financial institutions
should be prohibited from accepting foreign government issued identification
documents other than passports as an acceptable form of identification.
On the first issue, Treasury reaffirmed its original judgment that the maintenance of
photocopies in all cases did not provide a security benefit that justified the
additional record keeping burden. Further, many identification documents contain
security features that render copies illegible. However, Treasury does note that in
some cases financial institutions, at their discretion, may find it prudent to maintain
photocopies of identification documents.
On the second issue, Treasury concluded that the risk-based approach taken by
the final rules, combined with the ability to notify financial institutions if concerns
arise with specific identification documents, provide an ample mechanism to
address any security concerns.
Treasury expects ail financial institutions covered by the customer identification
regulations to have their customer identification program drafted and approved by
October 1, 2003.
This additional comment period, which concluded July 31, represented Treasury's
commitment to considering all relevant information in implementing these
regulations in a way that is fair to those regulated and effective in properly
identifying new customers.
A fact sheet providing further information on the notice of inquiry and the original
rule, as well as a copy of the notice that will appear in the Federal Register
announcing the results of the notice of inquiry are attached.

Related Documents:
• Final Regulations Implementing Customer Identity Verification
Requirements under Section 326 of the U S A PATRIOT Act

DEPARTMENT OF THE TREASURY
Office of Public Affairs
September 18, 2003

FACT SHEET:
Results of the Notice of Inquiry on Final Regulations Implementing Customer Identity
Verification Requirements under Section 326 of the USA PATRIOT
Act
Overview:
Following the review of over 34,000 comments received as a result of the July notice
of inquiry on certain provisions of the final rules implementing Section 326 of the
U S A P A T R I O T Act, Treasury found that there was no n e w information presented that
was not considered prior to issuing the final rules. Accordingly, Treasury will not
seek changes to the final rules to prohibit the acceptance of foreign issued
identification documents, such as consular IDs, or to require that financial institutions
maintain photocopies of identification documents.
Background:
The U.S. Treasury, the Financial Crimes Enforcement Network and the federal financial
regulators announcedfinalrules implementing customer identification and verification
requirements under Section 326 of the U S A P A T R I O T Act M a y 9, 2003.
Treasury published a notice of inquiry in the Federal Register July 1, 2003 initiating a 30day comment period that concluded July 31, 2003. The notice of inquiry sought
comment on two specific issues: (1) whether financial institutions should be required to
retain photocopies of identification documents used to verify customers' identities; and
(2) whether financial institutions should be prohibited from accepting foreign government
issued identification documents other than passports as an acceptable form of
identification.
Treasury expects all financial institutions covered by the customer identification
regulations to have their customer identification program drafted and approved by
October 1, 2003 as scheduled.

**MORE**

Foreign issued identification documents:
_
Treasury concluded that the risk-based approach taken by thefinalrules, combined with
the ability to notifyfinancialinstitutions if concerns arise with specific identification
documents, provide an ample mechanism to address any security concerns. There was
no need to expressly prohibit specific IDs in the regulations themselves.
• An effective program for identifying new customers must allow financial
institutions theflexibilityto use methods of identifying and verifying the identity
of their customers appropriate to their individual circumstances. For example,
some financial institutions open accounts via the Internet, never meeting
customers face-to-face.
• Rather than dictating which forms of identification documents financial
institutions m a y accept, thefinalrule employs a risk-based approach that allows
financial institutionsflexibility,within certain parameters, to determine which
forms of identification they will accept and under what circumstances.
• However, with this flexibility comes responsibility. When an institution decides
to accept a particular form of identification, they must assess risks associated with
that document and take whatever reasonable steps m a y be required to minimize
that risk.
• Federal regulators will hold financial institutions accountable for the effectiveness
of their customer identification programs.
• Additionally, federal regulators have the ability to notify financial institutions of
problems with specific identification documents allowing financial institutions to
take appropriate steps to address those problems.
Photocopy requirement:
Treasury reaffirmed its original judgment that the maintenance of photocopies in all
cases did not provide a security benefit that justified the additional record keeping
burden.
• The final rules implementing Section 326 of the PATRIOT Act require that financial
institutions maintain records of the steps taken to verify identity, including all
relevant information in an identification document, such as address, document
number, etc.
• The record keeping may include photocopies of identification documents but does not
require it. In some casesfinancialinstitutions, at their discretion, m a y find it prudent
to maintain photocopies of identification documents.
•

Additionally, some IDs have security features that render photocopies illegible,
making copies useless.

Breakdown of Comments:
Total
Comments:

34602
Photocopy Issue:
Total Comments Received:
Total Comments
Requesting No Change to
the Final Regulation:

10704

9623

Total Percent in Favor of No
89.90%
Change:
Identification Card Issue:
Total Comments Received:

23898

Total Comments
Requesting No Change to
the Final Regulation:

19770

Total Percent in Favor of No
82.73%
Change:

DEPARTMENT OF THE TREASURY
Office of Public Affairs
April 30, 2003

FACT SHEET:
Final Regulations Implementing Customer Identity Verification Requirements
Section 326 of the USA PATRIOT
Act

under

Overview:
O n M a y 9, 2003, the U.S. Treasury, the Financial Crimes Enforcement Network and the
federal financial regulators announcedfinalregulations implementing customer
identification and verification requirements under Section 326 of the U S A P A T R I O T
Act. These n e w regulations will provide another tool to protect the U.S. financial system
from m o n e y laundering, terrorist financing, identity theft and other forms of fraud.
Background:
O n October 26, 2001, President Bush signed into law the U S A P A T R I O T Act, important
legislation providing a wide range of n e w tools to combat m o n e y laundering and the
financing of terrorists. In July of 2002, Treasury announced a proposed rule
implementing Section 326 of the P A T R I O T Act. T h efinalrule incorporates important
changes that increase the effectiveness of the rule while eliminating unnecessary burden
on regulated institutions.
What it requires:
The rule requires that financial institutions develop a Customer Identification Program
(CIP) that implements reasonable procedures to:
1) Collect identifying information about customers opening an account
2) Verify that the customers are w h o they say they are
3) Maintain records of the information used to verify their identity
4) Determine whether the customer appears on any list of suspected terrorists or
terrorist organizations
Collecting information:
A s part of a Customer Identification Program (CIP), financial institutions will be required
to develop procedures to collect relevant identifying information including a customer's
name, address, date of birth, and a taxpayer identification number - for individuals, this
will likely be a Social Security number. Foreign nationals without a U.S. taxpayer
identification number could provide a similar government-issued identification number,
such as a passport number.
Verifying identity:
A CIP is also required to include procedures to verify the identity of customers opening
accounts. Most financial institutions will use traditional documentation such as a driver's
license or passport. However, thefinalrule recognizes that in some instances institutions
cannot readily verify identity through more traditional means, and allows them the
flexibility to utilize alternate methods to effectively verify the identity of customers.

Maintaining records:
A s part of a CIP, financial institutions must maintain records including customer
information and methods taken to verify the customer's identity.
Checking terrorist lists:
Institutions must also implement procedures to check customers against lists of suspected
terrorists and terrorist organizations w h e n such lists are identified by Treasury in
consultation with the federal functional regulators.
Reliance on other financial institutions:
Thefinalrule also contains a provision that permits a financial institution to rely on
another regulated U.S. financial institution to perform any part of the financial
institution's CIP. For example, in the securities industry it is c o m m o n to have an
introducing broker - w h o has opened an account for a customer - conduct securities
trades on behalf of the customer through a clearing broker. Under this regulation, the
introducing broker is required to identify and verify the identity of their customers and
the clearing broker can rely on that information without having to conduct a second
redundant verification, provided certain criteria are met.
The following financial institutions are covered under the rule:
> Banks and trust companies
> Savings associations
> Credit unions
> Securities brokers and dealers
> Mutual funds
> Futures commission merchants and futures introducing brokers
The regulations were developed jointly by:
> The Department of the Treasury
> Treasury's Financial Crimes Enforcement Network
> The Board of Governors of the Federal Reserve System
> The Commodity Futures Trading Commission
> The Federal Deposit Insurance Corporation
> The National Credit Union Administration
> The Office of the Comptroller of the Currency
> The Office of Thrift Supervision
> The Securities and Exchange Commission

EMBARGOED UNTIL 11:00 A.M.
September 18, 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 $30,000
million to refund an estimated $33,831 million of publicly held 13-week and 26-week
Treasury bills maturing September 25, 2003, and to pay down approximately $3,831
million. Also maturing is an estimated $26,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced September 22, 2003.
The Federal Reserve System holds $15,355 million of the Treasury bills maturing
on September 25, 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 23, 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 $993 million into the 13-week bill and $797 million into the 26-week
bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo

Attachment

Jp - w

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED SEPTEMBER 25, 2003
September 18, 2003
Offering Amount $15,000 million $15,000 million
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
$ 6,300
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

million
million
million
million

92-day bill
912795 PC 9
September 22, 2003
September 25, 2003
December 26, 2003
June 26, 2003
$24,421 million
$1,000

$ 5,250 million
$ 5,250 million
$ 5,250 million
None

182-day bill
912795 PR 6
September 22, 2003
September 25, 2003
March 25, 2004
September 25, 2003
$1,000

JS-745: Secretary John Snow: World Bank Development Committee Statement

Page 1 of 3

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 22, 2003
JS-745
Statement by U.S. Treasury Secretary John Snow to the World Bank
Development Committee, Dubai, U A E , September 20, 2003
We have come together in Dubai to address a vital cause, supporting developing
countries' efforts to increase economic growth, raise living standards, and reduce
poverty. The United States is committed to meeting this chailenge. Our shared
objective further reinforces the urgency of increasing global economic growth.

Increasing Grants
The World Bank has made some important changes that will help to advance
developing countries' growth more rapidly and effectively. One such reform is the
increasing use of grants. For the poorest countries, grants are particularly
important in such areas as education and health - investments that increase
productivity but do not directly generate the income needed for debt servicing. W e
must increase grants in IDA 14 and beyond so that strong performers with heavy
debt burdens can still access the external resources they need to support real
growth-promoting development.

Mainstreamirtg Results Measurement
I commend the World Bank for the ambitious transformation it has launched to
orient itself toward producing results. No development endeavor should be
considered a success unless it achieves measurable impact on the lives of the
poor. The Bank's work to integrate a results measurement system and evaluation
into its operations and strategies must be practical, achievable and transparent.
The focus on results should also apply to Bank lending for budget support for
recipient countries. Budget support must be designed around a strong results
framework, with clear, measurable baselines, indicators and objectives. It should
be going to solid performers with the most credible public expenditure
management.
Measuring results, rewarding performance, and increasing transparency are all
steps intended to bolster program effectiveness and enhance accountability. To
advance this agenda, w e call on the Bank to:
Fully disclose the performance rating system it uses to allocate resources to poor
countries, including disclosure of individual country performance scores that are
used to apportion IDA resources, and the scores of their components;
Tie staff performance incentives to the quality of development outcomes rather than
the quantity of development flows, and;
Conduct an external performance audit of the 1DA-13 results commitment, to which
the United States has tied its $200 million incentive contribution.

Supporting Private Sector-Led Growth
The World Bank is engaging more seriously in supporting private sector-led growth,
which is essential for poverty reduction. I particularly want to commend the IFC and
IDA initiatives to expand small business access to credit in Africa. I welcome the
focus of next year's World Development Report on the links between investment
climate improvements, growth and poverty reduction. Investment climate
diagnostics must be central to all country programs. Where private finance is

JS-745: Secretary John Snow: World Bank Development Committee Statement

unavailable, the Bank must also catalyze infrastructure investments necessary to
strengthen markets, productivity and services delivery.

Remittances
Remittances from the developed countries to people in poor countries play a crucial
role in economic development, with recorded flows reaching over $70 billion per
year and far exceeding official development assistance. These flows reduce
poverty and help achieve other development goals in education and health. Actual
flows are believed to be significantly higher given that remittances often flow
through informal channels. The use of informal channels indicates that there is
room for improvement in our formal financial systems and that w e can reduce the
cost of remittances thereby increasing the flows significantly. It is critical that the
IFIs dedicate resources to the systematic analysis of remittance issues. In this
vein, w e welcome the World Bank's recent draft report for A P E C that creates a
framework for estimating the magnitude of remittance flows and examines the
incentives for using informal systems.

Reducing Barriers to Trade
Increased trade offers significant potential for developing countries to increase
growth and reduce poverty. The World Bank has m a d e commendable efforts to
incorporate trade issues into country programs, reducing administrative obstacles to
trade and supporting regional integration projects. More operations are needed to
improve the legal, administrative, financial and customs/transportation frameworks
that can m a k e or break a country's ability to compete. The most important m e a n s
of increasing trade, however, is to bring down trade barriers in both developed and
developing countries. World Bank studies show that the gains from such reforms
for emerging markets alone could be $500-$800 billion annually.
The United States commends the willingness of the World Bank to support
developing countries with adjustment needs related to trade liberalization. W e must
not let the outcome at Cancun become a lost opportunity for global trade
liberalization. A s governments reflect on next steps, it will be critical for all
countries to consider their contributions to reducing barriers to poverty-reducing
trade and investment.

Voice of Developing and Emerging HHarket
Countries
The United States has long supported strengthening the voice of developing and
emerging market countries in the international financial system. The U.S. w a s one
of the earliest and strongest advocates of the creation of the G-20 and the countrydriven P R S P process, and the U.S. has advocated including borrowing country
representatives in IDA-13 and African Fund replenishment negotiations. W e
supported measures taken last spring to enhance the influence of the borrowing
countries with regard to the Bank, including adding resources to the largest
constituencies.

Supporting Iraq and Afghanistan
It is propitious that we are meeting in Dubai. Our coming together here
underscores the vital work that the World Bank and other institutions are doing in
this region. A s w e all know, the task of supporting reconstruction and recovery in
Iraq is enormous. The World Bank is already making a tremendous contribution on
a needs assessment, and w e look forward to its continuing active engagement. In
particular, the World Bank should work with the Iraqi Governing Council and
relevant Iraqi ministries to provide substantial financial support to Iraq as soon as
possible.
I believe that we have already achieved important successes in Iraq, especially in
the economic and financial areas. While these achievements are helping to
underpin economic stability in Iraq, substantial work is needed to lay the foundation
for private sector-led growth and to bring lasting and meaningful improvements to
the Iraqi people. Helping Iraqis achieve these objectives will require a sustained
commitment by the international community, and I look forward to next month's

Page 2 of 3

JS-745: Secretary John Snow: World Bank Development Committee Statement

meeting in Madrid as an opportunity for donors to pledge their support.
In Afghanistan, reconstruction is moving forward with the help of the international
community. Substantial progress has been m a d e on crucial infrastructure projects,
and I c o m m e n d the contributions that the World Bank and Asian Development Bank
are making in this area. The Afghan government deserves credit for its efforts to
provide the basis for a working economy.
Afghanistan is at a critical juncture. To ensure success, the United States will
increase its assistance to Afghanistan this year and accelerate projects to provide
concrete, visible results to the Afghan people. To be successful, however, this
must be a united effort with the full support of the Afghan government and the
international community. I urge donors to increase and expedite their assistance.

Combating Terrorist Fsnancing/Anti-Wfoney
Laundering
We are making progress in protecting people from terrorism by combating terrorist
financing and money laundering, but much remains to be done. The World Bank
has contributed to this effort and I look forward to further work. A high priority is the
joint World Bank, IMF and Financial Action Task Force (FATF) pilot project for
assessing country compliance with standards for combating terrorism financing and
money laundering. This should become a permanent part of the IFIs' oversight and
surveillance of financial systems. It will be critical to the war on terrorism and will
help to anchor the foundations of sustainable growth and development.

World Bank Budget
To ensure the ability of the World Bank to deliver its assistance more effectively and
achieve its objectives, its administrative budget must be more transparent and
focused on the strategic priorities of the Bank. The U S will work with other
shareholders in the World Bank and the other international financial institutions to
propose changes in the way their budgets are structured, with a view to
implementing these changes over the next year.

Conclusion
I want to share a longer-term vision reflecting on the ambitious goals that we have
set for reducing poverty. A s these goals are met, w e can add another target that
w e should all want to achieve, and that is for the development institutions - bilateral
and multilateral - to work themselves out of business. While it m a y seem like a
strange measure of success, such an achievement would m e a n that people's lives
have improved and countries are relying on investment, private capital, and
entrepreneurship instead of pledges, concessions, and debt relief, it would m e a n
that the people of developing countries will have governments that deliver basic
services and provide for the rule of law; it will m e a n that they will have a chance to
better their lives and see their children educated; and it will m e a n that they will
know freedom and h u m a n dignity.
Thank you.

Page 3 of 3

JS-746: Secretary John Snow: Post-G7 Press Statement

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 20, 2003
JS-746
Statement by U.S. Treasury Secretary John Snow following the G7 Finance
Ministers Meeting, Dubai, U A E , September 20, 2003
Good afternoon. I welcomed the chance to meet today for the fourth time with my
fellow G-7 Finance Ministers and Central Bank Governors.
Strengthening global growth must be the top priority for the G-7. I repeated that
strong message today. Growth in the major economies, in Europe, and in Asia, is
simply not what it could be. W e need to do more to ensure a robust global recovery
and to promote higher growth rates in our economies and I was pleased the
communique c a m e out so strongly in support of this idea.
The United States has taken legislative action, proposed by President Bush, to
strengthen the U.S. recovery. That legislation is clearly beginning to take affect.
After a series of shocks that included terrorist attacks, corporate scandals, and a
recession, the U.S. economy is finally accelerating.
I made clear today that the United States can not be the sole engine of world
growth, others need to take bold actions themselves - including fundamental
structural reforms where necessary - to spur domestic led growth, create jobs and
contribute to global prosperity. This is the very same growth message I have taken
to Europe, Asia and across the world on m y global growth campaign and I w a s
pleased to see the G 7 for the first time come together on this point.
But I also made clear the U.S. leads by example, and with actions, not just words.
Thus, w e are continuing to act to strengthen our economy and create jobs.
Earlier this month, President Bush unveiled a six-point plan for ensuring the
economic success w e all want to see, which I reviewed with m y colleagues in s o m e
detail. Under the President's plan, w e will take the following steps to create the
conditions in which employers will hire more workers and our economy will continue
to grow.
First, we are working to make health care more affordable and its costs more
predictable, so employers can add new workers without also adding a large and
uncertain burden from health care costs.
Second, we are working to prevent frivolous lawsuits from diverting money from job
creation into legal battles.
Third, we are working to build a more affordable, reliable energy system that can
support the expansion of our economy.
Fourth, we are streamlining regulations and needless paperwork requirements that
reduce business productivity and deter growth.
Fifth, we are opening new markets to high value American products and bringing
down prices for American consumers through trade agreements.
And lastly, number six, we are working to make tax relief permanent, so businesses
and families alike can plan for the future with confidence.
We have an ambitious agenda for maximizing economic growth and job creation in
our country. These actions, together with President Bush's previous stimulative
measures, will take the U.S. economy through the recovery stage, and m o v e to a

Page 1 of 3

JS-746: Secretary John Snow: Post-G7 Press Statement

n e w level of expansion, prosperity and success. I urged m y G 7 colleagues to
embark on their o w n appropriate and equally ambitious agendas and they were
quite receptive.
Throughout my meetings we had extensive discussions on the issue of currencies.
I expressed m y long-held view that the world trading system works best under a
regime with market based exchange rates. I w a s pleased the communique
reflected this view.
The need for action, however, extends beyond the G-7. All countries need to
strengthen their policies and implement reforms aimed at achieving growth. W e all
benefit w h e n the international financial system relies on the principles of free trade,
free capital flows, and market based exchange rates among the major economies.
Trade, and its importance to global prosperity, was discussed. I was very
disappointed with the collapse of the W T O talks in Cancun, Mexico earlier this
month. T o reaffirm our views on global trade, I m a d e this point crystal clear today:
the United States supports free trade because a world that trades freely will grow in
prosperity. For developing nations, free trade tied to economic reform has helped
to lift hundreds of millions of people out of poverty. The growth of economic
freedom and ownership in developing countries creates the habits of liberty and
creates the pressure for democracy and political reform. Also, of course, w e support
free trade in America because it creates jobs. It's vital to the success of our
economy. I m a d e clear to m y colleagues and reiterate here that the United States
stands ready to work with others w h o seek trade liberalization.
Economic and financial crises can disrupt our drive for sustained growth. I am
pleased that spreads in emerging markets are down, and that there have been
fewer crises, and that capital flows are up. I a m also pleased that w e have m a d e
progress on policy changes that improve predictability in emerging markets. T h e
establishment of collective action clauses as a market standard is a critical step
forward.
Yet we all agreed today that there is more to be done to make the IMF as effective
as it needs to be. In particular, I underscored the need for IMF to address currency
mismatches in assessing its members' economies. The IMF also needs to focus its
lending on countries truly committed to reform. The United States and others in the
G-7 strongly support recent steps to enhance IMF transparency. Today, w e
underscored in particular the importance of disclosing all IMF documents especially the exceptional access reports that justify large scale lending.
Promoting growth and job creation is the single best way that we can help
developing countries. In the spirit of Monterrey, the G-7 continues to work to
improve development assistance through a results-based approach that focuses on
countries implementing credible reforms. W e highlighted today the need for these
countries to address structural weaknesses and governance issues. I also
emphasized the need for the World Bank to reflect the priorities of development and
growth in their administrative budgets.
Turning to Iraq and Afghanistan, my colleagues and I discussed the enormous but
critical task of supporting reconstruction and recovery. Over the last week, as I
traveled through Israel, Jordan, Saudi Arabia, Afghanistan and Pakistan, I have had
extensive discussions on this topic with the leaders of this region.
While there has been important progress, much work remains to lay the foundation
for private sector- led growth and to bring meaningful improvements to the Iraqi and
Afghan people. President Bush has indicated our commitment to providing very
substantial s u m s in support of this effort. I urged others to rise to the challenge of
helping both countries with the task of reconstruction. And, to help provide a sound
footing for the future, w e in the G-7 have pledged to seek a solution to Iraq's debt
problem by the end of 2004. Tomorrow morning, I will meet with the n e w Iraqi
Finance Minster Al-Kilani for the first time. During that meeting, I will underscore
our dedication and commitment to rebuilding Iraq for the people of Iraq.
In addition to our normal meeting, I am pleased the G-7 had the opportunity to meet
together this morning with Palestinian Finance Minister Fayyad. I met with Minister
Fayyad last week to underscore with him President Bush's vision of peace and
prosperity for the Middle East, and for both the Israeli and Palestinian people.

Page 2 of 3

JS-746: Secretary John Snow: Post-G7 Press Statement

W e fully support the Palestinian Authority in its efforts to bring peace and economic
stability and prosperity to the Palestinian people. Toward this end, the United
States will continue to provide budgetary support and other aid to the Authority to
help insure that it can effectively conduct normal government functions. During our
meeting today, I called on others in the G-7 to provide similar support.
Finally, I am eager to sit down this evening with Finance Ministers from countries
engaged in the fight against terrorist financing. In the past two years, w e have
m a d e important progress in protecting the world's financial systems from abuse by
terrorists - thanks to the hard work of m a n y countries, the FATF, and the IMF and
World Bank. I look forward to the Fund and Bank making terrorist financing/money
laundering assessments a permanent part of their surveillance and oversight
function. I will also press during our dinner discussion for broad support for
measures to ensure that the informal sectors are not alternative havens for the
flows of terrorist funds. I will encourage steps to m a k e sure charitable donations go
for worthy causes and not to support terror. These steps are important
counterparts to our continuing effort to deny terrorists access to the formal networks
of international finance.
Thank you.

Page 3 of3

JS-747: U.S.-Turkey Financial Agreement - Joint Statement

Page 1 of 1

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 22, 2003
JS-747
United States - Turkey Financial Agreement
Joint Statement Following Signing of the Agreement
September 22, 2003
Dubai, U A E
Turkey and the United States signed a Financial Agreement today by which the
United States is making available as much as $8.5 billion in loans to Turkey.
The purpose of the Financial Agreement is to support Turkey's ongoing economic
reform process.
The loan disbursements will be used to service Turkey's external and domestic
debts.
The loan will have a 10-year maturity with a 4-year grace period for repayment of
principal.
The loan will be disbursed over a period of about 18 months in 4 equal
disbursements.
Under the Financial Agreement, each disbursement is conditioned on Turkey
meeting the conditions set forth in U.S. law. The two conditions are: (1) Turkey is
implementing strong economic policies; and (2) Turkey is cooperating with the
United States in Iraq.
The contribution of Turkish troops for peacekeeping and stability operations in Iraq
is not a necessary condition for determining Turkish cooperation in Iraq.
The Turkish Treasury will decide on the timing of the request for each
disbursement, taking into account cashflow,and internal and external debt service.
The United States will reply within 8 business days of a request for a disbursement
as to whether it considers that Turkey meets the conditions.
The last two disbursements can be converted into a grant, if Turkey wishes.
Turkey may pre-pay the loan.
The Financial Agreement will become effective once remaining legal and technical
procedures are completed.

JS-748: Secretary S n o w Statement Regarding the U.S.-Turkey Financial Agreement

Page 1 of 1

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 22, 2003
JS-748
United States - Turkey Financial Agreement
Statement by United States Treasury Secretary John S n o w
Monday, September 22, 2003
On April 16, President Bush signed the war supplemental appropriations act that
provides economic assistance for Turkey. I a m very pleased to announce that
Turkey and the U.S. signed a Financial Agreement today that will provide as much
as $8.5 billion in loans.
The purpose of the assistance is to support Turkey's ongoing economic reform
process and to mitigate the economic impact on Turkey related to Operation Iraqi
Freedom. Turkey is a valuable regional ally of the U.S. and is a partner in the
global war on terrorism. Turkey also serves as a valuable example of a strong and
economically stable democracy in the islamic world.
It is in the U.S. interests that Turkey maintain its economic stability and continue its
ambitious economic and political reform process. This U.S. assistance aims to
reinforce the Turkish government's own economic policies.
Turkey's economy has made great strides in recovering from the crisis of 2001.
Growth has been strong over the past year and a half, and inflation has declined to
historic lows. Resolute implementation of good economic policies does make a
difference. Strong economic growth improves the lives of ordinary Turks and
reduces poverty, a message I have been delivering around the world on m y global
growth campaign.
The contribution of Turkish troops for peacekeeping and stability operations in Iraq
is not a necessary condition for determining Turkish cooperation in Iraq. This
assistance package offered by the U.S. to Turkey and the deployment of Turkish
troops in Iraq are two separate issues.
Although the U.S. Treasury will administer the loan program, numerous U.S.
government agencies have contributed to the process of finalizing the agreement,
including State, Defense, and O M B . State and Defense have roles in determining
whether Turkey is meeting conditions, and all involved agencies will continue to
provide valuable input during the life of the loan.

JS-749: Treasury's Wolfe N a m e d CPA's Director of Economic Development in Iraq

Page 1 of 1

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 22, 2003
JS-749
George Wolfe, Treasury Deputy General Counsel
,
N a m e d N e w Director of Economic
Development for the Coalition Provisional Authority in Iraq
The Coalition Provisional Authority (CPA) today announced the appointment of Mr.
George Wolfe as the Director of Economic Development for the CPA. Mr. Wolfe
will assume this position on the departure of Mr. Peter McPherson, the current
Director, on 24 September when he returns to his position as President of Michigan
State University.
Mr. Wolfe has served as the Deputy Director of Economic Development since May.
CPA Administrator, Ambassador Paul Bremer said:
"I am extremely pleased that George has agreed to serve as the Director o
Economic Development. Since May, he has performed with great skill, energy and
effectiveness. George brings a wealth of talents to his new position, and I have
great confidence in him."
Mr. Wolfe has served as Deputy General Counsel for the U.S. Treasury Department
since July 2001. Before that, he practiced law in the private sector in Washington
D C and in South Carolina. H e also served as a private sector adviser to the U S
Trade Representative under President George H.W. Bush.
Mr. Wolfe will serve as Director of Economic Development until November 1, when
he will return to the United States to. become Acting General Counsel of the U.S.
Treasury Department. He will be succeeded at that time by Marek Belka, whose
appointment as CPA's Director of Economic Development staring on November 1
was recently announced. Belka is the former Deputy Prime Minister of Poland, and
has been serving as head of the C P A Centre for International Cooperation.

JS-750: Statement of the G 7 Finance Ministers and Central Bank Governors

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 20, 2003
JS-750
Statement of G7 Finance Ministers and Central Bank Governors
Recent data indicate that a global recovery is underway. Equity markets have
rebounded, confidence has increased, financial conditions have improved, oil prices
are expected to remain stable and inflation is under control.
Macroeconomic policies should continue to support the recovery while ensuring
medium-term fiscal sustainability. However, for growth to strengthen, be sustained
and be less unbalanced, structural reforms must be accelerated. W e support the
progress m a d e to reform tax and regulatory regimes, labour markets and pension
systems. Further efforts are needed. Our top priority is to raise productivity and
employment. W e will do our part in further reforms as set out in the attached
Agenda for Growth.
We reiterate the importance of a rules based and multilateral approach to trade. We
are disappointed at the breakdown of trade negotiations in Cancun. W e urge a
speedy resumption of the Doha Round which is vita! for global growth and the
alleviation of world poverty. W e believe that the immediate blockages can be
removed and, with an effort on all sides, agreement reached on the remaining
issues. W e welcome the International Financial Institutions' proposed assistance for
countries to deal with the transition to a more open trading system.
We reaffirm that exchange rates should reflect economic fundamentals. We
continue to monitor exchange markets closely and cooperate as appropriate. In this
context, w e emphasize that more flexibility in exchange rates is desirable for major
countries or economic areas to promote smooth and widespread adjustments in the
international financial system, based on market mechanisms.
Effective and persuasive surveillance is crucial. Even in current favourable
conditions, the IMF should identify vulnerabilities, in particular currency
mismatches, and provide candid advice on policy reforms. W e welcome the
agreement to publish exceptional access reports. W e welcome the increasingly
widespread use of collection action clauses (CACs) in foreign sovereign bond
issues. W e look forward to further work on the Code of Conduct, which will be
discussed by the G-20 meeting in October.
JS-750
W e encourage emerging market countries to pursue sound policies and to enhance
their climate. This will help attract flows, reduce external vulnerabilities, and support
sustained growth. W e welcome the progress Brazil and Turkey have m a d e in
implementing structural reforms and support further efforts. W e welcome today's
agreement between Argentina and the IMF. The implementation of the program will
be the key to restore strong and long-lasting economic growth and investment
climate. W e look forward to a speedy agreement with private creditors ensuring fair
treatment.
We remain committed to transparency and effective exchange of information
between countries as vital weapons is the fight against money laundering and tax
evasion. W e strongly urge those O E C D countries that have not taken necessary
steps - in particular in allowing access to bank information - to do so as soon as
possible.
We welcome the work of the Financial Stability Forum, in particular in areas of

Page 1 of 2

JS-750: Statement of the G 7 Finance Ministers and Central Bank Governors

Page 2 of 2

audit, financial analysts, credit risk, reinsurance and rating agencies, and
encourage it to continue strengthening cooperation in these areas.
We reaffirm our commitment to fight global poverty and to help developing countries
achieve the international development goals of the Millennium Declaration. In this
respect, w e discussed financing issues and results based measurement. W e asked
the IMF and the World Bank to do further work on aid effectiveness, absorption
capacity, financing facilities and results-based measurement mechanisms, and
report at the Annual Meetings in September 2004. W e welcome the views of
developing and emerging market countries on these issues.
We reaffirm our strong commitment to complete the Heavily Indebted Poor
Countries Initiative. W e urge all bilateral creditors to join with us in canceling out the
1 0 0 % of their eligible claims. W e ask the IFIs to review the methodology for
calculating the amount of "topping up" debt relief. W e look forward to the outcome
of the IFIs work on low income countries vulnerabilities to exogenous shocks.
Since September 11, 2001, we have made significant progress in the fight against
terrorist financing, although much remains to be done. W e look forward to the Fund
and Bank making terrorist financing/money laundering assessments a permanent
part of their work. W e have intensified the dialogue with several non-G7 countries to
prevent abuse of non-profit organizations and alternative remittance systems. W e
seek to eliminate terrorist financing through implementation of measures in
accordance with the F A T F Eight Special Recommendations.
We welcome both the Afghan donors meetings this month and the upcoming Iraq
Donors' Conference. W e reaffirm our support for a multilateral effort to help rebuild
and develop Iraq, based on a needs assessment led by the World Bank at the
Donors' Conference in Madrid, next month. W e support the IMF and the World
Bank rapidly providing, subject to their policies, financial and other assistance to
Iraq and call upon regional financial institutions to do likewise.
We call upon the Paris Club to make its best effort to complete the restructuring of
Iraq's debt before the end of 2004. W e urge all non-Paris creditors to cooperate.
Related Documents:
» G7 Agenda for Growth
• G 7 Statement Regarding the Economy of the Palestinian Authority

Bureau of ?he

PubllC ;
United Std'i : • , "' r/Tcnr oi rj-,e /.'eav.v •/

jreau Of The Public Debt Aids Savings Bonds Owners Ravaged By Sever
eather In North Carolina and Virginia
»R IMMEDIATE RELEASE
stember 22, 2003

: Bureau of Public Debt took action to assist victims of severe weather in North Carolina and Virginia by expediting the replace
'ment of United States Savings Bonds for owners in those areas. The emergency procedures are effective immediately for paying
;nts and owners in North Carolina and Virginia affected by the storms. These procedures will remain in effect through the end of
ober 2003.

die Debt's action waives the normal minimum holding period for Series EE and Series I savings bonds presented to authorized payi
mts for redemption by residents of the affected area. Most financial institutions serve as paying agents for savings bonds.

i counties in North Carolina are: Beaufort, Bertie, Brunswick, Camden, Carteret, Chowan, Craven, Currituck, Dare, Edgecombe, Gat
ifax, Hertford, Hyde, Jones, Martin, N e w Hanover, Northampton, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Pitt, Tyrell and
shington. In Virginia, for independent cities of: Norfolk, Chesapeake, Virginia Beach, Portsmouth, Suffolk, Franklin, Hampton,
uoson, Newport News, Alexandria, Williamsburg, Hopewell, and Emporia and the counties of: Greensville, Southampton,
thhampton, Accomack, Isle of Wight, Sussex, Surry, Prince George, Charles City, James City, York, Gloucester, Mathews, Middlesex,
caster, Northumberland, Westmoreland and Richmond. Should additional counties be declared disaster areas the emergency
cedures for savings bonds owners will also go into effect.

replacement of bonds lost or destroyed will also be expedited by Public Debt. Bond owners should complete form PDF-1048, availab
nost financial institutions or by writing the Richmond Federal Reserve Bank's Savings Bond Customer Service Department, 701 East
d Street, Richmond, Virginia 23219; phone (804) 697-8000. This form can also be downloaded from Public Debt's website at:
M.treasurydirect.gov. Bond owners should include as much information as possible about the lost bonds on the form. This information
uld include how the bonds were inscribed, social security number, approximate dates of issue, .bond denominations and serial
ibers if available. The completed form must be certified by a notary public or an officer of a financial institution. Completed forms
uld be forwarded to Public Debt's Office of Investor Services, 200 Third St., Parkersburg, West Virginia 26106-1328. Bond owners
uld write the word "DISASTER" on the front of their envelopes, to help expedite the processing of claims.
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

JS -7/1

federal financing bank
•WASI-IM3TC3K. D.C

2D22Z

FEDERAL FINANCING BANK
2003 PRESS RELEASE
September 2003
FFB holdings of obligations issued, sold or guaranteed by other Federal
agencies totaled $35.5 billion on September 30, 2003, posting a decrease of
$875.2 million from the level on August 31, 2003. This net change was the result
of decreases in holdings of agency assets of $750.0 million and in holdings of
government-guaranteed loans of $125.2 million. The FFB m a d e 36
disbursements and received 16 prepayments during the month of September.
The FFB also priced 14 refinancings and extended the maturities of 168 loans
guaranteed by the Rural Utilities Service ("RUS") during the month.
During the fiscal year 2003, the FFB holdings of obligations issued, sold or
guaranteed by other Federal agencies posted a net decrease of $4,059.7 million
from the level on September 30, 2002. This net change was the result of
decreases in holdings of agency debt of $3,840.6 million and in holdings of
agency assets of $1,220.0 million, and an increase in holdings of governmentguaranteed loans of $1,000.8 million.
Below are tables presenting FFB September loan activity and FFB holdings
as of September 30, 2003.
PRINT

FEDERAL FINANCING BANK
September 2003 ACTIVITY
Borrower
A G E N C Y DEBT
U.S. POSTAL SERVICE

J5 75/

Date

Amount
of Advance

Final
Maturity

Interest
Rate

Semi
innually or
Quarterly

Page

U.S. Postal Service

| 9/04 | $2,523,437,000.00|

9/18/2003

[ 1.102%

| Semi-Annually

U.S. Postal Service

9/18

$2,523,437,000.00

9/24/2003

1.030%

Semi-Annually

U.S. Postal Service

9/24

$2,523,437,000.00

10/1/2003

1.000%

Semi-Annually

GOVERNMENT-GUARANTEED
1 r»ANQ

G E N E R A L S E R V I C E S ADMINISTRATION
San Francisco Bldg Lease

9/16

$2,075,082.56

8/1/2005

1.698%

Semi-Annually

San Francisco O B

9/16

$97,868.87

8/1/2005

1.698%

Semi-Annually

9/09

$396,006.81

1/2/2032

5.094%

Semi-Annually

A & N Electric #868

9/02

$1,113,000.00

12/31/2036

5.141%

Quarterly

Ravalli #641

9/02

$1,000,000.00

12/31/2029

5.020%

Quarterly

E. Iowa Coop. #807

9/03

$3,600,000.00

12/31/2008

3.697%

Quarterly

Lake Region Elec. #737

9/03

$200,000.00

12/31/2030

5.184%

Quarterly

Mille Lacs Electric #769

9/03

$462,000.00

12/31/2035

5.255°s

Quarterly

Roanoke Electric M e m . #820

9/03

$700,000.00

12/31/2036

5.266%

Quarterly

Tri-County Elec. Coop. #646

9/08

$2,800,000.00

1/2/2035

5.076%

Quarterly

Chariton Valley #524

9/11

$400,000.00

12/31/2029

4.899%

Quarterly

Vernon Electric Coop. #2008

9/11

$668,000.00

12/31/2036

5.054%

Quarterly

Farmer's Rural Elec. #2046

9/12

$5,000,000.00

12/31/2003

0.969%

Quarterly

Midwest Electric #610

9/12

$1,666,000.00

1/3/2034

5.055%

Quarterly

Mountrail-Williams #665

9/12

$1,162,000.00

1/2/2035

5.075%

Quarterly

Morgan County Elec. #710

9/12

$185,000.00

12/31/2009

2.845%

Quarterly

Morgan County Elec. #759

9/12

$1,000,000.00

12/31/2035

5.092%

Quarterly

Southside Electric #786

9/12

$475,000.00

12/31/2035

5.092%

Quarterly

A d a m s Rural Electric #706

9/15

$500,000.00

12/31/2003

0.973%

Quarterly

Polar Telecommunications #2056

9/15

$1,346,000.00

12/31/2003

0.972%

Quarterly

Upper Cumberland Elec. #2049

9/16

$8,500,000.00

12/31/2037

5.097%

Quarterly

York Electric Coop. #848

9/16

$5,000,000.00

12/31/2031

4.973%

Quarterly

Arkansas Valley Elec Coop #895

9/17

$6,000,000.00

12/31/2036

5.090%

Quarterly

Douglas Electric #725

9/17

$90,000.00

12/31/2035

5.072%

Quarterly

Carroll Elec. #618

9/22

$300,000.00

1/3/2034

4.901%

Quarterly

Flint Elec. #2016

9/22

$6,000,000.00

1/3/2034

4.903%

Quarterly

Jackson Energy #794

9/22

$7,348,000.00

12/31/2003

0.960%

Quarterly

Washington Electric #655

9/22

$350,000.00

1/2/2035

4.920%

Quarterly

Ironton Telephone Co. #2051

9/23

$2,956,000.00

12/31/2003

0.962%

Quarterly

San Carlos Apache Tele. #729

9/25

$195,000.00

1/2/2024

4.676%

Quarterly

Grundy Elec.Coop. #744

9/29

$500,000.00

12/31/2003

0.942%

Quarterly

Medina Electric #2050

9/29

$2,000,000.00

9/30/2004

1.209%

Quarterly

Pine Belt Cellular, Inc. #2061

9/29

$1,731,632.00

12/31/2019

4.109%

Quarterly

DEPARTMENT OF EDUCATION
Tuskegee Univ.
R U R A L UTILITIES S E R V I C E

Page 3 of 8

*Amicalola Electric #664

9/30

$6,772,390.66

12/31/2003

0.968%

Quarterly

*Atlantic Telephone M e m . #805

9/30

$5,852,576.00

12/31/2003

0.968%

Quarterly

*Bailey County Elec. #856

9/30

$1,896,000.00

12/31/2003

0.966%

Quarterly

*Bailey County Elec. #856

9/30

$615,000.00

12/31/2003

0.966%

Quarterly

*Basin Electric #425

9/30

$12,744,828.72

12/31/2003

1.093%

Quarterly

*Big Sand Elec. #540

9/30

$758,747.68

12/31/2003

0.968%

Quarterly

*Big Sand Elec. #540

9/30

$569,060.75

12/31/2003

0.968%

Quarterly

*Big Sand Elec. #540

9/30

$951,346.02

12/31/2003

0.968%

Quarterly

*Big Sand Elec. #540

9/30

$2,212,580.15

12/31/2003

0.968%

Quarterly

*Blue Grass Energy #674

9/30

$1,949,185.09

12/31/2003

0.968%

Quarterly

*Blue Grass Energy #674

9/30

$4,966,931.45

12/31/2003

0.968%

Quarterly

*Brazos Electric #917

9/30

$2,389,382.24

9/30/2008

2.755%

Quarterly

*Brazos Electric #917

9/30

$1,828,193.74

9/30/2008

2.755%

Quarterly

*Brazos Electric #917

9/30

$1,490,140.49

9/30/2008

2.755%

Quarterly

*Brazos Electric #917

9/30

$1,127,240.08

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,491,907.36

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$191,489.09

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,713,427.62

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,602,256.14

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$400,999.02

9/30/2010

3.210%

Quarterly

*Brazos Electric #917

9/30

$816,665.77

9/30/2010

3.210%

Quarterly

*Brazos Electric #917

9/30

$13,316.95

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$352,120.39

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$330,301.23

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$2,765,658.07

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$732,649.26

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$804,150.15

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$1,228,388.64

9/30/2010

3.251%

Quarterly

*Brazos Electric #917

9/30

$309,722.67

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$714,394.25

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$932,777.56

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$621,171.16

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$357,140.02

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$667,702.24

9/30/2010

3.283%

Quarterly

*Brazos Electric #917

9/30

$813,773.38

9/30/2013

3.701%

Quarterly

*Brazos Electric #917

9/30

$262,416.53

9/30/2013

3.701%

Quarterly

*Brazos Electric #917

9/30

$190,451.59

9/30/2013

3.701%

Quarterly

*Brazos Electric #917

9/30

$1,690,131.70

9/30/2008

2.782%

Quarterly

*Brazos Electric #917

9/30

$1,965,785.09

9/30/2010

3.251%

Quarterly

*Brazos Electric #844

9/30

$4,614,000.00

10/2/2023

4.820%

Quarterly

*Brazos Electric #844

9/30

$5,000,000.00

9/30/2013

3.988%

Quarterly

Page 4 of 8

$5,000,000.00

9/30/2013

3.988%

Quarterly

9/30

$5,000,000.00

10/2/2023

4.820%

Quarterly

*Brazos Electric #844

9/30

$5,000,000.00

10/2/2023

4.820%

Quarterly

*Brown County Elec. #687

9/30

$242,211.92

12/31/2003

0.968%

Quarterly

*Brown County Elec. #687

9/30

$581,308.63

12/31/2003

0.968%

Quarterly

*Brown County Elec. #687

9/30

$290,701.17

12/31/2003

0.968%

Quarterly

*Citizens Elec. #742

9/30

$2,659,200.62

12/31/2035

4.861%

Quarterly

*Citizens Elec. #878

9/30

$3,000,000.00

12/31/2031

4.774%

Quarterly

*Clark Energy Coop. #611

9/30

$2,854,038.03

12/31/2003

0.968%

Quarterly

"Clark Energy Coop. #611

9/30

$1,896,580.17

12/31/2003

0.968%

Quarterly

*Clark Energy Coop. #611

9/30

$4,232,592.25

12/31/2003

0.968%

Quarterly

*Clark Energy Coop. #611

9/30

$3,539,698.98

12/31/2003

0.968%

Quarterly

"Clark Energy Coop. #611

9/30

$2,563,960.74

12/31/2003

0.968%

Quarterly

•Cumberland Valley #668

9/30

$4,069,160.36

12/31/2003

0.968%

Quarterly

"Cooper Valley Tel. #648

9/30

$965,505.55

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$1,792,480.84

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$412,919.09

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$199,019.57

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$235,289.48

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$171,119.62

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$253,889.44

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$209,065.60

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$1,420,725.36

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$265,052.89

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$523,017.97

12/31/2003

0.968%

Quarterly

*Darien Telephone Co. #719

9/30

$380,957.25

12/31/2003

0.968%

Quarterly

*East River Power #453

9/30

$370,545.38

12/31/2003

1.093%

Quarterly

*East River Power #453

9/30

$182,741.70

12/31/2003

1.093%

Quarterly

"East River Power #601

9/30

$3,223,773.96

12/31/2003

0.968%

Quarterly

"East River Power #601

9/30

$4,273,864.72

9/30/2008

2.861%

Quarterly

"East River Power #793

9/30

$624,419.98

12/31/2003

0.968%

Quarterly

"Fairfield Elec. #684

9/30

$3,132,999.79

12/31/2003

0.968%

Quarterly

"Farmer's Telephone #459

9/30

$21,048.02

12/31/2003

1.093%

Quarterly

"Farmer's Telephone #459

9/30

$200,760.12

12/31/2003

1.093%

Quarterly

"Fleming-Mason Energy #644

9/30

$2,473,499.62

12/31/2003

0.968%

Quarterly

"Fleming-Mason Energy #644

9/30

$1,331,884.39

12/31/2003

0.968%

Quarterly

"Fleming-Mason Energy #644

9/30

$1,427,019.01

12/31/2003

0.968%

Quarterly

"Fleming-Mason Energy #644

9/30

$2,092,961.21

12/31/2003

0.968%

Quarterly

"Fleming-Mason Energy #644

9/30

$1,331,884.39

12/31/2003

0.968%

Quarterly

"Fleming-Mason Energy #644

9/30

$2,885,965.43

12/31/2003

0.968%

Quarterly

"Fleming-Mason Energy #644

9/30

$2,860,016.50

12/31/2003

0.968%

Quarterly

*Brazos Electric #844

9/30

*Brazos Electric #844

Page

"Freeborn-Mower Coop. #736

9/30

$730,866.54

12/31/2003

0.968%

Quarterly

"Freeborn-Mower Coop. #736

9/30

$487,258.68

12/31/2003

0.968%

Quarterly

"Freeborn-Mower Coop. #736

9/30

$196,076.58

9/30/2010

3.467%

"Freeborn-Mower Coop. #736

9/30

$197,332.55

9/30/2010

3.467%

Quarterly

"Farmers Telephone #476

9/30

$9,543,716.93

12/31/2003

1.093%

Quarterly

"Farmers Telephone #476

9/30

$7,109,387.88

12/31/2003

1.093%

Quarterly

"FTC Communications #709

9/30

$2,523,335.55

12/31/2003

0.968%

Quarterly

"FTC Communications #709

9/30

$3,227,113.39

12/31/2003

0.968%

Quarterly

"Grady Electric #690

9/30

$3,086,676.08

12/31/2003

0.968%

Quarterly

"Grady Electric #746

9/30

$3,188,109.81

12/31/2003

0.968%

Quarterly

"Grayson Aural Elec. #619

9/30

$1,141,615.21

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$570,807.62

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$951,346.02

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$1,232,498.03

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$973,546.39

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$2,465,527.86

12/31/2003

0.968%

Quarterly

"Greenbelt Elec. #743

9/30

$1,716,536.69

12/31/2003

0.968%

Quarterly

"Greenbelt Elec. #743

9/30

$495,515.48

12/31/2003

0.968%

Quarterly

"Grundy Elec.Coop. #744

9/30

$1,226,196.09

12/31/2003

0.968%

Quarterly

"Grundy Elec. Coop. #744

9/30

$981,088.94

12/31/2003

0.968%

Quarterly

"Habersham Electric M e m . #2001

9/30

$6,900,000.00

12/31/2036

4.879%

Quarterly

"Habersham Electric M e m . #2001

9/30

$4,400,000.00

12/31/2036

4.879%

Quarterly

"Harrison County #532

9/30

$947,477.17

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$852,729.47

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$953,869.49

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$1,555,437.31

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$1,674,618.05

12/31/2003

0.968%

Quarterly

"Hudson Valley Datanet #833

9/30

$5,000,000.00

12/31/2003

0.966%

Quarterly

"Hudson Valley Datanet #833

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

"Inter-County Energy #592

9/30

$1,421,215.75

12/31/2003

0.968%

Quarterly

"Inter-County Energy #592

9/30

$1,894,954.36

12/31/2003

0.968%

Quarterly

"Inter-County Energy #592

9/30

$2,470,072.99

12/31/2003

0.968%

Quarterly

"Inter-County Energy #592

9/30

$210,247.46

12/31/2003

0.968%

Quarterly

"Inter-County Energy #850

9/30

$4,000,000.00

12/31/2003

0.966%

Quarterly

"Inter-County Energy #850

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

"Jackson Energy #794

9/30

$3,948,330.53

12/31/2003

0.968%

Quarterly

"Jackson Energy #794

9/30

$2,961,247.90

12/31/2003

0.968%

Quarterly

"Jackson Energy #794

9/30

$4,639,288.38

12/31/2003

0.968%

Quarterly

"Jackson Energy #794

9/30

$1,974,165.27

12/31/2003

0.968%

Quarterly

"Jackson Energy #794

9/30

$2,467,706.59

12/31/2003

0.968%

Quarterly

"Jackson Energy #794
'

9/30

$1,974,225.15

12/31/2003

0.968%

Quarterly

Page 5 of 8

"Freeborn-Mower Coop. #736

| 9/30

"Freeborn-Mower Coop. #736

$730,866.54|

12/31/2003

9/30

$487,258.68

"Freeborn-Mower Coop. #736

9/30

"Freeborn-Mower Coop. #736

0.968%

[ Quarterly

12/31/2003

0.968%

Quarterly

$196,076.58

9/30/2010

3.467% '

Quarterly

9/30

$197,332.55

9/30/2010

3.467%

Quarterly

"Farmers Telephone #476

9/30

$9,543,716.93

12/31/2003

1.093%

Quarterly

"Farmers Telephone #476

9/30

$7,109,387.88

12/31/2003

1.093%

Quarterly

"FTC Communications #709

9/30

$2,523,335.55

12/31/2003

0.968%

Quarterly

"FTC Communications #709

9/30

$3,227,113.39

12/31/2003

0.968%

Quarterly

"Grady Electric #690

9/30

$3,086,676.08

12/31/2003

0.968%

Quarterly

"Grady Electric #746

9/30

$3,188,109.81

12/31/2003

0.968%

Quarterly

"Grayson Aural Elec. #619

9/30

$1,141,615.21

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$570,807.62

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$951,346.02

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$1,232,498.03

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$973,546.39

12/31/2003

0.968%

Quarterly

"Grayson Rural Elec. #619

9/30

$2,465,527.86

12/31/2003

0.968%

Quarterly

"Greenbelt Elec. #743

9/30

$1,716,536.69

12/31/2003

0.968%

Quarterly

"Greenbelt Elec. #743

9/30

$495,515.48

12/31/2003

0.968%

Quarterly

"Grundy Elec.Coop. #744

9/30

$1,226,196.09

12/31/2003

0.968%

Quarterly

"Grundy Elec. Coop. #744

9/30

$981,088.94

12/31/2003

0.968%

Quarterly

"Habersham Electric M e m . #2001

9/30

$6,900,000.00

12/31/2036

4.879%

Quarterly

"Habersham Electric M e m . #2001

9/30

$4,400,000.00

12/31/2036

4.879%

Quarterly

"Harrison County #532

9/30

$947,477.17

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$852,729.47

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$953,869.49

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$1,555,437.31

12/31/2003

0.968%

Quarterly

"Harrison County #532

9/30

$1,674,618.05

12/31/2003

0.968%

Quarterly

"Hudson Valley Datanet #833

9/30

$5,000,000.00

12/31/2003

0.966%

Quarterly

"Hudson Valley Datanet #833

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

"Inter-County Energy #592

9/30

$1,421,215.75

12/31/2003

0.968%

Quarterly

"Inter-County Energy #592

9/30

$1,894,954.36

12/31/2003

0.968%

Quarterly

"Inter-County Energy #592

9/30

$2,470,072.99

12/31/2003

0.968%

Quarterly

"Inter-County Energy #592

9/30

$210,247.46

12/31/2003

0.968%

Quarterly

*lnter-County Energy #850

9/30

$4,000,000.00

12/31/2003

0.966%

Quarterly

"Inter-County Energy #850

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

*Jackson Energy #794

9/30

$3,948,330.53

12/31/2003

0.968%

Quarterly

\Jackson Energy #794

9/30

$2,961,247.90

12/31/2003

0.968%

Quarterly

*Jackson Energy #794

9/30

$4,639,288.38

12/31/2003

0.968%

Quarterly

Mackson Energy #794

9/30

$1,974,165.27

12/31/2003

0.968%

Quarterly

*Jackson Energy #794

9/30

$2,467,706.59

12/31/2003

0.968%

Quarterly

Mackson Energy #794

9/30

$1,974,225.15

12/31/2003

0.968%

Quarterly

Page 6 of 8

Mohnson County Elec. #482

9/30

$1,520,568.10|

12/31/2003

1.093%

Quarterly

+Kansas Elec. Power #904

9/30

$34,391,134.28

12/31/2015

3.616%

Quarterly

+Kansas Elec. Power #904

9/30

$1,539,095.69

1/3/2017

3.737%

Quarterly

+Kansas Elec. Power #904

9/30

$785,236.16

1/3/2017

3.737%

Quarterly

+Kansas Elec. Power #904

9/30

$3,709,458.59

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$784,568.52

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$1,208,089.24

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$426,766.63

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$1,338,715.69

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$764,249.90

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$4,541,016.73

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$1,410,300.01

12/31/2018

3.958%

Quarterly

+Kansas E1ec. Power #904

9/30

$902,460.56

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$753,964.63

12/31/2018

3.958%

Quarterly

+Kansas Elec. Power #904

9/30

$689,151.64

12/31/2018

3.958%

Quarterly

"Licking Valley Elec. #522

9/30

$2,604,614.75

12/31/2003

0.968%

Quarterly

"Licking Valley Elec. #854

9/30

$2,000,000.00

12/31/2003

0.966%

Quarterly

"Magnolia Electric #560

9/30

$4,744,194.89

12/31/2003

1.093%

Quarterly

"North Carolina R S A 3 Tel #2009

9/30

$9,600,000.00

12/31/2003

0.966%

Quarterly

"New Horizon Elec. #791

9/30

$2,051,000.00

12/31/2003

0.968%

Quarterly

"Noun Rural Elec. #528

9/30

$1,793,574.28

12/31/2003

0.968%

Quarterly

"Noun Rural Elec. #577

9/30

$2,447,333.56

12/31/2003

0.968%

Quarterly

"Noun Rural Elec. #577

9/30

$2,447,333.56

12/31/2003

0.968%

Quarterly

"Noun Rural Elec. #840

9/30

$4,000,000.00

12/31/2003

0.966%

Quarterly

"North Central Elec. #638

9/30

$1,462,617.47

1/2/2035

4.843%

Quarterly

"Northstar Technology #811

9/30

$1,807,661.89

12/31/2003

0.968%

Quarterly

"Northstar Technology #811

9/30

$985,912.07

12/31/2003

0.968%

Quarterly

"Owen Electric #525

9/30

$1,897,600.04

12/31/2003

0.968%

Quarterly

"Owen Electric #525

9/30

$1,893,767.79

12/31/2003

0.968%

Quarterly

*Owen Electric #525

9/30

$955,440.21

12/31/2003

0.968%

Quarterly

"Owen Electric #525

9/30

$1,926,753.21

12/31/2003

0.968%

Quarterly

*Pennyrile Elec. #513

9/30

$5,802,451.99

12/31/2003

1.093%

Quarterly

*Pennyrile Elec. #513

9/30

$5,492,715.24

12/31/2003

1.093%

Quarterly

*PRTCommunications #798

9/30

$4,802,000.00

12/31/2003

0.968%

Quarterly

*PRTCommunications #798

9/30

$1,800,000.00

12/31/2003

0.968%

Quarterly

*Runestone Electric Ass. #886

9/30

$1,500,000.00

12/31/2003

0.966%

Quarterly

*San Miguel Electric #919

9/30

$7,302,416.60

12/31/2003

0.968%

Quarterly

*San Miguel Electric #919

9/30

$7,667,622.82

12/31/2003

0.968%

Quarterly

*Socorro Elec. #869

9/30

$1,652,000.0C

12/31/2003

0.966%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$933,644.6C)

12/31/2003

0.968%

Quarterly

*Surry-Yadkin Elec. #534

9/30

$933,644.6C)

12/31/2003

0.968%

Quarterly

Page 7 of 8

"Surry-Yadkin Elec. #534

9/30

$466,822.30|

12/31/2003

0.968%

Quarterly

"Surry-Yadkin Elec. #534

9/30

$933,644.60

12/31/2003

0.968%

Quarterly

"Surry-Yadkin Elec. #534

9/30

$933,644.60

12/31/2003

0.968%

Quarterly

"Surry-Yadkin Elec. #534

9/30

$948,952.24

12/31/2003

0.968%

Quarterly

"Surry-Yadkin Elec. #534

9/30

$955,129.92

12/31/2003

0.968%

Quarterly

"Surry-Yadkin Elec. #534

9/30

$2,206,437.04

12/31/2003

0.968%

Quarterly

"Surry-Yadkin Elec. #852

9/30

$1,000,000.00

12/31/2003

0.966%

Quarterly

"Thumb Electric #767

9/30

$468,522.46

1/3/2034

4.861%

Quarterly

"United Elec. Coop. #870

9/30

$12,000,000.00

12/31/2003

0.966%

Quarterly

"Upsala Coop. Tele. #429

9/30

$285,962.22

1/2/2018

4.023%

Quarterly

"Upsala Coop. Tele. #429

9/30

$6,567.80

1/2/2018

4.023%

Quarterly

"Upsala Coop. Tele. #429

9/30

$19,063.95

1/2/2018

4.023%

Quarterly

"Upsala Coop. Tele. #429

9/30

$83,090.24

1/2/2018

4.023%

Quarterly

"Upsala Coop. Tele. #429

9/30

$78,966.04

1/2/2018

4.023%

Quarterly

"Upsala Coop. Tele. #429

9/30

$90,087.12

1/2/2018

4.023%

Quarterly

"Upsala Coop. Tele. #429

9/30

$57,209.60

1/2/2018

4.023%

Quarterly

"Webster Electric #705

9/30

$2,154,148.24

12/31/2003

0.968%

Quarterly

"West Plains Elec. #501

9/30

$2,231,750.74

12/31/2003

1.093%

Quarterly

Return To top

FEDERAL FINANCING BANK HOLDINGS
September 2003
(in millions of dollars)

FEDERAL
Fiscal Year
Monthly
BANK
FINANCING
Net
Change
Net
Change
HOLDINGS
September 30,August 31, 20039/1/03- 9/30/03 10/1/02- 9/30/03
2003

Program

Agency Debt:
U.S. Postal Service

$7,273.4
$7,273.4

$0.0
$0.0

($3,840.6)
($3,840.6)

Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal*
Govt-Guaranteed Lending:

$805.0
$1,830.0
$4,270.2
$6,905.2

$855.0
$2,530.0
$4,270.2
$7,655.2

($50.0)
($700.0)
$0.0
($750.0)

($145.0)
($1,075.0)
$0.0
($1,220.0)

DOD-Foreign Military Sales

$1,688.4

$1,706.1

($17.6)

($234.1)

$79.3

$79.1

$0.2

$10.7

$2.l

$2.8

$0.6

($2.9)

Subtotal*

DoEd-HBCU+
D H U D - C o m m . Dev. Block Grant

Page 8 of 8

DHUD-Public Housing Notes

$1,133.2

$0.0

($74.1)

General Services Administration+

$2,147.1

$2,150.1

($3.0)

($58.5)

$9.6

$0.0

($1-8)

$607.5

$0.0

($173.3)

$15,618.2

$15,720.7

($102.5)

$1,560.0

$77.3

$79.0

($1.7)

($25.1)

$3.1
$21,366.0
$35,544.6

$3.1
$21,491.2
$36,419.0

$0.0
($125.2)
($875.2)

($0.2)
$1,000.8
($4,059.7)

DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Devel. Cos.
DOT-Section511
Subtotal*
Grand total*
_

Return To top

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

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
September 22, 2003

202-691-3550

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

September 25, 2003
December 26, 2003
912795PC9

High Rate: 0.935% Investment Rate 1/: 0.953% Price: 99.761
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 73.75%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

33,157,101
1,380,192
243,600

13,376,476
1,380,192
243,600

SUBTOTAL 34,780,893 15,000,268 2/
Federal Reserve 5,961,901 5,961,901
TOTAL $ 40,742,794 $ 20,962,169
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 = 34,780,893 / 15,000,268 = 2.32
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,086,825,000

-"76^
http://www.publicdebt.treas.gov

or KICK Or IT B I.U V n\i US • 1 500 ITNNSV l.\,\SI V \\ KM!!:, N.W. • WASH I M ; TON. t>.t .• 202211 •(202:ft2 a- 2-«>ftH

EMBARGOED UNTIL 11:00 A.M.
September 2 2 , 2003

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $12,000 million to
refund an estimated $26,000 million of publicly held 4-week Treasury bills maturing
September 2 5 , 2 0 0 3 , and to p a y down approximately $14,000 m i l l i o n .
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDlrect
will not b e accepted.
The Federal Reserve System holds $15,355 million of the Treasury bills maturing
on September 2 5 , 2 0 0 3 , in the System Open M a r k e t A c c o u n t (SOMA). This amount m a y b e
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 b e 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 b e 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 p o i n t , 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 B i l l s , N o t e s , and Bonds (31 CFR Part 3 5 6 , as a m e n d e d ) .
Details about the new security are given in the attached offering highlights.

oOo
Attachment

l^3

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED SEPTEMBER 25, 2003
September 22, 2003
Offering Amount $12,000
Maximum Award (35% of Offering Amount)... $ 4,200
Maximum Recognized Bid at a Single Rate.. $ 4,200
NLP Reporting Threshold
$ 4,200
NLP Exclusion Amount
$10,700

million
million
million
million
million

Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NT 4
Auction date
September 23, 2003
Issue date
September 25, 2003
Maturity date
October 23, 2003
Original issue date
April 24, 2003
Currently outstanding
$41,879 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.

CUTK'K (>!•' PUBLIC \I-T\IKS • I5IH> I'KNNSYI.V \M.\ WKMJK, \.W. • WASHINGTON, !).(.'.• 20220*12021 622-2*60

EMBARGOED UNTIL 11:00 A.M.
September 22, 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 $16,140
million of publicly held notes maturing September 30, 2003, and to raise new cash of
approximately $8,860 million.
In addition to the public holdings. Federal Reserve Banks hold $6,535 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.
TreasuryDirect customers requested that we reinvest their maturing holdings
of approximately $522 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

cr^y

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED SEPTEMBER 30, 2003
September 22, 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
Q-2005
912828 BL 3
September 24, 2003
September 30, 2003
September 30, 2003
September 30, 2005
Determined based on the highest
accepted competitive bid
Determined at auction
March 31 and September 30
$1,000
None
Determined at auction

$1, 000
912820 JH 1
September 30. 2005 - - 912833 ZZ 6

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. TreasuryDlrect customers can use the Pay
Direct feature which authorizes a charge to their account of record at their
financial institution on issue date.

202-691-3550

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

September 25, 2003
March 25, 2004
912795PR6

High Rate: 1.010% Investment Rate 1/: 1.033% Price: 99.489
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 58.93%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

31,727,077
1,082,915
175,000

13,742,507
1,082,915
175,000

SUBTOTAL 32,984,992 15,000,422 2/
Federal Reserve 5,689,996 5,689,996
TOTAL $ 38,674,988 $ 20,690,418
Median rate 1.000%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.945%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 32,984,992 / 15,000,422 = 2.20
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $858,116,000

5 1$
( /

http://www.publicdebt.treas.gov

JS-755: Statement by Secretary S n o w to the International Monetary and Financial Commi... Page 1 of 3

FROlVt T H E OFFICE O F P U B L I C A F F A I R S
September 21, 2003
JS-755
United States Treasury Secretary John W. Snow
Statement to the International Monetary and Financial Committee (IMFC)
Dubai, U A E R
September 21, 2003
The balance of risks to the global economy has improved since we met in
Washington this spring. While uncertainties have eased and recovery is
strengthening in s o m e regions, w e cannot relax. W e must continue to strive for
higher economic growth.
This is the message i delivered to my colleagues in Japan earlier this month, and in
Europe over the summer. W e must all work together to ensure a strong, broadbased, and sustained upturn in the global economy.
On the demand side, appropriate monetary and fiscal policies are already in place
in many of the key economies. But the success of the agenda for growth will
depend on improving economic structures that raise productivity and provide a
lasting basis for a durable recovery in private sector activity. Important steps have
been taken - for instance to reduce marginal tax rates, reform labor markets,
strengthen financial systems and stimulate investment. W e now need to build on
this progress. The rewards of taking decisive action now will be sizable in the long
run.
The U.S. recovery is gaining momentum, and I expect growth to accelerate in the
latter half of this year, in fact, a recent Wall Street Journai survey of economists
predicts growth of 4.7% in the second half of this year.
Yet the global economy cannot continue to rely on the United States alone to power
the global growth engine. Industrial countries must take additional action to
address remaining structural impediments to long-term growth. Emerging markets,
which are benefiting from benign external financing conditions, should seize the
opportunity to consolidate reform. Finally, w e all need to act to avail ourselves of
the benefits of open trade - with the international financial institutions helping as
needed to build trade capacity and facilitate adjustment.
A Global Growth Agenda
Through sound advice and strong support for reforms, the IMF can help foster
financial stability and promote economic growth. The IMF needs to focus on its
core strengths, coordinating with the World Bank, other international institutions,
and bilateral donors in order to achieve results.
Promoting Crisis Prevention and Resolution
The number and severity of crises in recent years has diminished, and flows into
emerging markets' debt have risen. Yet foreign direct investment is likely to fali to a
seven-year low this year. Neither we, nor the IMF, can afford to be complacent.
The IMF has taken s o m e key steps in the last year, but more needs to be done.
The IMF must do a better job of analyzing vulnerabilities and predicting crises.
Good work has been done to improve analysis of debt sustainability. N o w the IMF
should follow up on currency mismatches and balance sheet impacts. And the
Fund needs to focus on providing a candid and fresh approach in all its surveillance
activities.

JS-755: Statement by Secretary Snow to the International Monetary and Financial Commi... Page 2 of 3

Wider dissemination of IMF analysis is essential to achieving the goals of stability
and growth. It will be critical that members and IMF management work together to
strengthen IMF transparency, especially the publication of all exceptional access
documentation and a separate justification of occasions of exceptional access.
More information will help the market and public at large understand and respond to
reforms, and greater transparency wiil m a k e the IMF itself more accountable, and
over time further enhance the quality of the analysis. I urge all countries to publish
their surveillance documents.
Official resources are limited, and there will not be a quota increase in the
foreseeable future. Neither large scale nor repeated access to IMF lending will
itself solve any country's economic challenges. The IMF m a d e an important
decision earlier this year by developing procedures to govern exceptional access to
Fund resources. These rules m a k e the role of the official sector in crisis resolution
more predictable. W e should now seek to raise the bar for lending standards, with
the goal of reducing the number of IMF programs.
I want to reflect briefly on a key development this year that has made the debt
restructuring process more orderly and predictable. Collective action clauses are
now standard in internationally-issued sovereign debt. W e c o m m e n d the countries
that have issued external bonds with these clauses. W e hope that future issuers
will follow this important trend in strengthening market practices.
Promoting Growth in Low Income Countries
The IMF's principal role in low income countries should be macroeconomic
surveillance, monitoring and technical assistance. Many low income countries have
attained macroeconomic stability.
The IMF will be considering its role in low income countries over the next few
months. It is important for the Fund to support countries that have good policies in
place. I want to challenge the IMF to more clearly define the scope and terms for
its support to low income countries and to consider transforming P R G F s from loans
to grants.
Finally, I want to underscore that the United States supports a strong role for
developing countries and emerging market countries in the international financial
system.
We also believe, however, that quotas should reflect economic weight and the
ability to contribute to the financing of the IMF. A s the world has changed, s o m e
countries are n o w under-represented, and s o m e carry too much weight. There is
merit in discussing potential changes, but w e recognize that quota redistribution is
only likely in the context of a general quota increase, and the Fund's current ample
liquidity does not require such an increase. T o help developing countries enhance
their participation in decision making, w e have strongly supported measures to
improve the capacity and influence of governments and their Executive Board
representatives.
Assisting Iraq
The IMF must play an integral role in facilitating the reconstruction and recovery of
Iraq. I look forward to next month's meeting in Madrid as an opportunity for the
international community to demonstrate its sustained commitment. The IMF should
be prepared, expeditiously, to provide its expertise and financial support.
Combating Terrorist Finance and Money Laundering
Protecting the world's financial systems from abuse by terrorists and money
launderers protects our citizens. W e have m a d e good progress over the past 24
months, and this reflects to a significant degree the hard work of m a n y of those
attending this session. I especially want to c o m m e n d the IMF, along with the World
Bank and FATF, for their important and ongoing contributions in the fight against
terrorist financing and money laundering, and I look forward to the A M L / C F T
assessments becoming a permanent part of the IFI's oversight and surveillance of
financing systems.
Our successes, however, cannot blind us to the long road that remains ahead. We

JS-755: Statement by Secretary S n o w to the International Monetary and Financial Commi... Page 3 of 3

cannot yet say that w e are fully denying terrorists access to the formal networks of
international finance (or capital flows) - and w e cannot be satisfied even when w e
do. Remittances are an important source of income for many poor people.
However, at times, the channels through which remittances flow lack the
transparency of the traditional financial sector, rendering those channels vulnerable
to abuse by terrorists and money launderers. W e must work to reduce the risk of
abuse of informal remittance channels by encouraging a further deepening of the
formal financial system - a win/win measure that will benefit developing countries
and emerging markets. Above all, w e must cut off terrorist financing at its source.
Our next steps should include making national asset freezing regimes more
effective, extending safeguards to informal financial sectors, addressing the
inadequacies in our formal sectors that drive legitimate customers elsewhere, and
ensuring that charitable donations go for worthy causes, not to support terror.

202-691-3550

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

September 25, 2003
October 23, 2003
912795NT4

High Rate: 0.860% Investment Rate 1/: 0.876% Price: 99.933
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 47.93%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

Accepted

Tendered

Tender Type

34,659, 500
35, 085
0

11,965,475
35,085
0

34,694,,585

12,000,560

3,702,.771

3,702,771

38,397,, 356

15,703,331

Median rate
0.855%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.845%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,694,585 / 12,000,560 = 2.89
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

{f& 1S^

JS-756: Statement by Secretary Snow to the I M F / W B Annual Meeting Plenary Session

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 23, 2003
JS-756
U.S Treasury Secretary John W. Snow
Plenary Statement
2003 Annual Meeting
Dubai, U A E
Chairmen, Governors, Ladies and Gentlemen, Mr. Wolfensohn, Mr. Koehler. To
Sheikh Maktoum bin Rashid al Maktoum, Emir of Dubai, and the people of the
Emirate of Dubai, I want to express m y heartfelt appreciation for your wonderful
hospitality.
All our nations, today, have achieved a level of interdependence. Economic
performance and financial flows in each of our economies affects all of our
economies. This connection reinforces our mutual imperative for economic growth.
In the United States, President Bush has taken significant steps to accelerate
economic growth. The President's Jobs and Growth plan, in particular, has m a d e a
real difference. A recent Wall Street Journal survey of economists now predicts
growth of 4.7% in the second half of this year. This month, President Bush unveiled
a six point plan for the economy to further strengthen the recovery.
Other countries have also moved to stimulate growth. We need to work together to
build on this progress. And w e believe strongly that progress is best achieved in a
system incorporating the principles of free trade, free capital flows, and marketbased exchange rates among the major economies.
Together, developing and industrialized countries alike should take advantage of
the opportunities offered by free trade. The United States c o m m e n d s the
willingness of the IMF and the World Bank to support developing countries with
adjustment needs related to trade liberalization.
This was an important message to WTO members at Cancun, despite the
impasse.
The fact is, emerging markets are enjoying improved circumstances today.
Borrowing costs have fallen; crises are less numerous and less severe; and more
capital isflowingto these economies.
Not coincidentaliy, we have been making great progress in strengthening the
international financial system. Collective action clauses in sovereign debt are now
the market standard. The official community has set clear limits on its resources,
limiting contagion. Crisis prevention has improved as well.
We can and should go further. We need an IMF that is at the cutting edge in its
analysis, resolute in its advice, and forceful in its support for strong economic
policies.
The IMF should ensure that its analysis of member economies is thorough and
rigorous. This means addressing the issue of currency mismatches. The IMF also
needs to focus its lending where it can achieve results - results that will reduce
reliance on IMF resources. Moreover, greater transparency in IMF procedures and

Page 1 of 2

JS-756: Statement by Secretary Snow to the I M F / W B Annual Meeting Plenary Session

public disclosure of IMF documents will help the markets and the public at large to
understand and support reforms.
Official assistance to developing countries should have the objective of raising
productivity growth. Fast growing economies create jobs and opportunities for their
entire populations, far more than any external aid program can create.
President Bush's Millennium Challenge Account ties assistance directly to the
performance of recipient countries, to m a k e a real difference for their populations.
The World Bank, too, is increasing its use of grants, focusing on results, and
helping countries foster a vibrant private sector. I want to specifically recognize the
IFC and IDA initiatives to expand small business access to credit in Africa. I
c o m m e n d the Bank for a good start. Nonetheless, there is more to be done.
I call on the Bank to integrate the principles of rewarding performance and
delivering results throughout its operations. W e should fully disclose the
performance rating system used to allocate resources to the poorest countries.We
should conduct an external performance audit of the IDA-13 results commitment, to
which the U.S. has tied its incentive contribution. W e should further increase grant
financing in the next replenishment of IDA, and IMF should consider transforming
its financial assistance to low income countries from loans to grants.
I'd like to conclude by acknowledging our progress fighting terrorist financing, and
rebuilding the infrastructure and economies of Afghanistan and Iraq.
We have made important progress protecting our citizens from terrorism by
restricting terrorist financing and money laundering. I praise the World Bank, IMF
and F A T F for their ongoing contributions and look forward to a continuation of their
work. In addition to denying terrorists access to the formal financial networks, w e
must also ensure that the informal sectors are not havens for terrorist funds.
With regard to Iraq, the task of reconstruction and recovery is enormous.
Substantial work remains before private sector-led growth can bring greater
opportunity to the Iraqi people. I a m looking forward to next month's meeting in
Madrid where I hope to see the international community demonstrate its sustained
commitment to Iraq.
Finally, I have just come from a trip to Kabul. Reconstruction is moving apace. To
ensure success, however, the Afghan government needs the full support of the
international community. The United States is doubling its commitment to
Afghanistan over the next year.
Thank you for your attention, and thanks again to our gracious host, the Emirate of
Dubai.

Page 2 of 2

JS-757: Treasury Designates Six Al-Qaida Terrorists

Page 1 of7

L PRLSS h O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
September 24, 2003
JS-757
Treasury Designates Six Al-Qaida Terrorists
- The U.S. Treasury today announced that it has designated six individuals as
Specially Designated Global Terrorists (SDGTs) under Executive Order 13224,
freezing any assets in the U.S. and prohibiting transactions with U.S. nationals.
Today's action comes in coordination with the listing of these individuals by the
United Nations. The U N action requires all U N Member States to freeze without
delay any assets belonging to these individuals.
The list, submitted to the UN by Germany, includes Abu Musa'ab Al-Zarqawi (also
known as A h m e d Fadil Ai-Khalayleh, among other aliases), w h o provided financial
and other support to the terrorists w h o assassinated U.S. diplomat Laurence Foley
in A m m a n , Jordan last October. Zarqawi has also been involved in smuggling
terrorists into Israel, has arranged training for Jordanian terrorists in al-Qaida
camps. In his speech to the United Nations Security Council last February,
Secretary of State Powell revealed that under the regime of Saddam Hussein,
Zarqawi and his network found refuge in Iraq and Zarqawi himself w a s treated in a
Baghdad hospital. Zarqawi's network also established a poisons and explosives
training camp in Northwest Iraq.
Also designated are members of Zarqawi's German-based terrorist cell Al Tawhid,
an organization with close links to al-Qaida. The German government has
established that Zarqawi serves as the operational leader of the cell.
This action underscores the international commitment to fight terrorist financing.
Since September 11, 2001,173 countries have issued blocking orders to freeze
assets, and $136.8 million has been frozen worldwide. With today's designation,
the U.S. has n o w listed a total of 320 individuals and organizations as terrorists and
terrorist supporters since September 11, 2001.
The following individuals were designated today:

>
>
>
>
>
>

Abu Musa'ab A L - Z A R Q A W I
Mohamed A B U D H E S S
Shadi A B D A L L A
AschrafAL-DAGMA
Ismail SHALABI
Djamel M O U S T F A

A fact sheet on today's designation and excerpts from Secretary Powell's speech to
the U N Security Council discussing Zarqawi are attached.

JS-757: Treasury Designates Six Al-Qaida Terrorists

Page 2 of 7

F * A T r*i gr-r-nr

ACT SHEET
September 23, 2003

ABU MUSA'AB AL-ZARQAWI
AKAs: KHALAILAH, Ahmed Fadee liAL-KHALAYLAH, Ahmad FadH NazzaliABU
AL-MU'TAZ
Abu Musa'ab a1-ZARQAWI, a Jordanian citizen, has ties to a1-Qaida, Asbat a1Ansar and Hizbal 1ah. In addition to providing the financial and material support for
the assassination of a U.S. diplomat, he has participated in acts of terrorism, trained
terrorist, led terrorist cells, facilitated transport of terrorists and is being cited in the
international press as a suspect in the recent devastating bombing of the Jordanian
embassy in Baghdad.
ZARQAWI has arranged training for terrorists at a1-Qaida camps. While he was in
Pakistan, Z A R Q A W I m a d e contact with a1-Qaida to train Jordanians. His
operatives (called "Jund a1-Sham") began to arrive in Afghanistan in large numbers
in 1999. S o m e of these operatives trained at a1-Qaida's a1-Faruq C a m p , where
they received full support from a1-Qaida. Z A R Q A W I eventually established his o w n
cell and c a m p in Herat, Afghanistan.
Plans were made to send ZARQAWI'S operatives to meet with Asbat a1-Ansar
(designated under E.O. 13224 as a Specially Designated Global Terrorist on
September 24, 2001 and as a Foreign Terrorist Organization on March 27, 2002),
Hizballah and any other group that would enable them to smuggle mujaheddin into
Palestine. This plan w a s launched by Z A R Q A W I with other terrorist leaders in order
to smuggle operatives into Israel to conduct operations. In addition to being tasked
with finding a mechanism that would enable more suicide martyrs to enter Israel,
these operatives were also sent to provide training on explosives, poisons, and
remote controlled devices.
In October 2000, ZARQAWI was indicted in absentia in Jordan for his role in the alQaida Millennium bombing plot targeting the Radisson S A S hotel in A m m a n as well
as other American, Israeli, and Christian religious sites in Jordan.
In mid 2001, ZARQAWI returned to Qandahar from Herat. At this time, he had
received more than U.S. $35,000 for work in Palestine. Z A R Q A W I planned to use
the money to bring more Jordanian and Palestinian mujaheddin to the c a m p in
Herat, to purchase passports, and to facilitate travel to Lebanon. H e received
assurances that further financing would be provided for attacks against Israel. In
early 2002, Z A R Q A W I w a s reported to have found a way into Palestine.
On October 28, 2002, U.S. diplomat Laurence Foley, an officer with the U.S.
Agency for international Development, w a s assassinated in A m m a n , Jordan.
Z A R Q A W I provided financial and material support for this assassination. Key
individuals involved in both the planning and execution of the operation had strong
ties to Afghan Jihad, the Internationa! Mujaheddin Movement, and al-Qaida. O n e of
these individuals, Salim Sa'd Salim Bin-Suwayd, a m e m b e r of al-Qaida, received
more than U.S. $50,000 for his cooperation in planning assassinations in Jordan
against U.S., Israeli, and Jordanian government officials. Z A R Q A W I instructed
Suwayd to hide after he had completed his first operation and to plan to pursue
additional operations against Israeli and Jordanian targets in A m m a n in the future.
Jordanian authorities arrested Suwayd for the murder. The trial of Suwayd, a Libyan
national, is currently underway in Jordan.
In late 2002, ZARQAWI traveled to Iraq where he initiated plans to smuggle
additional small arms, explosives, and rockets (NFI) into Jordan for use by his
terrorist cell.
DOB: 20 October 1966
P O B : Zarqa, Jordan
Passport Number: Z264958; Issued 4 April 1999, valid through 4 April 2004 (also
using fraudulent Lebanese and Saudi passports (NFI))
Citizenship: Jordan
National No. 9661031030

JS-757: Treasury Designates Six Al-Qaida Terrorists

Additional information on Z A R Q A W ! can be found in excerpts from Secretary of
State Colin L. Powell's Remarks to the United Nations Security Council on 5
February 2003 at www.state.gov//document/organization/20124.pdf.
Z A R Q A W I *S G E R M A N C E L L
The German government has established that ZARQAWI is the operational leader
of Al Tawhid, an organization with close personal and organizational links to the alQaida network. Al Tawhid, which has the figurative meaning of "unity of all the
faithful" -is the name of a Palestinian Sunni movement with roots in Jordan. It is
waging a campaign against the Jordanian monarchy, which it rejects as "unIslamic." Based on a militant interpretation of Islam, the Al Tawhid movement
promotes and supports the "jihad" of al! fellow-believers worldwide; in particular, the
"fight against non-believers and crusaders" led by Usama bin Laden and al-Qaida.
The German government notes that an independent Al Tawhid cell was formed in
Germany by September 2001. Formed around Mohamed A B U D H E S S , the cell
worked in both an isolated and clandestine manner. In addition to Z A R Q A W I ,
members of the cell included Mohamed A B U D H E S S , Shadi ABDALLA, Aschraf AlD A G M A , and Ismail SHALABI, w h o were living in Beckum, German. In early
September 2001, Z A R Q A W I met his confidant, Mohamed A B U D H E S S , in Iran and
instructed him to commit terrorist attacks against Jewish or Israeli facilities in
Germany with "his people."
According to the German government, the group was involved in gathering
donations, smuggling "fighters" and forging passports, but then increasingly
concentrated on planning the attacks in Germany. Z A R Q A W I urged them to carry
out his instructions swiftly. The members of the cell planned to use a pistol fitted
with a silencer to carry out an attack on a busy square in a German town or city and
to explode hand grenades in another German town in the immediate vicinity of an
Israeli or Jewish property with the aim of killing as many people as possible. The
attacks were supposed to be carried out by Shadi ABDALLA, Aschraf A L - D A G M A
and Ismail SHALABI.
The German government has also stated that Shadi ABDALLA, a trusted ally of
Z A R Q A W I with close contacts to Mohamed A B U D H E S S , was instructed to identify
potential targets in German cities and, above all, to obtain the necessary weapons.
In March 2002 he ordered a pistol fitted with a silencer and a crate of hand
grenades from Djamei M O U S T F A , a supporter of the cell based in Dusseldorf.
However, before the weapons could be delivered, Shadi ABDALLA, M o h a m e d A B U
D H E S S , Aschraf A L - D A G M A , Ismail SHALABI and Djamei M O U S T F A were
arrested along with other suspects on April 23, 2002. All five of them are currently in
detention awaiting trial.
Shadi ABDALLA was indicted by the German Public Prosecutor General of the
Federal Court of Justice on May 15, 2003 before the State Security Division of the
Dusseldorf Higher Regional Court for being a member of a terrorist organization
and for the organized forging of passports. The investigations against M o h a m e d
A B U D H E S S , Aschraf A L - D A G M A , Ismail SHALABI, and Djame! M O U S T F A are
still ongoing.
In addition to ZARQAWI, the German government submitted several Al Tawhid
members to the United Nations to be added to the U N Security Council Resolution
1267-list of terrorists and terrorist supporters. The U.S. supports the U N action to
designate the following individuals:
>
>
>
>
>

Mohamed A B U D H E S S
Shadi A B D A L L A
Aschraf A L - D A G M A
Ismail SHALABI
Djamei M O U S T F A

Page 3 of7

JS-757: Treasury Designates Six Al-Qaida Terrorists

E X C E R P T S F R O M R E M A R K S T O T H E UN SECURITY COUNCIL B Y
S E C R E T A R Y O F S T A T E COLIN P O W E L L
New York City
February 5, 2003

"Iraq today harbors a deadly terrorist network headed by Abu M u s a b alZarqawi an associate and collaborator of U s a m a bin Laden and his alQaida lieutenants.
Zarqawi, Palestinian born in Jordan, fought in the Afghan war more than a
decade ago. Returning to Afghanistan in 2000, he oversaw a terrorist
training camp. O n e of his specialties, and one of the specialties of this
camp, is poisons.
When our coalition ousted the Taliban, the Zarqawi network helped
establish another poison and explosive training center camp, and this c a m p
is located in northeastern Iraq. You see a picture of this camp.
The network is teaching its operatives how to produce ricin and other
poisons. Let m e remind you how ricin works. Less than a pinch - imagine a
pinch of salt - less than a pinch of ricin, eating just this amount in your
food, would cause shock, followed by circulatory failure. Death c o m e s
within 72 hours and there is no antidote. There is no cure. It is fatal.
Those helping to run this camp are Zarqawi lieutenants operating in
northern Kurdish areas outside S a d d a m Hussein's controlled Iraq. But
Baghdad has an agent in the most senior levels of the radical organization
Ansar al-lslam that controls this corner of iraq. In 2000, this agent offered
al-Qaida safe haven in the region.
After we swept al-Qaida from Afghanistan, some of those members
accepted this safe haven. They remain there today.
Zarqawi's activities are not confined to this small corner of northeast Iraq.
H e traveled to Baghdad in May of 2002 for medical treatment, staying in
the capital of Iraq for two months while he recuperated to fight another day.
During his stay, nearly two dozen extremists converged on Baghdad and
established a base of operations there. These al-Qaida affiliates based in
Baghdad n o w coordinate the movement of people, money and supplies
into and throughout Iraq for his network, and they have n o w been operating
freely in the capital for more than eight months.
Iraqi officials deny accusations of ties with al-Qaida. These denials are
simply not credible. Last year, an al-Qaida associate bragged that the
situation in Iraq w a s "good," that Baghdad could be transited quickly.
We know these affiliates are connected to Zarqawi because they remain,
even today, in regular contact with his direct subordinates, include the
poison ceil plotters. And they are involved in moving more than money and
materiel. Last year, two suspected al-Qaida operatives were arrested
crossing from Iraq into Saudi Arabia. They were linked to associates of the
Baghdad cell and one of them received training in Afghanistan on h o w to
use cyanide.
From his terrorist network in Iraq, Zarqawi can direct his network in the

JS-757: Treasury Designates Six Al-Qaida Terrorists

Middle East and beyond. W e in the United States, all of us, the State
Department and the Agency for International Development, w e all lost a
dear friend with the cold-blooded murder of Mr. Laurence Foley in A m m a n ,
Jordan, last October. A despicable act w a s committed that day, the
assassination of an individual whose sole mission w a s to assist the people
of Jordan. The captured assassin says his cell received money and
weapons from Zarqawi for that murder. After the attack, an associate of the
assassin left Jordan to go to Iraq to obtain weapons and explosives for
further operations. Iraqi officials protest that they are not aware of the
whereabouts of Zarqawi or of any of his associates. Again, these protests
are not credible. W e know of Zarqawi's activities in Baghdad. 1 described
them earlier.
Now let me add one other fact. We asked a friendly security service to
approach Baghdad about extraditing Zarqawi and providing information
about him and his close associates. This service contacted Iraqi officials
twice and w e passed details that should have m a d e it easy to find Zarqawi.
The network remains in Baghdad. Zarqawi still remains at large, to c o m e
and go.
As my colleagues around this table and as the citizens they represent in
Europe know, Zarqawi's terrorism is not confined to the Middle East.
Zarqawi and his network have plotted terrorist actions against countries
including France, Britain, Spain, Italy, Germany and Russia. According to
detainees Abu Atiya, w h o graduated from Zarqawi's terrorist c a m p in
Afghanistan, tasked at least nine North African extremists in 2001 to travel
to Europe to conduct poison and explosive attacks.
Since last year, members of this network have been apprehended in
France, Britain, Spain and Italy. By our last count, 116 operatives
connected to this global w e b have been arrested. The chart you are seeing
shows the network in Europe.
We know about this European network and we know about its links to
Zarqawi because the detainees w h o provided the information about the
targets also provided the names of members of the network. Three of those
he identified by n a m e were arrested in France last December. In the
apartments of the terrorists, authorities found circuits for explosive devices
and a list of ingredients to make toxins.
The detainee who helped piece this together says the plot also targeted
Britain. Later evidence again proved him right. W h e n the British unearthed
the cell there just last month, one British police officer w a s murdered during
the destruction of the cell.
We also know that Zarqawi's colleagues have been active in the Pankisi
Gorge, Georgia, and in Chechnya, Russia. The plotting to which they are
linked is not mere chatter. Members of Zarqawi's network say their goal
w a s to kill Russians with toxins.
We are not surprised that Iraq is harboring Zarqawi and his subordinates.
This understanding builds on decades-long experience with respect to ties
between Iraq and al-Qaida. Going back to the early and mid-1990s w h e n
bin Laden w a s based in Sudan, an al-Qaida source tells us that S a d d a m
and bin Laden reached an understanding that al-Qaida would no longer
support activities against Baghdad. Early al-Qaida ties were forged by
secret high-level intelligence service contacts with al-Qaida, secret Iraqi
intelligence high-level contacts with al-Qaida.

Page 5 o f 7

JS-757: Treasury Designates Six Al-Qaida Terrorists

Page 6 of 7

W e know m e m b e r s of both organizations met repeatedly and have met at
least eight times at very senior levels since the early 1990s. In 1996, a
foreign security service tells us that bin Laden met with a senior Iraqi
intelligence official in Khartoum and later met the director of the Iraqi
intelligence service.
Saddam became more interested as he saw al-Qaida's appalling attacks. A
detained al-Qaida m e m b e r tells us that S a d d a m w a s more willing to assist
al-Qaida after the 1998 bombings of our embassies in Kenya and
Tanzania. S a d d a m w a s also impressed by al-Qaida's attacks on the USS
Cole in Y e m e n in October 2000.
Iraqis continue to visit bin Laden in his new home in Afghanistan. A senior
defector, one of Saddam's former intelligence chiefs in Europe, says
S a d d a m sent his agents to Afghanistan sometime in the mid-1990s to
provide training to al-Qaida members on document forgery.
From the late 1990s until 2001, the Iraqi Embassy in Pakistan played the
role of liaison to the al-Qaida organization.
Some believe, some claim, these contacts do not amount to much. They
say S a d d a m Hussein's secular tyranny and al-Qaida's religious tyranny do
not mix. I a m not comforted by this thought. Ambition and hatred are
enough to bring Iraq and al-Qaida together, enough so al-Qaida could learn
how to build more sophisticated bombs and learn how to forge documents,
and enough so that al-Qaida could turn to Iraq for help in acquiring
expertise on weapons of mass destruction.
And the record of Saddam Hussein's cooperation with other Islamist
terrorist organizations is clear. Hamas, for example, opened an office in
Baghdad in 1999 and Iraq has hosted conferences attended by Palestine
Islamic Jihad. These groups are at the forefront of sponsoring suicide
attacks against Israel.
Al-Qaida continues to have a deep interest in acquiring weapons of mass
destruction. A s with the story of Zarqawi and his network, I can trace the
story of a senior terrorist operative telling how Iraq provided training in
these weapons to al-Qaida. Fortunately, this operative is now detained and
he has told his story. I will relate it to you now as he, himself, described it.
This senior al-Qaida terrorist was responsible for one of al-Qaida's training
camps in Afghanistan. His information comes firsthand from his personal
involvement at senior levels of al-Qaida. H e says bin Laden and his top
deputy in Afghanistan, deceased al-Qaida leader M u h a m m a d Atif, did not
believe that al-Qaida labs in Afghanistan were capable enough to
manufacture these chemical or biological agents. They needed to go
somewhere else. They had to look outside of Afghanistan for help.
Where did they go? Where did they look? They went to Iraq. The support
that this detainee describes included Iraq offering chemical or biological
weapons training for two al-Qaida associates beginning in December 2000.
H e says that a militant known as Abdallah al-lraqi had been sent to Iraq
several times between 1997 and 2000 for help in acquiring poisons and
gasses. Abdallah ai-lraqi characterized the relationship he forged with Iraqi
officials as successful.
As I said at the outset, none of this should come as a surprise to any of us.
Terrorism has been a tool used by S a d d a m for decades. S a d d a m w a s a

JS-757: Treasury Designates Six Al-Qaida Terrorists

Page 7 o f 7

supporter of terrorism long before these terrorist networks had a name, and
this support continues. The nexus of poisons and terror is new. The nexus
of Iraq and terror is old. The combination is lethal.
With this track record, Iraqi denials of supporting terrorism take their place
alongside the other Iraqi denials of weapons of mass destruction. It is all a
w e b of lies."

JS-758: Written Testimony of David D. Aufhauser, Before the House Financial Services ... Page 1 of 4

..PRES3 : ROOM

'%&

F R O M T H E OFFICE OF PUBLIC AFFAIRS
September 24, 2003
JS-758
Written Testimony of
David D. Aufhauser, General Counsel
Before the House Financial Services Committee
Subcommittee on Oversight and Investigations
September 24, 2003 - 10:00 A M
The United States House of Representatives
Chairman Kelly, Congressman Gutierrez and distinguished members of this
Committee, thank you for inviting m e to testify today about the United States
Government's efforts to address the financing of terror. Let m e tell you why w e
believe it is so important.
For more than a decade - after its misadventure into Kuwait in August of 1990 Iraq has been an international pariah. More particularly, it has been the subject of
the most comprehensive and far-reaching economic sanctions program ever
imposed by the United Nations. The Oil for Food Program, later added to the
sanctions program, permitted barter trading of Iraqi oil in exchange for humanitarian
goods and services, all subject to UN monitoring and control.
The good news is that tens of billions of dollars flowed through the program
between 1996 and today, providing food, medicine, shelter and necessities of life
for the Iraqi people, it was one of the rare programs that well served both a moral
imperative and the most fundamental physical needs of people for whom freedom is
a stranger.
The bad news is that the program was viewed by the Iraqi regime as an invitation
for graft, corruption and sanctions busting. And they made it their holiday. Within
the OFF program, they skimmed, they demanded kickbacks, they bought brokers,
they created false front companies and they banked the money abroad in cash, or
in accounts for product credit. They also began to deal in oil - in an open and
notorious fashion - outside of the UN sanctioned program. The smuggled oil
produced rivers of money and credit - a conservative G A O estimate is $6.0 billion
in a four year period alone - that were banked abroad.
That money - and those credits - purchased the goods and services that kept Iraq
a threat against all reason and international law. That is the cost of turning a blind
eye to laundered funds. W e all witnessed a second cost when the World Trade
Center vanished before our eyes two years ago this month.
I was in Cambridge, England on September 11th attending an international
conference on money laundering. The conference was populated by Attorneys
General, Chief Justices, Ministers of Police, and even General Counsels, it had the
trappings of a sober and serious affair, but in truth, there was a lot of selfcongratulation. The law enforcement community had been on the trail of money
laundering for more than a decade, and it had much to crow about. Elaborate
computer screens, predictive models, profiles of conduct, capture and indictment of
persons moving or hiding dirty money, evidenced that we were gaining a lead on a
tough issue.
The assaults on New York and Washington silenced the gathering, it was not just
the awfulness of the video replaying its unspeakable carnage. It was the realization
that w e - the professionals charged with the responsibility of policing the

JS-758: Written Testimony of David D. Aufhauser, Before the House Financial Services ...

international financial system - had been looking at the world through the wrong
end of the telescope. M o n e y had been spirited around the globe, by m e a n s and
measures and in denominations that mocked detection. The more serious threat to
our well being w a s n o w clean money intended to kill, not dirty money looking for a
place of hiding.
Shortly after the September 11th attacks, President Bush gave those of us who
deal with these issues clear orders. H e told us to starve the terrorists of funding.
Since that mandate over two years ago, the United States has waged a "war"
against global terrorism. But this "war" is profoundly uncommon. There is no
known sovereign; no uniformed army; no hill to take; no target that is seemingly out
of bounds. Indeed, terrorists obscenely place a premium upon the death of
innocents. It is shadow warfare, and the primary source of the stealth and mobility
necessary to w a g e the war is money. M u c h of the intelligence of war is, in fact,
suspect -the product of treachery, deceit, custodial interrogation, bribery and
encrypted talk. Butfinancialaudit trails do not lie. They are literally the diaries of
terror and they reveal the secrets necessary to stem tithes intended to underwrite
acts of terror.
Money leaves a signature, an audit trail, which once discovered might well prove
invaluable in the identification and capture of terrorists. Stopping the flow of m o n e y
to terrorists m a y also be one of the very best ways w e have to stopping terror
altogether. That is a dramatic statement, but it is not possible to overstate the
importance of the campaign against terrorist financing. W e believe that if you stop
the money, you go a long way to stop the killing.
That being said, it is unwise to understate the difficulty of this endeavor. Our
economies are deliberately open and porous. The ways to g a m e restrictions on the
flow of capital are nearly infinite. Moreover, the challenge is worldwide in scope.
The overwhelming bulk of the assets we seek to freeze; the cash flow that we hope
to strangle; and the records w e aspire to exploit are beyond the oceans that
surround us here in North America. T o act alone in this endeavor would justly invite
critique, and be ultimately ineffective.
In the United States, our program to wage this war includes the following:
i. A n Executive Order (Executive Order 13224) using the powers in the international
Emergency Economic Powers Act that raises the standards of conduct and due
diligence of financial intermediaries, and explicitly targets underwriters of terror for
the freezing of their assets;
ii. U N Security Council resolutions that internationalize certain asset freezes and
mandate the criminalization of terrorist financing;
iii. More scrutiny at the gateway to U.S. financial markets as provided by the U S A
P A T R I O T Act;
iv. L a w enforcement criminal investigations and other actions aimed at terrorists
and their financiers;
v. Extensive diplomatic efforts, including the engagement of central bankers and
finance ministries, to champion the need and wisdom for international vigilance
against terrorist financing;
vi. Outreach to the private sector for assistance in the identification, location and
apprehension of terrorists and their bankers; and,
vii. Bilateral and multilateral efforts to build laws and systems that will help prevent
terrorists from gaming the system in developing countries around the globe, and
then developing programs to train those countries in h o w to administer those laws.
Perhaps the most visible tactic of our comprehensive strategy has been the public
designation of terrorists and their support network coupled with the freezing of their
assets. Public designation of terrorists, terrorist supporters and facilitators, and
blocking their abilities to receive and m o v e funds through the world's financial
system has been and is a crucial component in the fight against terrorism. T h e
Executive Order imposing economic sanctions under the International Emergency
Economic Powers Act permits the public designation of not only terrorists and
terrorist organizations, but also supporters, facilitators and underwriters of terror as
well. O n c e designated, this order freezes the assets within U.S. jurisdiction of the
designee. Action under this order is not "criminal" and does not require proof

Page 2 of 4

JS-758: Written Testimony of David D. Aufhauser, Before the House Financial Services ... Page 3 of 4

beyond a reasonable doubt. Currently, 321 individuals and entities are publicly
designated as terrorists or terrorist supporters by the United States, and since
September 11th, over $136.8 million dollars have been frozen around the world.
However, only a small measure of success in the campaign is counted in the dollars
of frozen accounts. The larger balance is found in the wariness, caution, and
apprehension of donors; in the renunciation of any immunity for fiduciaries and
financial intermediaries w h o seek refuge in notions of benign neglect and discretion,
rather than vigilance; in pipelines that have gone dry; in the flight to old ways of
value transfer such as the use of cash couriers and the ability to focus our
resources on those avenues of last resort; and, in the gnawing awareness on the
part of those w h o bank terror that the symmetry of borderless war means that there
is no place to hide the capital that underwrites terror.
Notwithstanding the power of this tool, it is important to remember that it is only
powerful to the extent w e can pull the rest of the world with us in identifying and
freezing the assets of identified terrorists and their supporters. Most of the capital
w e are attempting to freeze is beyond the reach of the United States. Acting
unilaterally is often an empty gesture; an action without an effect. Therefore, w e
need our allies to join with us in a coordinated manner. This is no easy task. This
is the task that occupies much of our time on the financial front of the war against
terrorism. The most critical aspect of this task is the ability to provide sufficient
actionable information - information that is often thin and encumbered by
sensitivity. The predicate for everything w e do is actionable intelligence. Without
actionable intelligence, it is impossible tofightthis war.
Organization of the Effort
Shortly after the attacks of September 11th, the National Security Council
established a Policy Coordinating Committee on Terrorist Financing. The purpose
of the committee is to (i) recommend strategic policy direction to the National
Security Council on issues relating to terroristfinancing;(ii) vet and approve
proposed public action against targeted terrorists and terrorist financiers; and, (iii)
coordinate the United States efforts on issues relating to terrorist financing. I have
chaired the committee since October 2001. W e have purposefully kept the process
flexible, informal, collaborative and iterative. It is a process that has worked well to
vet and coordinate proposed action on thefinancialfront of the war.
HAMAS
The focus of this hearing is the terrorist organization HAMAS, and whether our
actions to interdict the funds flowing to H A M A S have had any real world effect. The
answer is yes, but it is a qualified yes. A s stated earlier, many of our actions particularly actions involving public designation and freezing of assets - have
dramatic impact only when w e can convince the rest of the world to act with us. It
has been an uphill road with H A M A S .
HAMAS was formed in 1987 with a goal of establishing an Islamic Palestinian state
in place of Israel. H A M A S ' strength is in Gaza and the West Bank. H A M A S relies
on broad popular appeal and it is an integral part of the Palestinian political and
social landscape.
H A M A S has established networks of mosques, schools, and relief organizations
that are highly visible and widely seen by many Palestinians as more effective than
services provided by the Palestinian Authority. H A M A S is loosely structured, with
some elements working clandestinely and others working openly through mosques
and social service institutions to recruit members, raise money, organize activities,
and distribute propaganda. It is this dichotomy that has created one of the principal
challenges with this organization.
Unlike action against al-Qa'ida, action against HAMAS does not enjoy the same
support around the globe. For example, an al-Qa'ida related U N economic
sanctions program, which mandates action by all members, has been an extremely
valuable tool in getting the world to act in concert against al-Qa'ida. N o economic
sanctions program exists at the U N for H A M A S . Countries in Europe and the

JS-758: Written Testimony of David D. Aufhauser, Before the House Financial Services ...

Persian Gulf- two principal areas that supply funds to H A M A S - have been slow to
support action against the entire organization, if at all. In fact, s o m e sources
estimate that as much as half of H A M A S ' income is derived from money raised in
the Persian Gulf, including the Kingdom of Saudi Arabia - notwithstanding a M a y
2002 decree by Crown Prince Abdullah that ceased official Saudi support for the
group.
The United States designated the entire HAMAS organization as a foreign terrorist
organization in 1995 and w e have acted or are acting against H A M A S fundraisers
identified and located here in the United States. A principal example of our action is
our designation of the Holy Land Foundation for Relief and Development, a Texas
based N G O , in December 2001. This designation w a s challenged in Federal court
and has been upheld. The Holy Land Foundation no longer operates. Additionally,
our colleagues from the FBI have a number of on-going investigations of other
individuals and organizations linked to H A M A S . W e are working side-by-side with
the FBI to ensure that those individuals and organizations will be addressed and the
funding that is occurring will be stopped.
We have also taken action against HAMAS outside of the United States. On
August 22nd, w e announced the freezing of four European-based H A M A S
fundraisers and one H A M A S fundraiser based in Lebanon: the Comite de
Bienfaisance et de Secours aux Palestinians (CBSP), the Association de Secours
Palestinian (ASP), Interpal, the Palestinian Association in Austria (PVOE) and the
Sanabii Association for Relief and Development. W e announced the public
designation of six top H A M A S leaders, and earlier this year w e designated the AlAqsa Foundation - another European-based H A M A S fundraiser. Of the 321
persons and entities designated to date, 16 are H A M A S related entities. These
designations have resulted in the freezing of $24.7 million dollars around the world.
The rest of the world, particularly Europe (until recently) and countries in the
Persian Gulf, view the political/charitable wing of H A M A S differently from its socalled military wing. In our view this is pure sophistry. W e have advocated
forcefully throughout the world that this distorted view of H A M A S should end. O n
this front, w e have s o m e good news.
After nearly constant diplomatic pressure from the United States, on September
12th the European Union, having previously only designated the military wing of
H A M A S , designated the entire organization. The European Union's recent action is
welcome, if late in coming. A large portion of H A M A S ' fundraising has c o m e from
Europe and w e think the EU's designation of the entire organization will help
change that dynamic. Despite the EU's welcome action, the political questions
surrounding the Palestinian people coupled with the political and charitable work
H A M A S undertakes m a k e it hard to convince other countries around the world especially in the Persian Gulf-to cease supporting H A M A S .
We think it is critical that governments move now to stop the flow of funds to
H A M A S , a terrorist organization that has the conceit and audacity to proclaim with
pride that it is sends suicide bombers onto buses and into public plazas to kill
innocents with the aim of destroying any chance for progress toward peace
between the Israelis and Palestinians. Funds flowing to H A M A S fuel this terror.
Again, w e think if you stop the money, you go a long way toward stopping the
terror. N o matter h o w terrible the plight of the Palestinian people, there can be no
justification for the killing of innocents. In our view, toleration of such terror by
anyone is nothing short of complicity.

Page 4 of 4

JS-759: Asst. Secretary Abernathy's Statement on Senate Committee Approval of F C R A ... Page 1 of 1

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 24, 2003
JS-759
Statement of
Assistant Secretary for Financial Institutions W a y n e A. Abernathy
Regarding Senate Banking Committee Approval of F C R A Legislation
"I wish to congratulate Chairman Shelby, Ranking Member Sarbanes, and the
members of the Senate Banking Committee for their expeditious work, approving
the National Consumer Credit Reporting System Improvement Act of 2003. This
unified action of the Committee on this important legislation is a key milestone
toward achieving our shared objective, announced by Secretary S n o w on June 30,
to ensure that our national credit system continues to deliver expanded access to
credit for all Americans while protecting the accuracy and security of their personal
financial information. Of particular significance is the prominent attention in the
legislation tofightingthe scourge of identity theft.
"As the Federal Trade Commission recently reported, approximately 10 million
Americans have become victims of identity theft in the past year, at a direct cost to
these victims of $5 billion, with a cost of $50 billion to businesses—a further cost
born by all their customers and the people w h o invest in these businesses.
"The Committee action was timely, greatly increasing the likelihood that our nation's
financial information system will be preserved and strengthened this year as a tool
against identity theft and as a means of broadening access to financial services for.
people throughout the nation. W e look forward to continuing to work with the
Senate in the legislative refinement process as the bill moves on to consideration
on the Senate floor."

JS-760: Testimony of David D. Aufhauser before the the Committee on Banking, Housin... Page 1 of 7

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 25, 2003
JS-760
Written Testimony of
David D. Aufhauser, General Counsel
before the
the Committee on Banking, Housing and Urban Affairs
United States Senate
September 25, 2003
Chairman Shelby, Senator Sarbanes, and distinguished members of this
Committee, thank you for inviting m e to testify today about the United States
Government's efforts generally, and the efforts of the Department of the Treasury in
particular, to address the financing of terror.
Shortly after the September 11th attacks, President Bush gave those of us who
work on these issues very clear orders. H e told us to starve the terrorists of
funding. Since that mandate over two years ago, the United States has waged a
"war" against global terrorism. W e at Treasury are principally involved in the
financial front of that "war." But this "war" is profoundly uncommon. There is no
known sovereign; no uniformed army; no hill to take; no target that is seemingly out
of bounds, indeed, terrorists obscenely place a premium upon the death of
innocents. It is shadow warfare, and a key source of the stealth and mobility
necessary to w a g e the war is money.
Money is the fuel for the enterprise of terror. It may also be its Achilles' heel. It can
leave a signature, an audit trail, which, once discovered, might well prove the best
single m e a n s of identification and capture of terrorists and pinpointing their donors.
Financial records are literally the diaries of terror. Stopping the flow of money to
terrorists m a y be one of the very best ways w e have of stopping terror altogether.
That is a dramatic statement, but it is not possible to overstate the importance of
the campaign against terrorist financing. If you follow and stop the money, you
have gone a long w a y to diminish the killing and destruction.
That being said, it is unwise to understate the difficulty of this endeavor. Our
economy is deliberately open and porous. The ways to g a m e restrictions on the
flow of capital within the banking system are nearly infinite, and the endeavor
becomes more difficult when money is moved outside the banking system.
Moreover, the challenge is worldwide in scope. The overwhelming bulk of the
assets w e seek to freeze; the cash flow that w e hope to strangle; and the records
that w e aspire to exploit are beyond the oceans that surround us. To act alone
would justly invite critique.
In the United States, the program to wage the financial front of the war includes:
(i) an Executive Order using the powers granted by the Congress through the
International Emergency Economic Powers Act that raises the standards of conduct
and due diligence of financial intermediaries, and explicitly targets underwriters of
terror for the freezing of their assets;
(ii) U N Security Council resolutions and conventions that internationalize asset
freezes and mandate the criminalization of terrorist financing;
(iii) more scrutiny at the gateway to U.S.financialmarkets that has been provided
under the U S A P A T R I O T Act;
(iv) law enforcement criminal investigations and foreign intelligence operations
aimed at terrorist supporters and terrorist financiers;
(v) extensive diplomatic efforts, including the engagement of central bankers and

JS-760: Testimony of David D. Aufhauser before the the Committee on Banking, Housin... Page 2 of 7

finance ministries, to champion the need and wisdom for international vigilance
against terrorist financing and the taking of appropriate action to address it;
(vi) outreach to the private sector for assistance in the identification, location and
apprehension of terrorists and their bankers; and,
(vii) bilateral and multilateral efforts to build laws and systems that will help prevent
terrorists from corrupting the financial system in developing countries around the
globe, followed by training missions dispatched to those countries to help their
officials administer those laws.
Perhaps the most visible weapon on the financial front of the war has been the
public designation of terrorists and their support network coupled with the freezing
of their assets. Publicly designating terrorists, terrorist supporters and facilitators,
and blocking their abilities to receive and m o v e funds through the world's financial
system have been, and continue to be, a crucial component in the fight against
terrorism. The Executive Order imposing economic sanctions under the
International Emergency Economic Powers Act permits the public designation of
not only terrorists and terrorist organizations, but also supporters, facilitators and
underwriters of terror as well. O n c e designated, this order freezes the assets of the
designee held by U.S. persons. Action under this order is not "criminal" and does
not require proof beyond a reasonable doubt. Currently, w e have publicly
designated 320 individuals and entities as terrorists or terrorist supporters and over
$136.8 million dollars have been frozen around the world.
This is not, however, a "box score" game. Only a small measure of success in the
campaign is counted in the dollars of frozen accounts. The larger balance is found
in the wariness, caution, and apprehension of donors; in the renunciation of any
immunity for fiduciaries and financial intermediaries w h o seek refuge in notions of
benign neglect and discretion, rather than vigilance; in financial pipelines that have
gone dry; in the flight to old ways of value transfer, such as the use of cash
couriers, in the ability to focus our resources on those avenues of last resort; and in
the gnawing awareness on the part of those w h o bank terror that the symmetry of
borderless war m e a n s that there is no place to hide the capital that underwrites
terror.
Notwithstanding the power of this tool, it is important to remember that it is only
potent w h e n w e can pull the rest of the world with us, through coordinated
multilateral action, in identifying and freezing the assets of identified terrorists and
their supporters. The simple fact is that most of the funds w e are attempting to
freeze are beyond the reach of the United States. Acting unilaterally is often an
empty gesture; an action without effect. Therefore, w e need our allies to join with
us and act in concert and in a coordinated way. This is no easy task. And this is a
task that occupies m u c h of our time on the financial front of the war against
terrorism. The most critical aspect of this task is the ability to develop and provide
our allies in the war with sufficient actionable information - information that is often
thin'and also derived from extremely sensitive sources. The predicate for
everything w e do is actionable information about a target.
Organization of the Effort
Shortly after the attacks of September 11, in furtherance of developing and
implementing a coordinated attack on terrorist financing, the National Security
Council established a Policy Coordinating Committee on Terrorist Financing. T h e
purpose of the Committee is to (i) recommend strategic policy direction to the
National Security Council on issues relating to terrorist financing; (ii) vet and
approve proposed public action against targeted terrorists and terrorist financiers;
and (iii) coordinate the United States' efforts on issues relating to terrorist
financing. I have chaired that Committee since October 2001.
The Committee has sufficient structure to ensure we are working toward achieving
the goals of the committee; however, w e have purposefully kept the process
flexible, informal, collaborative and iterative. It is a process that has worked well to
vet and coordinate proposed action by the United States on the financial front of the
war on terrorism.
Challenges Ahead
1. T h e Kingdom of Saudi Arabia. I have testified before that Saudi Arabia has
been an "epicenter" of terroristfinancing.Financing emanating from Saudi Arabia

JS-760: Testimony of David D. Aufhauser before the the Committee on Banking, Housin... Page 3 of 7

and a balance of Gulf States has been a central focus of our efforts at collection
and prevention. The Saudi Government has taken action and implemented
systemic changes - both before and after the M a y 12th bombings in Riyadh - that
are promising and constructive. More initiative, follow-through on systemic change,
and personal accountability are required.
The May 12th bombings in Riyadh appear to have given life to such a sea change.
A sense of urgency n o w informs Saudi efforts. The promising change on the
financial front of the war is the agreement to create a Joint Task Force with the
United States to investigate terrorist financing and follow financial leads. The
dialogue and dynamic in this task force will be "cop to cop" - taking place on the
ground rather than between diplomats at 30,000 feet. The task force will share
financial leads on a real time basis and begin meaningful - and hopefully productive
- investigations to track down the "banking of terror." This will be an important
proving ground to determine Saudi commitment on thefinancialfront of the war.
W e must watch diligently as the task force is established and moves forward.
2. HAMAS, etc. We must continue to focus our resources on HAMAS and similar
terrorist organizations. W e must work as hard as w e can to convince the rest of the
world that it cannot stand by and do nothing against groups that are sending suicide
bombers onto buses or into plazas to kill innocent children. Unlike al-Qa'ida, w e do
not enjoy a U N Sanctions program mandating the freezing of these organizations'
and their operatives' and supporters' assets. What is required is unrelenting,
consistent, well-informed diplomatic outreach using well developed facts actionable intelligence - to bring a principled discipline to countries that now stand
on the sideline refusing to act because the purpose of acts of terror are believed to
be politically laudable, not withstanding the moral obscenity of the means of
reaching any such goal.
3. Global Systemic Change. We must continue to work bilaterally and multilaterally
to buildfinancialsafeguards throughout the globe to do all w e can to ensure
terrorists cannot g a m e the financial system. Charities and informal money transfer
operations, or hawalas, are of particular concern. W e have done much in this area,
but w e need to continue to do more.
4. Address Root Causes. In the long run, the war on terror will be like Sisyphus
toiling to push the stone up the hill if the community of nations does not do
something to address the despair and economic misery that permits false prophets
to preach hate and killing and terror as remedy.
Those are some of the more significant challenges we see as we move forward on
the financial front of the war. W e have c o m e a long way, but w e have a long way to
go. The President has said on many occasions that this will be a long battle. I can
validate that statement. But you should know I see tremendous commitment to this
battle every day.
Because of this Committee's jurisdiction, we think it is important to spend some
time discussing what w e have done with the tools the Congress provided to us
nearly two years ago in the U S A P A T R I O T Act.
The Role of the Anti-Money Laundering Regulatory Regime in the Financial
W a r on Terrorism
After the attacks of September 11th, it seemed as if we were looking at the world
through the wrong end of a telescope. Worldwide efforts to combat money
laundering were focused, rightly so, on identifying large scale criminal enterprises
that were injecting millions of dollars into the financial system. In the world of the
financing of terrorism, however, w e were reminded that the deadliest of operations
can be financed with relatively paltry s u m s of money that would give even the best
of financial institutions not the slightest hint of their illicit purpose. A n integral part of
the financial war on terrorism over the past two years has focused on enhancing the
ability of financial institutions to better identify and guard against the financing of
terrorism. The first step, however, is recognizing our limitations. W e are still
discovering the m a n y different ways in which our enemies use the recorded

JS-760: Testimony of David D. Aufhauser before the the Committee on Banking, Housin... Page 4 of 7

financial system to fund their operations. While w e have developed considerable
information on their methods, w e still have m u c h to learn.
This we do know - even the most unsophisticated of terrorism financing operations
will likely intersect the regulatedfinancialsystem at s o m e point. Title III of the U S A
P A T R I O T Act mandates m a n y substantial changes to the United States anti-money
laundering regulatory regime. W e wish to thank this Committee for its work in
developing and securing passage of these provisions. Title III, in our view, reflects
the realities of today's global financial marketplace and the n e w threats to our
financial system. A s you know, for the past two years w e have been engaged in
the most extensive revision of the anti-money laundering regulatory regime in
recent memory.
Once complete, if properly enforced, these changes will go far to prevent not only
the laundering of illicit proceeds, but also aid thefinancialsystem in preventing the
use of clean money to finance terror. The Act's principal focus on financial
intermediaries, the international gateways to the U S financial system, the expansion
of due diligence and monitoring requirements, enhanced reporting obligations, and
renewed commitment to information sharing comprise the elements of a
comprehensive anti-terrorist financing regime. While the end goal of devising
systems capable of proactively identifying potential terrorist financing activities
remains elusive, w e are creating the necessary infrastructure within financial
institutions that will one day support such systems. For example, several sections
of the Act focus on the correspondent account, the international gateway to the U S
financial system. These provisions require financial institutions to conduct greater
due diligence both before opening such accounts and while they are open. T h e
scrutiny given to these accounts not only augments the audit trail, but also serves to
deny certain foreign financial institutions access to the U S financial system in the
first place. Uniform customer identification regulations recently issued will require
allfinancialinstitutions to take important steps to verify the identity of their
customers. Additionally, w e have created a system pursuant to section 314(a) of
the Act to enable law enforcement to locate quickly the accounts and transactions
of those suspected of m o n e y laundering or the financing of terrorism. While w e are
still working closely with law enforcement and thefinancialcommunity on the
operation of the system, since its creation, the system has been used to send the
n a m e s of 256 persons suspected of terrorism financing to financial institutions.
This has resulted in 1,739 matches that were passed on to law enforcement.
A particularly important provision is Section 311 of the Act, which provides the
Secretary with the necessary ability to protect the U S financial system against
specific terroristfinancingthreats posed by foreign financial institutions, accounts,
transactions, or even entire jurisdictions. The Secretary can require U S financial
institutions to take appropriate countermeasures against such threats,
countermeasures which include requiring the termination of any correspondent
accounts involving the threat. W e have utilized this authority in the money
laundering context, and w e are presently considering its use in connection with the
financing of terrorism.
I thought it would be helpful to bring you up-to-date on where we are in the process
of implementing Title III of the Act. Since its passage, Treasury, the Financial
Crimes Enforcement Network (FinCEN), the financial regulators, and the
Department of Justice have worked together to draft and issue extensive
regulations that implement the Act's provisions. A m o n g other things, w e have
published regulations that (i) Permit and facilitate the sharing of critical information between law enforcement
and the financial community, as well as a m o n g financial institutions themselves;
(ii) Close off ourfinancialborders to foreign shell banks, require additional due
diligence for correspondent accounts maintained for foreign financial institutions,
and require foreign banks with correspondent accounts in the United States to
supply the n a m e of a U S agent for service of process as well as the identities of
their owners;
(iii) Require U S financial institutions to establish customer identification and
verification procedures for all n e w accountholders;
(iv) Expand the universe of financial institutions reporting potentially suspicious
activities to FinCEN; and
(v) Expand our basic anti-money laundering regime to include a wide range of

JS-760: Testimony of David D. Aufhauser before the the Committee on Banking, Housin... Page 5 of 7

financial service providers, such as the securities and futures industry and m o n e y
services businesses.
Our work is not yet finished. We are working to complete several regulatory
packages. First on the list is the issuance of a final regulation that will delineate the
scope of the obligation of U S financial institutions to conduct due diligence and
enhanced due diligence on correspondent accounts maintained for foreign financial
institutions and private banking accounts for high net worth foreign individuals.
Although the banking, securities, and futures industries have been operating under
an interim rule since last year, important questions regarding the application of this
statutory provision remain.
We will also complete final regulations requiring other categories of financial
institutions, such as those in the insurance and hedge fund industries, to establish
anti-money laundering programs. This is an integral component of our anti-money
laundering and anti-terrorist financing efforts - to ensure that all available avenues
for financial crime are blocked by this basic protection. Similarly, n o w that w e have
issued final regulations requiring the banking, securities, futures, and mutual fund
industries to establish customer identification programs, w e will be drafting
regulations applicable to financial institutions in other industries that offer their
customers accounts. Finally, w e are continuing to explore the appropriate
expansion of the suspicious activity reporting regulations to additional categories of
financial institutions. W e have already proposed to require mutual funds, futures
commission merchants, and insurance companies to file such reports.
Let me provide you with some sense of how we are using the USA PATRIOT Act
and the implementing regulations to combat terrorist financing. While it is still
relatively premature to evaluate their impact, w e do have s o m e indication of their
effectiveness. For example, as I noted above, the section 314(a) system has been
used in m a n y cases and has resulted in a substantial number of leads. T h e
additional reporting and recordkeeping authorities have enhanced the database
FinCEN uses for its research and analysis in supporting terrorism investigations since September 11th, FinCEN has supported 2,692 terrorism investigations. T h e
Terror Hotline established by FinCEN has resulted in 789 tips passed on to law
enforcement. Since the World Trade Center Attacks, FinCEN has m a d e 519
proactive case referrals to law enforcement based upon an analysis of information
in the Bank Secrecy Act database. With the expansion of the suspicious activity
reporting regime, financial institutions have filed 2,655 suspicious activity reports
("SARs") reporting possible terrorist financing. In addition to passing these reports
on to law enforcement, FinCEN has and will continue to analyze the S A R s to report
on systemic patterns in the financing of terrorism.
Finally, I cannot neglect mentioning our partnership with the financial community.
Since passage of the Act, the willingness of the financial community to work with us
in this fight has been remarkable. Cooperation comes in the form of formal and
informal feedback on n e w regulations, one-on-one assistance with specific
investigations, and the proactive identification of potential instances of the
movement of funds to finance terrorism. While w e expect the financial community
to join us in this fight - and they have done so - w e also recognize and appreciate
these efforts, from the largest of financial institutions to the smallest of the
community banks.
While it is appropriate on this occasion to reflect on what we have accomplished, it
is essential that w e m a p out a strategy for proceeding. The plan is straightforward
- do a better job of leveraging the regulatory regime to maximize the protections
against the financing of terrorism. W e will do so in the following manner:
• Better utilization of technology
Technology holds one of the keys to our success in the financial war on terrorism.
This involves the ability to marshal and synthesize all available information to
proactively identify possible instances of the movement of illicit funds. N o w more
than ever w e require our financial institutions to produce data and information.
Several initiatives are already under w a y within Treasury and FinCEN. For
example FinCEN will be receiving assistance from the Business Executives for
National Security and the Wharton School of the University of Pennsylvania in

JS-760: Testimony of David D. Aufhauser before the the Committee on Banking, Housin... Page 6 of 7

developing technology that will allow financial institutions to report suspicious
transactions more easily and quickly. A s part of an overall plan to enhance our
technological platform, FinCEN is also developing a new system to m a n a g e the
Bank Secrecy Act ("BSA") database. "BSA Direct" will involve a significant upgrade
to the platform on which the B S A database is maintained, and will provide users
with web-based, secure access that allows for faster and easier searching. Finally,
w e will continue to work to assist financial institutions in developing proactive
software to better identify potential terrorist financing activities.
• increased Information Sharing
A central theme of the U S A P A T R I O T Act is enhanced information sharing. While
w e have taken substantial steps toward this goal, our challenge remains to find
better ways of providing information and feedback. This is not simple. Often the
information w e develop is highly protected intelligence information that cannot be
disclosed, and w e are always wary of providing our enemies with a roadmap or a
"how-to" guide to manipulating our defenses. That said, w e understand the
importance of, and are searching for, better ways to share information with the
private sector.
• Developing Similar International Standards
For our regulatory efforts to be effective, standards should be internationalized as
much as possible. Thus, w e will continue to devote ourselves to encouraging the
development of international money laundering and terrorism financing standards
that reflect the principles of our domestic regime. W e have already done this in
several areas. In conjunction with the Financial Action Task Force, in addition to
securing the promulgation of the Eight Special Recommendations on Terrorist
Financing, the F A T F recently completed the revision of the 40 Recommendations
on Money Laundering. The changes reflect many of the concepts of the U S A
P A T R I O T Act. For example, key changes to the 40 Recommendations include: (1)
enhanced due diligence with respect to correspondent banking accounts; (2)
increased scrutiny for politically exposed persons; and (3) prohibition on the use of
shell banks.
• Ensuring Compliance with International Standards
Assessing jurisdictions against these standards and cultivating their compliance
with them are important components of our work. Without vigorous and consistent
implementation of these standards throughout the globe, terrorists and criminals will
enter the internationalfinancialsystem at the point of least resistance, and
preventive national efforts will be rendered considerably less effective. Ensuring
global compliance with international standards is accomplished through a threeprong strategy that includes: (i) objectively assessing every country's standards
against the international standards; (ii) providing capacity-building assistance for
key countries in need; and (iii) ensuring appropriate consequences for countries
and institutions that fail to take reasonable steps to implement standards to prevent
terrorist financing and money laundering.
Treasury is participating in a variety of global assessments sponsored by the IMF
and the World Bank, the FATF, and FATF-Style Regional Bodies. W e are also
seeking to build the capacity of jurisdictions to combat money laundering and the
financing of terrorism through a robust regulatory regime. This is done through
bilateral and multilateral outreach and training. Finally, recalcitrant jurisdictions face
potential sanctions pursuant to section 311 of the U S A P A T R I O T Act.
• Evaluating the US Regulatory Regime
A s w e complete regulations implementing the U S A P A T R I O T Act, our next and
perhaps most important task is to take a critical look at what w e have done and ask
the difficult questions of whether they are effective and what additional regulations
m a y be necessary. W e will work through both formal and informal m e a n s to
conduct this evaluation, and look forward to working with this Committee during the
process.
We are, in our judgment, on the right path. We have much work left to do. We
appreciate the support w e have received from the Congress - particularly this
Committee - on these important issues. I believe what I have said time and again,
stopping the flow of m o n e y is one of the very best ways to stop the terror.

JS-761: Opening Statement David D. Aufhauser Senate Banking CommitteHearing on Te... Page 1 of 3

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 25, 2003
JS-761
Senate Banking Committee
Hearing on Terrorist Financing
Opening Statement
David D. Aufhauser
General Counsel
Department of the Treasury
September 25, 2003
Mr. Chairman, it is a distinct honor to appear before the Committee today. You and
I have previously discussed enforcement and terrorist financing matters in closed
hearings before the Senate Intelligence Committee. I a m grateful for the chance to
speak about these issues in the daylight so w e may all profit from an informed
debate on something that is central to the lives of our families and to our country.
Senator Sarbanes, I am equally grateful for the attention that you have turned to
this matter. I live in the District of Columbia, so for twenty years you have been the
closest thing that I have ever had to a Senator. But what recommends you most,
respectfully, is a staff that includes m y friend and, literally teacher when I first set
foot at Treasury, Steve Kroll. Working closely with Steve Harris, Cathy Casey and,
in particular, John Smith, w e are all a safer and a freer people because the work of
the Chairman, yourself and this Committee.
Terror traffics in three forms of currency - hate, counterfeit religion and money.
The first two are born out of a deficit of hope in the Middle East, the most naked
symbol of which is the failure to resolve the question of Palestine.
But the malevolence preys on a dynamic that extends far beyond those borders, to
corners of the world where youfindthe Islamic Diaspora - hungry, torn by civil war,
living in near permanent refugee camps, looking for remedy where reason seems to
beggar the notion. There, hopelessness is forged into hate by merchants of the
false cure called terror.
These are problems writ large that must be addressed if we hope to bring our
children up in a world no longer haunted by killers whose political agenda calls for
the death of innocents. But it will take years to win hearts and minds and the
challenge m a y be beyond m y personal ken.
I've had a more immediate calling - to deal with the third leg of terror, its funding.
The task came to me with some irony. I joined the Treasury Department in March
of 2001, challenged by Paul O'Neill to help him put good money -development aid
- to good account. W e wanted real world consequence, and our model w a s water
wells in a thousand villages rather than the narcotic of grand master plans.
After September 11th, ! was asked to deal with the distorted mirror image of that
ambition, no longer responsible for money intended to enrich people, but to destroy
them.
It is something that we have never done before in this country- at least in any
systemic way - and a legitimate subject for examination and, perhaps, reproach.

JS-761: Opening Statement David D. Aufhauser Senate Banking CommitteHearing on Te... Page 2 of 3

I say that because almost nothing is more important on the battlefield of the war on
terror than diminishing the flow of money. And there is additional irony that it took
the destruction of a temple of commerce to teach us that lesson.
Why is it important? First, it is doable and within our reach.
Al-Qaida's cash flow has been balkanized and cut by two-thirds since w e started
this campaign.
Second, it provides near infinite leverage to prevent calamity. You cannot limit the
imagination or designs of a terrorist cell that is rich with money in its pockets. But all
their invention is forfeit if the funds never materialize.
Third, in this uncommon shadow war of terror, virtually every source of information
is suspect, the product of treachery, deceit, bribes or interrogation. But financial
records don't lie and bring integrity to the process of threat assessment and the
prevention of m a y h e m .
Fourth, a man who straps a bomb to his chest is an implacable foe - beyond
redemption and certainly beyond deterrence because of any threat of economic or
physical sanction. But his would be banker is a coward and can be m a d e to be
wary, apprehensive and a bankrupt source of future funding.
Fifth, developing intelligence on future acts of terror is a compound of genius,
sweat-equity and serendipity. I don't like the serendipity part. The prospect of
collecting and successfully analyzing intelligence on a hundred events at the end of
the pipeline of the terrorist enterprise would be nothing short of miraculous.
Stopping the capital formation of that enterprise before all such invention, while a
daunting challenge, is our more promising strategic choice and goal.
There will be no surrender on the battleship Missouri in this war. There is no flag to
capture. There is no uniform army to corral. There is no clod of earth that our
enemies will wish to preserve in the event of defeat.
Rather, we will count our victories one at a time, measured in single captures or
killings. W e will defeat them, however, in a systematic way only by denying them
the lifeline of their mobility and stealth - and that is their financing.
It cannot be done alone. Virtually all of our concerns - save for John Pistole's good
industry on domestic threat - are abroad. W e therefore mark our successes by
building a n e w vocabulary, n e w laws, new capacities and political will globally to
stem the flow of terroristfinancing- whether it is Syrian and Iranian support for
Hezbollah, European support for H a m a s , or Gulf state support for al-Qaida.
There has been a sea change because of our efforts. Let me close with one
example.
Over the past 1700 years, any member of the Islamic faith could walk into one of
the tens of thousands of mosques that populate Saudi Arabia and reaffirm a
covenant with G o d - at least in s o m e small part - by depositing coin or currency
into a collection box (known as sakadah).
It is an intensely private act - what you might call a good secret. Nothing vainglorious, just a simple act of faith and charity.
In a world of peace, it would not be the business of government. Indeed, to
regulate it could be called sacrilege.
We do not, however, live in a world of peace. And some of these collection boxes
have been found in the hands of al-Qaida. And, today, in Saudi Arabia -the keeper
of Mecca - cash collection in sakadah is banned.

JS-761: Opening Statement David D. Aufhauser Senate Banking CommitteHearing on Te... Page 3 of 3

That kind of change in even the most fundamental acts of a society, let alone a
faith - has taken enormous resources and the kind of industry that would make this
Committee proud of a government and interagency process that works as one.
For a while there, we were spinning gold out of straw. And surely, we can make
improvements. But with colleagues like Tony and John, the campaign against
terrorist financing will bring more peace to our citizens than an army of soldiers.
And maybe if 1 get the privilege to return to public service, I can work on those
village wells that Paul and I spoke about three years ago when the world w a s a
different place.

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate: 1 5/8% Issue Date: September 30, 2003
Series:
Q-2005
Dated Date:
CUSIP No:
912828BL3
Maturity Date:

High Yield:

1.695%

Price:

September 30, 2003
September 30, 2005

99.863

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 78.20%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tendered
$

6,535,067

Federal Reserve
$

61,488,244

24,237,000
763,107
0
25,000,107 1/

54,953,177

SUBTOTAL

TOTAL

54,190,070
763,107
0

Accepted

31,535,174

Median yield
1.670%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
1.500%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 54,953,177 / 25,000,107 = 2.20
1/ Awards to TREASURY DIRECT = $624,571,000

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

<fs 7 ^

ori'KK or IM Hi.rr ANVXIKS • ison IT V S V V I . V I M \ w I.VI lm N:.\V. • U A M I I N C m v n.i .» 202211 »l:2n2> fi2220Mi

EMBARGOED UNTIL 11:00 A.M.
September 25, 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 $33,381 million of publicly held 13-week and 26-week
Treasury bills maturing October 2, 2003, and to pay down approximately $1,381 million.
Also maturing is an estimated $17,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced September 29, 2003.
The Federal Reserve System holds $15,303 million of the Treasury bills maturing
on October 2, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held September 30, 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 $962 million into the 13-week bill and $611 million into the 26-week
bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
0O0

Attachment

JS ~]U

H I G H L I G H T S OF TREASURY O F F E R I N G S OF B I L L S
TO B E ISSUED OCTOBER 2, 2003

September 25, 2003
Offering Amount
$16,000
Maximum Award (35% of Offering Amount)
$ 5,600
Maximum Recognized Bid at a Single Rate .... $ 5,600
NLP Reporting Threshold
$ 5,600
NLP Exclusion Amount
$ 6,300
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

million
million
million
million
million

92-day bill
912795 PD 7
September 29, 2003
October 2, 2003
January 2, 2004
July 3, 2003
$24,288 million
$1,000

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

million
million
million
million

182-day bill
912795 PS 4
September 29, 2003
October 2, 2003
April 1, 2004
October 2, 2003
$1,000

FROM THE OFFICE OF PUBLIC AFFAIRS
September 25, 2003
JS-764
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 $81,233 million as of the end of that week, compared to $80,596 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
September 5, 2003

September 12, 2003

80,596

81,233

TOTAL
1. Foreign Currency Reserves

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

7,344

13,437

20,781

7,516

13,400

20,916
0

Of which, issuer headquartered in the U.S.
b. Total deposits with:
hi. Other central banks and BIS

12,023

2,699

14,722

12,281

2,691

14,972

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

b.ii. Of which, banks located abroad

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

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

2. IMF Reserve Position 2

22,520

22,686

3. Special Drawing Rights (SDRs) 2

11,530

11,615

4. Gold Stock3

11,043

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
September 5, 2003
Euro

Yen

TOTAL

September 12, 2003
Euro

1. Foreign currency loans and securities
^
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

Yen

TOTAL

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

III. Contingent Short-Term Net Drains on Foreign Currency Assets
September 5, 2003
Euro
1. Contingent liabilities in foreign currency

Yen

TOTAL
0

September 12, 2003
Euro

Yen

TOTAL
0

1 .a. Collateral guarantees o n debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with e m b e d d e d
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
S.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

}F_SS R O O M

F R O M T H E OFFICE O F PUBLIC AFFAIRS
October 7, 2003
JS-765
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 $83,074 million as of the end of that week, compared to $82,068 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
September 19, 2003

September 26, 2003

82,068

83,074

TOTAL
1. Foreign Currency Reserves

]

a. Securities

Euro

Yen

7,549

13,798

Of which, issuer headquartered in the U.S.

TOTAL

Euro

21,347 • 7,656

Yen

TOTAL

14,069

21,724

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

12,329

2,771

15,100

12,481

2,826

15,307

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

b.ii. Of which, banks located abroad

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

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

2. IMF Reserve Position 2

22,869

23,148

3. Special Drawing Rights (SDRs) 2

11,709

11,851

11,043

4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
September 19, 2003
Euro
1. Foreign currency loans and securities
2

Yen

TOTAL

September 26, 2003
Euro

- 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
September 19, 2003
Euro
1. Contingent liabilities in foreign currency

Yen

TOTAL
0

September 26, 2003
Euro

Yen

TOTAL
0

l.a. Collateral guarantees o n debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with e m b e d d e d
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

JS-766: Statement of G 7 Finance Ministers and Central Bank Governors

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 20, 2003
JS-766
Statement of G7 Finance Ministers and Central Bank Governors
Recent data indicate that a global recovery is underway. Equity markets have
rebounded, confidence has increased, financial conditions have improved, oil prices
are expected to remain stable and inflation is under control.
Macroeconomic policies should continue to support the recovery while ensuring
medium-term fiscal sustainability. However, for growth to strengthen, be sustained
and be less unbalanced, structural reforms must be accelerated. W e support the
progress m a d e to reform tax and regulatory regimes, labour markets and pension
systems. Further efforts are needed. Our top priority is to raise productivity and
employment. W e will do our part in further reforms as set out in the attached
Agenda for Growth.
We reiterate the importance of a rules based and multilateral approach to trade. We
are disappointed at the breakdown of trade negotiations in Cancun. W e urge a
speedy resumption of the Doha Round which is vital for global growth and the
alleviation of world poverty. W e believe that the immediate blockages can be
removed and, with an effort on all sides, agreement reached on the remaining
issues. W e welcome the International Financial Institutions' proposed assistance for
countries to deal with the transition to a more open trading system.
We reaffirm that exchange rates should reflect economic fundamentals. We
continue to monitor exchange markets closely and cooperate as appropriate. In this
context, w e emphasize that more flexibility in exchange rates is desirable for major
countries or economic areas to promote smooth and widespread adjustments in the
international financial system, based on market mechanisms.
Effective and persuasive surveillance is crucial. Even in current favourable
conditions, the IMF should identify vulnerabilities, in particular currency
mismatches, and provide candid advice on policy reforms. W e welcome the
agreement to publish exceptional access reports. W e welcome the increasingly
widespread use of collection action clauses (CACs) in foreign sovereign bond
issues. W e look forward to further work on the Code of Conduct, which will be
discussed by the G-20 meeting in October.
We encourage emerging market countries to pursue sound policies and to enhance
their climate. This will help attract flows, reduce external vulnerabilities, and support
sustained growth. W e welcome the progress Brazil and Turkey have m a d e in
implementing structural reforms and support further efforts. W e welcome today's
agreement between Argentina and the IMF. The implementation of the program will
be the key to restore strong and long-lasting economic growth and investment
climate. W e look forward to a speedy agreement with private creditors ensuring fair
treatment.
We remain committed to transparency and effective exchange of information
between countries as vital weapons is the fight against money laundering and tax
evasion. W e strongly urge those O E C D countries that have not taken necessary
steps - in particular in allowing access to bank information - to do so as soon as
possible.
We welcome the work of the Financial Stability Forum, in particular in areas of
audit, financial analysts, credit risk, reinsurance and rating agencies, and
encourage it to continue strengthening cooperation in these areas.

Page 1 of 2

JS-766: Statement of G 7 Finance Ministers and Central Bank Governors

W e reaffirm our commitment to fight global poverty and to help developing countries
achieve the international development goals of the Millennium Declaration. In this
respect, w e discussed financing issues and results based measurement. W e asked
the IMF and the World Bank to do further work on aid effectiveness, absorption
capacity, financing facilities and results-based measurement mechanisms, and
report at the Annual Meetings in September 2004. W e welcome the views of
developing and emerging market countries on these issues.
We reaffirm our strong commitment to complete the Heavily Indebted Poor
Countries Initiative. W e urge all bilateral creditors to join with us in canceling out the
1 0 0 % of their eligible claims. W e ask the IFIs to review the methodology for
calculating the amount of "topping up" debt relief. W e look forward to the outcome
of the IFIs work on low income countries vulnerabilities to exogenous shocks.
Since September 11, 2001, we have made significant progress in the fight against
terrorist financing, although much remains to be done. W e look forward to the Fund
and Bank making terrorist financing/money laundering assessments a permanent
part of their work. W e have intensified the dialogue with several non-G7 countries to
prevent abuse of non-profit organizations and alternative remittance systems. W e
seek to eliminate terrorist financing through implementation of measures in
accordance with the F A T F Eight Special Recommendations.
We welcome both the Afghan donors meetings this month and the upcoming Iraq
Donors' Conference. W e reaffirm our support for a multilateral effort to help rebuild
and develop Iraq, based on a needs assessment led by the World Bank at the
Donors' Conference in Madrid, next month. W e support the IMF and the World
Bank rapidly providing, subject to their policies, financial and other assistance to
Iraq and call upon regional financial institutions to do likewise.
W e call upon the Paris Club to make its best effort to complete the restructuring of
Iraq's debt before the end of 2004. W e urge all non-Paris creditors to cooperate.

Page 2 of2

Page 1 of 1

F R O M T H E OFFICE O F PUBLIC AFFAIRS
October 8, 2003
JS-768
Gross External Debt Reporting System Becomes Operational
The Treasury Department today began publication of a data series on U.S. gross
external debt. The overall magnitude of U.S. indebtedness to foreigners and some
of the major components are already well known. This presentation provides more
detail.
U.S. data are now available for the quarter ending June 30, 2003, and will
henceforth be available quarterly, with a fag of one quarter, on Treasury's website
located at http://www.treas.gov/tic/external-debt,html.
This data series conforms to guidelines of the IMF's Special Data Dissemination
System (SDDS).

JS-769: Assistant Secretary Brian Roseboro's Speech to C F O Magazine Forum

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 29. 2003
JS-769
Remarks of
Assistant Secretary for Financial Markets Brian C. Roseboro
to
C F O Magazine Forum on Total Working Capital M a n a g e m e n t
N e w York, N Y
Good afternoon. I would like to thank CFO magazine for offering this opportunity to
speak with you on the topic of government borrowing. I will use m y time to make
three related points; first, yes deficits matter but focusing merely on current and
forecast deficits is focusing on the symptom and not the disease. Second,
Treasury's debt management policy is well positioned to manage the challenges of
aiding economic recovery and fighting the war on terrorism and lastly, the
enactment of the Administration's policies over the past two years have indeed
facilitated the emerging economic recovery.
Financing outlook:
The recession, corporate scandals and continuing war on terrorism all played a part
in slowing the growth of our economy and increasing the deficit. In the spring of
2001, the forecast for FY2003 was for a surplus of $334 billion. The Office of
Management and Budget's (OMB) most recent forecast for FY2003 was for a deficit
of $455 billion - a $789 billion adverse swing in 2 years. O M B has forecast deficits,
although declining after FY2004, for the next five years. Secretary S n o w has said
deficits matter but there are times when they are unavoidable, especially when w e
face critical needs. Further, let's put the current deficit outlook into perspective.
W h e n viewed beyond a simplistic and often misleading "nominal" measure, it
remains at a manageable level relative to the size of the U S economy at 4.2% of

GDP.
Managing these unwelcome deficits is an Administration priority. But effectively
managing deficits can only be done by not confusing the cause with the cure. Let's
do s o m e simple math. In the 2 year FY2003 forecast swing of -$789 billion,
approximately 2 2 % is a "static" accounting result of the President's tax cuts, 2 4 %
for Homeland Security cost. But 5 3 % or approximately -$418 billion of that w a s due
to lower economic growth than originally forecast. Clearly, even without the
President's tax cut package passed in 2001, the economic growth and jobs
package, spending on homeland security and the war on terrorism, w e would have
deficits n o w because of the downturn in the economy.
The obsession some have today with focusing on projected deficits, especially longterm, brings up another important issue. The most frequent conceptual error I see
committed by Capital Hill watchers and Wall Street analysts, with respect to the
government's financing needs, is to over-rely on official budget "point" forecasts,
and to under-invest in understanding the likely scope of deviation in these
projections. A s Yogi Berra said - "It's tough to make predictions, especially about
the future".
Over the past 10 years, the average error in Administration budget forecasts,
realized four months into the fiscal year, is approximately +/- $70 billion and the
Congressional Budget Office (CBO) and Wall Street get it just as wrong. O M B , the
Council of Economic Advisors (CEA), and other Administration officials strive to
improve our economic forecasting and thus our borrowing projections. However, the

JS-769: Assistant Secretary Brian Roseboro's Speech to C F O Magazine Forum

underlying problem is that our financing needs, driven by a $2 trillion budget are
constantly shifting in response to numerous dynamic, ever-evolving variables such
as seasonal changes in cash flows, structural changes in tax and expenditure
policies and the level of U S economic activity.
But striving towards better forecasting is only part of the answer. In preparing for
battle, General Eisenhower observed, "I have always found that plans are
useless, but planning is indispensable." So to manage the government's
borrowing requirements, Treasury debt managers must constantly ask those
fundamental risk management questions, "What is? What was? What if? And
H o w ? " What is our up-to-date borrowing estimate? What w a s the market response
to changes in previous borrowing quarters? What if w e vary the assumptions driving
future borrowing needs? H o w can w e better prepare the market for changes in our
borrowing pattern w h e n - not if - the future does not fit our forecast. W e have to
look at a range of futures and test how our decisions would turn out in each.
Deficits are manageable:
Treasury's single objective in managing its marketable debt is just like that of a
private sector chief financial officer; our objective is to achieve the lowest cost,
over time, for the federal government's financing needs. But w e have
constraints unlike those of a private sector C F O , most notably that a Treasury debt
manager does not, and must not attempt to "time the market". Providing investors
and financial intermediaries with confidence that the value of their holdings will not
change due to unforeseen changes in the amounts w e have issued, lowers our cost
of borrowing. Ten-year yields are still low by historical standards for example, but
w e aren't holding impromptu auctions. W e don't even take the yield curve into
account w h e n w e allocate how much to raise by different maturities. Nor do w e
cancel auctions due to spikes in our cash balances. Instead, to achieve our
objective of lowest cost over time, the Treasury commits to regular and predictable
issuance across a range of securities. This regularity and predictability gives
investors certainty that they can get our securities if they need them. We're always
there.
Market participants knowing of our stable issuance patterns have thus grown
habituated to using Treasuries for pricing, hedging, and cash management. There
is ongoing and increasing demand for our issuance. In 2001, the volume of
transactions in the Treasury market averaged almost $300 billion a day. That w a s
over three times the average daily volume for each of corporate debt, agency debt,
mortgage-related securities, and even the N e w York Stock Exchange, in 2002, w e
averaged close to $350 billion and in 2003 w e are averaging over $400 billion a
day. Over time, w e believe this regularity and predictability cuts our financing costs
more than market-timing moves ever could.
However "regular and predictable" does not mean static, inflexible or never
changing. It m e a n s factoring "variance" into our debt management policies. It
m e a n s reducing the uncertainty where w e can and planning for where w e cannot. It
m e a n s preparing the market, as much as possible, when w e do have to m a k e
policy changes.
Our planning is further aided by offering as broad a product range as we can,
consistent with minimizing cost to the taxpayer over time. Our current calendar has
roughly 195 auctions per year: 3 bill auctions per week (4-week, 13-week, and 26week bills), monthly 2-year & 5-year note auctions, quarterly 3-year notes, quarterly
10-year notes with re-openings one month later, and quarterly auctions for inflationindexed securities.
Occasional policy changes occur when our borrowing needs exceed the flexibility
built into our auction schedule. Over the last three decades, Treasury has
introduced, withdrawn and re-introduced numerous securities. These include the
52-week bill, 3-year note, 4-year note, 5-year inflation indexed note, 7-year note,
20-year bond, 30-year bond, 30-year callable bond, 30-year inflation indexed bond,
foreign targeted and foreign currency denominated securities.
W e signal our deliberations well ahead of time through our refunding statements,

Page 2 of 4

JS-769: Assistant Secretary Brian Roseboro's Speech to C F O Magazine Forum

the questions we ask of primary dealers and the publicly reported discussions we
have with our private sector advisory committee m a d e up offixedincome "buy" and
sell side participants. W e have worked hard to improve communications with
investors, both so that you know what to expect from Treasury debt management
and so that you have more opportunities to tell us what w e should expect from you
W h e n w e m a k e a decision, w e announce it at a quarterly refunding as early as w e '
can. W e want you to have substantial lead-time for any specific changes to our
offerings as well as an awareness of the problems or choices w e face.
But is current and prospective issuance "crowding out" the other fixed income
issuers? Answering this first requires a measure of the market. Today's total value
2 u?Pl^ •? Creditmarkets isabout $21 trillion. Of that, Treasury marketable
debt is $3.5 trillion. The mortgage backed securities market is nearly $5 trillion The
asset-backed securities market is $1.6 trillion. The corporate bond market is $4 1
trillion. The agency debt market is $2.4 trillion and other offerings (such as
municipal securities and money market instruments) account for $4.3 billion Over
the last 10 years, Treasury marketable debt has net increased by approximately
$389 billion while the other markets have grown by a combined $10.8 trillion.
Yet another perspective on Treasury's size in the market is to see that Treasury
notes and bonds account for only 1 0 % of the afore mentioned long-term credit
market debt compared to 1 8 % ten years ago. Further, this 1 0 % level is a 22-year
low as a percentage of long-term debt securities, indeed, even looking at shortterm issuance - i.e., short-term commercial paper plus Treasury bills - "T-biil"
issuance is at 4 1 % of open market paper compared to 5 4 % 10-years ago. Evidence
of any "crowding out" effect is lacking.
US economic outlook:
It's most likely that only returning to balanced budgets will eliminate questions and
concerns over the myth of "crowding out". The prescription for returning to balanced
budgets is straightforward: hold the line on spending and grow the economy. The
C E A has estimated that for every increase of 1 % in the economic growth rate, the
budget outlook improves by $1 trillion over 10 years. It is economic growth that
corrected the economic problems and closed budget gaps over the last 30 years.
The President put forth and signed legislation that is encouraging consumer
spending and promoting investment by individuals and businesses that will lead to
economic growth and job creation. Positive economic developments are occurring.
Housing starts recently reached a 17-year high. Retail sales have been robust over
the summer and disposable personal income, helped by recent tax cuts, has been
strong as well. Business investment in equipment and software in the second
quarter posted the largest increase in three years. While employment numbers
remain weak and a concern, improved economic growth will restore job gains. The
private sector consensus forecast is that real growth will exceed 4 percent in the
second half of this year and average just under 4 percent next year. In addition, the
President has recently announced a six-point plan to build employer confidence and
create m o m e n t u m to hire new workers.
Confidence that the Administration's plans have played a significant part in the
recovery can be found in testing the "null hypothesis" -" What would be U S
economic performance without the fiscal stimulus measures implemented through
the President's leadership?", i.e., eliminate the tax and spending provisions of the
Economic Growth and Tax Relief Reconciliation Act of 2001- June 2001-, the Job
Creation and Worker Assistance Act of 2002 -March 2002 - and the Jobs and
Growth Tax Relief Reconciliation Act of 2003 - May 2003. Treasury's Office of
Economic Policy estimates that through first half of this year:
• The unemployment rate would have been nearly 1 percentage point higher
• The economy would have created as many as 1.5 million fewer jobs.
• Real G D P would have been as much as 2 percent lower.
The President's actions, along with the impact of accommodative monetary policy,
low inflation, low interest rates and necessary adjustments by U S businesses
helped make the recession one of the shallowest in our nation's history.

Page 3 of 4

JS-769: Assistant Secretary Brian Roseboro's Speech to C F O Magazine Forum

Conclusion:
Yes, deficits matter but the need to implement policies that encourage and support
economic growth is what's important. Treasury's debt issuance calendar is well
positioned to manage the ongoing obligations from past decades of Congressional
decisions on taxes and spending, any new additional requirements to support the
economic recovery and war needs, and any further negative or positive variance in
budget forecast. In doing so, Treasury issuance will continue to support the broader
functioning and growth of the fixed income market.
America's economy is showing signs of promise. But there are still Americans out of
work today; there are still American businesses struggling. Partial success will not
be sufficient. A s the President has stated, w e can and must do better for all
Americans. The Administration's economic policies are helping to move the
economy in the right direction and improved growth and opportunity can be
expected.
Thank you.

Page 4 of4

JS-770: Treasury N a m e s D a n Iannicola, Jr. as Deputy Asst. Secretary for Financial Educa... Page 1 of 1

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 29, 2003
JS-770
Treasury Department Names Dan Iannicola, Jr.
as Deputy Assistant Secretary for Financial Education
The Treasury Department today announced that Dan Iannicola, Jr. has been
appointed as Deputy Assistant Secretary for Financial Education. Bringing
experience in both the education and financial fields, he begins his new post
September 29, 2003.
In this position, Mr. Iannicola is responsible for overseeing the Treasury's Office of
Financial Education (OFE), which was established in 2002 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. Mr. Iannicola will advise the Assistant Secretary of Financial Institutions on
matters pertaining to financial education, including the development,
implementation and analysis of policy.
Mr. Iannicola was most recently Special Counsel to the Assistant Secretary and
Director of Communications in the Department of Education's Office of
Postsecondary Education, where he has worked since 2002. During that time, he
drafted policy documents, provided legal analysis of statutes and regulations, and
represented the Department at public events.
Previously, Mr. Iannicola served as Counsel for The May Department Stores
C o m p a n y and Vice President/Regulatory Liaison for the M a y National Banks in St.
Louis, M O (1996-2002), while also serving as Adjunct Professor of Business Law at
St. Louis Community College (2000-2002). H e was president of the Affton Board ofEducation in St. Louis, M O during 1999-2001, following membership on the Board
since 1997. Mr. Iannicola also was an attorney with John Deere Credit in Moline, IL
(1994-1996).
Mr. Iannicola earned his Bachelor of Science degree in Economics from The
Wharton School at the University of Pennsylvania, and his Juris Doctor from the
Univeristy of Illinois College of Law. H e resides in Arlington, Virginia.

JS-771: TREASURY AND IRS ISSUE GUIDANCE ON THE DEDUCTIBILITY OF C...

F R O M T H E OFFICE O F PUBLIC A F F A I R S
September 30, 2003
JS-771
TREASURY AND IRS ISSUE GUIDANCE ON
T H E DEDUCTIBILITY O F C O N V E N T I O N E X P E N S E S
The Treasury Department and the Internal Revenue Service issued today Revenue
Ruling 2003-109, which provides an updated list of geographical areas that are
included in the "North American area" for purposes of deducting convention
expenses.
Section 274(h) of the Internal Revenue Code provides that expenses incurred by
U.S. taxpayers for conventions, seminars, or similar meetings in the North
American area that are otherwise deductible as ordinary and necessary business
expenses will be allowed without regard to the additional statutory limitations
applicable to foreign convention deductions. For this purpose, the North American
area includes the United States and its possessions, Canada, Mexico, jurisdictions
that have entered into Compacts of Free Association with the United States
providing for such treatment, and jurisdictions that are beneficiary countries as
defined in the Caribbean Basin Economic Recovery Act of 1983 and that have in
effect a tax information exchange agreement with the United States consistent with
the standards described in section 274(h)(6)(C). Revenue Ruling 2003-109 reflects
tax information exchange agreements in effect with such beneficiary countries,
including the tax information exchange agreement with Antigua and Barbuda that
recently c a m e into effect.
The revenue ruling provides that it will be updated as future developments result in
the inclusion of other areas in, or the exclusion of areas from, the North American
area.
Related Documents:
• The text of Revenue Ruling 2003-109

Page 1 of 1

Part I

Page 1 o f 3

Parti
Section 274.—Disallowance of Certain Entertainment, Etc., Expenses
26 CFR 1.274-1: Disallowance of Certain Entertainment, Etc., Expenses
Rev. Rul. 2003-109
ISSUE
Section 274(h) of the Internal Revenue Code limits deductions for expenses incurred in connection
with a convention, seminar, or similar meeting held outside the "North American area." This revenue ruling
contains an updated list of all geographical areas currently included in the North American area for purposes
of this section.
LAW AND ANALYSIS
Section 274(h) disallows deductions under section 162 for expenses allocable to attendance of an
individual at a convention, seminar, or similar meeting (a "convention") held outside the "North American
area." However, the disallowance does not apply if the taxpayer can demonstrate that the convention's
location satisfies specified standards of reasonableness.
Geographical areas are included in the "North American area" for purposes of section 274(h) under
one of four provisions.
Section 274(h)(3)(A)
Section 274(h)(3)(A) defines the term "North American area" as the United States, its possessions,
the Trust Territory of the Pacific Islands, Canada, and Mexico. The United States consists of the fifty states
of the United States and the District of Columbia. The possessions of the United States, for this purpose,
are American Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, G u a m , Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands,
Palmyra, the United States Virgin Islands, W a k e Island, and other United States islands, cays, and reefs not
part of trie fifty states or the District of Columbia. The jurisdictions that formerly constituted the Trust
Territory of the Pacific Islands - the Republic of the Marshall Islands, the Federated States of Micronesia,
and the Republic of Palau - are n o w covered by the compacts with the United States described below.
The Compact of Free Association Act of 1985
The Compact of Free Association Act of 1985, Pub. L. No. 99-239, 99 Stat. 1770 (1986) went into
effect on October 21, 1986, with respect to the Republic of the Marshall Islands, and on November 3, 1986,
with respect to the Federated States of Micronesia. Section 405 of Title IV of the Compact provides that, for
purposes of section 274(h)(3)(A) of the Code, the Republic of the Marshall Islands and the Federated States
of Micronesia are included in the North American area.
The Compact of Free Association Between the United States and the Republic of Palau
~
The Compact of Free Association between the United States and the Republic of Palau, Pub. L. 99658,100 Stat. 3672 (1986) went into effect on October 1, 1994. Section 255(d) of Title II of the Compact
with Palau provides that, for purposes of section 274(h)(3)(A) of the Code, Palau is included in the North
American area.

Parti

Page 2 of3

Section 274(h)(6)
Section 274(h)(6) provides that the term "North American area" also includes any "beneficiary
country" if, as of the time a convention begins, (1) there is in effect an agreement described in section 274(h)
(6)(C) providing for the exchange of tax information between the United States and the beneficiary country,
and (2) there is not in effect a finding by the Secretary of the Treasury that the tax laws of the beneficiary
country discriminate against conventions held in the United States.
Section 274(h)(6)(B) defines the term, "beneficiary country" as meaning a beneficiary country as
defined in section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act, Pub. L. No. 98-67, 97 Stat.
384 (1983), and Bermuda. A n agreement described in section 274(h)(6)(C) providing for the exchange of
information between the United States and a beneficiary country generally must provide:
for the exchange of such information (not limited to information concerning nationals or
residents of the United States or the beneficiary country) as m a y be necessary or appropriate
to carry out and enforce the tax laws of the United States and the beneficiary country (whether
criminal or civil proceedings), including information which m a y otherwise be subject to
nondisclosure provisions of the local law of the beneficiary country such as provisions
respecting bank secrecy and bearer shares. Section 274(h)(6)(C)(i).
Rev. Rul. 94-56, 1994-2 C.B. 37, modifying Rev. Rul. 87-95, 1987-2 C.B. 79, identifies each of the
following jurisdictions as a beneficiary country for which there is in effect an agreement with the United
States described in section 274(h)(6)(C) and for which there is not in effect a finding by the Secretary of the
Treasury that the tax laws of the beneficiary country discriminate against conventions held in the United
States: Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras,
Jamaica, Saint Lucia, and Trinidad and Tobago. Each of these jurisdictions continues to be considered as
part of the North American area under section 274(h)(6) for purposes of claiming deductions for expenses
incurred in connection with a convention beginning on or after the date on which the tax information
exchange agreement between the jurisdiction and the United States c a m e into effect.
Since the publication of Rev. Rul. 94-56, the "Agreement Between the Government of the United
States of America and the Government of Antigua and Barbuda for the Exchange of Information with
Respect to Taxes" has c o m e into effect. This agreement entered into force on February 10, 2003 and c a m e
into effect as of that date. See Treas. N e w s Release JS-165 (April 8, 2003). Antigua and Barbuda is
included within the North American area under section 274(h)(6) as of February 10, 2003.
HOLDING
For purposes of claiming deductions for expenses incurred in connection with a convention, seminar,
or similar meeting, the following areas are included in the "North American area" as of the effective date of
section 274(h) except as otherwise indicated:
1. The fifty states of the United States and the District of Columbia;
2.
The possessions of the United States, which for this purpose are American Samoa, Baker
Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana
Islands, G u a m , Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway
Islands, Palmyra, the United States Virgin Islands, W a k e Island, and other United States
islands, cays, and reefs not part of the fifty states or the District of Columbia;
3.
Canada;
4.
Mexico;
5.
The Republic of the Marshall Islands;
6.
The Federated States of Micronesia;
7.
The Republic of Palau;

Parti

Page 3 of3

For expenses incurred in attending a convention that began after:
Antigua and Barbuda
February 9, 2003
Barbados
November 2, 1984
Bermuda
December 1, 1988
Costa Rica
February 11, 1991
Dominica
May 7, 1988
Dominican Republic
October 11, 1989
Grenada
July 12, 1987
Guyana
August 26, 1992
Honduras
October 10, 1991
Jamaica
December 17, 1986
Saint Lucia
Trinidad and Tobago
April 21, 1991
February 8, 1990
This revenue ruling will be updated as future developments result in the inclusion of other areas
the exclusion of areas from, the North American area.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.

EFFECT O N O T H E R R E V E N U E R U L I N G S
Rev. Rul. 94-56 and Rev. Rul. 87-95 are superseded.
DRAFTING INFORMATION
The principal author of this revenue ruling is M a e J. Lew of the Office of Associate Chief Counsel
(International), Branch 1. For further information regarding this revenue ruling, contact M a e J. Lew on (202)
435-5262 (not a toll-free call).

JS-772: TREASURY AND IRS ISSUE TREATY LIST FOR NEW REDUCED TAX RA... Page 1 of 1

F R O M T H E OFFICE O F PUBLIC AFFAIRS
September 30, 2003
JS-772
T R E A S U R Y A N D IRS ISSUE T R E A T Y LIST
F O R N E W R E D U C E D T A X R A T E O N DIVIDENDS
Today, the Treasury Department and the IRS issued a Notice covering the taxation
of dividends paid by foreign corporations under the provisions of The Jobs and
Growth Tax Relief Reconciliation Act of 2003 (the "2003 Act"). By reducing the
rates of tax for individuals on certain dividends, the 2003 Act reduces the double tax
on dividends. The Notice provides guidance on the application of the reduced rates
of tax to dividends paid by a foreign corporation.
Dividends paid by a foreign corporation are subject to the reduced tax rates if the
corporation is a qualified foreign corporation. With certain exceptions, a "qualified
foreign corporation" for this purpose includes a foreign corporation that is eligible for
benefits of a U.S. income tax treaty if the treaty meets three requirements. T o
qualify, the treaty must be comprehensive, the Secretary must determine it is
satisfactory, and it must provide for the exchange of tax information. The Notice
issued today contains the current list of the U.S. tax treaties that meet these three
requirements.
Corporations incorporated in one of the countries included in this treaty list must
also be eligible for benefits of the U.S. income tax treaty in order to qualify for the
reduced tax rates for dividends. Treasury and the IRS are working on further
guidance regarding the eligibility requirements for foreign corporations.
Dividends paid by a foreign corporation also may qualify for the reduced rates of tax
under an alternative test based on whether the stock of the corporation is readily
tradable on an established U.S. securities market. Treasury and the IRS will issue
guidance relating to this alternative test shortly.

Related Documents:
* The text of Notice 2003-69

Notice 2003-

Page 1 of 3

Part III - Administrative, Procedural, and Miscellaneous

United States income tax treaties that meet the requirements of section l(h)(l l)(C)(i)(II).
Notice 2003-69
Summary
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27, 117 Stat. 752) (the "2003 Act"), was
enacted on M a y 28, 2003. Subject to certain limitations, the 2003 Act generally provides that a dividend paid to an
individual shareholder from either a domestic corporation or a "qualified foreign corporation" is subject to tax at the
reduced rates applicable to certain capital gains. A qualified foreign corporation includes certain foreign corporations
that are eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary
determines is satisfactory for purposes of this provision and which includes an exchange of information program. This
Notice contains the current list of the U.S. tax treaties that meet these requirements. Treasury and the IRS are working
on additional guidance concerning other aspects of this provision.
Analysis

Section 1(h)(1) of the Code generally provides that a taxpayer's "net capital gain" for any taxable year will be s
to a m a x i m u m tax rate of 15 percent (or 5 percent in the case of certain taxpayers). The 2003 Act added section 1(h)
(11), which provides that net capital gain for purposes of section (l)(h) means net capital gain (determined without
regard to section l(h)(l 1)) increased by "qualified dividend income." Qualified dividend income means dividends
received during the taxable year from domestic corporations and "qualified foreign corporations." Section l(h)(l 1)(B)
(i). Subject to certain exceptions, a qualified foreign corporation is any foreign corporation that is either (i)
incorporated in a possession of the United States, or (ii) eligible for benefits of a comprehensive income tax treaty with
the United States which the Secretary determines is satisfactory for purposes of this provision and which includes an

exchange of information program (the "treaty test"). Section l(h)(l l)(C)(i). A qualified foreign corporation does
not include any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the
preceding taxable year, is a foreign personal holding company (as defined in section 552), a foreign investment
[2]
company (as defined in section 1246(b)), or a passive foreign investment company (as defined in section 1297)
Section l(h)(ll)(C)(iii).
The appendix to this Notice sets forth the current list of U.S. income tax treaties that meet the requirements of
(h)(l l)(C)(i)(II). Four U.S. income tax treaties do not meet the requirements of section l(h)(l l)(C)(i)(II). The tax
treaties with B e r m u d a and The Netherlands Antilles are not comprehensive income tax treaties within the meaning of
section l(h)(l 1). The U.S.-U.S.S.R. income tax treaty, which was signed on June 20, 1973 and currently applies to
certain former Soviet Republics, does not include an information exchange program. The current income tax treaty
with Barbados w a s determined not to be satisfactory for purposes of section l(h)(l 1) because of concern that the treaty
may operate to provide benefits which are intended to mitigate or eliminate double taxation in cases where there is no
nsk of double taxation.

Treasury and the IRS intend to update this list, as appropriate. Situations that may result in changes to the list
the entry into force of n e w income tax treaties and the amendment or renegotiation of existing tax treaties. Further

Notice

Page 2 of 3

Treasury and the IRS continue to study the operation of each of our income tax treaties, including the implications of
m y changes m the domestic laws of the treaty partner, to ensure that the treaty accomplishes its intended objectives and
continues to be satisfactory for purposes of this provision. It is anticipated that any changes to the list of income tax
xeaties that meet the requirements of section (l)(h)(l l)(C)(i)(II) will apply only to dividends paid after the date of
publication of the revised list.

Finally, in order to be treated as a qualified foreign corporation under the treaty test, a foreign corporation mus
eligible for benefits of one of the U.S. income tax treaties listed in the Appendix. Accordingly, the foreign corporation
nust be a resident withm the meaning of such term under the relevant treaty and must satisfy any other requirements of
[hat treaty, including the requirements under any applicable limitation on benefits provision. Treasury and the IRS are
working on guidance concerning whether foreign corporations are qualified foreign corporations under the treaty test.
fhe Notice is effective for taxable years beginning after December 31, 2002.

No'tice

Page 3 of3

APPENDIX
U.S. INCOME TAX TREATIES SATISFYING
THE REQUIREMENTS OF SECTION l(h)(ll)(C)(i)(II)
Australia
Austria
Belgium
Canada
China
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
India
Indonesia

Ireland
Israel
Italy
Jamaica
Japan
Kazakhstan
Korea
Latvia
Lithuania
Luxembourg
Mexico
Morocco
Netherlands
N e w Zealand
Norway
Pakistan
Philippines

Poland
Portugal
Romania
Russian Federation
Slovak Republic
Slovenia
South Africa
Spain
Sweden
Switzerland
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Kingdom
Venezuela

[!]
A foreign corporation that does not satisfy either of these two tests is treated as a qualified foreign corporation with respect to any dividend
paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the
United States. Section l(h)(l l)(C)(ii). Treasury and the IRS are working on guidance concerning the definition of "readily tradable on an
established securities market in the United States."
[2]
A dividend from a qualified foreign corporation also is subject to the other limitations in section l(h)(l 1). For example, a shareholder
receiving a dividend from a qualified foreign corporation must satisfy the holding period requirements of section l(h)(l l)(B)(iii).
PJ
The conference report provides that, for the period prior to this determination, foreign corporations will not be considered qualified foreign
corporations by reason of eligibility for benefits of the U.S.-Barbados income tax treaty. H.R. Rep. 108-126, 108 th C o n g 1st Sess at 42
(2003).

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

3?io
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
September 30, 2003

202-691-3550

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

October 02, 2003
October 30, 2003
912795NU1

High Rate: 0.845% Investment Rate 1/: 0.863% Price: 99.934
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 64.83%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal

Reserve

TOTAL

29, ,001, ,882

12, ,960, ,047

39, ,985
0

29, , 041,
,867

13, ,000, ,032

3,,472, ,174

32, ,514, 041

16, ,472, 206

Median rate
0.840%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.82 0%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 29,041,867 / 13,000,032 = 2.23
1/ Equivalent coupon-issue yield.

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Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $13,000 million to
refund an estimated $17,000 million of publicly held 4-week Treasury bills maturing
October 2, 2003, and to pay down approximately $4,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $15,303 million of the Treasury bills maturing
on October 2, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
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.

0O0

Attachment

Js 11^

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED OCTOBER 2, 2003
September 29, 2003
Offering Amount $13,000 million
Maximum Award (35% of Offering Amount) . . . $ 4,550 million
Maximum Recognized Bid at a Single Rate..$ 4,550 million
NLP Reporting Threshold
$ 4,550 million
NLP Exclusion Amount
$11,100 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NU 1
Auction date
September 30, 2003
Issue date
October 2 , 2003
Maturity date
October 30 , 2003
Original issue date
May 1, 2003
Currently outstanding
$43,124 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-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 1 of 13

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
September 30, 2003
JS-775
Report to Congress on the Financing of Benefits Attributable to the Military
Service of Current and Former Employees of the Postal Service

The Postal Civil Service Retirement System Funding Reform Act of
2003, P.L. 108-18 requires that:

"The United States Postal Service, the Department of the Treasury,
and the Office of Personnel Management shall, by September 30,
2003, each prepare and submit to the President, the Congress, and
the General Accounting Office proposals detailing whether and to
what extent the Department of the Treasury or the Postal Service
should be responsible for the funding of benefits attributable to the
military service of current and former employees of the Postal
Service that, prior to the date of the enactment of this Act, were
providedfor under section 8348(g)(2) of title 5, United States
Code."

Executive S u m m a r y

It is the Administration's position that the U.S. Postal Service (USPS) should be
responsible for a share of the costs paid to retired employees of the Postal Service
that arise from increasing Civil Service pension benefits because of military service.
O n e of the primary goals for the reorganization of the Post Office into the U S P S
w a s to ensure that all the costs associated with the new organization be paid
through stamp revenue and not through taxpayer dollars. Therefore, all pension
costs for employees that are attributable to service after the reorganization should
be borne by the Postal Service.

The question then is how to determine what portion of the cost of military credit is
attributable to service since the Postal Service became independent in 1971. W e
maintain that the attribution method adopted in the new legislation (P.L. 108-18) is
an easy-to-administer method that is fair to both the Postal Service and the Federal

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 2 of 13

taxpayer.

The Postal Service should be Responsible for the Cost of Military Service
Credits Attributable to Service Since the Postal Service B e c a m e Independent
in 1971

The Postal Service Should Pay the Full Cost of Benefits Received by its Employees

W e maintain that it has been a basic principle of the legislation that created the
Postal Service that revenue and expenses for Postal Service should be kept
separate from the rest of the Federal Government, and that the Postal Service
should pay for all of its expenses through Postal rates. The benefits attributable to
military service are a retirement benefit that Postal employees receive just like other
benefits, such as the Cost of Living Allowances (COLAs) increases for annuitants,
and Postal Service customers should pay for the full cost of all benefits received by
its employees.

S o m e have argued that it is not fair to ask the Postal Service to finance the cost of
military service for Civil Service Retirement System (CSRS) employees, as it would
be the only agency required to operate under this financing mechanism. However,
for other agencies the special treatment of military service under the C S R S merely
shifts the timing of when the contributions are m a d e and whether they are charged
to the Treasury or charged to agency budgets. In either case, the costs would still
ultimately be borne by the taxpayer. By contrast, Postal Service costs are paid
through postage revenues rather than funded by the Treasury.

The special treatment of military service that applied to Postal Service employees
under the old law can be viewed as more of an historic accident than a deliberate
policy choice.

As described in Appendix A, the prior funding mechanism for the Postal Service
under C S R S (including the special treatment of military service) w a s developed in a
piecemeal fashion that never fully addressed all of the factors that affect the costs
of the system.

By contrast to C S R S , each time a comprehensive system for funding Federal
annuities w a s developed there w a s no special treatment of military service. For
example, in the Federal Employees' Retirement System (FERS) that w a s enacted
in 1984, the cost of benefits attributable to military service is borne by the agencies
(including the Postal Service) through the normal cost. The Administration has also
proposed the s a m e method for funding the cost of C S R S benefits attributable to
military service for non-Postal agencies under the Managerial Flexibility Act.

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 3 of 13

In view of the long history of Congressional action, it is reasonable to assume that
Congress m a y have taken further action to address the issues of excess interest
earnings and the costs of military service, if O P M had not identified the problems
with the static funding methodology.

The payment of military service costs for Postal Service employees is consistent
with the funding of F E R S , the funding system on which the new law w a s patterned.

The adoption of a n e w financing system for the Postal Service under P.L. 108-18
provided an opportunity to design a complete funding system for the Postal Service
retroactive to when the Postal Service became independent in 1971. Although the
old law static funding of C S R S did not require the Postal Service to fund the cost of
military service, it also did not contemplate that the actuarial gains or losses of the
retirement system would be attributed to the Postal Service. Experience shows that
the retirement system benefited from extremely high interest rates during the
1980's. The gains from interest earnings in excess of the static interest rate far
exceed the additional costs of military service. The Postal Service should not
benefit from the positive dynamic experience of the pension fund without assuming
the other responsibilities that c o m e with dynamic funding.

The Attribution Method Adopted in P.L. 108-18 is a Fair Approach for
Determining the Benefits Attributable to Pre-1971 Military Service.

Although it is clear that the Postal Service should be responsible for all employee
benefit costs that arise due to employment under its tenure, there remains the
question of what its responsibility should be for military service costs for employees
w h o worked for both organizations.

The Postal Service should be responsible for a share of the costs associated with
military service based on the portion of the career that is served with the Postal
Service. This is the method that w a s adopted in the Postal Civil Service Retirement
System Funding Reform Act of 2003 (P.L. 108-18). It is consistent with the funding
provisions of F E R S and with the policy that the Postal Service should pay for all of
its expenses through Postal rates.
The following describes several ways to allocate military costs for Postal Service
employees. A n illustrative example of each method is shown in Appendix B.

"USPS Pays All" for Post-1971 Retirement
The most straightforward method of allocating costs would be to assume that the
Treasury should be responsible for the cost of military service for employees w h o
retired from the old Post Office Department before July 1,1971, and that the Postal
Service should be responsible for the cost for employees w h o retired after June 30,
1971.
Because military service only becomes creditable at the time when an employee
actually retires, it would not be unreasonable to charge Postal Service for the entire
amount of military service for all employees w h o retired from the Postal Service

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 4 of 13

after June 30, 1971. It w a s only because these employees retired from the Postal
Service that they received credit for their military service.
Civil Service rules required that to receive a regular retirement benefit the
employees must have at least five years of civilian service and then attain additional
age and service requirements.
"P.L. 108-18 - USPS Pavs Pro-rata Share" Based on the Portion of
Total Career Served under the Post Office Department
Under the Administration's approach (as adopted in P.L. 108-18) the
cost of military sendee for employees w h o were hired before July 1,
1971, but w h o retired on or after this date, is pro-rated based on the
ratio of pre-1971 civilian service to total civilian service. W e believe
this pro-rata method provides a fair w a y of allocating the cost of
military service for these employees and is the most consistent with
F E R S funding.
"Treasury Pays for Pre-1971 Hires"
Under this allocation the Postal Service would only be responsible
for the cost of military service for employees hired after June 30,
1971. For example, an employee hired in 1970 w h o spends almost all
of his/her career at the Postal Service would, of course, receive credit
for their military service. However, under this approach, the Postal
Service would not be charged with any of the cost of these benefits,
even though they are being paid as a result of the employee having
worked for almost an entire career at the Postal Service.
"USPS Pays for Post-September 30. 2002 Military Service Benefits"
An allocation suggested in discussions with Congressional staff was to charge the
Postal Service only for the cost of military service benefits that are payable after
September 30, 2002. This method w a s based on the notion that "the Treasury
already paid for the military service" before this date. However if the objective after
Postal Service reorganization w a s to raise revenue to pay the employment costs of
Postal workers from the sale of stamps instead of the payment of taxes, this
proposed method continues to require Government revenues to fund benefits paid
to Postal employees.
It is our position that the Postal Service should not benefit from the positive dynamic
experience of the pension fund without assuming the other responsibilities that
c o m e with dynamic funding.Jl] A s w a s mentioned previously, w e believe that
Postal Service should be responsible for all of its retirement costs, and it is
irrelevant what m a y or m a y not have been paid for by Treasury under the old law.
This method does not provide a reasonable way of allocating the cost based on
pre-1971 and post-1971 service.
"Treasury Pavs AH"
Treasury would be responsible to pay all of the costs of military service and the
Postal Service would pay none of the costs of military service.
It is our position that this policy violates the principle that the Postal Service should
pay for its o w n expenses through Postal rates. Individuals retiring from the Postal
Service receive C S R S credit for their military service only because of their
employment with the Postal Service.

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 5 of 13

The following table summarizes the costs of these different ways of treating military
service, with more complete information shown in Appendix C:

U S P S Responsible for:

Total Additional Cost
To Treasury
(in billions of dollars)

U S P S Pays All

All military for post-71
retirees

P.L 1 0 8 - 1 8 - - U S P S
Pays a Pro-Rata Share

All military for post-71 hires,
pro-rata share for pre-71
hires

Treasury Pays for Pre1971 Hires

All military for post-71 hires,
no military for pre-71 hires

7.1

U S P S Pays post9/30/02 Military Service
Benefits

Only for military service
benefits paid in the future

16.6

Treasury Pays All

N o military service, past or
future

27.2

(20.7)

Budgetary Implications of the Allocations Presented A b o v e

Under P.L. 108-18, the military service for pre-1971 hires is
allocated between Treasury and the Postal Service based on the ratio
of pre-1971 civilian service to total civilian service. Appendix C
shows that, as of September 30, 2002, U S P S is still required to fund
a supplemental liability of $4.8 billion under this approach. This
supplemental liability would be amortized by the Postal Service
through 40-year amortization payments. Current law (P.L. 108-18)
has already incorporated these supplemental liability payments into
the scoring of the legislation.
If the Postal Service paid for all of the cost of military service for its
post-1971 retirees, the supplemental liability to be amortized by the
Postal Service would be $25.5 billion, an increase of $20.7 billion
over the current law.
Under the allocation where the Postal Service is responsible only for
the cost of military service benefits that are paid after September 30,
2002 ("USPS Pays for Post-9/30/02 Military Service"), U S P S would
carry a supplemental liability of negative $11.8 billion, or, in other
words, there would be an over-funding of $11.8 billion. This
assumes that the Postal Service would continue to pay the full
normal cost of 24.4 percent of payroll. However the over-funding
position would likely necessitate the elimination of all future Postal
agency contributions (only the employee contributions would
remain). The $16.6 billion difference between the $4.8 billion
supplemental liability under P.L. 108-18 and the negative $11.8
billion under the " U S P S Pays for Post-9/30/02 Military Service"

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 6 of 13

Method represents the additional cost to the Treasury.

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 7 of 13

Appendix A
Background
The benefit payments under Civil Service Retirement System
( C S R S ) include credit for military service. Generally, employees
must pay a deposit of the 7 percent employee contributions on their
military pay to receive this credit. The policy issue addressed here is
to what degree the cost of the benefits attributable to military service
in excess of the employee deposits should be paid for by the Postal
Service. The U.S. Department of the Treasury must pay any portion
of this cost not paid by the Postal Service.
Static Funding of CSRS - 1969 Law
P.L. 91-93, which was passed in 1969, set up the basic funding methodology for
C S R S Government-wide. This methodology did not provide full funding of C S R S
under private sector standards that were later incorporated into the Employee
Retirement Income Security Act (ERISA) and into the dynamic funding methodology
for the Federal Employees' Retirement System (FERS). Under the static funding of
C S R S , the increases in retirement costs due to general salary increases and Cost
of Living Allowances C O L A s for annuitants are not anticipated or financed in
advance. Each general salary increase is financed by means of a new series of 30year amortization payments that is set up after that salary increase has occurred.
Under the original law, there w a s no separate financing of the cost of C O L A s for
annuitants, although this w a s later added for the Postal Service only.
Employees and agencies each contribute 7 percent of pay, which approximates the
ongoing or normal cost, and which does not pay for the cost of salary increases or
C O L A s for annuitants.
The Treasury is required to pay for the cost of military service through military
service payments that are m a d e each year, which are equal to the total amount of
benefits attributable to military service that were paid out during that fiscal year.
Finally, the Treasury also pays interest on the static unfunded liability, which covers
any costs that are not otherwise being financed, such as the cost of C O L A s for
annuitants. [2] Any gains from excess interest earnings, beyond what were
assumed under the static interest rate assumption, would reduce the unfunded
liability, and thus lower the Treasury payments of interest on the unfunded liability.
Thus, all of the gains due to excess interest earnings flow through to the Treasury.
Postal Service Financing of CSRS
Shortly after the Postal Service became independent in 1971, Congress passed
P.L. 93-349 which required the Postal Service to finance the cost of all Postal salary
increases by m e a n s of separate thirty-year amortization payments. These
payments covered the entire cost of all Postal salary increases, and did not
distinguish between the portions of the salary increases attributable to the pre- or
the post-1971 service of Postal employees.
Under the Omnibus Budget Reconciliation Acts of 1987, 1989,1990, and 1993,
Congress gradually instituted a series of measures that eventually required the
Postal Service to finance the entire cost of C O L A s for Postal annuitants attributable
to service since 1971 by means of fifteen-year amortization payments.]!]
In summary, the Postal Service financing of CSRS gradually evolved over time
through a series of steps that resulted in the Postal Service paying for the full cost
of all salary increases and the cost of C O L A s attributable to post-1971 service.
There w a s no comprehensive plan for Postal financing of C S R S such as w a s

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Milit... Page 8 of 13

adopted under FERS. Any gains from excess interest earnings, and the costs of
military service, stayed with the Treasury.
FERS Financing Provisions
FERS was a result of Congress taking a comprehensive approach to designing a
new retirement system for Federal employees who were also covered under Social
Security. Under the dynamic funding methodology that was adopted for F E R S in
1986, there was separate accounting for the assets and liabilities for Postal and
non-Postal employees. Postal Service was required to pay for al! of the retirement
costs for Postal employees, including the cost of military service.

Appendix B

Examples of Methods for Allocating the Cost of Military Service
For an Employee Hired Before 1971 W h o Retired After 1971
Employee Retired in 1991 (on 7/1/1991) with 30 years total service
(including 3 yrs. military and 1 yr. sick leave)
1991 Final Average Salary: $50,000
1971 Salary: $20,000 ( = High-3 Average Salary in 1991 assuming no post1971 pay increases)

C S R S Benefit Formula: 1.5% of High-3 Average Salary for first 5 years of
service, 1.75% for next
5 years of service, 2.0% for remaining years of service.

Total Service = 30 yrs.

Total Benefit = $ 50,000 * [ (5 yrs.) * 0.015 + (5 yrs.) * 0.0175 + (20 yrs.) *
0.02]
= $ 50,000 * 0.5625
= $28,125

Civilian Service = 30 - 3 = 2 7 yrs

Civilian Service Benefit = $ 50,000 * [ ( 5 yrs.) * 0.015 + (5 yrs.) * 0.0175 +
(17 yrs.)* 0.02]

JS-775: T r e a s u r y / O P M Report to Congress o n Financing of Benefits Attributable to Milit... Page 9 of 13

= $ 50,000 * 0.5025
= $25,125

Military Service Benefit = Total Benefit - Civilian Service Benefit
= $28,125-$25,125
= $ 3,000
Military Service = 3 yrs.
Sick Leave = 1 yr.
Actual Civilian Service = 27 yrs. - 1 yr. = 26 yrs.
Civilian Year of Hire = 1991 - (30 - 3 - 1) = 1965
Pre-1971 Actual Civilian Service = 1971 - 1965 = 6 yrs.
Ratio of Pre-1971 Actual Civilian Service to Actual Civilian Service = (6 /
26)

Method 1 - "USPS Pavs All" for Post-1971 Retirement

Federal Civilian Service = 6 yrs. + [ 1 yr. * (6 / 26) ] = 6.231 yrs.

Federal Share = Federal Civilian Service Benefit
= $ 20,000 * [ ( 5 yrs.) * 0.015 + (1.231 yrs.) * 0.0175 ]
= $ 20,000 * 0.09654
= $1,931

Method 2 - "P.L. 108-18 - USPS Pays Pro-rata Share" Based on the Portion of
Total Career Served under the Post Office Department

Federal Service = 6 yrs. + [ (3 yrs. + 1 yr.) * (6 / 26) ] = 6.923 yrs.

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Mi... Page 10 of 13

Federal Share = $ 20,000 * [ (5 yrs.) * 0.015 + (1.923 yrs.) * 0.0175 ]
= $20,000* [0.10865]
= $2,173

Method 3 - "Treasury Pays for Pre-1971 Hires"

Federal Service = Federal Civilian Service + Military Service = 6 + [1 *
(6/26)] + 3 = 9.231 years

Federal Share = $ 20,000 * [ (5 yrs.) * .015 + (4.231 yrs.) * .0175 ]
= $20,000*.14904
= $2,981

Method 4 - " U S P S Pavs for Post-September 30, 2002 Military Service
Benefits"

Federal Civilian Service = 6 + [ 1 * (6 / 26) ] = 6.231 yrs.

Federal Civilian Service Benefit = $ 20,000 * [ ( 5 yrs.) * 0.015 + (1.231
yrs.)* 0.0175]
= $ 20,000 * 0.09654
= $1,931

Federal Share before 10/1/2002 = Federal Civilian Service Benefit +
Military Service Benefit
= $1,931 + $3,000 = $4,931 initial benefit, adjusted by COLA'S

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Mi... Page 11 of 13

Federal Share after 9/30/2002 = Federal Civilian Service Benefit
= $ 1,931 initial benefit, adjusted by COLA's

Method 5 - "Treasury Pays All"

Federal Civilian Service = 6 + [ 1 * (6 / 26) ] = 6.231 yrs.

Federal Civilian Service Benefit = $ 20,000 * [ ( 5 yrs.) * 0.015 + (1 231
yrs.)* 0.0175]
= $ 20,000 * 0.09654
= $1,931

Federal Share = Federal Civilian Service Benefit + Military Service Benefit
= $1,931 +$3,000
= $4,931

JS-775: Treasury/OPM Report to Congress o n Financing of Benefits Attributable to Mi... Page 12 of 13

Appendix C

C o m p a r i s o n of Allocation M e t h o d s for Postal C S R S Benefits
Attributable to Military Service

(in billions of dollars)

USPS
Responsible
for:
USPS
Pays Ail
P.L 10818USPS
Pays a
ProRata
Share
Treasury
Pays for
Pre1971
Hires
USPS
Pays
post9/30/02
Military
Ser-vice
Benefits
Treasury
Pays All

= Projected
Supplemental
Liability

Total
Additional
Cost T o
Treasury

17.2

25.5

(20.7)

22.0

17.2

4.8

174.2

14.9

17.2

(2.3)

7.1

190.4

185.0

5.4

17.2

(11.8)

16.6

179.1

185.0

(5.9)

16.5

(22.4)

27.2

PV
Future
Benefits

Postal
Fund

Current
Liability

All military
for post-71
retirees

192.1

149.4

42.7

All military
for post-71
hires, prorata share
for pre-71
hires

190.4

168.4

All military
for post-71
hires, no
military for
pre-71 hires

189.1

Only for
military
service
benefits
paid in the
future
N o military
service,
past or
future

- P V Future
Contributions

£U The gains from interest earnings in excess of the static interest rate far
exceed the additional costs of military service. Assuming that the Treasury
were to fund all military costs, the present value of all interest gains to the
Postal Service from July 1, 1971 through September 30, 2002 would be
approximately $106.6 billion. The cost to the Treasury of military service
would be $16.6 billion, resulting in a net gain of $90 billion.

JS-775: Treasury/OPM Report to Congress on Financing of Benefits Attributable to Mi...

I2J More precisely, the Treasury was required to contribute 10 percent of the
!n ?vfo7? th® sJatic un^nded liability and 10 percent of the military service benefits
n'pvJoIn ml?**contribute 20 Percent in FY1972, and so on through 100 percent
in FY1980 and future years.

[3] These statutes were P.L. 100-203, P.L. 101-239, P.L.101-508, and P.L.103-66.

Related Documents:
• Letter to Speaker Hastert

Page 13 of 13

CORRECTED COPY
UNITED STATES
OFFICE OF PERSONNEL MANAGEMENT
WASHINGTON, DC 20415-0001
OFFICE OF THE DIRECTOR

SEP 3 0 2003
The Honorable J. Dennis Hastert
Speaker of the House of Representatives
Washington, D C 20515
Dear Mr. Speaker:
On April 23,2003, the President approved Public Law 108-18, the "Postal Civil Service Retirement
System Funding Reform Act of 2003." Section2(e) of the Act requires that the Office of Personnel
Management, the Department of the Treasury, and the United States Postal Service each prepare and
submit, by September 30,2003, to the President, the Congress, and the General Accounting Office
proposals detailing whether and to what extent the Department of the Treasury or the Postal Service
should be responsible for the funding of benefits attributable to the military service of current and
former employees of the Postal Servicethat, prior to the date of enactment of this statute, were the
responsibility of the Department of the Treasury under section 8348 of title 5, United States Code.
The Office of Personnel Management and the Department of the Treasury have prepared a joint
report in accordance with these provisions which w e are pleased to transmit to you.
The Office of Management and Budget advises that there is no objection to the submission of this
report from the standpoint of the Administration's program.
Similar letters will be sent to the President of the United States, the President of the Senate, and the
Comptroller General of the United States.

Director of the Office of Personnel Management

John W. Snow
Secretary of the Treasury
Enclosure

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
September 29, 2003

202-691-3550

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

October 02, 2003
April 01, 2004
912795PS4

High Rate: 1.005% Investment Rate 1/: 1.027% Price: 99.492
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 33.92%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

28,
28,280,300
,280, ,300
913,008
913, ,008
235,
235,000
,000
29,
r428,,308
29,428,308

SUBTOTAL
Federal Reserve 5,815,853 5,815,853

14,852,020
913,008
235,000
16,000,028 2/

5,,815, ,853

TOTAL $ 35,244,161 $ 21,815,881
Median rate 0.990%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.970%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 29,428,308 / 16,000,028 = 1.84
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $685,551,000

S
^

1^5

http://www.publicdebt.treas.gov

202-691-3550

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

October 02, 2003
January 02, 2 0 04
912795PD7

High Rate: 0.935% Investment Rate 1/: 0.953% Price: 99.761
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 54.97%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

32,754,604
1,384,543
225,000

14,390,799
1,384.543
225,000

SUBTOTAL 34,364,147 16,000,342 2/
Federal Reserve 6,015,065 6,015,065
TOTAL $ 40,379,212 $ 22,015,407
Median rate 0.920%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.905%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,364,147 / 16,000,342 = 2.15
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT - $1,052,030,000

JS 11
http://www.publicdebt.treas.gov

3412 8286 15
06/29/05-

•!,' MRB

Full text of Press Releases of the United States Department of the Treasury : Volume 407

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