The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
—
Mtf
Treas.
HJ
10
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v.411
Department of the Treasury
PRESS R E L E A S E S
The following numbers were not used:
JS-1105, 1140, and 1141.
For JS-1081 see 1084.
s-1077: Statement of Acting Assistant Secretary for Economic Policy Mark Warshawsky
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 2, 2004
js-1077
Statement of Acting Assistant Secretary for Economic Policy Mark
Warshawsky Regarding December Purchasing Managers' Index
Today's Purchasing Managers' Index report suggests progress in
manufacturing. December's index was above the "breakeven" 50 level for
the sixth straight month and at the highest level in twenty years. The new
orders index posted the strongest showing in over fifty years. The report
also suggests a better employment picture - further evidence the
President's initiatives are creating economic growth and boosting job
creation. However, there is more to be done and this Administration will
continue its efforts until every American looking for work can find a job.
-30-
Page 1
S-1078: Media Advisory: Secretary Snow Will Host G-7 Meeting in February
Page 1 or
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
January 6, 2004
JS-1078
Media Advisory: Secretary Snow Will Host G-7 Meeting in February
U.S. Treasury Secretary John W. Snow will host a meeting of the G-7 Finance
Ministers and Central Bank Governors on Friday, Feb. 6 and Saturday, Feb. 7 in
Boca Raton, Florida at the Boca Raton Resort and Club.
Media planning to cover the meeting will be required to register. Information on
registration and accommodations is attached below.
Further details regarding the G-7 meeting will be forthcoming. Treasury Public
Affairs contacts are Tony Fratto, 202-622-2910, and Betsy Holahan, 202-622-1997
Related Documents:
• Media Registration Form (Word)
• Media Registration Form (PDF)
• Local Overflow Hotels
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
January 05, 2004
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
January 08, 2004
July 08, 2004
912795QS3
High Rate: 1.020% Investment Rate 1/: 1.043% Price: 99.484
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 35.48%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Tendered
Competitive
Noncompetitive
FIMA (noncompetitive)
$
32,r982,,905
32,982,905
908,
,485
908,485
30,
,000
30,000
33,,921,,390
33,921,390
SUBTOTAL
Federal Reserve 5,783,469 5,783,469
$
15,061,565
908,485
30,000
16,000,050 2/
5,,783,.469
TOTAL $ 39,704,859 $ 21,783,519
Median rate 1.005%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.990%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,921,390 / 16,000,050 = 2.12
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $695,500,000
jOll
Q
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
?OR IMMEDIATE RELEASE CONTACT: Office of Financing
January 05, 2004
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
January 08, 2004
April 08, 2004
912795PT2
High Rate: 0.920% Investment Rate 1/: 0.939% Price: 99.767
All noncompetitive and successful competitive bidders were awarded
scurities at the high rate. Tenders at the high discount rate were
Llotted
9.33%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Tendered
Competitive
Noncompetitive
FIMA (noncompetitive)
$
37,
37,873,517
,873,,517
1,458,320
1,,458,,320
316,,800
316,800
39,,648,,637
39,648,637
SUBTOTAL
Federal Reserve 5,976,563 5,976,563
$
15,224,967
1,458,320
316,800
17,000,087 2/
5,,976, 563
TOTAL $ 45,625,200 $ 22,976,650
Median rate 0.910%: 50% of the amount of accepted competitive tenders
3 tendered at or below that rate. Low rate
0.900%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
1-to-Cover Ratio - 39,648,637 / 17,000,087 = 2.33
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,207,307,000
)
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http://www.publicdebt.treas.gov
DEPARTMENT
OF T H E
TREASURY
TREASURY fMl N E W S
nmt'K 01 I'UBI.U" AhKAlRS • I5»ll P1-'A\SYI.\\MA AVKNL'K, \.W. • W\SlfIN<;TO\. !).(..• 211220 »l202l dll-2960
EMBARGOED UNTIL 11:00 A.M.
January 5, 2004
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 5-YEAR NOTES
The Treasury will auction $16,000 million of 5-year 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 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 auction 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 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
crs
I OH
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
5-YEAR NOTES TO BE ISSUED JANUARY 15, 2004
January 5, 2004
Offering Amount
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)
$16,000
$ 5,600
$ 5,600
$ 5,600
million
million
million
million
5-year notes
D-2009
912828 BV 1
January 7, 2004
January 15, 2004
January 15, 2004
January 15, 2009
Determined based on the highest accepted
competitive bid
Determined at auction
July 15 and January 15
$1,000
None
Determined at auction
$1,000
912820 JS 7
See chart below
5-Year Note Due Dates and CUSIP Numbers for Additional TINTS
2007
2008
2009
January 15
912833 C3 2
912833 C5 7
912833 C7 3
July 15
912833 C4 0
912833 C6 5
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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender. TreasuryDlrect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
O F F K ' K O F l'» K I U
A F F A I R S • 1500 I'l- N \ S \ I.WNI \ A\ F.M.I-:, \.W. • \\ 'AMI I N C t O N . I M .» 2022H • i2U2l fi22-'<>MJ
EMBARGOED UNTIL 11:00 A.M.
January 5, 2004
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 10-YEAR INFLATION-INDEXED NOTES
The Treasury will auction $12,000 million of 10-year inflation-indexed
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 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 auction 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 security are given in the attached offering highlights.
oOo
Attachment
0 6 |<3fr2
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
10-YEAR INFLATION-INDEXED NOTES TO BE ISSUED JANUARY 15, 2004
January 5, 2004
Offering Amount $12,000 million
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Yield
NLP Reporting Threshold
$ 4,200 million
$ 4,200 million
$ 4,200 million
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Real yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest
Premium or discount
STRIPS Information:
Minimum amount required
Corpus CUSIP number
Due date(s) and CUSIP number(s)
for additional TIIN(s)
:
10-year inflationindexed notes
A-2014
912828 BW 9
January 8, 2004
January 15, 2004
January 15, 2004
January 15, 2014
Determined based on the highest accepted
competitive bid
Determined at auction
July 15 and January 15
$1,000
None
Determined at auction
$1,000
912820 JT 5
January 15, 2014 - - 912833 C8 1
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 real yield with three decimals, e.g., 3.123%.
(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 standard time on auction day.
Competitive tenders: Prior to 1:00 p.m. eastern standard time on auction day.
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of
full par amount with tender. rreasuryDirect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
Indexing Information: CPI Base Reference Period 1982-1984
Ref CPI 01/15/2004
Index Ratio 01/15/2004
184.77419
1. 00000
DEPARTMENT
OF
THE
TREASURY
TREASURY M ] N E W S
nri-'li K UK I'l hl.K \N-'\1]{N i l.'lm I'i SNSY'IAXNIA \S KMjl'. V\V. •tt'AMI I S (.TuS . I >.i'.» 2«22u • i2ii2 fi22-2J>ftii
Contact:
EMBARGOED UNTIL 11:00 A.M.
J a n u a r y 5, 2 0 04
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 $15,001 million of publicly held 4-week Treasury bills maturing
January 8, 2004, and to pay down approximately $6,001 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
Treasury-Direct will not be accepted.
The Federal Reserve System holds $15,517 million of the Treasury bills maturing
on January 8, 2 004, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
oOo
Attachment
fs
(3^3
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
January 06, 2004
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
January 08, 2004
February 05, 2004
912795PJ4
High Rate: 0.850% Investment Rate l/: 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 98.74%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender
Type
Tendered
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
Federal
Reserve
TOTAL
$
30,902,,355
33,, 732
0
Accepted
$
8,966, 380
33,,732
0
30,936,, 087
9,000,, 112
3,757,,258
3,757,,258
34,693,,345
$
1 2 , 7 5 7 ,,370
Median rate
0.845%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.800%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 30,936,087 / 9,000,112 = 3.44
1/ Equivalent coupon-issue yield.
r^fo?^
http://www.publicdebt.treas.gov
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JANUARY 8, 2 004
January 5, 2 004
Offering Amount $ 9,000 million
Maximum Award (35% of Offering Amount)... $ 3,150
Maximum Recognized Bid at a Single Rate.. $ 3,150
NLP Reporting Threshold
$ 3,150
NLP Exclusion Amount
$11, 900
million
million
million
million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 PJ 4
Auction date
January 6. 2004
Issue date
January 8, 2 004
Maturity date
February 5, 2004
Original issue date
August 7, 2003
Currently outstanding
$45,707 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.
ureau of the ruonc ueot: Fublic ueDt Announces Activity for Securities In The STRIPS Program For ... Page 1 of 1
B u r e a u of the
Umted
Publiic
bt-jiei Department
of r>';e Treasury
jblic Debt Announces Activity for Securities in the STRIPS Program fo
scember 2003
R IMMEDIATE RELEASE
uary 7, 2004
Bureau of the Public Debt announced activity for the month of December 2003, of securities within the Separate Trading of
istered Interest and Principal of Securities program (STRIPS).
In Thousands
icipal Outstanding (Eligible Securities) $2,581,803,603
j in Unstripped Form $2,407,109,550
i in Stripped Form $174,694,053
instituted in December $12,634,252
iccompanying table, gives a breakdown of STRIPS activity by individual loan description. The balances in this table are subject to
and subsequent revision. These monthly figures are included in Table V of the Monthly Statement of the Public Debt, entitled
ings of Treasury Securities in Stripped Form."
TRIPS table, along with the new Monthly Statement of the Public Debt, is available on Public Debt's Internet site at:
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
5 /dtt>
•1087: Remarks by Treasury Secretary John Snow Delivered to the U.S. Chamber of Commerce
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 7, 2004
JS-1087
Prepared Remarks by Treasury Secretary John Snow
Delivered to the U.S. Chamber of C o m m e r c e
Wednesday, January 7, 2004
Thank you Tom [Donohue] for inviting me to join you today. I appreciate the
opportunity to share with you our thoughts on how the economy is faring.
Let me take a moment to review some recent economic data.
Last week's report on December's Purchasing Managers' Index was the sixth
straight month above 50 index points, showing solid growth in all of its components.
December's reading was the highest in twenty years, led by new orders which
reached its highest point in more than fifty years. These numbers suggest good
progress in manufacturing.
Earlier this week the Commerce Department reported that construction spending in
November set a record for the fifth month in a row, jumping 1.2 percent.
Construction is up 15 percent in the past sixth months.
The housing sector has buoyed the economy over the past few years and continues
to be a point of strength. Housing starts jumped to a twenty-year high in November
contributing to a remarkable year in home building - possibly the best since 1978.
Industrial production grew by a strong 0.9 percent in November, the biggest
monthly gain since 1999. Consumer goods and business equipment both increased
and high-tech goods were especially strong, up 27.5 percent over last year.
Retail sales were up by a solid 0.9 percent in November, bolstered by strong auto
sales. The holiday season appears to have ended well, with weekly reports showing
a 5.6 percent increase in the most recent week, compared to a year ago.
Job creation continued in November, rising for the fourth straight month. In the last
four months, over 300,000 jobs have been created, putting the economy on the
right path - the most robust four-month job growth record in nearly three years.
Weekly unemployment claims have declined for the past three weeks, pushing the
four-week moving average down to a near three-year low.
These recent encouraging signs suggest a sustainable economic recovery, building
on a robust third quarter which saw real G D P growth of 8.2 percent - the best in
nearly 20 years.
We are encouraged by these signs, but we are not satisfied.
Let me take a moment to discuss the President's vision, which without a doubt is
the primary reason why the economy is improving.
This past May, the President signed the Jobs and Growth Tax Relief Reconciliation
Act of 2003. The Act provided a boost to the economy this year, and it will provide
a sound basis for promoting economic growth in the future. The Act will continue
Page 1 of 3
-1087: Remarks by Treasury Secretary John Snow Delivered to the U.S. Chamber of Commerce
to buoy the economy as taxpayers see increased tax refunds c o m e April 15th from
the increased child credit, reduced marriage penalty, and reduced rates, and as
businesses invest to take advantage of the increased expensing and bonus
depreciation.
This legislation was the right action to take, at precisely the right time. It directly
helps families and workers. For example:
Taxpayers with children received an immediate boost from rebate checks of $400
per eligible child sent out in July and August.
Because of lower tax rates and less income tax withholding, workers saw higher
take-home pay in their paychecks starting in July of this year.
Married couples benefit from reduction in the marriage penalty from expansion of
the fifteen percent rate bracket, and an increase in the standard deduction for joint
filers.
Families benefit from increased child tax credits.
Investors benefit from the lower tax rates on dividends and capital gains. These
lower rates were a positive step toward the President's goal of reducing the double
tax on dividends, and will help promote capital formation and an ownership society.
Small businesses are benefiting from a four-fold increase in the amount of new
investment they can deduct in one year, from $25,000 to $100,000.
All businesses are benefiting from the increase in bonus depreciation from 30 to 50
percent, as well as its extension through 2004 (2005 for longer-lived property). This
change addressed what had been a weak spot in the economic recovery - low
corporate investment.
Now, consider the situation we might have without the President's tax plans. The
Treasury Department ran an analysis on that scenario and the results were stark.
Without the passage of the President's plans, by the second quarter in 2003, the
unemployment rate would have been nearly 1 percentage point higher. A s m a n y as
1.5 million fewer Americans would be working, and real G D P would have been as
much as 2 percent lower.
What's more, without the President's tax cuts, it is likely that by the end of 2004 the
unemployment rate would be as much as 1.6 percentage points higher than it will
be. Three million fewer Americans would be working, and real G D P would be as
much as 3.5 to 4 percent lower.
Still, the labor markets aren't picking up as fast as we'd like to see. I can tell you
that President Bush is not going to be satisfied with this recovery until every
American w h o wants a job has one. We're not sitting back watching the numbers
roll in - we're out there making this economy better - making conditions better for
growth, investment, and job creation.
President Bush has unveiled a six-point plan to further strengthen this economy,
and set us on a long-term path toward growth.
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 of health care costs. W e need to create an environment where
health care spending is focused on providing high quality, high value care.
Second, we are working to prevent frivolous lawsuits from diverting money from job
creation into legal battles. W e also intend to ensure that when necessary lawsuits
proceed, the settlements are paid to the victims, not the trial lawyers.
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.
Page 2 of 3
1087: Remarks by Treasury Secretary John Snow Delivered to the U.S. Chamber of Commerce
Fifth, w e are opening n e w markets to high-value American products and bringing
down prices for American consumers through trade agreements. Trade is a critical
component of economic growth. The world economy is more connected than ever
before, as a result of the dramatic expansion of trade and capital flows in recent
decades. Financial markets are now closely integrated and businesses
increasingly serve customers across the world. The United States stands ready to
work with others w h o seek trade liberalization. O n the matter of the importance of
trade, here are s o m e cold hard facts: trade benefits both emerging and industrial
nations, trade leads to increased global prosperity, trade raises global standards of
living, and trade creates jobs.
And sixth, we are working to make tax relief permanent, so businesses and families
alike can plan for the future with confidence. This is one of the most critical parts of
the President's agenda to strengthen the economy. Nothing will kill our prosperity
faster than a repeal of the President's tax relief, which is scheduled to happen at
the end of this decade if w e don't take action now.
Consider this: if the 2001 and 2003 tax relief acts were to expire now, it would raise
taxes by an average of $1,544 for 109 million taxpayers in 2003.
Let me be perfectly clear: failure to make the tax relief permanent would be a huge
mistake and would put our recovery in jeopardy.
A key element of making tax relief permanent is making permanent the repeal of
the death tax. The death tax falls on income that has already been taxed,
sometimes twice before. It forces the destruction of thousands of small family
businesses, and it discourages work, savings and asset-accumulation. It diverts
resources into tax avoidance and enforcement that could be spent in economically
productive activities.
Finally, a word about fiscal discipline. Our fiscal situation remains a matter of
concern. With major expenditures to protect our nation's homeland security and
fight the war on terror, coupled with a recovering economy, w e still face a deficit in
the $500 billion range for the current fiscal year - larger than anyone wants. But
that size deficit, at roughly 4.5% of G D P (compared with a modern peak of 6 %
during the 80s), is not historically out of range; and it is entirely manageable, if w e
continue the president's strong pro-growth economic policies and sound fiscal
restraint. Indeed, with adoption of the President's policies, our projections show a
solid path toward cutting the deficit in half, toward a size that is below 2 % of G D P ,
within the next five years.
With renewed economic growth and Congress' cooperation in focusing spending on
our most critical priorities, w e can accomplish the great goals the President has set
for the country, while dramatically improving our budget situation.
Thank you. I look forward to your questions.
Page 3 of 3
-1088: Roseboro Statement on Government Securities Clearing Bank Working Group Report
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
January 7, 2004
JS-1088
Statement from Acting Under Secretary for
Domestic Finance, Brian Roseboro
on the Report of the Working Group on Government Securities
Clearance and Settlement
The Federal Reserve and the Working Group on Government Securities Clearance
and Settlement have m a d e a significant contribution to strengthen our government
securities clearing system and, therefore, our financial system as a whole. The two
existing major government securities clearing banks play an integral role in the
government securities market, and the Working Group's report is an important part
of the effort to ensure that the system is prepared in the event that the services of
one of these two banks is disrupted or terminated.
The Treasury Department looks forward to continuing to work with the Federal
Reserve, the S E C , other interested government agencies, and private sector
participants to further strengthen the infrastructure of our government securities
market.
Page 1 of 1
0S§ffe\
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
<^ic
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
January 07, 2 004
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
3 1/4%
D-2009
912828BV1
High Yield:
Issue Date:
Dated Date:
Maturity Date:
3.260?
Price:
January 15, 2004
January 15, 2 0 04
January 15, 2009
99.954
All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
illotted 90.09%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompet i t ive
FIMA (noncompetitive)
Tend*sred
$
SUBTOTAL
40,,032,,020
101,,176
0
$
40,,133,,196
Federal Reserve
TOTAL
Accepted
16,000, 024 1/
0
$
40, 133, 196
15,898, 848
101, 176
0
0
$
16,000, 024
Median yield
3.240%: 50% of the amount of accepted competitive tenders
3 tendered at or below that rate. Low yield
3.200%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
l-to-Cover Ratio = 40,133,196 / 16,000,024 = 2.51
Awards to TREASURY DIRECT = $61,484,000
1021
http://www.publicdebt.treas.gov
1090: Secretary Snow Takes Questions from the Audience
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
January 7, 2004
JS-1090
Secretary Snow Takes Questions from the Audience Following His Remarks
on the Economy at the U.S. Chamber of Commerce
Media Contact
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
Page 1 of 1
[091: R e m a r k s of Michael A . D a w s o n o n "Protecting the Financial Sector from Terrorism and Other ... P a g e 1 of 5
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 8, 2004
js-1091
Remarks of Michael A. Dawson
Deputy Assistant Secretary
for
Critical Infrastructure Protection and Compliance Policy
at the Conference on
Protecting the Financial Sector and Cyber Security Risk Management
Organized by the
Federal Deposit Insurance Corporation
Minneapolis, Minnesota
"Protecting the Financial Sector from Terrorism and Other Threats"
I am here today because, unfortunately, terrorists continue to target the
United States, its people, and its economy. In addition, w e know that
terrorists continue to target the financial infrastructure. The recent bombing,
just before Thanksgiving, of a bank in Istanbul is a painful reminder of that
fact. With over two hundred banks, credit unions, thrifts, securities firms,
commodity futures merchants and insurance companies as well as a
Federal Reserve Bank, Minneapolis is a significant hub of the financial
infrastructure of the United States. You are the stewards of that financial
infrastructure. I know you take the protection of this infrastructure very
seriously. I thank you for your efforts.
The purpose of this conference is to share with you some of the policies
and programs that m a y help you in this important task. In partnership with
the FDIC, the Department of the Treasury and our colleagues in the public
and private sectors are holding conference like this in twenty-four cities
across the United States. During the conferences, w e will reach thousands
of professionals like you, stewards of our financial infrastructure. W e hope
you will take advantage of the policies and programs that you learn about
today - policies and programs that can further strengthen the critical
financial infrastructure of the United States.
Importance of Protecting Our Financial Infrastructure
The resiliency of the financial infrastructure is an issue that is very
important to the Department of the Treasury. At the Treasury, w e are
responsible for developing and promoting policies that create jobs and
improve the economy. W e are also concerned with developing and
promoting policies that enhance the resilience of the economy, policies that
minimize the economic d a m a g e and speed economic recovery from a
terrorist attack. Indeed, the President n a m e d Treasury as the lead agency
to enhance the resilience of the critical financial infrastructure.
[091: R e m a r k s of Michael A . D a w s o n o n "Protecting the Financial Sector from Terrorism and Other ... P a g e 2 o f 5
Fortunately, w e are starting from a very strong base. The American
economy is resilient. Over the past few years, w e have seen that resilience
first hand, as the American economy withstood a significant fall in equity
prices, an economic recession, the terrorist attacks of September 11,
corporate governance scandals, and the power outage of August 14-15.
There are m a n y reasons for the resilience of the American economy. G o o d
policies - like the President's Jobs and Growth Initiative - played an
important part. S o has the resilience of the American people. O n e of the
reasons are economy is so resilient is that our people are so tough, so
determined to protect our w a y of life.
Like the economy as a whole, the American financial system is resilient.
For example, the financial system performed extraordinarily well during the
power outage last August. With one exception, the bond and major equities
and futures markets were open the next day at their regular trading hours.
Major market participants were also well prepared, having invested in
contingency plans, procedures, and equipment such as backup power
generators. The U.S. financial sector withstood this historic power outage
without any reported loss or corruption of any customer data. This
resilience mitigates the economic risks of terrorist attacks and other
disruptions, both to the financial system itself and to the American
economy as a whole.
Although we are starting from a strong base, the fact remains that terrorists
continue to target the U.S. economy and U.S. financial institutions.
Therefore, w e must continue our vigilant efforts to protect our critical
financial infrastructure.
Guiding Principles
Four principles guide our efforts to enhance the resilience of our financial
infrastructure. These principles guided our actions as the financial system
recovered from the attacks of September 11th. They guided our actions
during the power outage of August 14-15. They guide our day to day
actions as w e prepare for the next disruption.
The first principle is to remember that the financial system is really about
people. People, not buildings or computers, produce financial services. And
it is people w h o benefit from financial services.
We depend on people to run the financial system. We need these people tellers, technicians, loan officers, technologists - to see the system through
times of stress. Indeed, it w a s the commitment of these professionals to
their institutions, customers, and colleagues that helped the financial
system recover from the attacks of September 11th and weather the power
outage of August 14-15.
Just as we depend on people to run the financial system, people depend
on the financial system to run. Every American depends on financial
services to get their paycheck, buy their groceries, purchase a house,
finance their children's education, or save for retirement. W e must ensure
that people continue to have confidence that the financial system will meet
their needs.
The second principle is the importance of maintaining confidence.
Confidence in the ability of financial institutions to clear checks, execute
transactions, and satisfy insurance obligations helps the system weather
significant disruption from evolving threats. By relying on a sound financial
system, Americans can m a k e business decisions for the future and
1091: R e m a r k s of Michael A . D a w s o n o n "Protecting the Financial Sector from Terrorism and Other ... P a g e 3 o f 5
conduct necessary business in the present.
The third principle is to ensure that the financial system remains accessible
and open for business w h e n the safety of the employees permits. During
times of disaster, investors depend on markets to price the impact of the
disruption on assets. The longer markets are closed, the longer investors
must go without knowing what the impact will be. This uncertainty can itself
be harmful to the economy, compounding the impact of any disruption. The
sooner w e can eliminate this uncertainty, the more w e can mitigate the
impact and speed recovery.
Fourth, we want to promote responsible decision-making and problemsolving within the private sector. In general, financial institutions should
m a k e the appropriate decisions without waiting for guidance from
Washington. After all, it is the private sector that owns and operates the
majority of the financial systems. You in the private sector have the subject
matter expertise in your o w n systems. It is the private sector that best
knows h o w to help these systems recover from a disruption.
Organization
With these principles in mind, we have organized ourselves into two main
groups. O n e is the Financial and Banking Information Infrastructure
Committee (FBIIC). The FBIIC is sponsored by the President's Working
Group on Financial Markets and consists of m a n y state and federal
regulators. The FDIC, which organized this conference today, is a member.
S o too are the Board of Governors of the Federal Reserve System, the
Securities and Exchange Commission, the Commodity Futures Trading
Commission, the National Association of Insurance Commissioners, the
Conference of State Banking Supervisors, and m a n y other important
regulators. Treasury chairs the FBIIC.
The other important group is the Financial Services Sector Coordinating
Council (FSSCC). The F S S C C consists of virtually every important
financial services association in the United States.
The structure of these organizations advances the principles I just spoke
about. As the President stated in his National Strategy for the Physical
Protection of Critical Infrastructures and Key Assets, "it is important to
remember that protection of our critical infrastructures and key assets is a
shared responsibility. Accordingly, the success of our protective efforts will
require close cooperation between government and the private sector at all
levels." These two organizations facilitate that close cooperation and
encourage private sector responsibility to protect the critical financial
infrastructure without adding unnecessary layers of bureaucracy.
Policies
The four principles - protecting people, maintaining confidence, maintaining
access to financial institutions, and promoting de-centralized decisionmaking and responsibility - shape our policies to enhance the resilience of
the U.S. economy. For example, they highlight the importance of
developing accurate and timely information about threats and sharing that
information with the private sector. A s w e share more and better
information about threats, people in the private sector w h o o w n and
operate our financial infrastructure can better estimate the risks they bear
and can more effectively reduce the probability of a disruption through
strategic investments.
1091: R e m a r k s of Michael A . D a w s o n o n "Protecting the Financial Sector from Terrorism and Other...
Furthermore, as more institutions invest in better security measures, the
incentive for other firms to invest will also increase as they realize they
might be left behind the competition. This tipping or cascading effect on
businesses provides a very efficient and effective m e a n s of encouraging
optimal investment in our corporate resilience. It also reduces the need for
the government to impose costly, inflexible, and potentially ineffective
command-and-control security regulations on the private sector.
Programs
I wish to highlight a few of the programs that we have developed. These
programs provide you with specific, tangible services that can help m a k e
your institutions and your colleagues safer.
Recently, the FBIIC and the FSSCC launched the next generation
Financial Services Information Sharing and Analysis Center (FS/ISAC).
Since 1999, the FS/ISAC has been a leader in information sharing for the
financial sector, allowing m e m b e r s to receive and submit anonymous
reports on security threats and solutions. This next generation FS/ISAC
includes both cyber and physical threat information; serves the entire
sector; and deploys a secure, confidential technology platform where
companies can exchange information in real time as they identify
vulnerabilities, address the vulnerabilities, and respond to attempts to
exploit the vulnerabilities.
Given the benefits of increased information sharing on the general public,
Treasury is pleased to support the next-generation FS/ISAC. I hope that all
of you will consider joining the FS/ISAC as members. You can learn more
about h o w your financial institution can benefit from the FS/ISAC at
www.fsisac.com.
Another important program is the Government Emergency
Telecommunications Service (GETS) program. This program, which is run
by the National Communications Service, provides critical m e m b e r s of the
private sector priority access to the telecommunication system. In times of
emergency w h e n the telephone system experiences heavy traffic, G E T S
users can complete their calls faster so that they m a y discuss and
coordinate emergency decisions. The importance of this emergency tool is
apparent. Therefore, it is no surprise that since the attacks of September
11, the G E T S program has expanded more than six-fold within the financial
sector. If you are interested in participating in this program, please contact
your primary regulator. Each of the participating regulators serves as the
administrative sponsor for the G E T S program. If you are already a G E T S
user, please remember to test your cards on a quarterly basis.
A third important program that the Treasury created is the Protective
Response Planning Program. This program brings together federal and
local government officials, m e m b e r s of law enforcement and individuals
from important financial institutions to develop and coordinate emergency
responses to major disruptions at these specific institutions. Having
personally participated in one such exercise for a very important institution,
I can attest to its value. Watching the diverse array of law enforcement
authorities - from the local police chief, to the county sheriff, the state police
superintendent, the FBI, the United States Secret Service, and still others coordinate their emergency response plans, in s o m e cases for the first
time, demonstrated h o w powerful a collaborative effort could be. The
Protective Response Planning Program is open to the most critical financial
institutions. If you are interested, please contact m e .
Page 4 of 5
1091: Remarks of Michael A. D a w s o n on "Protecting the Financial Sector from Terrorism and Other ... Page 5 of 5
Thank you for your time today. Thank you for attending this important
conference.
[092: Air transportation Stabilization Board N a m e s Michael Kestenbaum A s Executive Director
wmmBmuumamm
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 8, 2004
JS-1092
Air Transportation Stabilization Board
N a m e s Michael Kestenbaum A s Executive Director
The Air Transportation Stabilization Board (ATSB) has named Michael Kestenbaum
as its Executive Director. Mr. Kestenbaum is replacing Brian C. Roseboro, Acting
Under Secretary for Domestic Finance, Department of the Treasury, w h o has
served as acting Executive Director of the A T S B since August 2003.
Mr. Kestenbaum was the first financial analyst hired by the ATSB after its creation.
Prior to joining the ATSB, he was an analyst in the Investment Research Division at
Goldman, Sachs & Co. in N e w York City, focusing on the airline industry. Mr.
Kestenbaum is a graduate of Yale University.
The Chairman of the ATSB, Federal Reserve Board Governor Edward M. Gramlich,
said "We are delighted that Michael Kestenbaum has agreed to take over as
Executive Director. H e has valuable private sector experience with the U.S. airline
industry, as well as extensive institutional knowledge of the operations of the ATSB.
He will play a vital role in helping the Board fulfill its responsibilities."
Additional information on the ATSB is available on its web site, www.treas.gov/atsb.
-30-
Page 1 of 1
Page 1 of 1
193: Statement of Secretary John Snow on Employment Report
•B
PRLSS R O O M
F R O M T H E OFFICE OF PUBLIC AFFAIRS
January 9, 2004
js-1093
Statement of Secretary John Snow on Employment Report
Following five months of job growth, the unemployment rate fell in December to a
14 month low. Regardless, today's report on December job growth demonstrates
that while the fundamentals are in place, we must continue our efforts to strengthen
the environment for job creation.
The fact is that while an index of manufacturing orders is at a fifty year high,
construction spending is up, housing starts are at a twenty year high, retail sales
are solid, and G D P growth is strong, the Administration will not be satisfied until
every American who wants a job can get one.
W e are on the right path to a strong recovery, and w e must stay on the path.
-30-
federal financing bank
'ASM\.",-::IV o ;:. 20220
NEWS
FEDERAL FINANCING BANK
2004 PRESS RELEASE
January 2004
Brian Jackson, Chief Financial Officer, Federal Financing Bank (FFB)
announced the following activity for the month of January 2004.
FFB holdings of obligations issued, sold or guaranteed by other Federal
agencies totaled $31.3 billion on January 31, 2004, posting an increase of
$451.7 million from the level on December 31, 2003. This net change was
the result of increases in holdings of agency debt (U.S. Postal Service) of
$282.3 million and in net holdings of government-guaranteed loans of
$169.4 million. The FFB made 37 disbursements and received 11
prepayments during the month of January.
Below are tables presenting FFB January loan activity and FFB
holdings as of January 31, 2004.
F E D E R A L FINANCING B A N K
January 2004 ACTIVITY
Borrower
J6 -/^9V
Amount
of Advance
Final Interest
Maturity Rate
Semi-Annually or
Quarterly
A G E N C Y DEBT
U.S. POSTAL SERVICE
U.S. Postal Service
1/02 $24,600,000.00 1/5/2004 1.000%
Semi-Annually
U.S. Postal Service
1/02 $206,600,000.00 1/6/2004 1.010%
Semi-Annually
U.S. Postal Service
1/30 $282,300,000.00 2/2/2004 0.969%
Semi-Annually
GOVERNMENT-GUARANTEED LOANS
General Services Administration
San Francisco Bldg Lease
1/30
$3,274,037.46 8/1/2005 1.722%
Semi-Annually
$9,698,445.90 10/1/2004 1.055%
Semi-Annually
DEPARTMENT OF EDUCATION
Shaw University
1/26
RURAL UTILITIES SERVICE
Arrowhead Electric #773
1/02
$500,000.00 12/31/2035 4.948%
Quarterly
Coastal Electric #2082
1/02
$3,000,000.00 12/31/2037 4.983%
Quarterly
Pickwick Electric Coop.
#2074
1/02
$5,000,000.00 1/3/2033 4.895%
Quarterly
North Central Elec. #638
1/06
$884,000.00 1/2/2035 5.043%
Quarterly
Brazos Electric #844
1/07
$5,000,000.00 6/30/2004 1.019%
Quarterly
Brazos Electric #844
1/07
$5,000,000.00 6/30/2004 1.019%
Quarterly
Brazos Electric #844
1/07
$4,800,000.00 6/30/2004 1.019%
Quarterly
Eastern Maine Coop. #795 1/08
$815,000.00 12/31/2035 4.947%
Quarterly
Georgia Trans. Corp. #849 1/08 $71,559,811.00 12/31/2025 4.666%
Quarterly
New Horizon Elec. #791
1/12
$1,000,000.00 6/30/2004 0.959%
Quarterly
Satilla Electric #2083
1/13 $12,000,000.00 12/31/2037 4.862%
Quarterly
Southern Iowa Electric
#2044
1/14
$500,000.00 12/31/2037 4.828%
Quarterly
Thumb Electric #767
1/14
$250,000.00 12/31/2035 4.791%
Quarterly
Volunteer Electric Coop.
#803
1/14
$4,000,000.00 3/31/2011 3.464%
Quarterly
Clark Energy Coop. #2087 1/15
$2,500,000.00 6/30/2004 94.200%
Quarterly
Grundy Elec.Coop. #744
1/15
$500,000.00 6/30/2004 0.942%
Quarterly
Rutherford Electric #2091
1/15 $15,100,000.00 12/31/2037 4.782%
Quarterly
Blue Grass Energy #674
1/16
$5,000,000.00 6/30/2004 0.943%
Quarterly
Clark Electric Coop. #2043 1/16
$2,000,000.00 12/31/2037 4.753%
Quarterly
Webster Electric #703
1/16
$2,402,919.00 12/31/2014 3.430%
Quarterly
Charles Mix Elec. #630
1/20
$86,262.00 12/31/2030 4.633%
Quarterly
Carbon Power & Light #533 1/21
$371,232.00 7/1/2019 4.486%
Quarterly
1/21
$617,000.00 12/31/2036 4.797%
Quarterly
Whetstone Valley #891
Northern Electric Coop.
#827
1/22
$1,600,000.00 6/30/2009 3.112%
Quarterly
T h u m b Electric #767
1/22
$300,000.00 12/31/2035 4.761%
Quarterly
Tri-County Electric #876
1/22
$700,000.00 12/31/2036 4.777%
Quarterly
Missoula Elec. #688
1/23
$525,000.00 12/31/2029 4.563%
Quarterly
Northeast Texas Electric
#2065
1/23 $42,264,000.00 1/3/2028 4.498%
Quarterly
St. Croix Elec Coop. #801
1/23
$500,000.00 12/31/2035 4.709%
Quarterly
Victory Electric #782
1/23
$500,000.00 12/31/2035 4.709%
Quarterly
Victory Electric #782
1/26
$500,000.00 12/31/2035 4.792%
Quarterly
Tri-State E.M.C. #730
1/27
$1,000,000.00 1/2/2035 4.834%
Quarterly
Return To top
FEDERAL FINANCING BANK HOLDINGS
January 2004
(in millions of dollars)
January 31, 2004
Program
Dec. 31, 2003
Monthly
Fiscal Year
Net Change
Net Change
1/1/04-1/31/04 10/1/03-1/31/04
Agency Debt:
$2,532.30
$2,250.00
$282.30
($4,741.10)
$2,532.30
$2,250.00
$282.30
($4,741.10)
FmHA-RDIF
$680.00
$680.00
$80.00
($125.00)
FmHA-RHIF
$1,830.00
$1,830.00
$80.00
$80.00
Rural Utilities Service-CBO
$4,270.00
$4,270.20
$0.00
$0.00
Subtotal*
$6,780.20
$6,780.20
$0.00
($125.00)
$1,622.70
$1,634.90
($12.20)
($65.70)
$115.00
$105.00
$9.20
$35.70
$1.00
$1.10
$0.10
($1.20)
DHUD-Public Housing Notes
$1,054.80
$1,054.80
$0.00
($78.50)
3eneral Services Administration+
$2,143.60
$2,142.60
$1.10
($3.50)
$8.20
$9.60
($1.40)
($1.40)
$597.30
$607.50
($10.20)
($10.20)
$16,334.60
$16,149.60
$185.10
$716.40
U.S. Postal Service
Subtotal*
Agency Assets:
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
D H U D - C o m m . Dev. Block Grant
DOI-Virgin Islands
)ON-Ship Lease Financing
Jural Utilities Service
$69.80
$71.00
($2.10)
($7.60)
$3.00
$3.00
$0.00
$0.00
Subtotal*
$21,950.10
$21,780.70
$169.40
$584.10
Grand total*
$31,262.60
$30,810.90
$451.70
($4,282.00)
SBA-State/Local Devel Cos.
DOT-Section 511
*figures may not total due to rounding; +does not include capitalized interest
Return To top
2003 Press Releases
Return to PRESS RELEASES
Last Updated on 2/19/04
095: M e d i a Advisory: Treasury Will A n n o u n c e F Y "05 Budget Proposals
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
January 13,2004
js-1095
Media Advisory: Treasury Will Announce FY '05 Budget Proposals to Close
Loopholes, Improve Compliance, and Simplify the Tax Code
Treasury Assistant Secretary for Tax Policy Pam Olson will hold a briefing
on Tuesday, January 13, 2004 at 10:00 a m in room 3327 (Large
Conference Room). This briefing will provide information on new proposals
that will be included in the President's F Y '05 Budget to close loopholes,
improve compliance, end several abusive tax avoidance transactions, and
simplify the tax code.
Media without Treasury or White House press credentials planning to
attend 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 m a y also be faxed to (202) 622-1999.
-30-
Page 1 of 1
1096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 1 of 7
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 13, 2004
JS-1096
Treasury Announces New Budget Proposals
N e w Proposals Close Loopholes, Stop Abusive Tax Avoidance
Today the Treasury Department announced a series of legislative proposals
included in the President's F Y '05 Budget that are designed to close loopholes, halt
several abusive tax avoidance transactions, and simplify the tax code. The
President's F Y '05 Budget reflects the Administration's continuing commitment to
ensuring that all taxpayers pay their fair share of taxes, while reducing the needless
cost borne by those attempting to comply. In addition, the President's F Y '05
Budget provides for increases to the IRS' budget to enhance compliance.
Voluntary compliance with the tax laws is threatened when taxpayers use abusive
transactions to avoid paying the taxes they owe. For the past three years, the
Administration has acted aggressively to restore confidence in the tax system by
halting the promotion of abusive transactions and bringing taxpayers back into
compliance with the tax laws. The FY '05 budget proposals build on the
Administration's prior proposals and on information gathered through IRS
compliance programs. The new legislative proposals close loopholes and target
identified abusive transactions and practices. As other abusive transactions are
identified, the IRS will challenge the transactions in audits, and the Treasury
Department and the IRS will work with Congress to enact any legislation necessary
to address the transactions.
The President's FY '05 Budget includes $300 million for IRS efforts to ensure
compliance with the tax laws, and increases the total IRS budget by 4 . 8 % —
significantly above the average for non-defense, non-homeland discretionary
spending. The budget continues a three year trend of increasing resources for the
IRS to improve compliance with the tax laws, particularly with respect to abusive tax
avoidance transactions, while maintaining customer service to taxpayers.
Just as abusive tax avoidance transactions threaten voluntary compliance, so too
does the complexity of the tax laws. Complexity imposes needless costs on honest
taxpayers simply doing their best to comply with the law. Simplifying the tax laws
makes it both less painful and less costly for Americans to fulfill their civic
obligations. For these reasons, it is important to continue efforts to simplify the tax
laws. The new F Y '05 Budget proposals, all of which relate to the complexity borne
by individuals and families, do not represent an exhaustive list. Rather, they serve
as examples of the many steps that should be taken to make the tax code easier to
understand and comply with. The Administration looks forward to working with
Congress in further efforts to simplify the tax laws.
"The laws must ensure that those who would shirk their civic responsibilities cannot
do so by exploiting unintended loopholes, and the IRS must ensure that taxpayers
do not engage in abusive tax avoidance transactions," said Treasury Secretary
John Snow. "These proposals would close loopholes and give the IRS the tools it
needs to do the job. At the same time, w e need to give honest Americans a better
deal. W e want to make it easier for those who pay their taxes, and harder for those
who choose not to do so. While nobody likes paying taxes, w e need to make it as
simple and painless as possible. And reducing the burden of government on
citizens and the economy remains a critical part of the President's six point plan for
1096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 2 of 7
"We are committed to restoring confidence in the tax system by ending the
proliferation of abusive tax avoidance transactions and simplifying the tax code,"
said Treasury Assistant Secretary for Tax Policy Pam Olson. "Ultimately, there is
no "silver bullet" or "one-size-fits-all" solution addressing abusive tax avoidance
transactions—other than continuing to simplify the tax code and ensure that the tax
results match the economic realities of the transactions. The proposals announced
today make use of the information Treasury and IRS have gathered and build on
actions and efforts already in progress to increase transparency."
"Among the areas for which we propose simplification are the education provisions.
You shouldn't need a college degree to get help with your child's education, but the
education provisions of the tax code are so complex that even tax advisors struggle
to understand them. Our legislative proposals would greatly simplify the provisions
and make it easier for everyone to get the help they need," Olson concluded.
"Curbing the use of abusive tax avoidance transactions by corporations and
individuals is our top enforcement priority," said IRS Commissioner Mark W .
Everson. "Stiffer penalties for failing to comply with the rules on the promotion of
abusive transactions will get the attention of promoters, attorneys, accountants and
other advisors."
IRS C O M P L I A N C E A N D E N F O R C E M E N T P R O P O S A L S
Impose Penalties on the Failure to Disclose Potentially Abusive Transactions
Penalties for nondisclosure by taxpayers and promoters are either nonexistent or
insufficient. The Treasury Department's March 2002 legislative proposals would
impose significant penalties on taxpayers who fail to disclose potentially abusive
transactions on a return and on promoters who fail to comply with their registration
and list-maintenance requirements.
Permit Uniform Disclosure Rules for Potentially Abusive Transactions Disclosure works best when the IRS has multiple sources of information about a
transaction. In that case, taxpayers and promoters will understand that their failure
to disclose will eventually be discovered. Current statutory requirements do not
permit completely uniform and consistent rules. The Treasury Department's March
2002 legislative proposals would change the promoter registration and listmaintenance provisions of the tax code to allow for uniform and consistent rules.
Permit Injunction Actions against Promoters who Repeatedly Disregard the
Registration and List-Maintenance Requirements - Some promoters repeatedly
disregard requirements in the tax code, including the registration and listmaintenance requirements. The Administration's proposal would confirm the
Government's authority to enjoin the most egregious promoters of abusive tax
avoidance transactions, as it is doing currently with promoters of tax scams directed
primarily at individuals and small businesses.
Impose a Penalty for the Failure to Report an Interest in a Foreign Financial
Account- Individual taxpayers are required to disclose on their tax returns
interests in a foreign financial account, such as bank account. Under the
Administration's proposal, a new civil penalty would be imposed on the failure to
disclose foreign financial accounts, which often are used in tax avoidance
transactions.
Curb Abusive Income-Separation Transactions - Some taxpayers continue to
engage in transactions that separate the periodic income steam from an underlying
income-producing asset in order to generate an immediate tax loss for one taxpayer
and the conversion of current taxable income into deferred capital gain for another.
Although the Tax code prohibits these transactions for bonds and preferred stock,
taxpayers have been engaging in essentially identical transactions using similar
assets, such as shares in a money-market mutual fund. Under the Administration's
proposal, an income-separation transaction would be treated as a secured
borrowing, not a separation of ownership. Debt characterization will ensure that the
tax treatment of the transaction clearly reflects income.
1096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 3 of 7
Eliminate Obstacles to Disclosure - S o m e non-corporate taxpayers and
practitioners have asserted the statutory tax practitioner privilege to avoid the
disclosure of the identity of taxpayers w h o have entered into potentially abusive
transactions. Delays in the disclosure of information about taxpayers w h o have
entered into potentially abusive transactions also m a y prevent the IRS from
examining these transactions before the statute of limitations expires. T h e
Administration's proposal would expand the "corporate tax shelter" exception to the
statutory tax practitioner privilege to all "tax shelters." The proposal also would
confirm that the identity of any person that a promoter is required to identify is not
privileged. In addition, the proposal would extend the statute of limitations for
potentially abusive transactions that a taxpayer fails to disclose on a return until the
transaction is disclosed to the IRS by either the taxpayer or the promoter.
Increase Penalties for False or Fraudulent Statements Made to Promote
Abusive Tax Avoidance Transactions - Existing penalties are insufficient to deter
promoters from making false or fraudulent statements regarding the claimed
benefits of an abusive transaction. The Administration's proposal would
significantly increase the penalty to up to 50 percent of the fees earned by the
person making or furnishing the false statement in connection with the promotion of
an abusive transaction.
Eliminate Abusive Transactions Involving Foreign Tax Credits Current law
provides taxpayers with a credit for certain foreign taxes in order to eliminate the
double taxation of foreign income (i.e., taxation by both the United States and the
country where the income is earned). Taxpayers have structured transactions in an
attempt to use foreign tax credits not to eliminate double taxation but
inappropriately to reduce their U.S. tax liability on unrelated foreign income. T h e
Treasury Department's March 2002 legislative proposals would deny foreign tax
credits for foreign withholding taxes imposed on income if the underlying property
generating the income w a s not held for a specified minimum period of time. In
addition, the Administration's proposal would provide the Treasury Department with
regulatory authority in order to prevent transactions that inappropriately separate
foreign taxes from the related foreign income to take advantage of the foreign tax
credit rules where there is no real risk of double taxation.
10-year revenue effect of all provisions above: $1,071 billion.
Stop Abusive Leasing Transactions with Tax-Indifferent Parties Taxpayers
increasingly have used purported leasing transactions to "acquire" significant tax
benefits from a tax-indifferent party, such as a municipal transit authority or foreign
government, in exchange for a modest fee. These transactions do not involve any
useful economic activity, such as the acquisition or financing of business assets,
and instead simply m o v e a tax benefit, including depreciation, from a party that
cannot use it (the municipality or foreign government) to a party that can (the
taxpayer). Congress sought to limit these transactions in 1984 but these rules have
proved ineffective over time. The Administration's proposal would sharply limit the
tax benefits claimed by the taxpayer in these transactions.
10-year revenue effect: $33,725 billion.
Require Charitable Deductions to Reflect Accurately the Value of the
Donation The tax laws encourage donations to charities. S o m e taxpayers,
however, recently have claimed deductions for contributions of patents, intellectual
property, motor vehicles, and other property that far exceed the value of the
property donated. The Administration's proposal would impose additional appraisal
requirements and limit, in the case of patents and certain other intellectual property,
the amount that can be deducted so that the charitable contribution deduction
allowed matches the value of the donation.
10-year revenue effect: $4,771 billion.
Prevent Misuse of Tax-Exempt Casualty Insurance Companies The tax laws
provide that certain small casualty insurance companies are not subject to federal
income tax. The Treasury Department and the IRS are aware that s o m e taxpayers
have established insurance companies to claim tax-exempt status and improperly
accumulate investment income tax-free. The Administration's proposal would
prevent individuals from using this targeted exception to inappropriately earn
investment income tax free.
10-year revenue effect: $1,184 billion.
1096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 4 of 7
Address the Tax Consequences of Changing Beneficiaries of a Section 529
College Savings Plan The Administration's proposal would resolve issues arising
from the funding of section 529 college savings plans, changes to the beneficiaries
or account owners of these plans, and distributions and withdrawals from these
plans. Current law is unclear and these issues cannot be fully addressed through
regulations. Until these issues are resolved, these ambiguities will permit taxpayers
to avoid transfer taxes. The Administration's proposal makes the rules
administrable and equitable and, therefore, would protect the fisc and further
encourage savings for college expenses through these increasingly popular plans.
10-year revenue effect: $194 million.
Tighten the Deduction Limitation for Interest Paid to Related Parties - Current
law denies a deduction for certain interest paid by a corporation to a related party to
the extent the corporation's net interest expenses exceed 50 percent of its taxable
income (computed with certain adjustments). This limitation only applies if the
corporation's debt-equity ratio exceeds 1.5 to 1.0. Because of the opportunities
available under current law to inappropriately reduce taxes on U.S. operations
through the use of foreign related party debt, the Administration proposes to tighten
the limitation for related party interest expense. The Administration proposal would
eliminate the current law 1.5 to 1 debt-equity safe harbor and reduce the income
threshold from 50 percent to 25 percent for related party interest. This proposal
also would limit the carryforward period for disallowed interest and eliminate the
carryover of limitation under current law so that taxpayers cannot use disallowed
interest expense in another taxable year.
10-year revenue effect: $3.116 billion.
Prevent Avoidance of U.S. Tax on Foreign Earnings Invested in U.S. Property
- Under current law, U.S. shareholders of a controlled foreign corporation must
include in income their pro rata share of earnings of the corporation that are
invested in certain U.S. property. Deposits with banks are excluded from the
definition of U.S. property subject to this rule, however, so that taxpayers operating
through foreign subsidiaries are not discouraged from using the U.S. banking
system. This exception has been interpreted in a manner inconsistent with the
underlying policy. For example, certificates of deposit have been issued by a U.S.
affiliate in a transaction structured to take advantage of the bank exception. Under
the Administration's proposal, the exception for deposits with persons carrying on
the banking business would be modified to eliminate this potential for abuse.
10-year revenue effect: $234 million.
Modify Tax Rules for Individuals Who Give Up U.S. Citizenship or Green Card
Status - If an individual gives up U.S. citizenship, or terminates long-term U.S.
residency, with a principal purpose of avoiding U.S. tax, the individual is subject to
an alternative tax regime for 10 years. The Administration proposes to improve
compliance with the expatriation rules by: (1) replacing the subjective "principal
purpose" test with an objective test, (2) providing that individuals w h o expatriate
continue to be taxed as U.S. citizens or residents until they give notice of the
expatriating act or termination of residency, (3) providing special rules for
individuals w h o are physically present in the U.S. for more than 30 days per
calendar year, (4) subjecting certain gifts of stock of closely-held foreign
corporations by these individuals to U.S. gift tax, and (5) requiring annual reporting
for these individuals.
10-year revenue effect: $273 million.
Curb Frivolous Returns and Submissions Penalties may apply to frivolous
positions taken on a tax return. Penalties do not apply to other submissions, such
as offers-in-compromise (OICs), offers to enter into installment agreements, and
requests for collection due process hearings, that m a y be based on frivolous
arguments and that m a y be filed for the purpose of delaying or impeding tax
administration. The Administration's proposal would increase the penalty for
frivolous returns and allow the penalty to be applied to frivolous submissions that
are not withdrawn after IRS request. The IRS would be permitted to disregard nonreturn frivolous submissions that are not withdrawn.
10-year revenue effect: None.
Terminate Installment Agreements when Taxpayers Fail to File Returns or
M a k e Tax Deposits The IRS cannot terminate an installment agreement even if a
taxpayer fails to file required returns or fails to m a k e required federal tax deposits.
The Administration's proposal would permit the IRS to terminate an installment
096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 5 of 7
agreement in these situations.
10-year revenue effect: None.
Streamline the Handling of Collection Due Process Cases The Tax Court and
the U.S. district courts have jurisdiction over collection due process cases, and
which court has jurisdiction over a particular case depends on the type of tax
involved. The jurisdiction rules are unnecessarily complicated and have been used
by some taxpayers to delay tax administration. The Administration's proposal
would consolidate jurisdiction over collection due process cases in the Tax Court.
10-year revenue effect: None.
Improve Procedures for Taxpayers Seeking to Resolve Their Tax Liabilities The Administration has two proposals to improve procedures for taxpayers seeking
to resolve their tax liabilities. The Administration's first proposal would permit the
IRS to enter into installment agreements that do not guarantee full payment of a
liability over the life of the agreement. This will permit the IRS to work with a
broader range of taxpayers w h o desire to resolve their tax liabilities. The
Administration's second proposal would make counsel review of accepted offers-incompromise more efficient without diminishing oversight over the offers that are
accepted.
10-year revenue effect: $505 million.
Make the Payment of FMS Fees for Levies More Efficient The Financial
Management Services (FMS) processes certain IRS levies. The Administration's
proposal would permit F M S to retain a portion of the amount collected as its fee,
thereby reducing Government transaction costs, while still crediting the taxpayer
with the full amount collected. Revenue: N o revenue effect.
10-year revenue effect: None.
Expand the Use of Electronic Filing - The IRS has taken a number of steps to
expand the availability and increase the use of electronic filing, which reduces costs
and speeds processing for both taxpayers and the Government. The
Administration's proposal would extend the April 15 filing date to April 30 for returns
that are filed electronically, provided that any tax due also is paid electronically.
This proposal would encourage more taxpayers to file electronically and allow the
IRS to process more returns and payments efficiently.
10-year revenue effect: None.
Permit Private Collection Agencies to Support the IRS' Collection Efforts The IRS' resource and collection priorities do not permit the IRS to continually
pursue all outstanding tax liabilities. Many taxpayers are aware of their outstanding
tax liabilities but have failed to pay them, and the IRS cannot continuously pursue
each taxpayer with an outstanding liability. The Administration's proposal would
allow private collection agencies, or PCAs, to support the IRS' collection efforts in
specific, limited ways. The proposal would enable Government to reach these
taxpayers to obtain payment while allowing the IRS to focus its own enforcement
resources on more complex cases and issues. P C A s would not have any
enforcement power and would be carefully monitored to ensure that taxpayer rights
are carefully protected.
10-year revenue effect: $1.531 billion.
SIMPLIFICATION P R O P O S A L S
Reduce Burden on Single Parents - Over 20 million single parents raising children
are entitled to tax relief in the form of a more generous standard deduction and
lower rates. But in order to qualify for the relief, single parents must satisfy the
household maintenance test, a complicated set of rules that is difficult to
understand and hard for the IRS to administer. The test also imposes a significant
record-keeping burden on the single parent. The proposal would eliminate the
household maintenance test and simply require that the taxpayers live with their
child.
Simplify the Earned Income Tax Credit (EITC) To qualify for the EITC,
taxpayers must satisfy requirements regarding filing status, the presence of children
in their households, investment income, and their work and immigration status in
096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 6 of 7
the United States. These rules are confusing, require significant record-keeping,
and are costly to administer. The proposal would: (1) allow s o m e estranged
spouses w h o live with their children to claim the EITC if they live apart from their
spouse for the last six months of the year; (2) allow certain taxpayers w h o live with
children but do not qualify for the larger child-related EITC to claim the smaller EITC
for very low-income childless workers; and (3) eliminate the investment income test
for taxpayers w h o are otherwise EITC eligible. The proposal would also improve
the administration of the EITC with respect to eligibility requirements for
undocumented workers.
Consolidate and Simplify Higher Education Tax Benefits Taxpayers are faced
with a range of options to reduce their taxes to pay or save for higher education.
Taxpayers often have difficulty determining which alternative is best for them. In
addition, the provisions are confusing and difficult to apply. The Administration
proposes to simplify the choices students and parents face by consolidating the
various provisions into two credits: the Hope credit and an expanded Lifetime
Learning credit. The n e w Lifetime Learning credit would cover student interest (up
to $2500) and would apply on a per-student rather than a per-taxpayer basis. T h e
phase out limits for both credits would be raised, and the dollar limits would be
indexed. The definitions of "qualified higher education expense" and "qualified
higher education institution" would be m a d e uniform throughout the Code. Other
changes would be m a d e to increase uniformity of definitions.
Make Computing the Child Tax Credit Easier - Taxpayers are required to satisfy
income tests to determine the refundable child tax credit and the EITC. The
requirements are different for the two credits. As a result, taxpayers must calculate
their income twice. In addition, the credits have different U S residency
requirements. The additional child tax credit also requires families with three or
more children to compute the amount of the credit twice to determine the higher
amount. The proposal would use the s a m e income and residency tests for the
refundable child tax credit and the EITC. The proposal would also provide one
computation to determine the credit amount.
Simplify the Taxation of Dependents The standard deduction for over 12 million
dependents is determined by a complicated formula. The formula results in the
filing of tax returns with very small amounts of tax liability. Additionally, special
rules called the "kiddie tax" apply to investment income of young dependents. The
"kiddie tax" requires complex calculations involving the parents' and siblings'
income and tax rates. The proposal would simplify and expand the standard
deduction for dependents. In addition, the proposal would tax young dependents
based on their income alone and not on the income of their parents and siblings as
well.
Simplify the Calculation of the Capital Gains Tax - Special tax rates apply to
gains on certain types of assets like small business stock, real estate, and
collectibles. These special rates complicate tax forms, worksheets, and instructions
for all taxpayers with capital gains. The proposal would eliminate the various special
rates for particular assets. Instead, fifty percent of the gain on these assets would
be taxed at ordinary income tax rates and the remainder at the standard capital
gains rate. In addition, special treatment for certain newly-issued small business
stock would be eliminated.
Make Adoption Easier - The adoption tax credit and the exclusion for employerprovided adoption expenses (taxpayers m a y not use both provisions for the s a m e
expenses) are phased out for higher-income families resulting in unnecessary
complexity. The proposal would eliminate the income phase-out for adoption tax
benefits.
Ease Compliance Burden for Unemployment Insurance Household employers
must separately pay Federal and state unemployment insurance taxes for their
employees. This separate requirement is extremely burdensome. As a result,
household employers and workers often fail to properly report those wages. T h e
proposal would allow household employers to annually report and pay a combined
federal and state unemployment tax to the federal government. Unemployment
insurance benefits for household employees would continue to be paid by the state
and reimbursed by the federal government.
Make Uniform Various Definitions of a Qualifying Child Families with children
096: Treasury Announces N e w Budget Proposals N e w Proposals Close Loopholes, Stop Abusive Ta... Page 7 of 7
m a y be eligible for reduced taxes or for refundable credits through the dependent
exemption, the head of household filing status, the child tax credit, the child and
dependent care tax credit, and the earned income tax credit (EITC). Each of these
tax benefits uses a definition of a qualifying child that is different in s o m e way from
the others. In addition, for s o m e of these benefits, the taxpayer must provide over
half the costs of supporting the child (the "support test"). Having different definitions
of a qualifying child for different tax benefits is confusing for taxpayers and leads to
errors. In addition, the support test, when it applies, is difficult to understand and
requires taxpayers to keep extensive records. The proposal would m a k e the
definition of a qualifying child the s a m e for each of the five child-related tax
benefits. In addition, the support test would be eliminated. Instead, taxpayers
would be required to live with the child for over half the year, which is a much
simpler test to apply.
10-year revenue effect of all simplification provisions: -$5,756 billion.
ADDITIONAL IRS FY '05 BUDGET INFORMATION
Total IRS Funding - The President's FY 2005 Budget increases the total IRS
budget by 4.8% to $10,674 billion.
Business Systems Modernization - The Presidents FY '05 Budget provides an
installment of $285 million for the IRS to continue efforts to overhaul its antiquated
computer system. Recent independent studies have shown that modernization
needs to be resized to focus efforts on those programs which are proving to be
successes.
-30-
097: Statement of Secretary John Snow on December Retail Sales
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 15, 2004
JS-1097
Statement of Secretary John S n o w on December Retail Sales
December's solid growth in the retail sector and upward revisions to November
sales is consistent with a strengthening of the economy's underlying fundamentals.
Along with healthy retail sales, last year ended with encouraging news in the form
of record high homeownership rates, solid business investment, strengthening in
the manufacturing sector, strong construction output and robust G D P growth.
Unemployment claims - both initial claims and continuing claims - fell this week,
indicating improvement in the labor market. W e are on a path to sustained
economic recovery.
However, looking forward, there is more to be done. Building on the boost provided
by the Jobs and Growth Act, the President has proposed a six-point plan to further
bolster economic growth. This Administration will continue its efforts until every
American looking for work can find a job.
Page 1 of 1
098: Treasury International Capital Data for November 2003
Page 1 of 2
PRESS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
January 16, 2004
JS-1098
Treasury International Capital Data for November 2003
Treasury International Capital (TIC) data for November are released today and
posted on the U.S. Treasury web site (www.treas.gov/tic). The next release date,
which will report on data for December, is scheduled for February 17, 2004.
According to the TIC data released today:
• Gross purchases by foreigners of U.S. long-term domestic securities from
U.S. residents were $1,171 billion in November. Gross sales by foreigners
of U.S. long-term domestic securities to U.S. residents were $1,089 billion in
November.
o Thus, net foreign purchases of U.S. long-term domestic securities
from U.S. residents were $83 billion in November, which compares
with $41 billion in October.
Net foreign purchases of U.S. Treasury notes and bonds
from U.S. residents were $33 billion in November, which
compares with $12 billion in October.
Net foreign purchases of U.S. agency bonds from U.S.
residents were $11 billion in November, which compares with
$9 billion in October.
Net foreign purchases of U.S. corporate bonds from U.S.
residents were $30 billion in November, which compares with
$21 billion in October.
Net foreign purchases of U.S. equities from U.S. residents
were $9 billion in November, which compares with -$1 billion
in October.
Net purchases by foreign official institutions of U.S. long-term domestic
securities in November were $21 billion, down from $23 billion in October.
Net purchases by foreign official institutions of U.S. Treasury notes and
bonds were $19 billion, which compares with $19 billion in October.
Gross purchases by foreigners of long-term foreign securities from U.S
residents were $321 billion in November. Gross sales by foreigners of longterm foreign securities to U.S. residents were $316 billion in November.
o Thus, net foreign purchases of long-term foreign securities from U.S.
residents were $5 billion in November, which compares with -$13
billion in October.
For the full November data set, including adjustments for repayments of principal on
098: Treasury International Capital Data for November 2003
asset-backed securities, as well as the historical series go to www.treas.gov/tic.
Related Documents:
• Treasury International Capital Table
Page 2 of2
Foreigners' Transactions in Long-Term Securities with U.S. Residents
Total Purchases, net
Total Gross Purchases
Total Gross Sales
2001
2002
501.2
574.6
12,819.5 15,663.0
12,318.3 15,088.4
12 Months Through:
Nov-02 Nov-03
571.0
670.2
15,489.7 18,877.0
14,918.7 18,206.7
Aug-03
Sep-03
49.9
4.3
520.8
547.6
546.3
709.4
62.4
Private, net /2
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
494.1
15.7
146.6
217.6
114.2
506.1
111.0
166.7
176.1
52.2
511.5
111.9
160.9
176.3
62.5
575.8
151.8
137.5
258.9
27.6
62.4
26.1
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
26.7
41.5
34.8
2.8
8.9
3.4
17.4
28.4
27.1
133.6
105.0
23.8
4.3
2.2
6.2
6.5
5.0
-2.1
-2.2
-19.6
27.0
30.5
-50.1
28.5
-1.5
Foreign Bonds, net
Foreign Equities, net
/l Foreign net purchases of of U.S. securities (+).
/2 Includes international and regional organizations.
/3 U.S. net acquisitions (-) of foreign securities.
Source: U.S. Department of the Treasury
27.8
87.6
1,785.8 1,708.6 1,807.5 1,492.6
1,735.8 1,704.4 1,779.7 1,405.0
Domestic Securities Purchased, net /l
Foreign Securities Purchased, net /3
Oct-03 Nov-03
15.9
41.1
82.5
4.3
18.3
-7.4
61.6
14.6
16.5
11.4
-2.5
-6.3
19.3
-6.2
0.0
11.5
-1.0
8.1
3.0
0.5
8.5
6.4
9.3
20.3
-1.0
28.8
22.9
19.5
20.9
18.9
3.0
0.7
1.3
0.9
8.9
-0.2
0.4
0.4
0.2
-0.1
-0.2
-0.2
24.7
-39.2
-12.5
-11.6
-13.3
5.1
32.5
-7.8
20.7
-59.9
1.0
-2.7
-8.9
-5.1
-8.2
-3.7
-13.6
8.8
099: M E D I A ADVISORY: Budget Request For The Financial Crimes Enforcement Network
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 16, 2004
JS-1099
MEDIA ADVISORY: Briefing On The Bush Administration's Budget Request
For The Financial Crimes Enforcement Network
Treasury Deputy Assistant Secretary, Executive Office of Terrorist Financing and
Financial Crime, Juan Zarate, and William Fox, Director of the Financial Crimes
Enforcement Network (FinCEN) will brief reporters on Friday, January 16, 2004, at
12:00 p m E S T in room 3327 at the main Treasury building. This briefing will provide
information about the President's budget request for FinCEN and how it will assist
in the administration's broader efforts in the effort to stop terrorist financing. This
briefing will be on the record, but no cameras will be admitted -- this is a "pen and
pad" briefing only.
Media without Treasury press credentials, including media with White House
credentials, planning to attend should contact Frances Anderson in Treasury's
Office of Public Affairs at (202) 528-9086 with the following information: name,
social security number and date of birth by 11:00 a m EST.
Page 1 of 1
100: Bush Administration Announces Budget Increase to help Fight Terrorist Financing and Financi... Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 16,2004
JS-1100
Bush Administration Announces Budget Increase to help Fight Terrorist
Financing and Financial Crime
The Bush Administration today announced that it will propose a 12.7% increase in
the budget of the Financial Crimes Enforcement Network (FinCEN) to further
strengthen our hand in the financial war on terror and other efforts against financial
crime.
FinCEN, a bureau of the United States Treasury, plays a key role in the
administration's broad effort to stop financial crimes and the flow of money to
terrorist organizations. FinCEN works with the financial community to support local,
state, and federal law enforcement and intelligence agencies to help prevent the
abuse of our financial system by criminals and terrorists.
"FinCEN is on the front lines every day, tracking down those who attempt to use the
U.S. and global financial system to plot, fund, and perpetrate acts of terrorism
around the world. By proposing to substantially increase FinCEN's resources,
President Bush has reaffirmed the administration's commitment to aggressively
fight terrorism on every front," said Secretary of the Treasury John W . Snow.
Under President Bush's proposal, FinCEN will be able to continue acquiring and
upgrading the technology and resources vital to its support of the nation's fight
against terrorism and financial crimes.
"The men and women of FinCEN appreciate the administration's recognition of the
key role we play in its efforts to stop financial crime and terrorist financing. The
President's FY 2005 budget request will enable FinCEN to effectively enhance its
ability to provide law enforcement and intelligence agencies with the types of
strategic, financial information and analysis they need to investigate and bring
criminals and terrorists to justice," said William J. Fox, Director of the Financial
Crimes Enforcement Network.
The new resources that President Bush has proposed in his budget will be
focused on three areas:
• Expand the capacity of FinCEN's Gateway program by at least 100%,
increasing its user capacity from the current 1100 users to more than 2000
users. This program makes it possible for local, state and federal law
enforcement officials to directly access information related to suspected
money laundering activities. In addition the new resources will allow FinCEN
to design and implement "BSA Direct" a new, state-of-the-art data retrieval
system with advanced analytical tools and data mining capabilities. B S A
Direct, which is currently under development, will provide a web-based,
user-friendly tool to financial investigators.
• Increase by 2 5 % the number of personnel dedicated to outreach to and
regulatory support of industries that are covered by federal anti-money
laundering programs for the first time. These efforts are an essential part of
FinCEN's mission, which is, in part, to assist the financial services
community in meeting its obligations to comply with regulations designed to
help protect their institutions from being used as a conduit for the illegal
proceeds of crime and terrorist financing.
• Increase the number of analysts to further strengthen FinCEN's ability to
100: Bush Administration Announces Budget Increase to help Fight Terrorist Financing and Financi... Page 2 of 3
provide strategic and tactical analytical products to law enforcement and the
financial community which are essential in the effort to prevent money
laundering and terrorist financing. These products range from trend and
pattern information to investigative case support.
President Bush's budget request for FinCEN is only part of the administration's
broader war on terrorist financing and other financial crimes. The President's
budget also seeks a 3.6% increase for Treasury's Office of Foreign Assets Control
(OFAC), which is responsible for identifying and blocking the assets of terrorists
and terrorist sponsors.
Stopping and tracing tainted money flows depends upon transparent and
accountable financial systems. Working together with other elements of the U S
government and the international community, the U S Treasury Department has led
the development of increased transparency and accountability in formal and
informal financial systems around the world, making it more difficult and costly for
terrorists and other criminals to raise, m o v e and use funds in support of their
operations. While the deterrent, preventive and investigative value of these efforts
cannot be captured by statistics, the following developments indicate substantial
progress in prosecuting the financial war on terror:
Since September 11, 2001:
• 1447 accounts, containing more than $139.1 million in assets, frozen
worldwide including $36.7 million in the U.S.
• $64 million in additional terrorist related assets seized by authorities
globally.
• 345 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:
• In December, the U.S. and Saudi Arabian governments took joint action
against a previously designated entity that w a s trying to reestablish itself
under a n e w identity.
• 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 European Union has now designated the political
wing of H a m a s .
• 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.
• Fifty countries joined the U.S. to designate al-Qaida's primary partner in
Southeast Asia, Jemaah Islamiyah, at the U N in 2002. In early 2003, two of
the organization's leaders were subsequently designated at the U N , and
Secretary S n o w announced the designation of 20 more key m e m b e r s of Jl
at the A P E C Ministerial Finance meeting in Thailand in September 2003.
• The Somali based al-Barakaat network once provided funding and
transferred money to 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.
• Three major U.S. based charities providing financing 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.
• Over 200 countries and jurisdictions have expressed their support in the
financial war on terror.
• 173 countries have issued blocking orders freezing terrorist assets.
• More than 100 countries have passed n e w laws, strengthening their
safeguards against terrorist financing.
• 84 countries have established Financial Intelligence Units to share
100: Bush Administration Announces Budget Increase to help Fight Terrorist Financing and Financi... Page 3 oi 3
information on terrorist financing.
• The U N Security Council has approved Resolutions 1373 and 1455 that
compel action by m e m b e r 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, providing international standards
to prevent terrorist financing.
FinCEN Accomplishments since September 11, 2001:
• Law Enforcement Support: Since 9-11, FinCEN has supported 12,914
cases involving 82,832 subjects. Of these cases, 2,692, involving 20,240
subjects were related to terrorism.
• 314(a) Information Sharing: FinCEN's 314(a) program enables federal law
enforcement agencies, through FinCEN, to reach out to over 29,000
financial institutions to locate accounts and transactions of persons that m a y
be involved in terrorism or money laundering. Regulations require that law
enforcement provide written certification that subjects submitted to FinCEN
are reasonably suspected based on credible evidence of engaging in
terrorist activity or money laundering.
• The system has processed 200 requests submitted by ten federal agencies
from February 18, 2003 to December 31, 2003.
• These federal law enforcement organizations have submitted cases in the
conduct of 68 terrorism/terrorist financing cases and 132 money laundering
cases.
• There were 1,302 subjects certified by law enforcement and forwarded by
FinCEN to financial institutions through the 314(a) system.
The feedback from law enforcement has been overwhelmingly positive and has
resulted in the discovery of hundreds of suspect accounts and transactions in
addition to the issuance of the following:
• 472 Grand Jury Subpoenas
• 11 Search Warrants
• 21 Administrative Subpoenas/Summons
• 3 Indictments
• FIU Support: FinCEN also supports U.S. law enforcement through the 84
Financial Intelligence Units (FlUs) throughout the world. Since 911, FinCEN
has referred 598 requests on behalf of U S law enforcement of which 346
related to terrorism.
• Hotline: FinCEN's financial institutions hotline, an initiative created by
FinCEN immediately following the events of September 11th, allows the
financial community to immediately alert law enforcement on suspected
terrorist financing or money laundering activities. To date, there have been
789 Hotline Tips that have been referred to law enforcement.
• Regulatory Efforts: 22 final, proposed and/or advance notices of proposed
rulemaking were issued under the Patriot Act to strengthen anti-money
laundering and terrorist financing efforts.
FinCEN submitted its Report to Congress on Informal Value Transfer Systems
(IVTS) as mandated by Section 359 of the U S A P A T R I O T Act.
01: Secretary Snow Tours N Y S E Floor on Friday
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 16, 2004
JS-1101
Secretary John Snow on Friday toured the trading floor of the New York
Stock Exchange with N Y S E C E O John Thain. (NYSE photo)
Media Contact
All media queries should be directed to the
Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
Page 1 of 1
)2: U.S. Designates Bin Laden's Mouthpiece
P a g e 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
January 16, 2004
js-1102
U.S. Designates Bin Laden's Mouthpiece
WASHINGTON - The U.S. Treasury Department today announced the
designation of the m a n w h o stood beside U s a m a bin Laden w h e n he
declared responsibility for the attacks of September 11th. Today's action
comes in response to the designation of this individual as a terrorist by the
United Nations.
Sulaiman Jassem Sulaiman Abo Ghaith (Abo Ghaith) became the
spokesperson for al-Qaeda after the attacks of September 11th, 2001. H e
repeatedly appeared in broadcasts on behalf of al-Qaeda, claiming
responsibility for that attack and others, including the November 2002
suicide attacks in Kenya that killed 13 people. Although he w a s born in
Kuwait, the Kuwaiti government revoked his citizenship in 2001.
Today's action is taken under obligations to freeze the assets of individuals
and organizations listed by the U N . The n a m e w a s originally submitted to
the U N by another country for listing. A U N listing requires all M e m b e r
States to freeze the assets of those listed and to bar cross-border travel.
The U N listed this individual on Friday, January 16th.
With today's action, the U.S. and our international partners have
designated 346 individuals and organizations as terrorists and terrorist
supporters and have frozen over $139.1 million in terrorist assets.
More information regarding Abo Ghaith is attached.
-30Related Documents:
• Sulaiman Jassem Sulaiman Abo Ghaith (Abo Ghaith)
Sulaiman Jassem Sulaiman A b o Ghaith
A K A s : Abo Ghaith; Sulaiman abu Ghaith
DOB: December 14, 1965
FOB: Kuwait
Sulaiman Jassem Sulaiman Abo Ghaith ("Abo Ghaith") has been the official spokesman of alQaeda since his appointment to that position after the attacks of September 11, 2001. Shortly
after these attacks, he appeared seated beside U s a m a bin Laden (UBL) and A y m a n Zawahiri in a
video that aired October 9th on al Jazeera, after the start of U.S. Operation E N D U R I N G
F R E E D O M in Afghanistan. H e has also appeared alone as the mouthpiece of bin Laden,
praising the attacks of September 11 th and threatening more. (The text of his statement,
broadcast on October 9, 2001, can be found at
http://news.bbc.co.uk/low/enqlish/world/middle east/newsid 1590000/1590350.stm.) In
December of 2002, he broadcast a message claiming al-Qaeda's responsibility for the November
2002 suicide attacks in Kenya that killed 13 people and called on al-Qaeda fighters to "prepare
themselves seriously for the next phase which will be bigger and more serious."
Although he was born in Kuwait, the Kuwaiti Government announced in October 2001 that Abo
Ghaith's citizenship w a s revoked in its "national interest."
Abo Ghaith was a high school teacher and preacher at a mosque in Kuwait. He fought in
Afghanistan, accused the U.S. government of killing children in Iraq through U N sanctions,
and joined Muslim guerillas fighting in Bosnia-Herzegovina in the s u m m e r of 1994. In the late
1990s, the government banned him from the mosque where he w a s preaching because he
strayed from officially approved religious themes, making strident and frequent attacks against
the Kuwaiti government and other Arab governments. After being banned from the mosque, Abo
Ghaith taught high school religion classes. Several individuals arrested for their involvement in alQaeda have stated they were recruited into the organization by Abo Ghaith. Indeed, while he
lived in Kuwait before September 11, 2001, his mission was to recruit elements for training in bin
Laden's camps in Afghanistan. At the end of the school year in 2001, he m a d e at least two trips
to Afghanistan.
Press reports indicate that Abo Ghaith is in custody in Iran.
-1103: John B. Taylor Under Secretary of the Treasury Remarks to the Brazil-U.S. Business Council
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 20, 2004
JS-1103
Remarks to the Brazil-U.S. Business Council
John B. Taylor
Under Secretary of the Treasury for International Affairs
2004 Strategic Planning Meeting Luncheon
U.S. Chamber of Commerce, Washington, D.C.
I would like to thank the Council for inviting m e here today. It's m y pleasure to
provide comments to this distinguished group alongside Assistant U S T R Chris
Padilla and Otaviano Canuto, w h o m I'm happy to welcome to Washington as
Brazil's new Executive Director at the World Bank.
The overriding objectives of U.S. economic policy—whether domestic or
international—are maintaining macroeconomic stability and increasing economic
growth. It is useful to think about what has happened in Brazil over the last year
and what the priorities are for the upcoming year in this context.
Improving Macroeconomic Stability: President Lula's First Year in Office
When I spoke at this event last year, President Lula had been in office less than
one month. While early indications were very positive, many Brazil observers and
Brazilians themselves were still uncertain regarding the direction of a Lula
presidency, especially with regard to economic policy. I noted at the time that w e in
the U.S. Treasury were encouraged by President Lula's balanced economic
a g e n d a — anchored in the maintenance of macroeconomic stability and driven by a
focus on economic growth to achieve the social objectives laid out by President
Lula in his inaugural address. Today, more than one full year President Lula's term,
I'm pleased to report that our optimism was well-placed.
President Lula and his Administration were quick to implement disciplined economic
policies aimed at achieving economic stability. The components of Brazil's
economic agenda are well-known to this audience, but I think they merit review
because it is easy to forget just how far w e have come over the last year. Sound
policy choices—and strong Brazilian ownership of these policies—have been the
decisive factor in restoring financial market confidence in Brazil.
To begin, President Lula sought to control spending by committing Brazil to a
primary surplus aimed at achieving sustainability of Brazil's public debt. Brazil overperformed on its IMF primary surplus target throughout 2003. President Lula m a d e
good on his promise to reform the public pension system and to reduce the deficit
stemming from public pension payments. Reducing poorly-targeted spending in
areas like pensions helps the government protect spending for priority areas such
as sanitation and key social initiatives such as Bolsa Familia. The Administration
has also started down the road to much-needed tax reform, it successfully passed
tax measures necessary to ensure Brazil's fiscal sustainability in the near and
medium-term. There is recognition that important reforms to correct inefficiencies in
Brazil's tax code must be addressed in the context of fiscal stability. This is a fiscal
reform record that demonstrates the Lula Administration's ability to build consensus
on tough issues. W e know it will need to sustain this consensus as it pursues other
elements of the growth agenda.
In the area of monetary policy, the Central Bank demonstrated its commitment to
Page 1 of A
1103: Jonn B. Taylor Under Secretary of the Treasury Remarks to the Brazil-U.S. Business Council
the inflation-targeting regime and withstood significant pressures to prematurely
relax monetary policy. This policy has resulted in a steady reduction of inflation
expectations in 2003, which peaked at 12.6 percent in March 2003. Statistics
released last week show that consumer inflation for 2003 w a s 9.3 percent.
Expectations for 2004 have followed a similar declining trend and currently stand at
less than 6 percent, close to the Central Bank's target of 5.5 percent. Locking-in a
lower inflationary path will be amply rewarded in the form of lower borrowing rates
and higher economic growth. Granting the Central Bank formal autonomy will be
an important next step to increase transparency and further reinforce expectations
of low inflation.
Brazil also took tangible steps to reduce vulnerabilities to future shocks. One
example is Brazil's concerted effort to accumulate international reserves in a
manner consistent with Brazil's floating exchange rate and inflation-targeting
monetary policy. Net international reserves—that is reserves excluding IMF
disbursements—increased from $14 billion at end-2002 to $17 at end-2003, while
the real appreciated 15 percent over the course of the year.
Another example is the government's strategy to aggressively reduce its reliance on
foreign currency-linked debt. In one year, the Treasury reduced the amount of
foreign currency-linked debt as a percent of Brazil's internal public debt outstanding
from 22.4 percent at the end of 2002 to 10.8 percent at the end of 2003. This result
exceeds the government's most optimistic target for reducing Brazil's direct fiscal
exposure to currency swings. Finally, the government is making a concerted effort
to deepen domestic financial markets by introducing the direct auction of public
securities through the internet, which should both diversify Brazil's sources of
funding and help increase potential sources of funds for the private sector.
Markets have reacted to this concerted progress. After approaching nearly 4.0 to
the dollar in October 2002, the real rebounded strongly in 2003 and has been
relatively stable in a range of 2.8 to 3.0 to the dollar since last April. Let us not
forget that Brazil's sovereign risk spread soared to 2,400 basis points over U.S.
Treasuries during the fall of 2002. Today, that sovereign risk spread stands at
about 400 basis points. Just last week Brazil issued its first global bond of 2 0 0 4 — a
$1.5 billion, 30-year bond that priced at just 376 basis points over the benchmark
U.S. Treasury. Brazil has now completed $3 billion in external placements out of a
planned $5.5 billion for 2004, having pre-financed $1.5 billion at the end of 2003.
Beyond the government, the lower sovereign spread has positive implications for
Brazilian companies, w h o can and have returned to international markets to raise
capital in 2003 and 2004.
The official community has also signaled its confidence. Brazil has entered a new
phase in its relations with the IMF. Late last year, Brazil and the IMF extended the
program on a precautionary basis through early 2005. The program extension is
designed as an exit strategy to unwind Brazil's obligations to the IMF in a way that
won't undermine Brazil's reserve position or d a m a g e market confidence. It is clear
that Brazil is moving away from reliance on official finance and has taken control of
its o w n reform strategy. The United States supported this exit strategy as it has
supported Brazil's consistently strong performance in meeting IMF commitments.
Increasing Economic Growth: The Agenda Ahead
Having achieved such substantial progress in restoring economic stability, it is
natural that the focus in Brazil should now turn to increasing economic growth. This
m e a n s addressing s o m e of the key microeconomic impediments to higher rates of
economic growth.
One priority is reducing the cost of credit and expanding access to capital.
According to a recent World Bank report on Brazil, less than 20 percent of small
enterprises have access to outside sources of financing. Nearly one-third of
entrepreneurs cite the lack of credit as a major obstacle to business growth. T h e
Brazilian government's 2004 agenda includes a number of measures designed to
reduce the cost and expand the availability of credit, including: the passage and
implementation of pending bankruptcy reform; implementation of measures to allow
workers to pledge a portion of their wages as loan collateral; and giving borrowers
Page 2 of 4
103: John B. Taylor Under Secretary of the Treasury Remarks to the Brazil-U.S. Business Council
and lenders access to a centralized credit rating system in order to encourage
competition in the banking sector.
Deregulation also has to be a priority. Entrepreneurship is encouraged by
eliminating unnecessary administrative procedures. In Brazil, the cumbersome
process of starting a business, which includes separate licensing and tax
registration at various levels within the government, serves as a disincentive to
business creation. The government has indicated its plans to examine measures to
simplify and reduce registration requirements for business and address overlaps
and redundancies between different agencies and levels of government.
A clear and transparent regulatory environment is critical to attracting new
investment in key industries such as energy and telecommunications. The
government recently unveiled plans to boost investment in key infrastructure
projects through Public Private Partnerships.
Eliminating distortions in labor markets and bringing more workers into the formal
labor market will also encourage investment as well as create jobs. Today, millions
of workers in Latin America are forced into the informal labor sector, as employers
find hiring employees through formal channels prohibitively expensive. By one
estimate, more than half of the Brazilian labor force is employed in the informal
sector. Addressing this problem requires action to address disincentives, such as
high payroll taxes, that discourage job creation in the formal sector.
Changes to put in a place a simpler, more efficient tax system are also essential for
getting incentives right for production and investment. The Lula Administration has
committed to pursuing tax reform designed to make the tax system simpler, more
efficient and socially just. Conversion of the cascading turnover tax, which
disadvantages certain activities with long production chains, into a value-added tax
is one example of this.
U.S.-Brazil Engagement
Raising economic growth is critical to combating poverty, promoting social
development, and strengthening democracies throughout the Western
Hemisphere. This w a s an important theme that emerged from last week's Special
Summit of the Americas in Monterrey, which provided a broad endorsement of the
kinds of sound economic policies needed to bolster economic growth across the
Hemisphere. The Summit also provided the opportunity to launch specific initiatives
to address the microeconomic impediments to higher growth. The United States
proposed specific initiatives to triple IDB-catalyzed credit to small businesses,
reduce the time required to start a business, and halve the cost of sending
remittances from migrant workers to their families.
The U.S.-Brazil Group for Growth was inaugurated last year following the meeting
between President Bush and President Lula. It provides a venue for advancing
discussions on ways to increase economic growth in Brazil and the United States.
W e view it as a n e w model for engaging on economic policy in this region. W e meet
as two, large, sophisticated economies with much to teach each other on
accelerating growth and reducing poverty. The inaugural meeting of the Group in
August provided an opportunity to examine and compare the how productivity is
measured in Brazil and the United States, and how such measurements are used in
the conduct of economic policy. W e also considered the relationship between
investment and productivity growth over long periods of time in both countries. W e
plan to build on this discussion at the next meeting of the Group due to be held in
Brazil in the first quarter of this year. This and future meetings will take up concrete
policies for encouraging entrepreneurship, job creation and investment.
Again, I thank the Council for inviting me to speak with you today and I welcome
your views on the outlook for Brazil and the kinds of issues w e should focus on in
the Group for Growth.
Page 3 014
1103: John B. Taylor Under Secretary of the Treasury Remarks to the Brazil-U.S. Business Council
Page 4 of
1104: Media Advisory: Treasury, O M B and IRS to Launch Second Annual free file Initiative on Thur... Page 1 of
PRESS ROOM
^fcjsJ
FROM THE OFFICE OF PUBLIC AFFAIRS
January 21, 2004
JS-1104
Media Advisory:
Treasury, O M B and IRS to Launch Second Annual
free file Initiative on Thursday
The Department of Treasury, Office of Management and Budget and Internal
Revenue Service will launch the second year of the IRS Free File initiative during a
news conference at 1:15 p.m. Thursday, January 22. This initiative allows the
majority of Americans to prepare and file taxes online electronically for free.
Treasury Secretary John W. Snow, OMB Director Joshua B. Bolten, IRS
Commissioner Mark W . Everson, and Mike Cavanagh, the Executive Director of the
Free File Alliance, will re-launch the Free File initiative and give brief remarks.
Terry Lutes, IRS Associate Chief, Information Technology Services, will provide a
demonstration of the Free File web site and will brief reporters. The Free File
program is the product of a public-private sector pact between the IRS and Free
File Alliance, LLC, a consortium of tax software companies.
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 noon.
Media without Treasury 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.
106: Treasury to Announce Joint Action with Saudi Arabia in the Financial W a r on Terror
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1106
MEDIA ADVISORY
Department of the Treasury to Announce Joint Action with Saudi Arabia in
the Financial War on Terror
Treasury Secretary John Snow today will announce a joint United States action with
Saudi Arabia in the financial war on terror. The announcement will be followed by
a briefing by officials from the Department of the Treasury, Department of State and
the Saudi Arabian government. Today's joint action with Saudi Arabia is another
important step in our ongoing war against terrorism and terrorist financing. The
briefing will be an on the record, on camera briefing.
WHAT: Announcement and Briefing
WHEN: 11:00 AM EST
WHERE: Department of the Treasury, Room 4121
WHO: Statement by Secretary John W. Snow, followed by statements and Q & A
with:
Juan Zarate, Deputy Assistant Secretary for Terrorist Financing and Financial
Crime,
Department of the Treasury
Ambassador J. Cofer Black, Coordinator for Counterterrorism,
Department of State
Tony Wayne, Assistant Secretary Bureau of Economic and Business Affairs,
Department of State
Adel Al-Jubeir, Foreign Policy Advisor to Saudi Crown Prince Abdullah
Today's announcement and briefing will be webcast live at www.treasury.gov
Media without Treasury press credentials planning to attend today's event should
contact the Treasury Public Affairs office at 202/622-2960 with the following
information: name, social security number and date of birth. Media with White
House press credentials must call to be cleared in to the Treasury Building.
Page 1 of 1
1107: Remarks of Secretary Snow on Joint U.S. and Saudi Action in the Financial W a r on Terror
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1107
Prepared Remarks of Treasury Secretary John Snow
to Announce Joint U.S. and Saudi Action Against Four Branches
of Al-Haramain in the Financial W a r on Terror
Thank you very much for being here today.
I am very pleased to announce that the United States and Saudi Arabia have joined
together today to take action against four branches of the Al-Haramain
organization. Today's designation is another important victory in our ongoing war
against the spread of terrorism and terrorist financiers and another demonstration of
our partnership in the war against terror.
The four branches of Al-Haramain that we are singling out today have not only
supported the plotting of despicable acts of terror, but they have done so by
exploiting countless individuals who believed that by supporting Al-Haramain, they
were, in fact spreading good will to many in need of a helping hand.
The four branches of Al-Haramain have cloaked themselves in the virtue of charity,
only to fund and support terrorist organizations around the world such as the alQaeda network.
These four branches located in Indonesia, Kenya, Tanzania, and Pakistan have
ignored past orders to cease their operations.
By designating these organizations under the President's Executive Order Number
13224, and joining with Saudi Arabia to call on the United Nations 1267 Sanctions
Committee to designate these groups as well, w e bring to bear the full weight of the
international community.
We will continue to vigilantly work to ensure that these groups will no longer be able
to disguise themselves as legitimate and benevolent organizations in order to
undermine peace and freedom.
We know generous givers to charities provide hundreds of millions of dollars to
improve the lives of countless people around the world.
We will not interfere with the noble work of legitimate charities.
But donors need to be assured that their contributions are being used for their
intended purposes - and not to fuel the activity of terrorists.
Make no mistake; this administration will continue to take aggressive actions, both
domestically and internationally, to ensure that charities are not being abused by
terrorists or other criminals.
Just days ago, during the State of the Union address, President Bush stated that
our greatest responsibility is the active defense of the American people.
Twenty-eight months have passed since September 11th, 2001 - over two years
without an attack on American soil. As the President said, it is tempting to believe
Page 1 of 2
1107: Remarks of Secretary Snow on Joint U.S. and Saudi Action in the Financial W a r on Terror
that the danger is behind us. But the terrorists continue to plot against America and
the civilized world.
However, we too are on the offensive against the terrorists who started this war.
We're tracking al Qaeda around the world, and nearly two-thirds of their known
leaders have n o w been captured or killed.
As part of the Administration's offensive against terror the President mentioned
during his national address, the Treasury Department is confronting networks that
funnel money to terrorists.
The United States, Saudi Arabia, and our other partners around the globe have
spoken out loud and clear - terrorism has no place in a civilized world. W e will
continue to work with Saudi Arabia and all our allies in the war against terror to
seek out those w h o bankroll terrorist organizations and shut them down.
Thank you very much.
Page 2 ot I
108: Treasury Announces Joint Action with Saudi Arabia In The Fight Against Terrorist Financing
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
January 22, 2004
JS-1108
Treasury Announces Joint Action with Saudi Arabia Against Four Branches
of Al-Haramain In T h e Fight Against Terrorist Financing
Once again, the United States and Saudi Arabian governments are joining together
to ask the United Nations' 1267 Sanctions Committee to add four branches of the
Al-Haramain Islamic Foundation to its consolidated list of terrorists tied to al-Qaida,
U s a m a bin Laden and the Taliban. Today's designation of the Al-Haramain
branches in Indonesia, Kenya, Tanzania, and Pakistan under Executive Order
13224 is the latest in a series of public joint actions with our ally in the war on
terrorist financing. These branches have provided financial, material and logistical
support to the al-Qaida network and other terrorist organizations.
"The United States and Saudi Arabia share a deep commitment to fighting the
spread of terrorism in all its forms. The branches of al Haramain that w e have
singled out today not only assist in the pursuit of death and destruction; they
deceive countless people around the world w h o believe that they have helped
spread good will and good works. By working together to take action today and
calling on the United Nations to do the same, our two countries send a clear
message: those w h o hide intensions of terror behind a veil of benevolence and
charity will not escape justice from the international community," said Secretary
John W . Snow.
The Saudi government in 2003 ordered Al-Haramain to close all of its overseas
branches. Al-Haramain stated it closed branches in Indonesia, Kenya, Tanzania,
and Pakistan, but continued monitoring by the United States and Saudi Arabia
indicates that these offices and or former officials associated with these branches
are either continuing to operate or have other plans to avoid these measures. The
actions by the Bosnia-Herzegovina branch, designated in March 2002, to
reconstitute itself and continue operations under the name, "Vazir," is one example.
Similarly, the Indonesian branch of Al-Haramain has attempted to operate under an
aka.
The four branches being designated today are only the most recent of AlHaramain's overseas branches to be investigated, and the U.S. remains committed
to ensuring that the branches of this charity can not be used to support terrorism.
The Saudi Arabian government has informed the host countries that these entities
are not Saudi entities and should be treated appropriately under local law.
Designation at the U N triggers international obligations on all m e m b e r countries,
requiring them to take steps to ensure that these offices can not continue to use
their remaining infrastructure or finances to fund or otherwise support terrorism. It is
also a critical action to publicly identify these supporters of terrorism, providing
warning to other entities that they are prohibited from doing business with them.
The Treasury Department is committed to stopping terrorism by taking action
against those w h o fund it. With this designation, 350 individuals and entities will
have been designated under President Bush's Executive Order aimed at freezing
the assets of terrorists and their supporters - Executive Order 13224. At least $139
million in assets has been kept out of the control of terrorists as a result of efforts by
the United States and its allies.
Blocking actions are critical to combating the financing of terrorism. When an action
is put into place, any assets that assets exist in the formal financial system at the
Page 1 of
108: Treasury Announces Joint Action with Saudi Arabia In The Fight Against Terrorist Financing
time the orders are frozen. Blocking actions serve additional functions as well, e.g.,
they act as a deterrence for non-designated parties w h o might otherwise be willing
to finance terrorist activity; expose terrorist financing "money trails" that m a y
generate leads to previously unknown terrorist cells and financiers; disrupt terrorist
financing networks by encouraging designated terrorist supporters to disassociate
themselves from terrorist activity and renounce their affiliation with terrorist groups;
terminate terrorist cash flows by shutting down the pipelines used to m o v e terroristrelated assets; force terrorist to use alternative, more costly, and higher-risk m e a n s
of financing their activities; and engender international cooperation and compliance
with obligations under U N Security Council Resolutions.
The United States works to preserve the sanctity of charitable giving and the value
of humanitarian aid provided by charities of all faiths. In this context, w e are working
to identify those charities that are abusing the trust of their donors. In addition to
today's designation's over 10 charities have been designated by the United States
because of their support to terrorism, including
• The Holy Land Foundation for Relief and Development (based in U.S.)
(December 2001)
• T w o Al-Haramain Branches (Bosnia-Herzegovina/Somalia) (March 2002)
• Global Relief Foundation (U.S.) (October 2002)
• Benevolence International Foundation (U.S.) (January 2003)
• Al Aqsa Foundation (Germany/Europe) (May 2003)
• Commite de Bienfaisance et de Secours aux Palestiniens (France) (August
2003)
• Association de Secours Palestinien (Switzerland) August 2003)
• Interpal (United Kingdom) (August 2003)
• Palestinien Association in Austria (Austria) (August 2003)
• Sanibil Association for Relief and Development (Lebanon)
• Al Akhtar Trust (Pakistan) (October 2003) (Al Akhtar w a s assuming a role
that had been held by the Al Rasheed Trust, another Pakistan-based charity
that w a s designated as part of the annex to E.O. 13224).
Like the United States, the Saudis have been victims of al-Qaida. They are an
important partner in the war on terrorist financing, and have taken important and
welcome steps to fight terrorist financing.
• The Saudis worked with the United States to establish a U.S.-Saudi task
force in
• Riyadh focused on combating terrorist financing and establishing initiatives
to better regulate charities.
• O n March 11, 2002, the United States and Saudi Arabia enacted the first
joint designation by blocking the funds of the Somalia and BosniaHerzegovina branches of Al-Haramain because these branches were
diverting charitable funds to terrorism. W h e n it became apparent that AlHaramain w a s continuing to operate under a n e w n a m e in BosniaHerzegovina, the United States and Saudi Arabia joined in asking the U N to
add the a/k/a, "Vazir," to the consolidated list.
• In August of 2002, Saudi Arabia joined the U.S. in the designation of Wa'el
Julaidan, a key terrorist financier w h o had known associations with U s a m a
bin Laden and headed several non-governmental organizations that
provided financial and logistical support to al-Qaida.
• Saudi Arabia also supported the addition of the Jeddah-based terrorist
financier, Yasin Al-Qadi, to the UN's consolidated list in October 2001.
Basis for Designation
Information in the possession of the U.S. government indicates these offices have
provided financial, material and logistical support to U s a m a bin Laden's (UBL's) alQaida network and other terrorist organizations. These branches are subject to
designation under Executive Order 13224 pursuant to paragraphs (d) (i) and (d) (ii)
based on a determination that they assist in, sponsor or provide financial, material,
or technological support for, or financial or other services to or in support of, or are
otherwise associated with, persons listed as subject to E.O. 13224. Because this
support is being provided to U s a m a bin Laden, al-Qaida, and/or the Taliban, these
Page 2 of 5
108: Treasury Announces Joint Action with Saudi Arabia In The Fight Against Terrorist Financing
branches also meet the standard to be included on the United Nations'
1267Sanctions Committee's consolidated list. In addition to requiring U N M e m b e r
States to freeze assets without delay, inclusion on this list triggers obligations to
implement other sanctions, such as a travel ban and arms embargo.
AL-HARAMAIN FOUNDATION (INDONESIA)
• In 2002, money purportedly donated by AHF for humanitarian purposes to
non-profit organizations in Indonesia was possibly diverted for weapons
procurement, with the full knowledge of A H F in Indonesia.
• Using a variety of means, AHF has provided financial support to al-Qaida
operatives in Indonesia and to Jemaah Islamiyah (Jl). According to a senior
al-Qaida official apprehended in Southeast Asia, O m a r al-Faruq, A H F w a s
one of the primary sources of funding for al-Qaida network activities in the
region. The U.S. has designated Jl, and the 1267 Committee has included it
on its list, because of its ties to al-Qaida. Jl has committed a series of
terrorist attacks, including the bombing of a nightclub in Bali on October 12,
2002 that killed 202 and wounded over 300.
AL-HARAMAYN FOUNDATION (KENYA & TANZANIA)
• Information available to the US shows that AHF offices in Kenya and
Tanzania provide support, or act for or on behalf of AIA and Al-Qaida. AIAI
shares ideological, financial and training links with al-Qaida and financial
links with several N G O s and companies, including A H F , which is used to
transfer funds. AIAI also has invested in the "legitimate" business activities
of A H F .
• As early as 1997, U.S. and other friendly authorities were informed that the
Kenyan branch of A H F w a s involved in plotting terrorist attacks against
Americans. A s a result, a number of individuals connected to A H F in Kenya
were arrested and later deported by Kenyan authorities.
• In August 1997, an AHF employee indicated that the planned attack against
the U.S. Embassy in Nairobi would be a suicide bombing carried out by
crashing a vehicle into the gate at the Embassy. A wealthy A H F official
outside East Africa agreed to provide the necessary funds. Information
available to the U.S. shows that A H F was used as a cover for another
organization whose priorities include dislike for the U.S. Government's
alleged anti-Muslim stance and purposed U.S. support for Christian
movements fighting Islamic countries.
• Also in 1997, AHF senior activities in Nairobi decided to alter their (then)
previous plans to b o m b the U.S. Embassy in Nairobi and instead sought to
attempt the assassination of U.S. citizens. During this time period, an A H F
official indicated he had obtained five hand grenades and seven "bazookas'
from a source in Somalia. According to information available to the U.S.,
these weapons were to be used in a possible assassination attempt against
a U.S. official.
• Information available to the U.S. shows that a former Tanzanian AHF
Director w a s believed to be associated with U B L and w a s responsible for
making preparations for the advance party that planned the August 7, 1998,
bombings of the U.S. Embassies in Dar Es Salaam, Tanzania, and Nairobi,
Kenya. A s a result of these attacks, 224 people were killed.
• Shortly before the dual-Embassy bombing attacks in Kenya and Tanzania, a
former A H F official in Tanzania met with another conspirator to the attacks
and cautioned the individual against disclosing knowledge of preparations
for the attacks. Around the s a m e time, four individuals led by an A H F official
were arrested in Europe. At that time, they admitted maintaining close ties
with EIJ and G a m m a Islamiyah.
Page 3 of 5
108: Treasury Announces Joint Action with Saudi Arabia In The Fight Against Terrorist Financing
• Wadih el-Hage, a leader of the East African al-Qaida cell and personal
secretary to UBL, visited the Kenya offices of A H F before the1998 dualembassy attacks. Searches conducted by authorities revealed that el-Hage
possessed contact information for a senior A H F official w h o w a s head of
AHF's Africa Committee, the overseeing authority for AHF's offices in Kenya
and Tanzania.
• In early 2003, individuals affiliated with AHF in Tanzania discussed the
status of plans for an attack against several hotels in Zanzibar. The
scheduled attacks did not take place due to increased security by local
authorities, but planning for the attacks remained active.
• Information made available to the U.S. as shows that AHF offices in Kenya
and Tanzania provide support, or act for or on behalf of al-Qaida and AIM.
AL-HARAMAIN FOUNDATION (PAKISTAN)
• Sometime in 2000, an AHF representative in Karachi, Pakistan met with
Zelinkhan Yandarbiev. The U.S. has designated Yandarbiev, and the1267
Committee has included him on its list because of his connections to alQaida. The A H F representative and Yandarbiev reportedly resolved the
issue of delivery to Chechnya of Zenit missiles, Sting anti-aircraft missiles,
and hand-held anti-tank weapons.
• Before the removal of the Taliban from power in Afghanistan, the AHF in
Pakistan supported the Taliban and other groups. It was linked to the U B L
financed and designated terrorist organization, Makhtab al-Khidemat (MK).
In one instance, some time in 2000, the M K director instructed funds to be
deposited in A H F accounts in Pakistan and from there transferred to other
accounts.
• At least two former AHF employees who worked in Pakistan are suspected
of having al-Qaida ties. O n e A H F employee in Pakistan is detained at
Guantanamo Bay on suspicion of financing al-Qaida operations. Another
former A H F employee in Islamabad was identified as an alleged al- Qaida
m e m b e r w h o reportedly planned to carry out several devastating terrorist
operations in the United States. In January 2001, extremists with ties to
individuals associated with a fugitive U B L lieutenant were indirectly involved
with a Pakistani branch of the AHF.
• As of late 2002, a senior member of AHF in Pakistan, who has also been
identified as a "bin Laden facilitator," reportedly operated a human
smuggling ring to facilitate travel of al-Qaida members and their families out
of Afghanistan to various other countries.
• AHF in Pakistan also supports the designated terrorist organization, Lashkar
E-Taibah (LET).
Identifier Information
A L - H A R A M A I N F O U N D A T I O N (INDONESIA)
Lembaga Pelayanan Pesantren & Studi Islam
Jl. Jati Padang II, No. 18-A
Jakarta Selatan 12540 Indonesia
Tel. 021-789-2870, Fax 021-780-0188
a/k/a Y A Y A S A N AL-MANAHIL-INDONESIA
Jalan Laut Sulawesi Blok DII/4
Kavling Angkatan Laut Duren Sawit
Jakarta Timur 13440 Indonesia
Tel. 021-8661-1265 and 021-8661-1266
Fax 021-8620174
AL-HARAMAYN FOUNDATION (KENYA)
1-Nairobi, Kenya
Page 4 of 5
108: Treasury Announces Joint Action with Saudi Arabia In The Fight Against Terrorist Financing
2-Garissa, Kenya
3-Dadaab, Kenya
AL-HARAMAYN FOUNDATION (TANZANIA)
1-P.O. Box 3616; Dar es Salaam, Tanzania
2 -Tanga
3 -Singida
AL-HARAMAIN FOUNDATION (PAKISTAN)
House #279, Nazimuddin Road, F-10/1, Islamabad, Pakistan
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Page 5 of 5
109: Secretary Snow To Visit Charleston, W V on Friday
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1109
Secretary Snow To Visit Charleston, WV on Friday
Treasury Secretary John W. Snow will visit Charleston, WV on Friday, January 23
to meet with local business leaders and discuss the President's plan to further
strengthen the U.S. economy through job creation.
During his visit to Charleston, Secretary Snow will tour a local construction site, an
industry that is playing a key role in the growth of the U.S. economy. The
Commerce Department this week reported that housing construction continued to
increase in December, making 2003 the best year for home builders since 1978.
10:15 am Tour of Yorktown Development construction site
Lot 17 of Yorktown Subdivision
404 Buckingham Point
Charleston, W V
** tour is photo-op only; press availability will take place afterwards
Page 1 of 1
110: Remarks by Treasury Secretary John W . Snow at Second Annual Launch of IRS Free File Initi... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1110
Remarks by Treasury Secretary John W. Snow
at Second Annual Launch of IRS Free File Initiative
Good afternoon. Thank you all for joining us here today. I would like to thank OMB
Director Bolten, IRS Commissioner Everson, and Mike Cavanagh with the Free File
Alliance for joining m e today as w e launch the second year of "Free File".
The IRS's Free File Web site features private-sector software partners, the Free
File Alliance, and allows most taxpayers to prepare and file their taxes online for
free.
A substantial majority of citizens are eligible to use this innovative service at
WWW.irs.gov. Free File is an exciting development in our efforts to make
government more productive, efficient, and taxpayer-friendly. It furthers the
President's vision and expectation that the government be run in a more
businesslike manner.
Make no mistake-no one likes paying taxes—it's too confusing and too time
consuming. But Free File makes this onerous task a good bit easier and less
burdensome. Free File is an easy, fast and secure way for citizens to file taxes,
and also allows Americans to get refunds in half the time. The efficiency of Free-file
saves both taxpayers and the IRS money.
I would like to thank all of our Free File Alliance Members for their participation in
providing millions of Americans the opportunity to file their taxes on line for free,
and their commitment and efforts in improving the Free File system for the benefit
of our customers-the taxpayers.
While tax simplification remains our goal, Free File incorporates a variety of
features that reduce errors arising from the vast complexity of the tax code. In our
technologically advanced economy, electronic transactions are everywhere. With
this effort, the federal government is finally catching up to the nation w e strive to
support.
Last year, the IRS received 2.8 million e-filed returns through sixteen Free File
Alliance members—this surpassed initial projections. This year, I hope that millions
more will take advantage of Free File.
To encourage even more Americans to electronically file their taxes, the President's
FY '05 budget will contain a proposal to extend the April filing date for electronic
returns by fifteen days, to April 30th. This will give taxpayers a little extra time to get
their affairs in order around tax day as an added inducement to e-file.
Congratulations to all at the IRS, and all the businesses involved in the Free File
Alliance, for an important contribution to the future of the United States
Government.
Ill: Treasury Launches Financial Education Newsletter
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1111
Treasury Launches Financial Education Newsletter and Outlines Elements of
a Successful Financial Education Program
The Treasury Department's Office of Financial Education (OFE) today released the
first issue of its on-line, quarterly newsletter, The Treasury Financial Education
Messenger. The inaugural issue contains a message from Secretary John S n o w
stressing the importance of financial education as well as the eight elements of a
successful financial education program.
"Financial education is extremely important for all Americans. As the President's
Jobs and Growth Plan puts more money into the hands of consumers through lower
marginal tax rates, an increased child tax credit, and accelerated marriage penalty
relief, Americans have an even greater chance to save, invest, or spend extra
money wisely. Yet without access to financial education resources, many people
may miss out on this golden opportunity," said Secretary John Snow.
The eight elements of a successful financial education program in this edition of
The Messenger offer guidance to financial education organizations as they develop
programs and strategies to achieve the greatest impact in their communities. Each
element is classified as relating to the program's content, delivery, impact or
sustainability.
A successful program...
Content
1. focuses on basic savings, credit management,
h o m e ownership and/or retirement planning.
2. is tailored to its target audience, taking into
account its language, culture, age and experience.
Delivery
3. is offered through a local distribution channel
that makes effective use of community resources
and contacts.
4. follows up with participants to reinforce the
message and ensure that participants are able to
apply the skills taught.
Impact
5. establishes specific program goals and uses
performance measures to track progress toward
meeting those goals
6. demonstrates a positive impact on
participants' attitudes, knowledge or behavior
through testing, surveys or other objective
evaluation.
Sustainability
7. can be easily replicated on a local, regional or
national basis so as to have broad impact and
sustainability.
8. is built to last as evidenced by factors such as
continuing financial support, legislative backing or
Page 1 o f 2
Ill: Treasury Launches Financial Education Newsletter
integration into an established course of instruction.
The Treasury Financial Education Messenger is available online at
www.treasury.gov/financialeducation, where visitors can also subscribe to receive
future issues of the newsletter by e-mail.
The Department of the Treasury's Office of Financial Education was established in
M a y 2002. The Office of Financial Education is responsible for focusing the
department's financial education policymaking, and for ensuring coordination on
financial education within the Department and all of its bureaus. The Office of
Financial Education serves to provide the Department of the Treasury with
expertise on the m a n y complex and interdisciplinary issues involved in financial
education, and is able to tap into the Department's wide base of expertise on
finance.
-30-
Page 2 of 2
112: Statement of Acting Assistant Secretary for Economic Policy Mark Warshawsky
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1112
Statement of Acting Assistant Secretary for Economic Policy Mark
Warshawsky
We are pleased to see today's report on the decline in initial unemployment
insurance claims. It is additional evidence that the labor market is building strength
and continuing to improve. N e w claims dropped last week, pushing the four-week
moving average to its lowest point since January of 2001. Although this is
encouraging news, there remains more to be done. This Administration is
committed to strengthening the environment for job creation and will not be satisfied
until every American looking for work can find a job.
Building on the progress started by the Jobs and Economic Growth Act, the
President is continuing his efforts to strengthen the economy and create jobs,
including the Jobs for the 21 st Century initiative announced this week
-30-
Page 1 of
13: Photo: Secretary S n o w announces the latest action in the financial war against terror
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 22, 2004
JS-1113
Photo: Secretary Snow announces the latest action in the financial war
against terror
The United States joined with Saudi Arabia on Thursday to designate four branches
of the Al-Haramain charitable organization in Kenya, Tanzania, Indonesia, and
Pakistan for providing financial, material, or logistical support to terrorist
organizations like al-Qaida
Media Contact
All media queries should be directed to the
Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
Page 1 of 1
14: Treasury and IRS Shut Down S Corporation ESOP Abuses
Page 1 of 1
PRESS R O O M
F R O M THE OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
January 23, 2004
JS-1114
Treasury and IRS Shut Down S Corporation ESOP Abuses
Today, the Treasury Department and the IRS issued a ruling to shut down abusive
transactions involving "S corporation ESOPs." The ruling makes these "listed
transactions" for tax-shelter disclosure purposes.
An employee stock ownership plan, or "ESOP," is a type of retirement plan that
invests primarily in employer stock. Congress has allowed an "S corporation" to be
owned by an ESOP, but only if the E S O P gives rank-and-file employees a
meaningful stake in the S corporation. When an E S O P owns an S Corporation, the
profits of that corporation generally are not taxed until the E S O P makes
distributions to the company's employees when they retire or leave the job. This is
an important tax break which allows the company to reinvest profits on a taxdeferred basis, for the ultimate benefit of employees who are E S O P participants.
The ruling shuts down transactions that move business profits of the S corporation
away from the ESOP, so that rank-and-file employees do not benefit from the
arrangement. For example, the ruling prohibits using stock options on a subsidiary
to drain value out of the E S O P for the benefit of the S corporation's former owners
or key employees.
"Congress recognized the potential for attempts to circumvent the rules and
specifically authorized Treasury and IRS to prevent it. This notice does just that,
imposing a 5 0 % excise tax on the option holders in cases where rank-and-file
E S O P participants are deprived of the business profits," stated Treasury Assistant
Secretary for Tax Policy Pam Olson.
The text of Revenue Ruling 2004-4 is attached.
-30Related Documents:
• Revenue Ruling 2004-4
15: Secretary John S n o w Remarks at the Enterprise Conference, London, U K (via satellite)
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 26, 2004
JS-1115
Remarks by U.S. Treasury Secretary John Snow to the Enterprise Conference
- "Advancing Enterprise: Britain in a Global Economy," London, U K (via
satellite)
Good afternoon. I would like to thank Chancellor Gordon Brown for assembling
such an illustrious group of participants for today's forum.
Today I want to talk about the joint responsibility the US and EU share in promoting
a dynamic, growing world economy. The U S and E U share particular challenges
and w e can be most effective when w e work together to address them.
Cooperation by the G-8 to promote global growth and stability is at the top of G-8
agenda this year when the U.S. hosts the leaders Summit at Sea Island. The
following year, when Prime Minster Blair will chair the leaders Summit, I hope w e
can be in a position to note substantial progress across all of our economies. The
need for increased global economic growth, by the way, will be the top agenda item
at the upcoming G 7 meeting I will chair in Florida and the number one topic of
discussion.
Let me provide a brief overview of our domestic situation. The US economy has
faced tough challenges over the last three years - 9-11, the collapse of the dotcom
bubble, two wars, and corporate scandals. Yet w e have managed to emerge with
the shortest and shallowest cyclical downturn in the last 50 years, even while other
major industrial economies were stagnant or declining.
Much of this is due to the fundamental strengths of the American economy and the
American worker, whose productivity growth has averaged a 4.4% annual rate
since the end of 2000, the fastest 11-quarter growth rate in 40 years (1963). It is
also in large measure due to President Bush's tax cut package that put money in
the hands of consumers when the economy needed it and set the basis for higher
levels of capital formation and investment in the future.
But we are not satisfied with just weathering these storms. We are committed to
policies that will support continued growth, prosperity and jobs in the US. President
Bush has laid out an ambitious agenda for maximizing growth and job creation.
In his State of the Union speech, the President committed to making health care
more affordable and its costs more predictable; working to prevent frivolous
lawsuits from diverting money from job creation into legal battles; working to build a
more affordable, reliable energy system; streamlining regulations and needless
paperwork requirements; opening new markets to high value American products;
preparing American workers for the demands of the 21st Century job market; and
working to make tax relief permanent, so businesses and families alike can plan for
the future.
All of these proposals point to the same end: create an environment that
encourages flexibility, capital formation and innovation, and in turn leads to job
creation, productivity, and higher living standards.
A word about our deficits. With the economic slowdown and recession that occurred
in 2000 and 2001, the United States is experiencing a period of fiscal deficits. The
Page 1 of 4
15: Secretary John Snow Remarks at the Enterprise Conference, London, U K (via satellite)
tax cuts, starting in 2001, were timely and effective; they m a d e the recession much
smaller and much shallower than it would have otherwise been. With the recession,
9/11 and the resulting war on terror these deficits are certainly understandable and
they are too large and they are not welcome and they will not last. M a k e no
mistake; President Bush is serious about the deficit.
We must keep the overall growth of spending down even as we bolster security and
fight terror. The deficit, at roughly 4.5% of G D P , compared with 6 % during the 80s,
is not historically out of range. If w e stick to President Bush's strong pro-growth
economic policies and sound fiscal restraint, w e expect to cut the deficit in half,
toward a size that is below 2 % of G D P , over the next five years.
Let me shed a little light on how the President will do this. In the budget that will be
delivered to Congress on February 2nd, the President will propose holding
discretionary nonsecurity-related spending accounts to a less than 1 percent
increase. This will be the fourth consecutive year of slowing nonsecurity-related
spending under this Administration. This is the lowest proposed rate of increase
since 1993. This is below the rate of inflation. Additionally, total annually
appropriated spending will increase by less than 4 percent next year.
Let me turn to particular challenges of interest to you in the EU.
For the EU, the challenge of increasing growth is most pressing for the major
economies in Europe where growth has lagged and where estimates of growth
potential are not as high as they should be. The E U has put forward the goal in its
Lisbon Agenda of becoming the most competitive and dynamic economy by 2010.
That's a most commendable objective and w e in the U S don't feel threatened by
this growth. Quite the contrary, we'd like to see all the major economies striving to
be dynamic, productive economies. Increased global economic growth will lead to
mutually reinforcing success.
Simply put, we are not fighting for a piece of the pie, we are striving to enlarge the
pie and improve standards of living for people in our economies and throughout the
world. Your growth is important to us and our growth is important to you. Global
growth is not a zero s u m game. Lets do all w e can to make sure w e all grow
together.
The EU still faces a number of challenges on the path to the Lisbon goals, as the
Commission outlined the other day. But, there has also been real progress. I
c o m m e n d Germany for passing the difficult labor market and tax reforms as part of
its Agenda 2010 and France for last year's pension reforms. W e hope this is the
bow wave of reform in Europe that boosts productivity and growth to new, higher
levels.
Examples of growth oriented reform and its benefits can be found within the borders
of the E U as well as outside. In a recent O E C D study of industrial economies, the
U K had the least restrictive regulatory regime in an index that combined barriers to
trade, administrative regulation and economic regulation. It's no coincidence that
the U K w a s able to avoid the major slowdown seen in other large European
economies in the last few years or that it ranks with the U S in leading industrial
countries in information technology investment as a share of G D P , a key to
productivity growth.
The EC's own findings also show a clear path for how to improve productivity,
namely lowering regulation, increasing expenditures on research and development,
completing the integration of markets and promoting E U competition, and reforming
financial services so that capital markets can respond to these policies by directing
finance to dynamic, employment-producing enterprises.
Cooperation between the US and the EU can enhance each of our growth agendas
and promote broader growth. Let m e dwell on two areas when our cooperation can
yield significant results - free trade and financial sector integration.
Page 2 of 4
15: Secretary John S n o w Remarks at the Enterprise Conference, London, U K (via satellite)
Free Trade
With the dramatic expansion of trade in recent decades, the world economy is more
connected than ever before.
For the United States, this means that our success in creating jobs and sustained
economic growth depends in no small measure on opening markets and reducing
barriers to trade. The s a m e is true for the EU. It is through free trade that all nations
can benefit from each other's prosperity. Free trade means new markets for
exporters while companies and consumers benefit from lower-priced imports.
Obviously, both the United States and EU and many others were disappointed in
the Cancun outcome, but there are hopeful signs that w e can get the Doha
Development Agenda back on track again so that 2004 is not a lost year. But even
as w e ponder the next steps in the W T O , the United States continues to press an
aggressive trade agenda to open markets regionally and bilaterally with willing
partners. By moving forward on multiple fronts, w e can exert leverage for openness
and create a new competition for trade liberalization. Just yesterday, w e completed
trade talks with Costa Rica ensuring they will be part of the Central American Free
Trade Agreement. And today, w e begin negotiations with Bahrain.
The focus of the WTO negotiations should be the market access agenda agriculture, industrial and consumer goods, and services. I believe that the United
States and E U agree that these areas have the greatest potential to promote
economic growth. Given that services were first included in multilateral trade talks in
the last round, the U S and E U are particularly interested in raising the number of
countries with services commitments and the quality of those commitments,
including in financial services.
The Doha Development Agenda also places particular emphasis on integrating the
developing world into the global economy so that they m a y begin to reap the great
benefits of free trade. The United States, the EU, Canada, and many others,
including the World Bank, share the view that developing countries need to reduce
their own trade barriers substantially in order to realize these benefits.
US/EU Financial Markets Dialogue
The US and EU markets represent the lion's share of global capital flows, making
the US-EU financial relationship critical to well-functioning global financial markets,
and the positive implications that entails for saving, investment and growth.
US Treasury and European Commission financial officials, along with our financial
regulators, have been working actively during the past two years through our
Informal Financial Markets Dialogue to resolve problems caused by law or
regulation to allow capital to flow more efficiently.
Our dialogue has focused on the European Commission Financial Services Action
Plan (FSAP), an ambitious effort to quickly build the legal and policy infrastructure
for an integrated European capital market. The U S has a profound interest in its
success both to promote faster growth in Europe and a more robust transatlantic
capital market that rewards competition and innovation. W e also have an interest in
seeing that U S financial institutions in Europe will be able to compete fairly in the
integrated European capital market. The E U also cares deeply about financial
market developments in the U S , including corporate governance issues and audit
oversight. Together w e also are addressing issues such as the supervision of large
complex financial institutions, the evolution of Basle II and clearing and settlement
processes.
It is not always easy. Both sides have different legal, historical, and cultural
traditions. Recognizing this, our overarching goal in the financial markets dialogue
is to see through these differences, and to achieve our c o m m o n objectives in
substance. W e know that if this process is managed successfully, it is a win-win for
the U S , Europe and the world.
Page 3 of 4
15: Secretary John S n o w Remarks at the Enterprise Conference, London, U K (via satellite)
Thank you.
16: Statement of Acting Assistant Secretary Mark Warshawsky on Consumer Confidence
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 27, 2004
JS-1116
Statement of Acting Assistant Secretary for Economic Policy Mark
Warshawsky on January Consumer Confidence
Increasing consumer confidence levels are an encouraging sign as the economy
continues to gain strength. Following a ten-point jump in the University of
Michigan's Consumer Sentiment Index earlier this month, January's Consumer
Confidence Index reached its highest point in 18 months.
The positive mood reflects the success of the President's economic policies as well
as encouraging news in many areas of the economy such as housing,
manufacturing and business investment. Despite the increasing signs of good
news, there is more work to be done. This Administration will continue in its efforts
to create a stronger environment for job creation and will not be satisfied until every
American looking for work can find it.
-30-
Page 1 of 1
17: Treasury Announces Departure of Gary B. Wilcox
Page 1 of 1
I
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 27, 2004
JS-1117
Treasury Announces Departure of Gary B. Wilcox
Today the Treasury Department announced that Gary B. Wilcox, Deputy Chief
Counsel (Technical) for the Internal Revenue Service, will leave the Office of Chief
Counsel in mid-February and return to private practice.
Mr. Wilcox joined the IRS in February 2002 as principal deputy to B. John Williams,
the former Chief Counsel. Having primary responsibility within the IRS for the
development of the Service's positions on technical tax issues and the issuance of
regulations and rulings, Mr. Wilcox was instrumental in carrying out Chief Counsel
Williams' and Treasury's priority of issuing more published guidance for the benefit
of taxpayers, tax professionals and IRS agents. During Mr. Wilcox's tenure, the rate
of published regulations and rulings increased significantly in comparison to prior
years.
"The tax system has been incredibly fortunate to have Gary's service during
challenging times. Gary brought to the Office of Chief Counsel his outstanding
ability as a lawyer, a c o m m o n sense appreciation of the circumstances in which
taxpayers and IRS agents must operate, management skills, and above all good
judgment," said Treasury Assistant Secretary for Tax Policy P a m Olson. "We could
not have accomplished what w e have the last two years without Gary's
contributions to the guidance process and to addressing the compliance problems
facing the tax system. He will be sorely missed."
"Gary's contributions to improving IRS public guidance have been extraordinary.
Taxpayers, practitioners and tax administrators all owe Gary their gratitude for his
willingness to use his exceptional legal talent in public service the past two years,"
stated B. John Williams, former Chief Counsel for the IRS and currently a tax
partner with Shearman & Sterling.
Mr. Wilcox will be rejoining his former law firm, Morgan Lewis, where he will
maintain offices in both Philadelphia and Washington, D.C.
-30-
-1118: Snow Statement on the Resignation of Asst Secretary Teresa Ressel
Page 1 of
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
January 28, 2004
JS-1118
Statement of Secretary John W. Snow on the Departure of
Assistant Secretary for Management & Chief Financial Officer
Teresa Ressel's
"Assistant Secretary Ressel has served a key role in President George W. Bush's
administration. Her involvement in the establishment of a new Department of
Homeland Security (DHS) - the largest reorganization of Federal Government in
half a century - was particularly noteworthy.
"The creation of DHS was a big job for our department, since it involved so many of
the Treasury Department's agencies. Assistant Secretary Ressel worked hard to
make that transition a smooth one for everyone involved. Additionally, her work has
helped Treasury's financial management performance continue to lead government,
and she helped Treasury complete an outstanding FY2003 financial closure. She
departs with the sincere gratitude and best wishes of all of her colleagues here at
Treasury."
Related Documents:
• Ressel Letter
DEPARTMENT OF THE TREASURY
WASHINGTON
ASSISTANT SECRETARY
liinuaty 27, 2-I04
The President
The White House
Washington, D.C. 20500
Dear Mr. President,
It has been my privilege and honor to serve you and our country since August of 2001.
Unfortunately, the demands of this role m a k e it extremely challenging to spend virtually
any time with m y family and children Thus, I respectfully would like to return to the
private sector to spend more time with them, and I a m writing to resign as Assistant
Secretary of the Treasury for Management
To allow for a smooth transition, Secretary Snow and I have agreed that my resignation
take effect during February.
Your leadership to clearly establish the President's Management Agenda created an
opportunity for the Management functions in government to align resources with results
Treasury accomplishments in financial management and performance have driven change
across the government on this aspect of your Agenda. In parallel, your 2003 priority of
establishing the Department of Homeland Security offered an opportunity for the
Treasury Management function to contribute in a very significant w a y and support the
stand-up of that enterprise. Literally, hundreds of colleagues contributed to this effort
and I a m proud of our contributions both relative to human capital and change
management.
However, as you wonderfully stated at your leadership talk on January 9,2004 -there is
always m u c h more to accomplish. While w e have made significant progress, I a m very
proud of the management team assembled at Treasury to drive future accomplishments as
well.
I will always remember and honor the opportunity to serve under your leadership
Very truly yours,
Teresa M. Ressel
1119: Statement of Acting Assistant Secretary for Economic Policy Mark Warshawsky on H o m e Sales Page 1 of 1
PRESS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
January 28, 2004
JS-1119
Statement of Acting Assistant Secretary for Economic Policy
Mark Warshawsky on H o m e Sales
The strength of the housing sector continues to bolster the economy. New home
sales in 2003 topped 2002 by nearly 12 percent to reach the best year on record.
This follows a report earlier this week which found existing home sales also set a
record in 2003, posting an almost 10 percent gain over 2002.
Record-breaking home sales build on encouraging news in housing construction.
Last week's report on housing starts found them reaching a twenty-year high in
December.
While we are pleased by the continuing strength of the housing sector, as well as
many other areas of the economy, we are not satisfied. Remaining steadfast in this
Administration's commitment to improving the environment for job creation, the
President will continue in his efforts to ensure that every American looking for work
can find a job.
1120: Treasury to Host Inaugural Financial Literacy and Education Commission Meeting
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 28, 2004
JS-1120
Treasury to Host Inaugural Meeting of the
Financial Literacy and Education Commission
The Department of the Treasury tomorrow will host the inaugural meeting of the
Financial Literacy and Education Commission. The Commission was established
by the Fair and Accurate Credit Transactions Act, signed by President Bush on
December 4, 2003. The Commission will work to promote and improve financial
education by coordinating the many efforts underway at the 20 participating
government agencies. The legislation designated that the Secretary of the
Treasury serve as the Chairperson of the Commission and that Treasury's Office of
Financial Education provide primary support to the Commission.
Tomorrow's event will include opening remarks from Secretary Snow, followed by
remarks from Chairman Alan Greenspan and other commission members.
Agencies that are members of the Commission are listed below.
WHAT: Inaugural Meeting of the Financial Education and Literacy Commission
WHEN: Thursday, January 29, 2004
10:30 a m E S T
WHERE: Department of the Treasury, Cash Room
WHO: Secretary John W. Snow, Department of the Treasury
Chairman Alan Greenspan, Chairman of the Federal Reserve Board of
Governors Representatives of the other Commission Members: Office of the
Comptroller of the Currency; the Office of Thrift Supervision; the Federal Reserve;
the Federal Deposit Insurance Corporation; the National Credit Union
Administration; the Securities and Exchange Commission; the Departments of
Education, Agriculture, Defense, Health and Human Services, Housing and Urban
Development, Labor, and Veterans Affairs; the Federal Trade Commission; the
General Services Administration; the Small Business Administration; the Social
Security Administration; the Commodity Futures Trading Commission; and the
Office of Personnel Management.
Tomorrow's meeting will be webcast live at www.treasury.gov
Media without Treasury press credentials planning to attend today's event
should contact the Treasury Public Affairs office at 202/622-2960 with the
following information: name, social security number and date of birth. Media with
White House press credentials must call to be cleared in to the Treasury Building.
Please plan to arrive at least 30 minutes early.
Page 1 of 1
121: Treasury and IRS Propose N e w Tax Form For Corporate Tax Returns
wmmmmamm
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
January 28, 2004
js-1121
Treasury and IRS Propose New Tax Form For Corporate Tax Returns
In an effort to increase the transparency of corporate tax return filings, today the
Treasury Department and Internal Revenue Service released a new proposed draft
form, Schedule M-3, Net Income (Loss) Reconciliation for Corporations with Total
Assets of $10 Million or More, for use by certain corporate taxpayers filing Form
1120, U.S. Corporation Income Tax Return. The new Schedule M-3 would expand
the current Schedule M-1, which has not been updated in several decades.
Schedule M-1 reconciles a corporation's financial accounting income or loss with
the taxable income or loss reported on the Form 1120. Large and Midsize
Business (LMSB) taxpayers (those with total assets of $10 million or more) will
complete the new Schedule M-3 in lieu of completing Schedule M-1. Small
Business and Self-Employed (SB/SE) taxpayers will not be required to complete the
new Schedule M-3 and will continue to complete Schedule M-1. Other federal tax
returns that also require the completion of Schedule M-1 (e.g., Form 1065, U.S.
Partnership Return of Income, and Form 1120S, U.S. Income Tax Return for an S
Corporation) m a y incorporate Schedule M-3 in the future.
"The proposed Schedule M-3 will make differences between financial accounting
net income and taxable income more transparent. This will help agents determine
from the return whether the return should be audited and identify the differences
that matter most in the audit of the return. W e see benefits to taxpayers and the IRS
from the n e w Schedule: a reduction in unnecessary audits and a swifter focus on
those differences that are more likely to arise when taxpayers take aggressive
positions or engage in aggressive transactions. In addition, the increased
transparency will have a deterrent effect," stated Treasury Assistant Secretary for
Tax Policy P a m Olson.
"The new Schedule will let the IRS sharpen and improve monitoring of corporate
compliance," said IRS Commissioner Mark W . Everson. "Our objective is to identify
and resolve potential audit issues promptly. This information will help us do so."
"These changes will enable us to focus our compliance resources on returns and
issues that need to be examined and avoid those that do not," said Deborah M.
Nolan, IRS Large and Mid-Size Business Division Commissioner. "Increasing the
transparency of corporate tax returns is critical to our objectives to provide certainty
to taxpayers sooner and to improve overall compliance."
The Treasury and IRS expect that the proposed Schedule M-3 will be finalized for
use with federal income tax returns for tax years ending on or after December 31,
2004.
The draft Schedule M-3, along with a general description of Schedule M-3, is
attached and m a y be accessed on www.irs.gov. Instructions for Schedule M-3 will
be released in the future and will be available on www.irs.gov.
Comments are requested regarding proposed Schedule M-3, including comments
on ways to minimize taxpayer burden. In addition, comments are requested on
significant difficulties that taxpayers m a y encounter if the use of Schedule M-3 is
required for a tax year that begins before Schedule M-3 is finalized. C o m m e n t s
Page 1 of 1
121: Treasury and IRS Propose N e w Tax Form For Corporate Tax Returns
should be submitted by April 30, 2004 to:
Susan Blake
Internal Revenue Service
Office of Pre-Filing and Technical Guidance
1111 Constitution Ave. N W
Mint Bldg M3-353 LM:PFT
Washington, D C 20224
Telephone number 202-283-8414
email address: PFTG2@irs.gov
ATTACHMENTS:
Draft Schedule M-3
Schedule M-3 General Explanation
-30Related Documents:
• Draft Schedule M-3
• Schedule M-3 General Explanation
Page 2 of
SCHEDULE M-3
(Form 1120)
Net Income (Loss) Reconciliation for Corporations
With Total Assets of $ 1 0 Million or More
Department of the'Treasury
Internal Revenue Service
•
O M B No. 1545-XXXX
i©04
• Attach to Form 1120.
See separate instructions.
Employer identification number
Name
Questions Regarding Corporate Financial Statements a n d Publicly Traded C o m m o n Stock
1 Indicate source of net income shown on Part II, line 1:
a • S E C Form 10-K
b D Other certified G A A P income statement
c D Other income statement
d D N o income statement. Books and records used.
Note: If line 1d is checked, skip lines 2 through 5 of Part I, skip lines 1 through 7 of Part II, and enter net income (loss
books and records of includible corporations on line 8 of Part II.
/
/
/
What is the income statement period for net income shown in Part II, line 1?
3
In the current or past five years, have the corporation's financial statements been restated? . . . . D Yes D N o
(If yes, attach details)
Under what symbol does the corporation's c o m m o n stock trade?
O n what exchange does it trade?
4
From
/
2
To
5 What is the nine-digit CUSIP number of the corporation's publicly traded c o m m o n stock?
DlfflTl
Reconciliation of Net I n c o m e (Loss) per I n c o m e Statement With Net I n c o m e (Loss) of Includible
Corporations
1
Net income (loss) per income statement
2 Remove net income (loss) of nonincludible foreign corporations (attach schedule)
3 Remove net income (loss) of nonincludible U.S. corporations (attach schedule) .
4 Include net income (loss) of other includible corporations (attach schedule) . .
5
Adjust elimination of transactions between includible and nonincludible corporations (attach
schedule)
6 Adjust net income (loss) to reconcile income statement year to tax return year (attach schedule) .
7 Other adjustments required to reconcile to amount on line 8 (attach schedule)
8 Net income (loss) per income statement of includible corporations. Add lines 1 through 7 .
=or Paperwork Reduction Act Notice, see the Instructions for Forms 1120 and 1120-A.
Cat. No. 37961C
Schedule M-3 (Form 1120) 2004
Pa
Schedule M-3 (Form 1120) 2004
9e 2
pEfflTlReconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable
I n c o m e per R e t u r n — I n c o m e (Loss) Items
I n c o m e (Loss) Items
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
54
15
16
7
Income (loss) from equity method foreign
corporations
Gross foreign dividends not previously taxed . .
Subpart F, PFIC, QEF, and similar income
inclusions
Section 78 gross-up
Gross foreign distributions previously taxed . . .
Income (loss) from equity method U.S.
corporations
U.S. dividends not eliminated in tax consolidation .
Minority interest for includible corporations . . .
Income (loss) from U.S. partnerships (attach schedule) .
Income (loss) from foreign partnerships (attach schedule)
Income (loss) from other flow-through entities
(attach schedule)
Tax-exempt interest
Life insurance proceeds
Involuntary conversions
Like-kind exchanges
Hedging transactions
Section 481 (a) adjustments
Inventory valuation adjustments
Section 198 environmental remediation costs . .
Other amounts relating to reportable transactions
(attach details)
Sale versus lease
Mark-to-market income (loss)
Unearned revenue/advance receipts
Installment sales
Long-term contracts
Original issue discount
Net capital gain from flow-through entities .
Net capital loss from flow-through entities
Gross capital gain from includible corporations . .
Gross capital loss from includible corporations . .
Disallowed capital loss in excess of capital gains .
Utilization of capital loss carryforward
Other income (loss) items with differences (attach
schedule)
Other income (loss) items with no differences . .
Total income (loss) items. Add lines 1 through 34
Total expense/deduction items (from Part IV,
line 38
Reconciliation totals: Subtract line 36 from line 35
(C)
(A)
(B)
Income (Loss) per Temporary Difference Permanent Difference
Income Statement
(D)
Income (Loss) per
Tax Return
(
)
(
)
(
)
(
)
Net Income (loss)
Note: Line 37, Column A must equal amount on
Part II, line 8 and Column D must equal amount per income
statement, Part
on Form 1120, page 1, line 28.
II, Line 8
:^%%%%%%^^
Net Temporary
Differences
wmmmm.
Net Permanent
Differences
Taxable Income
(Loss), (Form
1120) Pagel,
line 28
Schedule M-3 (Form 1120) 2004
Page 3
Schedule M-3 (Form 1120) 2004
fjmmvM
Reconciliation of N e t I n c o m e (Loss) per I n c o m e S t a t e m e n t of Includible Corporations With Taxable
I n c o m e per R e t u r n — E x p e n s e / D e d u c t i o n Items
Expense/Deduction Items
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
53
14
!5
6
7
U.S. current tax expense
U.S. deferred tax expense
State current tax expense
State deferred tax expense
Foreign current tax expense
Foreign deferred tax expense
Foreign withholding taxes
Stock option (ISO)
Stock option (NQSO)
Restricted stock
Meals and entertainment
Fines and penalties
Nondeductible punitive damages
Excess parachute payments
Excess section 162(m) compensation
Charitable contribution of cash and tangible
property
Charitable contribution of intangible property . .
Charitable contribution limitation
Charitable contribution carryforward used . . .
Current year acquisition/reorganization investment
bankinq fees
Current
year
acquisition/reorganization
leqal/accountinq fees
Current year acquisition/reorqanization other costs.
Impairment of qoodwill
Amortization of acquisition/reorganization and
start-up costs
Other amortization or impairment write-offs .
Abandonment losses (attach details)
Worthless stock deduction (attach details) . . .
Depletion
Depreciation
Bad debt expense
Accrued non-deductible liabilities (attach details) .
Corporate owned life insurance premiums . . .
Section 481(a) adjustments
Inventory valuation adjustments
Other amounts relating to reportable transactions
(attach details)
. ..
Other expense/deduction items with differences
(attach schedule)
Other expense/deduction items with no differences
(C)
(A)
(B)
Expense per Income Temporary Difference Permanent Difference
Statement
(D)
Deduction per Tax
Return
^m^m^my,
'wmmmmm.
3 Total expense/deduction items. A d d lines 1
through 37. Enter here and on Part III, line 36 . .
Schedule M-3 (Form 1120) 2004
General Description of Schedule M-3:
Net Income (Loss) Reconciliation for Corporations With Total Assets
of $10 Million or More
Background
• The current Schedule M-1 has remained virtually unchanged for decades. Over that
s a m e period of time, large and midsize corporations have changed dramatically in
the ways they are structured and conduct business, and in their corresponding
financial and tax accounting.
• Schedule M-1 (and the related instructions) do not provide a uniform reporting
requirement for "net income per books" on line 1 of Schedule M-1. A s a result,
taxpayers m a y provide information for (i) the worldwide group, (ii) the U.S.
consolidated tax group, or (iii) something in between.
• Similarly, Schedule M-1 (and the related instructions) do not provide uniform
disclosure requirements for reporting differences between financial accounting net
income and taxable income. The lack of requirements prevent efficient comparisons
among taxpayers and from year to year for the s a m e taxpayer, thus making
assessment of the risk of noncompliance associated with an issue or a taxpayer
more difficult.
Goals of Schedule M-3
• Increase transparency while minimizing overall taxpayer burden.
• Reduce the time required to examine tax returns and be in a position to examine the
most recent tax returns filed.
• Provide consistent reporting a m o n g taxpayers and from year to year for each
taxpayer.
• Provide a method of presentation to obtain more useful, descriptive information at
the time the federal income tax return is filed to assist the IRS in the identification of
tax returns that should or should not be selected for audit, identification of issues
that should or should not be audited, and identification of trends and areas of greater
compliance risk.
• Periodically modify the form to highlight emerging issues, identify trends, and adapt
to future changes encountered by large and midsize corporations.
• Facilitate tax return selection and issue identification through electronic filing.
• Facilitate the use of Limited Issue Focused Examination (LIFE) audits through
greater transparency.
1
Highlights of Schedule M-3
W h o is affected?
• Only Large and Midsize Business (LMSB) corporate taxpayers reporting gross
assets of $10 million or more on Schedule L (balance sheet) on Form 1120 at the
end of the taxable year would be required to complete and file Schedule M-3 instead
of Schedule M-1.
• All other taxpayers would continue to complete and file Schedule M-1. N o changes
are proposed for Schedule M-1 at this time.
• It is expected that a form similar to Schedule M-3 will be designed for Form 1065
Partnership Income Tax Returns, Form 1120S Small Business Corporation Income
Tax Returns, and perhaps other federal income tax returns that warrant enhanced
transparency.
Specifics of Schedule M-3
Part I - Question regarding corporate financial statements and publicly traded common
stock
Part 1 asks questions to identify the source of the financial statement information.
Taxpayers would be required to reconcile financial accounting net income to taxable
income based on the following hierarchy:
• S E C Form 10-K financial statements;
• Other certified G A A P statements;
• Other financial statements (with explanation of accounting method attached);
and
• If no financial statements are prepared by the taxpayer (certified or
otherwise), then the taxpayer would report income from its books and records
on the last line (Line 8) of Part II and skip the other lines.
Part II - Reconciliation of net income (loss) per income statement with net income (loss)
of includible corporations
Part II is a consolidated schedule that reconciles the taxpayer's worldwide net income
(loss) per the income statement (as determined in Part I (for example, the income
statement per the financial statements if one is prepared by the taxpayer)) to the net
income (loss) of the corporations included in the U.S. tax return (the U.S. consolidated
tax group).
• (Line 1) Start with net income (or loss) per the income statement.
• (Line 2) Remove net income (or loss) of foreign corporations that are included in
Line 1, but not in the U.S. consolidated tax group.
2
•
(Line 3) R e m o v e net income (or loss) of U.S. corporations that are included in
Line 1, but not in the U.S. consolidated tax group (for example, 5 1 % to 7 9 % owned U.S. subsidiaries).
• (Line 4) Include net income (or loss) of corporations that are consolidated for
federal income tax purposes, but are not included on Line 1.
• (Line 5) Adjust (remove or include) eliminations of intercompany transactions that
relate to non-includible entities removed in lines 2 and 3 or included in line 4,
leaving only intercompany eliminations that relate to includible entities.
Generally, for those corporations removed on Lines 2 and 3, Line 5 will add back
dividends received by the U.S. consolidated tax group and adjust for minority
interests included on Lines 2 or 3.
• (Line 6) Include adjustments for differences between the taxpayer's income
statement year and tax return year.
• (Line 7) Include any other necessary adjustments and attach a detailed schedule
of those adjustments.
• (Line 8) Line 8 is the net income (or loss) per the income statement of the
consolidated tax group. Taxpayers that did not prepare financial statements
would enter net income (or loss) per books and records for the U.S. consolidated
tax group.
The instructions to Part II would clarify that any amounts reported on Lines 2-7 must be
separately stated and adequately disclosed and the combining, or netting, of amounts is
not permitted.
Part III and IV- Reconciliation of net income (loss) per income statement of includible
corporations with taxable income per return.
Part III and IV are consolidating schedules that reconcile the net income (or loss) per
the income statement of the U.S. consolidated tax group in Part II Line 8 to the taxable
income of the U.S. consolidated tax group on Form 1120, Page 1, Line 28.
• Part III breaks out differences (between the net income (or loss) per the income
statement and taxable income) in items usually considered to be income (or loss)
items.
• Part IV breaks out differences (between the net income (or loss) per the income
statement and taxable income) in items usually considered to be expense/deduction
items.
3
•
Any income (or loss) items in Part III, or any expense/deduction items in Part IV, that
do not result in a difference between net income (or loss) per the income statement
and taxable income are reported on a single line in each respective part.
• Part III and IV require the taxpayer to identify the portion of each difference that is a
permanent difference and the portion that is a temporary difference. Generally,
items of difference that will reverse (that is, have an opposite effect on taxable
income in later years due to the difference in timing of recognition for accounting and
federal income tax purposes) or that are a reversal of prior differences are temporary
differences, and items that will never reverse are permanent differences.
• The
>
>
>
specific differences listed in Part III and IV reflect:
low risk differences that are separated out for greater transparency,
high risk differences that m a y require attention, and
other areas of special concern such as emerging issues.
• The instructions to Part III and Part IV will clarify that any difference reported must
be separately stated and adequately disclosed.
• Part III and IV each conclude with a summation of each of the columns. The total of
each column in Part IV is reported on a separate line at the bottom of Part III.
> The first column of Part III is the net income per the income statement and must
equal the amount shown at Part II Line 8.
> The second column is the total of all temporary differences.
> The third column is the total of all permanent differences.
> The fourth column is taxable income and must equal the amount shown at Form
1120, Page 1, Line 28.
Schedule L
• No changes are proposed to the format of Schedule L (the balance sheet) of Form
1120 at this time.
• The Form 1120 instructions would clarify that:
> The balance sheet amounts on Schedule L reflect full consolidation accounting
for all entities that are included in the tax return (with full elimination of
intercompany transactions between all includible entries), and not s o m e form of
combination accounting.
> The balance sheet amounts on Schedule L should correspond to the taxpayer's
financial statement amounts, if financial statements are prepared (in the case of
a U.S. consolidated tax group, if financial statements are prepared for the U.S.
parent).
> The balance sheet amounts on Schedule L should not be tax-basis balance
sheet amounts, unless the taxpayer only keeps tax-basis books and records and
reconciles to taxable income from net income per books and records rather than
from s o m e financial statement net income amount.
4
122: Secretary S n o w Chairs First Meeting of<br> the Financial Literacy and Education Commission
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
January 29, 2004
js-1122
Secretary Snow Chairs First Meeting of
the Financial Literacy and Education Commission
Secretary of the Treasury John S n o w today chaired the first meeting of the
Financial Literacy and Education Commission in the Department of the Treasury's
Cash Room. Representatives of twenty federal departments, agencies, and
commissions, including Federal Reserve Board Chairman Alan Greenspan, Federal
Deposit Insurance Corporation Chairman Donald Powell, Federal Trade
Commission Chairman Timothy Muris, Office of Thrift Supervision Director James
Gilleran, Social Security Administration Commission Jo Anne Barnhart, and
National Credit Union Administration Chairman Dennis Dollar, participated in the
meeting.
"Financial Literacy is the often the key to financial security. By coordinating our
many ongoing efforts and joining forces with the financial literacy community, the
Commission can work together, learn from each other and discover how w e can
best succeed in our efforts to make Americans aware of the many benefits of our
financial system including opportunities to save, plan for the future, use credit
wisely and purchase a first home," said Secretary Snow.
At the inaugural meeting today, the members of the Commission discussed the
establishment of subcommittees to fulfill two of the legislation's charges: to
establish and maintain a toll-free telephone number for financial education
purposes; and establish and maintain a financial education website that will serve
as a central clearinghouse for citizens w h o are in search of financial education
information and programs.
The new Commission's goal is to promote financial education and improve the
financial literacy of all Americans. The Commission will work to encourage
government and private sector efforts to promote financial literacy, and coordinate
financial education efforts of the federal government, including the identification and
promotion of best practices.
The legislation that created the Financial Literacy and Education Commission calls
for the development of a national strategy to promote financial literacy and
education a m o n g all American consumers; establishment of a website to serve as a
clearinghouse and provide a coordinated point of entry for information about federal
financial literacy and education programs, grants, and other information the
Commission finds appropriate; and the establishment of a toll-free hotline available
to members of the public seeking information about issues pertaining to financial
literacy and education.
The Financial Literacy and Education Commission was created by Title V of the
Fair and Accurate Credit Transactions Act, signed by President Bush on December
4, 2003. The Commission is composed of the Secretary of the Treasury and the
heads of the Office of the Comptroller of the Currency; the Office of Thrift
Supervision; the Federal Reserve; the Federal Deposit Insurance Corporation; the
National Credit Union Administration; the Securities and Exchange Commission;
the Departments Education, Agriculture, Defense, Health and H u m a n Services,
Housing and Urban Development, Labor, and Veterans Affairs; the Federal Trade
Commission; the General Services Administration; the Small Business
Page 1 of 2
122: Secretary S n o w Chairs First Meeting of<br> the Financial Literacy and Education Commission
Administration; the Social Security Administration; the Commodity Futures Trading
Commission; and the Office of Personnel Management.
The Treasury Department's Office of Financial Education has been designated by
Congress to lend its expertise and provide primary support to the Commission to
assist it in fulfilling its functions and duties. The Office of Financial Education (OFE)
w a s established in M a y 2002, as part of the Treasury Department's long-term
commitment to ensure that all Americans have access to financial education
programs that will help them make informed financial decisions throughout their
lives. More information about the O F E can be found at:
www.treasury.gov/financialeducation.
Page 2 of 2
123: Treasury Secretary John W . Snow Financial Literacy and Education Commission Inaugural Me... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 29, 2004
JS-1123
Remarks by Treasury Secretary John W . S n o w
Financial Literacy and Education Commission
Inaugural Meeting
Good morning, and welcome, everyone, to the Department of the Treasury. It's
always a pleasure to bring guests to this historic building, and particularly to this
incredible room.
The group who has gathered here today is impressive by anyone's standards.
It strikes me that any cause, any organization, would be honored, and fortunate to
attract just one or two of these individuals to work and speak on its behalf.
I'm pleased to say that this fine group of men and women are here today because
they are all dedicated to Financial Literacy.
So, welcome: Chairman Greenspan, Chairman Powell, Chairman Muris, Director
Gilleran, Commissioner Bamhart, Chairman Dollar and the representatives of the
other Commission members.
Welcome, and thank you for your commitment to this issue that is fundamentally
important to all Americans. I'm extremely proud that President Bush and his
administration are so dedicated to this cause.
It has been said that, regardless of how much money you have, wisdom has to be
acquired on the installment plan.
Similarly, it is true that regardless of an individual's income, saving must be done
steadily, deliberately, over a lifetime.
Learning about how to become, and stay, financially healthy, is a life-long pursuit as
well.
And that's why we're here today.
So many individuals and organizations - across the many agencies of government,
among members of Congress, and throughout the private sector - are dedicating
major resources to improve financial literacy in America.
In other words, there is a serious movement afoot, and it is a good one. And this
commission is not intended to replace those efforts... but, rather, to complement
them, act as a point of synergy for them, and of course to give them institutional
support.
A bit of history behind today's inaugural meeting:
The Treasury Department's Office of Financial Education was created by this
Administration in M a y of 2002.
123: Treasury Secretary John W . Snow Financial Literacy and Education Commission Inaugural Me... Page 2 of 2
Its work w a s then recognized by Congress in the s a m e action that created this
commission... that is: Title Five of the Fair and Accurate Credit Transactions Act,
which the President signed this past December.
Treasury's Financial Education Office will serve as the supporting office for this new
Commission.
Our work is to complement, encourage and sometimes coordinate the work of so
many individuals and institutions that are committed to greater financial literacy in
America. I would also like to see us identify s o m e areas that need the most help,
the quickest.
For example: we have a tremendous opportunity to start fresh with a new
generation... to ensure that tomorrow's young adults understand how important it is
to save, and how to protect themselves from identity theft, in the s a m e way that
they understand the basics of physical health or road safety.
There is a tremendous interest on the part of high school students to learn the
financial facts of life: how to manage a credit card, how to save and invest, h o w
important it is to save for retirement at the beginning of a career, not at the end.
When you consider the fact that the financial tragedy of bankruptcy is growing
fastest a m o n g young adults in their early 20s, it becomes clear that w e must work
to satisfy the natural desire of young people to learn now and therefore reduce this
problem for the next generation.
Another group that has an immediate need is our population of new immigrants to
this country.
Many new immigrants come to America from places where consumer financial
services are not c o m m o n , where checking accounts and credit cards and mortgage
loans are virtually unknown, and where a bank is not seen as a safe place to put
your money. They do not know how to get involved in the financial mainstream
here, and so they remain outside of the mainstream, prey to the loan sharks and
the financial predators.
This commission, and anyone who is passionate about financial literacy, should
reach out to these people to help bring them into the financial mainstream, where
they can safely build up their assets, invest and save for their futures and their
children's futures.
I'm excited to work with the esteemed members of this Commission to address
these and other issues in the realm of financial literacy. I envision this Commission
as a forum where w e work together, where w e learn from each other... ultimately
discovering what works, what doesn't, and how w e can best succeed.
Together, we will work with the financial literacy community in reaching out to the
millions of people in the multitude of different ways that w e collectively offer.
Thank you very much.
124: Treasury and IRS issue Guidance on the Application of Income Tax Treaties to Service Partner... Page 1 of 1
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®.
January 29, 2004
JS-1124
Treasury and IRS issue Guidance on the Application of Income
Tax Treaties to Service Partnerships
Today, the Treasury Department and the IRS issued guidance concerning the
application of the U.S.-Germany income tax treaty to a nonresident partner in a
service partnership that conducts activities in the United States. Revenue Ruling
2004-3 makes clear that a nonresident partner is subject to U.S. income taxation on
his share of income from the partnership to the extent that such income is
attributable to the partnership's activities in the United States, without regard to
whether the partner performs services in the United States. The guidance in this
revenue ruling also applies in the case of other U.S. income tax treaties that contain
applicable provisions regarding independent personal services like the provisions in
the U.S.-Germany income tax treaty.
Related Documents:
• The text of the Revenue Ruling
Parti
Section 894.—Income Affected By Treaty
26 CFR 1.894-1: Income affected by treaty
Rev. Rul. 2004-03
ISSUE
Whether a nonresident partner in a service partnership that has a fixed base in the
States is subject to U.S. tax on income attributable to that fixed base under Article 14,
Independent Personal Services, of the Convention Between the United States of America and the
Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed on
August 29, 1989, as amended by the Protocol signed on the same date (the "Treaty").
FACTS
P is a service partnership that is organized under the laws of Germany. P has office
Germany and the United States. Its U.S. office is a fixed base under Article 14 of the Treaty. P
is comprised of two partners: A, a nonresident alien individual who is a resident of Germany
under Article 4 of the Treaty, and B, a U.S. resident. A performs services solely at P's office in
Germany and B performs services solely at P's office in the United States. A and B agree to
divide the profits of the partnership equally.
L A W A N D ANALYSIS
Under section 701 of the Internal Revenue Code (the "Code"), a partnership is not sub
to income tax; rather, the persons carrying on the business of the partnership as partners are
liable for income tax in their separate or individual capacities. Code section 702 requires a
partner to determine its income tax by separately taking into account its distributive share of the
partnership's income. Under section 702(b), the character of an item of income, gain, loss,
deduction, or credit is determined as if such item were realized directly from the source from
which it was realized by the partnership, or incurred in the same manner as incurred by the
partnership. Under Code section 704, a partner's distributive share generally is determined by
the partnership agreement unless an allocation under the agreement does not have substantial
economic effect.
Under section 875(1) of the Code, a nonresident alien individual who is a partner in
partnership that is engaged in a U.S. trade or business is himself considered to be so engaged.
Section 871(b)(1) of the Code provides that a nonresident alien individual is taxable under Code
sections 1 or 55 on his taxable income that is effectively connected with the conduct of a U.S.
trade or business.
Section 894(a)(1) states that the provisions of the Code shall be applied to any taxpayer
with due regard to any U.S. treaty obligation that applies to such taxpayer. In Donroy, Ltd. v.
United States, 301 F.2d 200 (9th Cir. 1962), the court held that the U.S. permanent establishment
of a partnership was attributable to a foreign person that was a limited partner under the 1942
U.S.-Canada income tax treaty. In Unger v. Commissioner, 936 F.2d 1316,1319 (D.C. Cir.
1991), the court followed the holding in Donroy, noting that it stood for the proposition that the
office or permanent establishment of a partnership is, as a matter of law, the office of each of the
partners—whether general or limited. See also Johnston v. Commissioner, 24 T.C. 920 (1955)
(holding that a partnership's permanent establishment is deemed to be a permanent establishment
of its partners); Rev. Rul. 90-80, 1990-2 C.B. 170 (same).
Article 14 of the Treaty provides:
1. Income derived by an individual who is a resident of a
Contracting State from the performance of personal services in an
independent capacity shall be taxable only in that State, unless
such services are performed in the other Contracting State and the
income is attributable to a fixed base regularly available to the
individual in that other State for the purpose of performing his
activities.
2. The term "personal services in an independent capacity"
includes but is not limited to independent scientific, literary,
artistic, educational, or teaching activities as well as the
independent activities of physicians, lawyers, engineers,
economists, architects, dentists, and accountants.
Applying Article 14 in the partnership context requires a determination of whether an
individual partner in a service partnership w h o derives income attributable to the fixed base of
the service partnership in the other Contracting State is taxable on that income even though the
partner does not perform any services in the other Contracting State. Consistent with section 875
and the case law discussed above, the fixed base of a partnership is attributed to its partners for
purposes of applying Article 14 of the Treaty. Accordingly, A is treated as having a fixed base
regularly available to him in the United States. A is subject to U.S. net income taxation on his
allocable share of income from P to the extent that such income is attributable to the fixed base
in the United States without regard to whether A performs services in the United States.
HOLDING
A is treated as having a fixed base regularly available to him in the United States and is
subject to U.S. net income taxation on his allocable share of income from P to the extent that
such income is attributable to P's fixed base in the United States, without regard to whether A
performs services in the United States. This holding also is applicable in interpreting other U.S.
income tax treaties that contain provisions that are the same or similar to Article 14 of the Treaty.
DRAFTING INFORMATION
The principal author of this revenue ruling is Nina Chowdhryof the Office of Associate
Chief Counsel (International). For further information regarding this revenue ruling, contact
Nina Chowdhryon (202) 622-3880 (not a toll-free call).
125: Treasury N a m e s Robert Stein as Deputy Assistant Secretary for Macroeconomic Analysis
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 28, 2004
js-1125
Treasury Names Robert Stein as Deputy Assistant Secretary for
Macroeconomic Analysis
The Treasury Department today announced that Robert Stein was appointed this
week as Deputy Assistant Secretary for Macroeconomic Analysis. H e will be
responsible for scrutinizing and reporting on current and prospective economic
developments and assisting in the determination of appropriate economic policies.
Mr. Stein originally joined the Treasury Department in January 2003 as a Senior
Advisor in the Office of Economic Policy.
From January 2001 to January 2003 he was the chief economist for the Senate
Budget Committee where he was responsible for evaluating the outlook for the U.S.
economy, financial markets, and federal budget, analyzing key economic indicators
and events, and estimating budget revenue and surpluses. Prior to the Senate
Budget Committee, he was the staff director of the Senate Banking Subcommittee
on Economic Policy (1999-2000). Before that he was on the staff of Congress's
Joint Economic Committee as an economist, senior economist, and deputy chief
economist (1996-1999).
He holds a B.A. in economics (with honors and distinction) from Georgetown
University and a law degree from George Washington University.
Page 1 of 1
126: Statement of Secretary John Snow on the 2003 Fourth Quarter Gross Domestic Product Report
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 30, 2004
JS-1126
Statement of Secretary John Snow on the 2003 Fourth Quarter Gross
Domestic Product Report
Today's report on GDP growth in the fourth quarter of last year further
demonstrates that a good recovery is underway. Economic growth in the second
half of 2003 was the fastest in nearly 20 years. The President's well-timed Jobs and
Growth tax relief plan led to broad-based improvements. Following last
year's exceptional third quarter, 2003 ended with solid gains. W e are seeing good
economic news on many fronts and w e are encouraged, but w e are not satisfied.
The Administration's efforts will continue until every American looking for work can
find a job.
-30-
Page 1 of 1
127: M E D I A ADVISORY: Department of the Treasury "Blue Book" Technical Tax Briefing
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 30, 2004
JS-1127
MEDIA ADVISORY:
Department of the Treasury "Blue Book" Technical Tax Briefing
Treasury Assistant Secretary for Tax Policy Pam Olson will hold the "Blue Book"
technical background briefing on the tax proposals in the President's FY 2005
budget on Monday, February 2, 2004 at 12:00 p.m. in room 4121 (Treasury's media
room). This session will provide a synopsis of the tax proposals and will also allow
for a Question and Answer session with Tax Policy staff. No cameras will be
admitted- this is a "pen and pad" only briefing.
Media without Treasury press credentials planning to attend 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.
Page 1 of 1
128: Deputy Assistant Secretary Mark Sobel - Remarks to the European Financial Services Confere... Page 1 of 4
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 29, 2004
JS-1128
Remarks of Mark Sobel
Deputy Assistant Secretary
for
International Monetary and Financial Policy
at the Second Annual European Financial Services Conference
Brussels, Belgium
January 27, 2004
"The US-EU Financial Market Dialogue:
The Transatlantic Dimension"
It is an honor to address the "Second Annual European Financial Services
Conference." I thank the conference organizers for putting this event together and
for recognizing that Europe's momentum on financial markets is extremely
important to the United States.
The United States has strongly supported European integration for many decades.
The United States and the European Union are the two largest economies in the
world and share a special responsibility for promoting the sound management of
the global economy. The policies pursued in the United States and Europe are
critical not only for the citizens of each area, but also for the world at large.
A central aim of US foreign economic policy is to help promote strong global
growth. The United States has been doing its part, and continues to do so. Other
parts of the world are also growing. But in many key industrial countries,
weaknesses persist, and the world has relied too long on the United States as a
single motor.
Last September, the G-7 Finance Ministers committed to an Agenda for Growth.
Under this Agenda, the G-7 will focus on "supply side" surveillance, benchmarking
progress in implementing reforms to boost productivity in such areas as labor
markets, pensions, and tax systems. To be sure, concrete actions are underway on
these fronts. But further reforms are needed to create the flexibility for bolstering
growth in and across our countries. The need for increased global growth will be a
key discussion topic among G 7 Finance Ministers this year.
US history teaches us that the creation of efficient and robust capital markets is
critical for strong growth. The openness of the U S financial system, its depth and
liquidity, and fierce competition have been one of the most potent disciplinary forces
for enhancing competitiveness, strengthening consumer choice and welfare, and
offering borrowers capital at costs better suited to promoting investment.
Various studies have shown that Europe's Financial Services Action Program (the
FSAP) has the potential to raise European growth by one percentage point per
annum in a decade. Were this potential to be achieved, the F S A P -- building on the
euro's successful launch, let alone other structural reforms - could represent a
lasting accomplishment for Europe and a win-win opportunity for Europe, the United
States and the world.
The world is living through a period of rapid globalization in which financial markets
are a key driver. The F S A P is not just about creating a unified European financial
1128: Deputy Assistant Secretary Mark Sobel - Remarks to the European Financial Services Confere... Page 2 of 4
market. It is about anchoring the European market in an integrated, state-of-the-art
and open global financial marketplace. Needless to say, U S financial institutions are
leaders of the global financial industry and w e have a strong interest in seeing that
U S firms are able to compete globally on fair terms, allowing their competitive and
innovative energies to flow.
Indeed, US firms are a large, longstanding and dynamic part of the European
financial market, and the Euromarkets in particular. They can help the evolution of
the European market. For example, U S financial institutions are leaders in mutual
fund products, critical to the development of U S pension plans. Most analysts cite
the evolution of defined contribution systems as one of the keys for addressing
European demographic challenges.
As the FSAP process moves forward, the United States also recognizes that the
process of building a global financial market is a two-way street. European firms are
understandably interested in access to U S capital markets.
Also, Europe and the United States have different financial legal, historical and
cultural traditions; w e are not identical; and our actions m a y have "spillover" effects
into the other's jurisdiction. I a m reminded every day of this as outside m y office in
the Treasury hallway hangs a picture of former Secretary Carter Glass, one of the
co-authors of the Glass-Steagall Act, w h o obviously w a s not a proponent of
universal banking.
In achieving our common objectives, US and European authorities will face new
challenges, particularly in balancing competitive efficiencies with sound regulation.
Sound regulation is essential for investor protection and confidence. But the
financial industry is always a step ahead of the regulators, and all would be ill
served if regulation stifled innovation. Thus, regulators and supervisors should
consult closely with financial institutions, understand how firms operate, and take
their perspectives into account. To do so, regulations should be m a d e in a
transparent manner, open to public comment.
For these reasons, the US and EU have a strong interest in closely cooperating on
financial markets. Almost two years ago, technical teams from both sides began
meeting informally in the US-EU informal financial market dialogue. O n the U S side,
technical officials consist of representatives from the U S Treasury, the S E C , and
the Federal Reserve. The Commission represents Europe. Since then, w e have
met roughly every four months. This dialogue was cited by President Bush and
President Prodi at their Summit as a strong example of US-EU cooperation. In
addition, the dialogue is supplemented by high-level policy meetings; the S E C is
developing a regulatory dialogue with C E S R ; and P C A O B representatives have
forged strong ties with Brussels.
The US Treasury has a broad interest in financial market issues. Regulatory
agencies such as the S E C , Fed, O T S and P C A O B are independent and it is their
job to protect a sound financial system at home. Thus, in the dialogue, w e discuss
issues that are emerging and the implications of these issues for each other; w e
seek to iron out legitimate issues; and when problems arise, w e seek to work them
out. In short, w e manage "spillovers". H o w are w e doing? H o w does the U S see the
dialogue?
The United States strongly welcomes the FSAP. We know that the FSAP timetable
is ambitious. But even if there are slippages, setting ambitious deadlines and
working on a fast track can be a virtue.
We are pleased by the more transparent European processes for rule-making that
have developed in the last two years and the increased consultations with market
participants. Our sense is that Brussels and the European Parliament n o w
appreciate that working with market participants can improve European rulemaking, create buy-in for proposed regulations, and strengthen European financial
markets.
We are also watching many individual FSAP measures and other looming issues.
128: Deputy Assistant Secretary Mark Sobel - Remarks to the European Financial Services Confere... Page 3 of 4
The Financial Conglomerates Directive has attracted considerable attention. It
requires that foreign supervisory regimes be deemed "equivalent" by Europe for
foreign-based firms to operate in Europe without costly legal and financial changes
that could hurt the European market. W e , of course, believe that the U S system of
supervision is top flight, world class and sound. But to help Europe reach a finding
of equivalence, our regulators have worked closely with European regulators to
deepen understanding of U S practices. These discussions over two years have
included a full explanation of the system of U S regulation of investment banks, as
well as Federal Reserve and O T S supervision. They have also led the S E C to issue
a rule proposal formalizing the SEC's supervision of broker-dealers on a
consolidated group-wide basis. A formal equivalence finding m a y be several
months off, but the F C D is to be transposed into national laws by August 2004 and
take effect in 2005. Time is short. Europe should dispel uncertainty and m o v e
rapidly to find equivalence.
The Council of Ministers has recently agreed upon an Investment Services
Directive and the European Parliament is now following up. The directive could
have profound implications for the liquidity of equity trading in Europe. The U S has
one of the most efficient equity markets in the world, and one in which
"internalization" of transactions allowing for "price improvements" for larger
customers has long been practiced, consistent with the principle of transparency. In
managing spillovers through the dialogue, both Europe and the United States have
emphasized the need to achieve our c o m m o n objectives in substance - the
dialogue is about rewarding innovation and allowing regulation to support different
market practices in a neutral manner. H o w internalization is permitted in the
European context is extremely important for the future vibrance of European
financial markets.
Europe is also moving forward with a Takeover Directive after many years of
internal discussion. A n integrated economic space for M & A activity throughout the
Union which transcends national borders would represent forward movement for
the integration of E U capital markets, further strengthen the competitiveness of
Europe and the world economy and contribute vitally to the achievement of the
FSAP's lofty growth objectives.
Large direct investment flows between the United States and Europe have taken
place for centuries - think of the building of our canals and railroads. This is an
important achievement that has benefited our economies. The stock of European
FDI in the U S , at historic cost, is over $860 billion and s o m e 6 4 % of all FDI in the
US; the U S stock of FDI in Europe is over $700 billion and 4 6 % of the stock of total
U S FDI. In recent years, w e have witnessed eye-popping takeovers: Daimler has
taken over Chrysler; Deutsche Bank has taken over Banker's Trust and Alec
Brown; British Telcom bought Yellow Book USA; and Unilever bought Best Foods.
As w e in the United States sift through the complex legal provisions of the Takeover
Directive, w e believe it is essential that there be a clear statement that notions of
reciprocity vis-a-vis third countries be avoided. Otherwise, there is risk of generating
unnecessary uncertainty for potential investors in Europe, which would prove
economically deleterious.
For decades, US firms have listed securities on the Euromarkets on the basis of US
G A A P . But the implication of the Transparency and Prospectus Directives is that for
all securities admitted to trading in European markets by 2005, the issuing firms will
have to produce financial reports on the basis of IAS. Further, the Transparency
Directive does not effectively provide for grandfathering of existing securities. U S
firms and institutions remain huge issuers in the Euromarkets. W e understand that
Europe is n o w looking at these issues and considering whether U S G A A P should be
found "equivalent" or "comparable" for the purposes of the Directives. In the
meantime, third party issuers are facing a period of tremendous uncertainty.
Already, s o m e are reportedly pulling back from the Euromarkets. Clearly, were this
business to diminish, the Euromarkets would be smaller and less liquid, and the
cost of raising capital for those firms continuing to use the Euromarkets higher.
Such an outcome would be inconsistent with the noble objectives and growth
ambitions of the F S A P This issue should be tackled resolutely and expeditiously.
Over the medium term, we also recognize that the FSAP faces many more
128: Deputy Assistant Secretary Mark Sobel - Remarks to the European Financial Services Confere... Page 4 of 4
challenges and that the European Commission and the m e m b e r state Financial
Services Committee are looking to the future. The presence of national clearing and
settlement systems means that European cross-border transactions can cost 5 to
15 times higher than national costs. Reducing these costs would surely benefit
European consumer welfare enormously. S o would a reduction in impediments to
cross-border pension fund activities. Corporate governance, enforcement and
cross-border retail issues will also be important priorities.
Tackling all of these issues, dispelling uncertainty and creating a liberal and
integrated cross-border European space for financial markets will be critical if the
true promise of the F S A P is to be secured. W e wish Europe the best in achieving
these justifiably lofty and ambitious goals and w e will be monitoring implementation
closely.
In the wake of Sarbanes-Oxley, the SEC thoroughly discussed with European
officials such issues as auditor independence, loans to bank executives and
directors, certification of financial statements by C E O s and C F O s , and standards
related to audit committees. While the letter and spirit of Sarbanes-Oxley were fully
observed, E U concerns were accommodated. Notwithstanding s o m e hiccoughs
following the advent of the Public C o m p a n y Accounting Oversight Board (PCAOB),
the P C A O B launched bilateral talks with Europe and a healthy dialogue is
underway.
Adding to this agenda, the FASB and IASB are working to converge global
accounting standards. U S officials are mindful of the bigger picture. Converged
accounting standards -- each consistently applied, implemented and enforced would m a k e accounting in the U S and Europe a similar exercise, accelerating
m o m e n t u m toward an even more dynamic transatlantic capital market. Recent
events on both sides of the Atlantic have underscored that neither of us is infallible
and that the issue is not whether G A A P or IAS is better or worse - rather, the issue
is how to find the right balance between rules and principles underlying these
standards, how to ensure effective implementation of accounting standards, and
how to best strengthen investor confidence.
On our side, the United States intends to continue its close cooperative relations
with Europe for the good of the transatlantic financial market, for the good of U S European relations, and for the good of the global economy. In doing so, w e intend
to buttress our close ties with the Commission, to build further bridges to the
European Parliament and to strengthen our outreach with the private sector and
m e m b e r states.
In the final analysis, the US-EU financial market dialogue and regulatory
cooperation will be constructing a pillar of the international financial architecture of
the 21st century. Progress is being made, but many challenges lie ahead. The
United States will remain engaged.
129: S n o w tells Pataki and Bloomberg that President's Budget seeks to extend Liberty Bonds
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 30, 2004
JS-1129
S n o w tells Pataki and Bloomberg that President's Budget seeks
to extend Liberty Bonds
Secretary of the Treasury John W . Snow today spoke with N e w York Governor
George Pataki and N e w York City Mayor Michael Bloomberg by phone to deliver
the news that President Bush's FY 2005 budget request includes an extension of
the N e w York Liberty Bonds program until 2009.
"New Yorkers have stood strong in the face of terrorists and have made great
progress in their efforts to rebuild and recover. The President's request to extend
the Liberty Bonds program for five more years will help make further revitalization a
reality," said Secretary Snow.
New York Liberty Bonds were created as part of the economic stimulus package
that President Bush signed in the wake of the terrorist attacks of September 11,
2001. The Liberty Bond program allows the State of N e w York and N e w York City
to issue up to $8 billion in special tax-exempt private activity bonds to help finance
capital projects in the newly-designated Liberty Zone, located in lower Manhattan.
Approximately $2 billion in Liberty Bonds have been issued or authorized to date.
There is currently a backlog of applications for financing that may not have been
processed by the program's original expiration date at the end of 2004.
Fact Sheet:
N e w York Liberty Bonds
What are Liberty Bonds?
New York Liberty Bonds are special private activity bonds that can be used to
finance capital projects primarily in the Liberty Zone, the area of Manhattan south of
Canal Street, East Broadway and Grand Street. Interest on the bonds is exempt
from federal income tax.
When was the Liberty Bond program created?
The Liberty Bond Program was part of the economic stimulus package that was
signed by President Bush in the wake of September 11, 2001, attacks on the World
Trade Center and the Pentagon. The program was established to help N e w York
City rebuild and recover by spurring economic development in the areas hardest hit
by the attacks.
How big is the program?
The economic stimulus package authorized up to $8 billion dollars in Liberty
Bonds. At this point, N e w York has issued or authorized approximately $2 billion of
these bonds. There are many pending applications that would not have been
processed by the program's original expiration date at the end of 2004.
Page 1 of 2
129: S n o w tells Pataki and Bloomberg that President's Budget seeks to extend Liberty Bonds
H o w can Liberty B o n d s be used?
Liberty Bonds can be issued for certain housing, office, utility, and retail
development in the Liberty Zone and surrounding areas. First priority is given to
projects in the designated area in lower Manhattan. N e w York Governor George
Pataki and N e w York City Mayor Michael Bloomberg have each been allocated $4
billion for the program. U p to $800 million of the $8 billion total m a y be issued for
retail development, up to $1.6 billion for residential rental projects in the Liberty
Zone, and up to $2 billion for commercial projects in N e w York City but outside the
Liberty Zone.
How do Liberty Bonds work?
Liberty Bonds are sold to private investors to provide capital for designated
development projects. The bonds are not obligations of the State or City, but are
instead obligations of the entities established by the State or City to issue the
bonds. The bonds are secured by pledged project revenues, typically with no
recourse to the issuer. Interest on the bonds is exempt from federal, State, and City
income tax, and these savings are passed on to the borrower in the form of a lower
interest rate. The interest rate available to a borrower under the N e w York Liberty
Bond Program will depend on the individual project's credit worthiness and
financing structure, as well as general market conditions.
The New York Liberty Development Corporation, a local development corporation
formed at the direction of the Empire State Development Corporation, and the N e w
York City Industrial Development Agency will issue bonds for commercial and utility
projects. The State's issuer for residential facilities will be the N e w York State
Housing Finance Agency; the City's residential issuer will be the N e w York City
Housing Development Corporation.
Why does the program need to be extended?
New York City has come a long way in the last two years, but President Bush
knows there is still more opportunity and potential in the Liberty Zone and
surrounding areas. N e w York City has utilized approximately $2 billion of the $8
billion that w a s allocated to the program.
However, it has taken longer than expected for the City to be in a position to utilize
the full potential for these bonds. Therefore, President Bush has proposed an
extension in the program until 2009.
Page 2 of 2
130: Treasury Warns Against Fraudulent E-Mail Schemes
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
January 30, 2004
JS-1130
Statement from Assistant Secretary of the Treasury for Financial
Institutions W a y n e A. Abernathy Warning About Recent
Fraudulent E-Mail Schemes
Recently, many Americans have received a series of fraudulent e-mails which direct
recipients to websites where they are asked to verify sensitive personal
information. The e-mails claim that the individual's personal information is
necessary to assist in the fight against terrorism or for some other purpose
supposedly required by law. These e-mails are purportedly sent from several
government agencies or include content related to government agencies including
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Securities Investor Protection Corporation and others. The websites
to which the email recipients are directed are often very similar to, if not actual
clones of official government sites.
The fraudulent e-mails are part of a scam known as "phishing." Phishing is the
fraudulent scheme of sending an e-mail to a user falsely claiming to be a legitimate
company. The email attempts to con the user into surrendering private information
that could later be used for identity theft. The e-mail directs the user to visit a website where they are asked to update personal information, such as name, account
and credit card numbers, passwords, social security numbers and other
information. The W e b site, however, is bogus and set up only to steal the user's
information.
As part of the Treasury Department's efforts to fight identity theft, we want to assure
Americans that federal financial agencies do not communicate with consumers by
e-mail requesting important personal information such as your name, account
numbers, date of birth, social security number.
Consumers can protect themselves from this latest identity theft scam by following
these useful tips, which were developed by the Federal Trade Commission:
• If you get an email that warns you, with little or no notice, that an account of yours
will be shut down unless you reconfirm your billing information, do not reply or click
on the link in the email. Instead, contact the company cited in the email using a
telephone number or W e b site address you know to be genuine.
• Avoid emailing personal and financial information. Before submitting financial
information through a W e b site, look for the "lock" icon on the browser's status bar.
It signals that your information is secure during transmission.
• Review credit card and bank account statements as soon as you receive them to
determine whether there are any unauthorized charges. If your statement is late by
more than a couple of days, call your credit card company or bank to confirm your
billing address and account balances.
• Report suspicious activity to the FTC. Send the actual spam to uce@ftc.gov. If
you believe you've been scammed, file your complaint at www.ftc.gov, and then
visit the FTC's Identity Theft W e b site (www.ftc.gov/idtheft) to learn how to minimize
your risk of damage from identity theft.
The Treasury and federal financial regulators are working hard to combat identity
theft including the use of new tools in legislation recently signed by President Bush.
But all consumers must take reasonable precautions in the use of their personal
Page 1 of 2
130: Treasury Warns Against Fraudulent E-Mail Schemes
financial information in order to help prevent themselves from becoming victims of
identity thieves.
Page 2 of 2
JS-1131: The President's Savings Proposals: Tax-Free Savings and Retirement Security
Page 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 2, 2004
JS-1131
The President's Savings Proposals:
Tax-Free Savings and Retirement Security
Opportunities for all Americans
Today the Treasury Department announced that the President's FY 2005 Budget
includes the following savings initiatives: Retirement Savings Accounts, Lifetime
Savings Accounts, Employer Retirement Savings Accounts, and Individual
Development Accounts
The first proposal would create two consolidated savings accounts: Retirement
Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs) that will allow
everyone to contribute - with no limitations based on age or income status.
Individuals will be able to convert existing tax-preferred savings into these new
accounts in order to consolidate and simplify their savings arrangements.
• RSA and LSA contribution limits will be $5,000 per year. This contribution limit is
modified from last year's FY04 Budget proposal, which had a contribution limit of
$7,500.
"Americans want a secure future: simplifying savings will help them reach that
goal," stated Treasury Assistant Secretary for Tax Policy P a m Olson. "The savings
options proposed today will give all Americans the opportunity and flexibility they
need to save for their retirement security and other needs. The proposals make
saving simple for everyone and for every purpose. They stress the importance of
getting off the spending couch and into the savings gym."
The second proposal would create Employer Retirement Savings Accounts
(ERSAs) to promote and simplify employer sponsored retirement plans. The
proposal would consolidate 401 (k), SIMPLE 401 (k), 403(b), and 457 employerbased defined contribution accounts into a single type of plan more easily
established by any employer.
• This proposal is modified from the previous FY04 Budget proposal to enhance
flexibility and encourage small businesses to fund a custodial E R S A for their
employees. Employers with 10 or fewer employees would be able to fund an E R S A
by contributing to a custodial account, which is similar to a current-law IRA.
The third proposal would create Individual Development Accounts (IDAs) help
lower-income individuals save. This proposal would provide dollar-for-dollar
matching contributions of up to $500 targeted to lower income individuals.
Matching contributions would be supported by a 100 percent credit to sponsoring
financial institutions.
The President's Proposal to Expand Tax-Free Savings
Description of Proposal
RETIREMENT SAVINGS ACCOUNTS (RSA)
$5,000 annual contribution limit (indexed for inflation).
Available to all individuals - no income limits (contributions cannot exceed
compensation), no age limits.
Contributions would be nondeductible (like Roth IRAs).
Earnings would accumulate tax-free, and qualified distributions would be
excluded from gross income.
Qualified distributions could be made after age 58 or in the event of death or
JS-1 i^ i: ine President's Savings Proposals: Tax-Free Savings and Retirement Security
disability.
! Nonqualified distributions: Distributions in excess of prior contributions would be
included in income and subject to an additional tax.
Conversions to RSAs: Roth IRAs, Traditional and Nondeductible IRAs
!
Roth IRAs would be renamed R S A s and benefit from the new rules for RSAs.
~i Existing traditional and nondeductible IRAs could be converted into an R S A by
taking the conversion amount into gross income, similar to a current-law Roth
conversion.
: N o income limit would apply to the ability to convert.
i Existing traditional and nondeductible IRAs that are not converted to R S A s could
not accept any new contributions after 2004.
N e w traditional IRAs could be created to accommodate rollovers from employer
plans, but they could not accept any new individual contributions.
Individuals wishing to roll an amount directly from an employer plan to an R S A
could do so by taking the rollover amount (excluding basis) into gross income (i.e.,
"converting" the rollover, similar to a current law Roth conversion).
: Several of the withdrawal exceptions would be eliminated, increasing the
likelihood that money set aside for retirement is there for retirement.
LIFETIME SAVINGS ACCOUNTS (LSA)
l $5,000 annual contribution limit (indexed for inflation).
"1 Available to all individuals - no income limits, no age limits.
i Contributions would be nondeductible (like Roth IRAs).
"i Earnings would accumulate tax-free and all distributions would be excluded from
gross income.
N o minimum required distribution rules would apply at any age throughout
owner's life.
i Contribution limit of $5,000 applies to the individual owner of the account, not the
contributor.
o Contributors could make annual contributions to the accounts of other individuals.
o Annual aggregate contributions to an individual's accounts could not exceed
$5,000.
Consolidation to LSAs:
Individuals could convert balances from Coverdell Education Savings Accounts
(ESAs) or Qualified Tuition Plans (QTPs) to LSAs.
: Individuals could continue to contribute to E S A s and Q T P s as under current law.
: Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs)
would be retained.
EMPLOYER RETIREMENT SAVINGS ACCOUNTS (ERSA)
O n e Retirement Plan: Employer Retirement Savings Accounts would combine the
array of existing retirement plans into one simple uniform regime:
o401(k)
o SIMPLE 401 (k)
o 403 (b)
o Governmental 457
o SARSEPs
o SIMPLE IRAs
Access: Available to all employers
Simplified Administrative Rules: The new plan would be much simpler for
employers to administer, so employers w h o are not already sponsoring a plan,
especially smaller employers without the resources for administering plans, will be
more likely to offer a retirement savings program for their employees.
A single nondiscrimination test would apply to ERSA contributions, as compared
to the double test that currently applies to 401 (k) plan contributions.
Employers could avoid nondiscrimination testing altogether if they satisfy a
simplified safe harbor.
i ERSAs sponsored by state and local governments and section 501(c)(3)
organizations would not be subject to nondiscrimination testing under certain
circumstances.
Page 2 of 4
JS-11 J i. i ne ^resident's Savings Proposals: Tax-Free Savings and Retirement Security
Page 5 ot 4
i A simple custodial ERSA would be allowed for employers with 10 or fewer
employees to help reduce costs to small businesses and encourage them to offer
plans. The custodial E R S A would be similar to a current-law IRA. Employers would
be exempt from annual reporting requirements and provided relief from most ERISA
fiduciary rules similar to the relief provided to sponsors of SIMPLE IRAs.
The rules applicable to defined benefit plans would not be affected by this proposal.
INDIVIDUAL DEVELOPMENT ACCOUNTS (IDAs)
Individual Development Accounts would create accounts with dollar-for-dollar
matching contributions targeted to lower income individuals.
H Dollar-for-dollar matching contributions provided to individuals up to $500.
Single filers with incomes below $20,000, joint filers with incomes below $40,000
and head of household filers with incomes below $30,000 would be eligible.
~: Matching contributions supported by 100 percent tax credit for sponsoring
financial institutions that provide matches to individuals.
i A $50 per account credit for financial institutions to cover ongoing costs of
maintaining and administering each account and providing financial education to
participants.
i Qualified withdrawals of contributions and matching funds for higher education,
first-time home purchase, and small business capitalization.
The President's Proposal to Expand Tax-Free Savings
Important for the Future
Continues to Build an Ownership Society
• The United States is increasingly an ownership society. More than half of all
households - 84 million individual investors - own stock directly or through stock
mutual funds.
• The savings package further promotes an ownership society by:
o improving access by removing barriers to tax preferred saving.
o making savings simpler by reducing complexity and unifying the rules.
o improving fairness by providing the benefits of tax preferred savings to those least
able to save for the very long-term.
• Through the savings package, taxpayers get the benefit of paying the tax man
upfront, rather than when withdrawing funds for retirement or other needs.
Taxpayers' receive the full return on investments giving them greater certainty
about the amounts available for their retirement and other needs.
• A majority of taxpayers will be able to move all of their savings in a few short years
into tax free savings accounts. This will allow taxpayers to avoid the complexities of
reporting financial income on their tax returns and filing a schedule B and Schedule
D.
• Increased education and financial literacy will help raise awareness of the
importance of savings.
o Financial services firms will be more focused on counseling clients on maximizing
financial security rather than the intricacies of the tax rules - adding value instead
of paper work.
Enhances Low- and Moderate-Income Savings Opportunities
• The savings package simplifies individuals' savings decisions.
o Complex and confusing eligibility rules are replaced with one rule for both LSAs
and RSAs: everyone can contribute.
o The special rules that dictate what qualifies as a penalty free withdrawal are
replaced with one rule under LSAs: all distributions are tax-free.
• Tax preferred savings would become universally available.
o Individuals' saving will correspond more directly to their needs rather than to the
JS-11 D l: I ne Fresident's Savings Proposals: Tax-Free Savings and Retirement Security
special uses prescribed by the tax laws.
o The availability of tax preferred savings opportunities to the low income under
current law is largely illusory. The flexibility of LSAs allows access to tax preferred
savings regardless of an individual's savings horizon and use.
o The current alphabet soup of accounts are available to low and moderate income
taxpayers, but their shear complexity, for all practical purposes, closes them to low
and moderate income taxpayers w h o don't have access to the sophisticated tax
and financial advice needed to take advantage of them.
o Low-income individuals, in particular, m a y not have the resources to save for long
into the future.
o Low-income individuals are the most likely to need their savings in an emergency,
and the most likely to pay penalties for early withdrawal under current law.
• Uniform and simple rules will encourage financial services firms to market tax
preferred savings more aggressively and to spend their resources on financial
education and literacy.
• Dollar-for-dollar matching contributions up to $500 would be made available to
lower income individuals through Individual Development Accounts (IDAs). The
matching contributions would be supported by a tax credit to financial institutions.
Promotes Retirement Savings
• The ERSA proposal simplifies and unifies employer plan rules in a number of
important ways. E R S A s will be much easier for employers to adopt and administer
and will help reduce the costs to employers.
• ERSAs consolidate all types of employer plans into a single simplified plan.
• ERSA custodial accounts, available to employers with 10 or fewer employees,
would be exempt from annual reporting requirements and provided relief from
fiduciary rules.
• Lower administrative costs under ERSAs will translate into higher investment
returns to employer plan participants, which will help encourage participation.
More uniform employer plan rules may lead to greater competition between
financial services firms, which m a y further help drive down costs and increase
returns to investors.
Encourages Savings and Promotes Economic Growth
• The package promotes savings in several ways.
o These proposals remove the current law penalty on saving. The after-tax return
to savings is increased through greater access to tax preferred savings. Higher
after-tax returns encourage savings.
o The simpler and more uniform rules for individual savings vehicles will encourage
more savings.
o Lower costs for setting up and maintaining employer plans will increase returns
and encourage additional savings.
o More uniform rules for employer plans will foster more competition for investor
funds a m o n g financial services firms. More competition lowers costs and translates
into higher returns to investors, further encouraging savings.
• Greater savings translates into more investment, greater capital accumulation,
and higher living standards in the future.
• Greater savings means a more secure future for Americans of all income levels.
Page 4 of 4
JS-1132: Preserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P... Page 1 of 8
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 2, 2004
JS-1132
Preserving Cash Balance Plans for Workers:
Treasury Proposes Legislation to Protect Defined Benefit Plans and Ensure
Fair
Treatment of Older Workers
in Cash Balance Conversions
Today, the Treasury Department proposed legislation to ensure the fair treatment of
older workers in cash balance conversions.
"This proposal will make sure that every company converting to a cash balance
plan deals fairly with its older workers," said Secretary John Snow. "Cash balance
plans play an important role in achieving retirement security for millions of American
workers and their families. But w e must make sure that companies changing from
a traditional pension to a cash balance pension include a fair transition for older
workers. Cash balance plans can be a better option, particularly for today's
younger, more mobile workforce."
A cash balance plan is a pension plan that combines the benefit formula of a
defined contribution plan with the worker investment security of a defined benefit
plan. Cash balance plans are better suited to a mobile workforce because
employees accrue more substantial benefits earlier in their careers and can take
their cash balance benefits with them as they move from job to job. Under a cash
balance plan, a hypothetical account is set up for each worker and is credited with
hypothetical pay and interest credits. Most cash balance plans have been set up by
"converting" traditional defined benefit plans.
Treasury's proposal would ensure fairness for older workers in cash balance
conversions. The proposal would impose a 5-year "hold harmless" period after
each conversion. During this period, the benefits earned by any worker under the
cash balance plan would have to be at least as valuable as the benefits the worker
would have earned under the traditional plan if the conversion had not occurred.
The proposal would ban any "wear-away" of retirement benefits, so that all workers
would earn benefits immediately after the conversion.
These protections would be enforced through a 100 percent excise tax. The tax
would not apply if a company gives workers a choice between the traditional plan
and the cash balance plan or if the cash balance conversion grandfathers current
workers.
The proposal would also clarify that cash balance plans do not violate the agediscrimination rules that apply to pension plans as long as they treat older workers
at least as well as younger workers. This would remove uncertainty created by
inconsistent federal court decisions and would ensure the future of cash balance
plans.
The proposal would also eliminate the "whipsaw" effect, which acts as a cap on the
interest credits that cash balance plans can provide to workers. This would permit
companies to give higher interest credits, allowing larger retirement accumulations
for workers.
All changes would be effective prospectively from enactment of the proposal.
Attachments:
Cash Balance Plan F A Q
JS-1151: Preserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P... Page 2 of 8
Cash Balance Plan Proposal
Frequently Asked Questions on Treasury's Proposal for C a s h Balance Plans
W h a t are the goals of the proposed legislation for cash balance plans?
The proposal would accomplish three major objectives. Specifically, the proposal
would:
• Protect the defined benefit system by clarifying the status of cash balance plans.
• Ensure fairness for older workers in cash balance conversions.
• R e m o v e the cap on interest credits in cash balance plans.
Together, these objectives will help strengthen the defined benefit system while
ensuring that companies treat older and longer-service workers fairly w h e n they
convert to cash balance plans.
What is a cash balance plan?
A cash balance plan is a type of tax-qualified retirement plan. It is often described
as a "hybrid" plan because it combines features of a defined benefit plan and a
defined contribution plan.
A cash balance plan provides for annual "pay credits" to an employee's
"hypothetical account" and "interest credits" on the balance in the hypothetical
account. For example, a cash balance plan might provide for pay credits each year
equal to 5 percent of compensation, with interest at the rate on long-term Treasury
bonds.
The plan is a defined benefit plan, so the employer bears all investment risk and
benefits are insured through the Pension Benefit Guaranty Corporation. Otherwise,
the plan functions m u c h like a defined contribution plan from the perspective of an
employee.
The Pension Benefit Guaranty Corporation estimates that there are more than 7
million American workers covered by cash balance and other hybrid plans.
How does a cash balance plan differ from a traditional defined benefit plan?
A cash balance plan states the employee's benefit as an account balance, much
like a 401 (k) plan. A traditional defined benefit plan typically states the employee's
benefit as an annuity payable at normal retirement age. The annuity is often
expressed as a combination of a percentage of final average pay and years of
service (for example, an annual annuity equal to 1 percent of final average pay
times years of service).
A traditional plan delivers most of its value to an employee in the very last years
before retirement. By contrast, a cash balance plan provides for more level
accruals throughout an employee's working career.
Recent studies have shown that cash balance plans help employers compete in
tight labor markets because of the more level accruals of cash balance plans. This
is especially true where employers are trying to attract and retain more "mobile"
workers. Studies have also suggested that cash balance plans m a y provide higher
benefits for a majority of the next generation of workers than would traditional
defined benefit plans.
So cash balance plans have an important role to play in the retirement security of
millions of American workers and their families.
What is a cash balance conversion?
When an employer amends a traditional defined benefit plan to become a cash
JS-115i: Freserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P... Page 3 of 8
balance plan, that process is known as a conversion. Most cash balance plans
have been set up in this way.
Why is this legislative proposal needed?
Cash balance conversions can result in unfair treatment of older and longer-service
workers because of the abrupt change from the traditional formula to a cash
balance formula.
Many employers have voluntarily provided transition relief for older and longerservice workers. But ensuring the fair treatment of older and longer-service
workers in conversions requires strengthening current law.
Current law does not protect the future expectations of older and longer-service
employees affected by cash balance conversions, and it does not give Treasury the
authority to impose fairness requirements for conversions. This very important
issue has to be resolved through a change in the law.
What does the legislative proposal say about cash balance conversions?
The proposal requires that an employer converting to a cash balance plan provide
for fair treatment of its older and longer-service workers. The proposal would do
this in two ways.
First, the proposal would impose a 5-year "hold harmless" period after each
conversion. During this period, the benefits earned by any employee under the
cash balance plan would have to be at least as valuable as the benefits the
employee would have earned under the traditional plan if there had been no
conversion.
Second, the proposal would ban any wear-away of benefits at any time after the
conversion. A wear-away occurs when an employee's benefits under the cash
balance plan have to "catch up" with the benefits already accrued under the
traditional plan. This means that some employees do not earn n e w benefits for a
period after the conversion. By banning wear-away, the proposal would m a k e sure
that all employees immediately earn new benefits after the conversion.
Why is the "hold harmless" period 5 years?
The hold harmless period has to protect reasonable expectations of older and
longer-service employees. At the s a m e time, it cannot be so burdensome that the
company decides to freeze the plan entirely, which harms all employees. A 5-year
period strikes this balance.
Along with the complete ban on benefit wear-away, the 5-year period will ensure a
fair transition for older and longer-service employees to the cash balance formula.
In particular, employees w h o are within 5 years of normal or early retirement will
have full protection under this proposal.
How would the new conversion rules be enforced?
The new conversion rules would be backed up by a 100 percent excise tax on the
employer. The tax would apply to any shortfall between the benefits required under
the n e w rules and the benefits actually provided by the cash balance plan. W e
believe that, faced with such an excise tax, employers will provide the benefits
required under the proposal.
Some employers may convert to cash balance plans because they are experiencing
adverse business conditions. For this reason, the amount of the excise tax would
not exceed the greater of the plan's surplus assets at the time of the conversion or
the plan sponsor's taxable income.
Would the excise tax apply if the employer provided some other kind of
protection for its older and longer-service workers?
JS-11 JZ: freserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P... Page 4 of 8
The excise tax would not apply if employees were given a choice between the
traditional plan and the cash balance plan or if the conversion grandfathers current
employees under the traditional plan. This would preserve flexibility of plan
sponsors to implement other protections for older and longer-service employees.
Does this mean that Treasury thinks cash balance conversions violate the
age-discrimination rules?
The legislative proposal released today goes beyond current law to ensure that
every cash balance conversion provides for fair treatment of older and longerservice employees. In December 2002, Treasury and the IRS proposed regulations
that interpret the current age-discrimination rules in the context of cash balance
plans and cash balance conversions. Those regulations say that some, but not all,
cash balance conversions could be age-discriminatory.
These new rules would apply even if the conversion satisfies the current agediscrimination rules.
Don't employers convert to cash balance plans mainly to save money on their
pension obligations?
The evidence on the motivation for cash balance conversions is mixed. One recent
study states that a majority of large companies had higher costs after a conversion
while another suggests that costs were slightly reduced on average. Regardless,
cost savings is only one of m a n y possible motives for conversion. Even where an
employer converts to save money, the conversion is preferable to simply freezing or
terminating the plan, as long as older and longer-service workers are treated fairly.
What does the legislative proposal say about cash balance plans?
The proposal would clarify the legal status of cash balance plans under current
law.
The federal courts have split on the question whether cash balance plans satisfy
the age-discrimination rules. This has created uncertainty about the basic legality
of these plans. Removing that uncertainty is critical to preserving the vitality of the
defined benefit system, which provides retirement income security for millions of
American workers and their families.
The proposal would clarify that a cash balance plan satisfies the age-discrimination
rules if the plan provides pay credits for older and longer-service employees that
are not less than the pay credits for younger employees and if the interest credits
are not discriminatory.
The proposal would also clarify that certain transition strategies used in conversions
do not violate the age-discrimination or other applicable rules. This would allow
companies that convert to preserve the value of early retirement subsidies, for the
benefit of employees, without violating the law.
The proposal would provide similar rules for other types of hybrid plans, such as
pension equity plans.
Hasn't a federal court already said that cash balance plans are illegal?
One federal district court in Illinois said that one company's cash balance plan
violates the age-discrimination rules (Cooper v. IBM Personal Pension Plan).
However, other federal district courts have reached the opposite conclusion on
other cash balance plans (Eaton v. O n a n Corp.; Campbell v. BankBoston). These
inconsistent decisions have left the law in a state of uncertainty.
So does this mean that Treasury thinks cash balance plans are good plans?
Treasury believes that cash balance plans have an important role to play in
providing retirement security for millions of American workers and their families.
However, Treasury also believes that the transition from a traditional defined benefit
olan to a cash balance plan must provide for the fair treatment of older and longer-
JS-1 i32: ^reserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P...
service workers. That is why the proposal calls for new transition protections in
cash balance conversions.
What does the legislative proposal say about "whipsaw"?
The proposal would eliminate whipsaw on a prospective basis.
This means that a cash balance plan could distribute an employee's account
balance as a single s u m as long as the plan does not credit interest at an abovemarket level. This would permit plan sponsors to give higher interest credits to
employees, allowing larger retirement accumulations.
What exactly is whipsaw?
Whipsaw is an interpretation of current law, set out in IRS Notice 96-8, that says
that cash balance plans must increase single s u m distributions above employee
account balances for future interest credits. This interpretation w a s never set out in
formal IRS regulations. Nevertheless, three federal courts of appeals have followed
the Notice 96-8 interpretation.
Whipsaw applies if the plan provides an interest crediting rate above the rate on 30year Treasury bonds (or an equivalent rate).
So does that mean that the proposal will reduce employee distributions?
Absolutely not. The proposal would be effective on a prospective basis, so no
employee would get a dollar less than what they would get without this n e w
legislation.
In the future, the distributions of many employees should increase because the
proposal will allow their employers to provide more generous interest credits,
resulting in higher account balances and higher distributions.
What is the effective date of the proposal?
The entire proposal would be effective for periods after enactment. That means
that the n e w rules will not apply before the date Congress enacts this proposal.
ENSURE FAIR TREATMENT OF OLDER WORKERS
IN CASH BALANCE CONVERSIONS
AND PROTECT DEFINED BENEFIT PLANS
Current Law
Qualified retirement plans consist of defined benefit plans, which allocate
investment risk to the plan sponsor, and defined contribution plans, which allocate
investment risk to plan participants. In recent years, m a n y plan sponsors have
adopted cash balance and other "hybrid" plans that combine features of defined
benefit and defined contribution plans. A cash balance plan is a defined benefit
plan that provides for annual "pay credits" to a participant's "hypothetical account"
and "interest credits" on the balance in the hypothetical account. A s with traditional
defined benefit plans, the sponsor of a cash balance plan bears investment risk (as
well as s o m e mortality risk), and benefits are guaranteed by the Pension Benefit
Guaranty Corporation. Otherwise, the cash balance plan functions like a defined
contribution plan from the perspective of a participant.
Questions have been raised regarding whether and how cash balance plans satisfy
the rules relating to age discrimination and the calculation of lump s u m distributions.
' Age Discrimination. Code section 411 (b)(1 )(H) provides that a defined benefit plan
fails to satisfy the benefit-accrual rules if, under the plan, a participant's benefit
accrual is ceased, or the rate of a participant's benefit accrual is reduced, because
of the attainment of any age. Section 204(b)(1 )(H) of the Employee Retirement
Income Security Act of 1974 (ERISA) and section 4(i)(1 )(A) of the A g e
Page 5 of 8
JS-1 J- JZ: rreservmg Cash Balance Plans for Workers: Treasury Proposes Legislation to P... Page 6 of 8
Discrimination in Employment Act (ADEA) set forth similar rules.
Age-discrimination questions have been raised regarding two aspects of cash
balance plans. First, s o m e have argued that pay credits for younger participants
provide higher benefits than the s a m e pay credits for older participants because the
pay credits for younger participants accrue interest credits over longer periods.
Although one federal district court has agreed with this analysis, others have
rejected it. Compare Cooper v. IBM Personal Pension Plan, 274 F. Supp. 2d 1010
(S.D. III. 2003) (cash balance plan found age-discriminatory) with Campbell v.
BankBoston, N.A., 206 F. Supp. 2d 70 (D. Mass. 2002) (cash balance plan found
not age-discriminatory), aff'd, 327 F.3d 1 (1st Cir. 2003), and Eaton v. O n a n Corp.,
117 F. Supp. 2d 812 (S.D. Ind. 2000) (same).
Second, some have argued that "conversions" of traditional defined benefit plans to
cash balance plans disadvantage older participants. A conversion occurs w h e n a
plan sponsor a m e n d s a traditional plan to m a k e it a cash balance plan. A
conversion can result in lower future accrual rates for s o m e or all participants. If
this occurs, ERISA section 204(h) and Code section 4980F require that participants
receive advance notice. The conversion can also result in "wear-away" - a period
following the conversion during which a participant's prior accrued benefits under
the traditional plan exceed the benefits payable under the cash balance plan. Thus,
during wear-away, the benefits under the cash balance formula of s o m e or all
participants must "catch up" with benefits accrued under the traditional plan. Wearaway m a y occur for the normal retirement benefit, the early retirement benefit, or
both. However, under C o d e section 411 (d)(6) and ERISA section 204(g), the
conversion m a y not reduce the accrued normal or early retirement benefit of any
participant.
Some have argued that the adverse effects of cash balance conversions fall more
heavily on older participants than on younger participants because traditional plans
usually provide more valuable accruals to older and longer-service participants.
M a n y plan sponsors have adopted strategies to mitigate these effects, including
protection of participant expectations through "choice" and "grandfathering" as well
as avoidance of wear-away. However, these strategies have been voluntary, as
current law generally gives the plan sponsor broad authority to a m e n d a plan for
any reason at any time. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 443
(1999).
In December of 2002, Treasury and the IRS proposed regulations to address these
and other age-discrimination issues. 67 Fed. Reg. 76123 (Dec. 11, 2002). The
proposed regulations provide that a cash balance formula is not discriminatory as
long as pay credits for older participants are equal to or greater than pay credits for
younger participants. The proposed regulations also provide that cash balance
conversions are not discriminatory as long as the conversions satisfy one of three
permissible methods specified in the regulations. The proposed regulations do not
prohibit reductions in future accrual rates or benefit wear-away because, under the
conditions specified in the proposed regulations, those effects are not inherently
age-discriminatory.
Calculation of Lump Sum Distributions. Three federal appellate courts have
addressed the calculation of lump s u m distributions under cash balance plans.
Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir.
2003); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert, dismissed, 531
U.S. 1061 (2001); Lyons v. Georgia-Pacific Salaried Employees Retirement Plan,
221 F.3d 1235 (11th Cir. 2000), cert, denied, 532 U.S. 967 (2001). All three courts
held that a participant's hypothetical account balance must be projected to normal
retirement age using the plan's interest crediting rate, converted to an annuity, and
then discounted to a lump s u m using the section 417(e) interest rate. If the plan's
interest crediting rate is the section 417(e) rate, the present value of the normal
retirement age annuity will be the s a m e as the hypothetical account balance.
However, if the plan's interest crediting rate is higher than the section 417(e) rate,
the present value of the normal retirement age annuity - and the amount of any
lump s u m distribution - will be greater than the hypothetical account balance. This
result is sometimes referred to as "whipsaw."
These federal court decisions have followed an analysis set out in IRS Notice 96-8.
M a n y plan sponsors have responded to whipsaw by limiting the interest crediting
rate to the section 417(e) rate (or a deemed equivalent). This response effectively
m a k e s the section 417(e) rate a ceiling on plan interest credits.
JS-ii3z: ^reserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P...
Reasons for Change
Although cash balance plans and cash balance conversions are not inherently agediscriminatory, current law does not provide adequate protection for older workers
in every conversion. For example, the statutory age-discrimination rules do not
prevent a plan sponsor from changing future benefit accruals. Also, current law
does not prevent a plan sponsor from imposing wear-away of normal or early
retirement benefits. (Current law actually restricts certain transition practices, such
as preserving the value of early retirement subsidies through additions to participant
account balances.) M a n y plan sponsors have voluntarily tried to mitigate any
adverse effects that cash balance conversions m a y have on older and longerservice participants. However, ensuring the fair treatment of older and longerservice participants in conversions requires strengthening current law to guarantee
reasonable transition protections and to prohibit benefit wear-away.
Inconsistent federal court decisions make it necessary to clarify that cash balance
plans are not inherently discriminatory as long as older participants are treated at
least as well as younger participants. Removing uncertainty about the basic legality
of cash balance plans is critical to preserving the vitality of the defined benefit
system, which provides retirement income security for millions of American workers
and their families.
As applied by the courts, the whipsaw effect under Notice 96-8 has harmed
participants by leading plan sponsors to limit interest credits to the section 417(e)
rate. This results in lower retirement accumulations for participants. The whipsaw
effect should be eliminated so that plan sponsors can give participants higher
interest credits.
Proposal
The proposal would accomplish three major objectives:
1. Ensure fairness for older workers in cash balance conversions.
2. Protect the defined benefit system by clarifying the status of cash balance plans.
3. Remove the effective ceiling on interest credits in cash balance plans.
Ensure fairness for older workers in cash balance conversions. The proposal would
provide n e w protections for participants in cash balance conversions that would
ensure fair transitions from traditional plans to cash balance plans. For each of the
first five years after a conversion, the benefits earned by any current participant
under the cash balance plan would have to be at least as valuable as the benefits
the participant would have earned under the traditional plan if the conversion had
not occurred. Additionally, there could be no wear-away of normal or early
retirement benefits for any current participant at any time.
To prohibit violations of the new transition protections, there would be a 100 percent
excise tax, payable by the plan sponsor, on any difference between the benefits
required under the proposal and the benefits actually provided by the cash balance
plan. In recognition of the fact that s o m e plan sponsors m a y be experiencing
adverse business conditions, the amount of the excise tax could not exceed the
greater of the plan's surplus assets at the time of the conversion or the plan
sponsor's taxable income. Failure to implement the n e w transition protections
would not result in disqualification of the plan.
The excise tax would not apply if participants were given a choice between the
traditional formula and the cash balance formula or if the cash balance conversion
grandfathered current participants under the traditional formula. This would
preserve flexibility of plan sponsors to implement other provisions that protect older
and longer-service participants.
Protect the defined benefit system by clarifying the status of cash balance plans.
The proposal would clarify that a cash balance plan satisfies the age-discrimination
rules if the plan provides pay credits for older participants that are not less than the
pay credits for younger participants, in the s a m e manner as any defined
contribution plan. The proposal would also clarify that certain transition strategies
Page 7 of 8
JS-1152: Preserving Cash Balance Plans for Workers: Treasury Proposes Legislation to P...
used in conversions (such as preserving the value of early retirement subsidies) do
not violate the age-discrimination or other qualification rules. The proposal would
provide similar rules for other types of hybrid plans and for conversions from
traditional plans to other types of hybrid plans.
Remove the effective ceiling on interest credits in cash balance plans. The
proposal would eliminate whipsaw, providing that a cash balance plan m a y
distribute a participant's account balance as a lump s u m distribution as long as the
plan does not credit interest in excess of a market rate of return. The Secretary
would be authorized to provide safe harbors for what constitutes a market rate of
return and to prescribe appropriate conditions regarding the calculation of plan
distributions. This would permit plan sponsors to give higher interest credits to
participants, resulting in larger retirement accumulations.
Conforming amendments and effective date. There would be conforming
amendments under ERISA and the A D E A for statutory changes to the existing agediscrimination and distribution rules (but not for the n e w excise tax).
All changes under the proposal would be effective prospectively. The legislative
history would state that there would be no inference as to the status of cash
balance plans or cash balance conversions under current law.
Page 8 of 8
JS-1155: treasury Announces Market Financing Estimates
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 2, 2004
JS-1133
Treasury Announces Market Financing Estimates
The Treasury Department announced today that it expects net borrowing of
marketable debt to total $177 billion in the January - March 2004 quarter. The
projected cash balance on March 31 is $20 billion. In the last quarterly
announcement on November 3, 2003, Treasury announced that it expected net
borrowing to total $160 billion with an end-of-quarter cash balance of $20 billion.
This increase in borrowing is due to lower receipts, primarily from an increase in tax
refunds, and higher outlays.
Treasury also announced that it expects net borrowing of marketable debt to total
$75 billion in the April - June 2004 quarter. The projected cash balance on June 30
is $45 billion.
During the October - December 2003 quarter, Treasury's net marketable borrowing
totaled $113 billion and the cash balance on December 31 was $33 billion. O n
November 3, Treasury announced that it expected net marketable borrowing to total
$117 billion with an ending quarter cash balance of $35 billion. The decrease in
borrowing is primarily attributable to lower outlays.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, February 4.
Related Documents:
• Supplemental Release: Treasury's Market Financing Estimates
SUPPLEMENTAL RELEASE:
TREASURY'S M A R K E T FINANCING ESTIMATES
Today, the Treasury Department announced net borrowing of marketable debt for
the January - March 2004 and April - June 2004 quarters.
Quarter
Jan - M a r 2004
A p r - J u n 2004
Estimated
Borrowing
($ billion)
$177
End-of-Quarter
Cash Balance
($ billion)
$20
$45
$75
Since 1997, the average forecast error in net market borrowing for the current
quarter is $9 billion, of which $3 billion is attributable to differences in the end-ofquarter cash balance. Similarly, the average forecast error for the following
quarter is $21 billion, of which $3 billion is attributable to differences in the endof-quarter cash balance.
The following tables display and reconcile the variation between forecasted and
actual net marketable borrowing in the October - December 2003 quarter.
Quarter
Estimated
Borrowing
($ billions)
Oct-Dec 2003
$117
Actual
Borrowing
($ billions)
Estimated
End-ofQuarter Cash
Balance
($ billions)
End-ofQuarter Cash
Balance
($ billions)
$113
$35
$33
Categories
Receipts
Outlays
Non-Marketable
Activity
Change
in
Cash
Balance
Decrease in Borrowing
Actual
? from Nov Estimate
1/
$0
+$7
-$5
+$2
+$4
1/ " + " and "-" represents the impact on financing needs. " + " represents
a decrease in financing, while "-" represents an increase.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A . M . on Wednesday, February 5.
JS-11:^: acting Asst. Secretary Warshawsky Statement
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 2, 2004
JS-1134
Acting Assistant Secretary of the Office of Economic Policy
Mark J. Warshawsky
Statement for the Treasury Borrowing Advisory Committee
of the Bond Market Association
The economy continued to experience strong growth in the three months since the
Committee's last meeting. While the pace of activity tapered from the
unsustainably rapid rate of the third quarter, growth in real G D P in the fourth quarter
was still very favorable at a 4.0 percent annual rate. That is well above the
potential rate of growth of the economy, currently estimated by the Administration at
3.1 percent.
Real consumer spending continued to rise at a solid 2.6 percent annual rate in the
fourth quarter even after growing at a 6.9 percent pace in the third quarter, the
fastest pace in 17 years. Confidence is rising, with both the University of Michigan
and Conference Board measures moving up in the fourth quarter to their highest
levels in more than a year and surging further in January. Motor vehicle sales
strengthened through the quarter and in December were at an annual rate of 17.9
million units, the second-highest monthly selling pace of the year. Gains in
consumer spending are expected to be maintained this year as well, as jobs and
incomes rise. In addition, last year's tax cuts are expected to continue to help lift
the economy in the first half through higher refunds.
Households also continued to spend money on new homes, and the housing sector
added more than 1 percentage point to real G D P growth in the third quarter and
almost that much in the fourth. The number of housing starts surpassed an annual
rate of 2 million in the final quarter of the year and 2003 marked the best year for
homebuilding since 1978. The high level of housing starts at the end of last year
implies another large contribution to growth from residential construction in the first
quarter.
Business optimism has improved as well and that has translated into a strong
upward track for investment. Corporate profits rose strongly in the third quarter and
earnings reports for the fourth quarter have been very positive so far.
Roughly two-thirds of S&P 500 companies reported fourth-quarter results in
January and almost 70 percent of those beat analysts' estimates. Equity prices
have risen, with the S & P 500 increasing 26.4 percent last year after three straight
years of decline. In addition, corporate interest rates have come down in tandem
with the benchmark 10-year Treasury and yield spreads have narrowed.
Profit growth, low interest rates, and increased certainty that a sustained economic
recovery is firmly underway, along with the investment-enhancing provisions of last
year's stimulus legislation, have led to continued gains in business investment in
equipment and software. That spending rose at a 10 percent annual rate in the
fourth quarter, bringing growth over the four quarters of 2003 to almost 9 percent
compared to an increase of just 1.6 percent over 2002. Additional gains are likely
this year, with the consensus of private forecasters expecting about a 10 percent
rise in business fixed investment for 2004 (as measured year/year).
Strong demand on the part of consumers and businesses has spurred
manufacturers to boost production at a 6.6 percent annual rate in the fourth quarter,
the largest increase in 3-1/2 years. S o m e of that production went into inventory
rebuilding, as businesses began to restore depleted stocks in the fourth quarter
after reducing them in the prior two quarters. Exports have started to turn around
JS-i lit: /\cung Asst. Secretary Warshawsky Statement
and the economies of our major trading partners have strengthened a bit. After
three quarterly declines, U.S. exports in real terms increased in the last two
quarters of 2003.
Growth in profits and the consequent pickup in investment has been helped along
by low unit labor costs, which have been held in check by exceptional productivity
growth over the past few years. Since the fourth quarter of 2000 and through the
third quarter of last year, productivity in the nonfarm business sector has surged at
a 4.4 percent annual rate, the strongest performance of any comparable period in
40 years. High productivity growth contributed to low inflation, with consumer
prices rising only 1.9 percent over the 12 months of 2003 and the core rate
(excluding food and energy) up just 1.1 percent, the smallest increase since 1966.
The low inflation environment has allowed the Federal Reserve to maintain an
accommodative monetary policy stance, holding the target federal funds rate at
1.00 percent since the end of June.
Another favorable feature of current economic developments is an improving labor
market, although job growth is not as strong as w e would like. Labor markets
began to turn around last summer, and the unemployment rate c a m e down from 6.3
percent last June to 5.7 percent by the end of the year. Recent figures on initial
claims for unemployment insurance benefits have been declining and are near a 3year low, and surveys of business hiring have turned positive, such as those from
the National Federation of Independent Business, the National Association For
Business Economics, and the ISM for both manufacturing and non-manufacturing.
In the last five months of 2003 the economy created 278,000 nonfarm payroll jobs
compared to a loss of 6,000 in the s a m e period a year earlier. While the latest job
gains were modest, employment is on an upward path.
The Administration projects further economic expansion and job growth this year
and in the years ahead. Real G D P is forecast to grow 4.4 percent on an annual
basis in 2004, building on the forward m o m e n t u m of the second half of 2003. The
unemployment rate is forecast to recede from the 5.9 percent average in the fourth
quarter of 2003 to 5.5 percent in the fourth quarter of this year. Over the following
five years of the forecast horizon, real G D P growth tapers to its potential rate of 3.1
percent and the unemployment rate levels off at 5.1 percent, in line with the
consensus of private forecasters.
Page 2 of2
JS-ii-33: .Proposed treasury Budget for F Y 2005
Page 1 of 2
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 2, 2004
JS-1135
Proposed Treasury Budget for FY 2005
The Department of the Treasury's FY 2005 budget reflects the President's
commitment to strengthening the economy, fighting the financial war on terrorism
and ensuring compliance with the tax laws.
The overall proposed budget for Treasury is $11.680 billion, a 4.5 percent increase
over the current FY 2004 level appropriated, providing for the Department to
continue in its vital role as the federal government's economic policymaker,
financial manager and revenue collector.
Among the Department's key priorities are making the tax cuts permanent,
improving tax compliance while ensuring that w e maintain a fair tax system, using
new technology to modernize the tax system, fighting the financial war on terror and
safeguarding the government's finances, as well as the nation's financial systems
and currency.
Making the Tax Cuts Permanent. The President's three tax relief measures have
resulted in significant reduction in tax burdens for millions of American families and
businesses. By making this relief permanent w e will reduce uncertainty and
continue to stimulate economic growth and job creation, benefiting millions of
Americans.
Ensuring the Tax System is Fair - Maintaining World Class Service and Compliance
with Tax Laws. A series of legislative proposals included in the budget are designed
to close loopholes, halt several abusive tax avoidance transactions, and simplify the
tax code. The budget reflects the Administration's continuing commitment to
ensuring that all taxpayers pay their fair share of taxes, while reducing the needless
cost borne by those attempting to comply. In addition, the budget provides for
increases to the IRS' budget to enhance compliance.
Modernizing the Nation's Tax Systems through Technology Investments. The
budget provides for the IRS to continue its efforts to replace current business
systems and technology, which will allow for greater management focus and
capacity on critical projects and initiatives as well as improvements to management
and business processes.
Fighting the Financial War on Terror. As a vital part of the government's war on
terror, Treasury offices work to disrupt and dismantle the financial infrastructure of
terrorists, drug traffickers and other criminals and execute the nation's financial
sanctions policies. The importance of these efforts is reflected in a 12.7 percent
increase for the Financial Crimes Enforcement Network (FinCEN) and a 3.6 percent
increase for Treasury's Office of Foreign Assets Control (OFAC) to strengthen our
hand in the financial war on terror and other efforts against financial crime. The
work of these agencies includes a concerted effort to safeguard financial systems
through the longer term establishment of effective anti-money laundering strategies
and programs.
Safeguarding the Government's Finances and our Nation's Financial Systems. The
budget continues support for critical Treasury objectives such as increasing the
reliability of the U.S. financial system, managing the federal debt effectively and
efficiently, ensuring accurate and on-time payments and collections, effectively
administering the government's financial systems and increasing economic
security.
JS-i i5D: Proposed treasury Budget for F Y 2005
These are merely a few of the important priorities included in the President's budget
for the Treasury Department. In delivering on these and other commitments,
Treasury continues in its dedication to the President's Management Agenda and
the Department's performance budgeting processes to align funding with
performance and results.
Page 2 of2
JS-11 D o: z,erzan Remarks to Council of Federal Home Loan Banks
Page 1' of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 2, 2004
JS-1136
Remarks of Greg Zerzan, Deputy Assistant Secretary for Financial Institutions
Before the Council of Federal Home Loan Banks
Lake Buena Vista, Florida
February 2, 2004
Thank you very much for inviting me to join you today. It is always a great pleasure
to spend time with men and w o m e n dedicated to improving the lives and
communities of our fellow citizens, and I a m grateful to you for asking m e to
participate in this event.
The past year has been one of tremendous progress for our country and our
economy. I don't think I need to remind anyone in this room of the serious
challenges that faced us at the dawn of 2003. The economy was still recovering
from the terrorist attacks of 9/11, the burst of the market bubble and the corporate
scandals of the previous two years. The recession inherited by the Bush
Administration had taken a large toll, depressing profits and forcing Americans out
of work. The President was determined to confront these crises directly.
When it came to dealing with the recession, the President was guided by one clear
and central principal: in order to encourage economic growth, the government's job
is to let people keep and spend more of their own money. In order to accomplish
this, the President promoted successive rounds of tax cuts despite the strong
opposition of some, who seemed reflexively opposed to putting money back in the
hands of those w h o earned it. Under the President's plan• 109 million Americans have received, on average, a tax cut of $1,126.
• 23 million small business owners have received tax cuts averaging $2,209.
• Married tax payers, taxpayers with children, and in fact every American that pays
taxes has seen reductions in their tax obligations.
• Businesses, and especially small businesses, have received new incentives to
invest in plants and equipments and create new jobs.
The results of these tax cuts have been dramatic. We have emerged from the
recession with an economy stronger and more resilient than many would have
thought possible. N e w housing starts, business investment, corporate profits, and
G D P have all increased. In the third quarter of 2003 alone, 328,000 new jobs were
created.
In fact, our research at the Treasury Department informs us that, without these tax
cuts, there would be 2 million fewer jobs in America than exist today under the
President's plan. The economy has not simply endured the shocks of the last
several years; it has overcome them.
We have also responded vigorously to the corporate scandals of the preceding
years. N e w laws, such as the Sarbanes-Oxley Act, as well as vigorous
prosecution of corporate wrongdoing, have ensured investors that their profits and
losses will be based on real-world economic results, and not the misdeeds of a
handful of irresponsible corporate executives. The performance of the stock market
over the last year tells us that investor confidence has returned, and America's
markets will remain the safest and most reliable investment opportunity in the world.
We also cannot forget the ongoing threat of terror that continues to plague not only
our country, but all societies that favor democracy and the rule of law to tyranny and
oppression. Let no one doubt that the world is a safer place thanks to the
overthrow of the Al Qaeda and Taliban government in Afghanistan, and the recent
JS-n^o: z.erzan Kemarics to Council of Federal H o m e Loan Banks
capture of Saddam Hussein. Although the war on terror continues, there is no
doubt that the enemies of America sleep less and less comfortably every night,
knowing that American justice is their fate.
With all the progress we have made in the last year, their remains work to be done.
O n e of the areas of supreme importance to this Administration is continuing to
make America a place where families have the opportunity to purchase their own
homes. In order to promote h o m e ownership, the President has called for
increasing minority h o m e ownership by 5.5 million families by the end of the
decade. Remarkably, in the past 18 months alone 1 million minority families have
already achieved their dream of owning their own homes.
America remains the best place in the world for a young family, just starting out, to
buy a house. As you are well aware, the Treasury has called for the housing G S E s
to register their equity securities with the Securities and Exchange Commission
under the '34 Act. In order to help further the goal of ensuring Americans can
obtain the dream of h o m e ownership, the Administration has called for reforming
the regulation of the housing government sponsored enterprises (GSEs).
The central principle behind reforming regulation of the housing GSEs is simple:
these entities are world-class financial institutions, and they deserve a world-class
regulator- one that is on par with other such financial institution regulators in the
U.S. and around the world. The Administration has called for placing Fannie Mae,
Freddie M a c and the H o m e Loan Banks under a single regulator equipped with the
stature and the tools to ensure these institutions continue to operate in a safe and
sound manner, and able to perform their mission of expanding h o m e ownership
opportunities for all Americans.
Last summer I was asked to head-up a survey of the Federal Home Loan Bank
System, with particular view to the changes that have taken place in the System
since passage of the Gramm-Leach-Bliley Act, and how the Banks' activities have
evolved in recent years. In the course of this project, w e have spoken with
participants in the System, the Finance Board, most of the Banks, and others. W e
also solicited comments from each of the Banks individually, to which most have
responded. A s it relates to changes in the System since the passage of the
Gramm-Leach-Bliley Act, our review has focused primarily on the implementation
and results of the Act's new capital structure for the Banks, and on the Act's
provisions that expanded access to the System for small depository institutions.
Any review of the activities of the Federal Home Loan Banks over the last 15 years
reinforces our belief that the Bank System needs to be included in the new
regulatory structure which has been proposed for the GSEs. The activities of the
FHLBanks have been transformed to some degree from being focused solely on
providing collateralized advances to members, to operating more active investment
portfolios, including investments in mortgage-backed securities and more recently
direct investments in mortgages from the Banks' mortgage purchase programs. A s
the risks undertaken by the housing G S E s have converged, there becomes a
greater need that they be regulated in a similar manner.
By combining the housing GSEs under a single, credible regulator, we can ensure
that the mission of promoting h o m e ownership in our communities is conducted in a
safe and sound manner, with a unitary view towards what's best for the housing
finance system as a whole. The new regulator must be empowered with the ability
to take a comprehensive look not only at each G S E individually, but also monitor
developments in the housing finance market and the G S E s ' operations in relation to
it. The new regulator must have the power to review the new activities of a G S E ,
set prudent minimum and risk-based capital standards, and take prompt corrective
action when necessary. The new regulator must also have the ability to conduct an
orderly wind-down of an institution in the unlikely event that such an institution were
to fail. These changes are not simply commonsense proposals to give the housing
G S E regulator the s a m e powers as our other financial regulatory agencies; they are
proposals which will strengthen the G S E s and allow them to continue their
important mission of increasing h o m e ownership affordability for working
Americans.
Finally, let me conclude with the message that I hope you all take from my remarks
here today. W h e n it was announced that Treasury was conducting a survey of the
Bank System, and that the Administration was pursuing comprehensive regulatory
reform of the G S E regulatory model, I sensed that there w a s genuine concern in the
Page 2 of 3
JS-i i^o: z^erzan Remarks to Council of Federal H o m e Loan Banks
System as to our ultimate goal. Please allow me to be clear: the Administration
fully supports a strong, safe and sound Federal H o m e Loan Bank System. The
changes w e are proposing are intended to make sure that all of the housing G S E s
can continue to serve the mission for which they were created. A credible
regulator, equipped with the tools, power and stature to ensure the G S E s continue
to focus on that mission, is in the best interest of the housing finance system, the
Federal H o m e Loan Banks, and all Americans.
I thank you for inviting me to speak with you today, and I thank you for the work you
do to expand h o m e ownership affordability in our communities. As the reform
process moves forward, your continued input is not only necessary, it is welcome.
Thank you.
Page 3 of 3
137: February 2004 Quarterly Refunding Statement
©
F R O M T H E OFFICE O F PUBLIC AFFAIRS
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February 4, 2004
JS-1137
Acting Undersecretary for Domestic Finance Brian C. Roseboro
February 2004 Quarterly Refunding Statement
We are offering, in this refunding, $56.0 billion of notes to refund approximately
$26.6 billion of privately held notes and bonds maturing on February 15, raising
approximately $29.4 billion. The securities are:
1. A new 3-year note in the amount of $24 billion, maturing February 15, 2007.
2. A new 5-year note in the amount of $16 billion, maturing February 15, 2009
3. A new 10-year note in the amount of $16 billion, maturing February 15,
2014.
These securities will be auctioned on a yield basis at 1:00 PM Eastern time on
Tuesday, February 10, Wednesday, February 11, and Thursday, February 12,
respectively. The balance of our financing requirements will be met through the
monthly issuance of 2 - year and 5-year notes, the 10-year note reopening and 10year TIPS, and bill offerings. The Treasury is likely to issue cash management bills
in early March and April.
Expanding the TIPS Market
Treasury continues to examine ways of promoting inflation-indexed securities and
expanding the market for this asset class. W e are pleased with the growth and
development of this market to date and remain committed to further expansion.
Treasury is considering the possibility of adding one or more TIPS maturity point(s),
including maturities both longer than and shorter than the current 10-year TIPS.
Additional issuance would help meet the natural and growing demand for inflation
protected investments, expanding and diversifying demand for Treasury securities.
Depending on the fiscal environment, expansion of the TIPS market could come
from shifting existing longer-term nominal issuance to TIPS issuance.
A decision will be reached by the May 2004 refunding. We invite market participants
to comment on this matter at the debt.managment@do.treas.gov.
Six-decimal price awards in Treasury auctions
Treasury currently computes price awards in auctions to three decimal places
based on the 3-decimal stop-out yield of bank-discount rates tendered in auctions.
O n short-dated instruments, this practice can produce different yields that generate
the same invoice price. In other words, there is not a 1 -to-1 mapping between 3decimal yields and 3-decimal prices.
Therefore, we will publish awarded price determined to 6-decimal places per
hundred; this will permit price determinacy for all Treasury auctions and will result in
settlement (purchase) prices to the exact penny for a $1,000,000 face amount. W e
will keep market participants informed about the status of this pending change,
which w e expect to implement in the second half of this year.
137: February 2004 Quarterly Refunding Statement
Auction Contingencies
Treasury has discussed the factors and circumstances that might lead to an auction
delay with market participants. These discussions have m a d e it clear that each
potential disruption will be unique and the appropriate responses do not lend
themselves to simple protocols. Nonetheless, two general operating principles
evolved from the contingency discussions; first, preparedness is an area of
continuous improvement requiring regular testing of contingency systems. Second,
market uncertainty in the event of an auction disruption can be reduced through
open and frequent communications with market participants.
As such, Treasury will conduct any announced auction that is disrupted within an
hour of the originally scheduled time and in the event that circumstances and
conditions are such that a one hour postponement cannot be met, Treasury will
communicate information to market participants as it becomes available.
The next quarterly refunding announcement will take place on Wednesday, May 5,
2004.
Please send comments and suggestions on these subjects or others relating to
debt management to debt.management@do.treas.gov.
Related Documents:
• Q1 Tables
• Q 2 Tables
Page 2 of2
US TREASURY FINANCING SCHEDULE FOR 1ST QUARTER 2004
BILLIONS OF DOLLARS
ISSUE
ANNOUNCEMENT
DATE
4-WK
4-WEEK AND
3&6 MONTH BILLS
12/24
12/31
12/29
1/5
1/2
1/8
1/8
1/12
1/20
1/26
1/15
1/22
1/29
1/15
1/22
1/29
2/5
2/12
2/19
2/26
2/2
2/9
2/16
2/23
2/5
2/12
2/19
2/26
3/4
12.00
9.00
8.00
9.00
14.00
19.00
20.00
22.00
24.00
25.00
25.00
22.00
18.00
MATURING
AMOUNT
OFFERED
AMOUNT
3-MO
AUCTION SETTLEMENT
DATE
DATE
A
A
A
A
A
A
16.00
17.00
17.00
18.00
18.00
19.00
19.00
19.00
19.00
19.00
19.00
18.00
18.00
693.00
'
6-MO
A
A
A
A
A
A
15.00
16.00
16.00
16.00
16.00
17.00
18.00
20.00
20.00
20.00
20.00
18.00
18.00
A
A
A
A
A
A
NEW
MONEY
51.00
45.00
44.00
46.00
46.00
43.00
40.00
41.00
46.00
51.00
51.00
51.00
54.00
609.00
-8.00
-3.00
-3.00
-3.00
2.00
12.00
17.00
20.00
17.00
13.00
13.00
7.00
0.00
84.00
3/4
3/1
3/8
3/11
3/18
3/15
3/22
3/11
3/18
3/25
12/30
1/2
15.00
15.00
0.00
3/3
3/4
20.00
20.00
0.00
CASH MANAGEMENT BILLS
13-Day Bill
11-Day Bill
12/29
Matures 1/15
3/2
Matures 3/15
COUPONS
CHANGE
IN SIZE
5-Year Note
10-Year TIPS
1/5
1/5
1/7
1/8
1/15
1/15
16.00
12.00
A
A + 1.00
15.22
0.78
12.00
2-Year Note
1/26
1/29
2/2
26.00
A
24.55
1.45
3-Year Note
5-Year Note
10-Year Note
2/4
2/4
2/4
2/10
2/11
2/12
2/17
2/17
2/17
24.00
16.00
17.00
11.82
24.00
16.00
5.18
2-Year Note
2/23
2/25
3/1
26.00
23.74
2.26
5-Year Note
10-Year Note (R)
3/8
3/8
3/15
3/15
3/17
3/22
16.00
13.00
2-Year Note
3/22
3/24
3/31
27.00
193.00
R = Reopening
A = Announced
Treasury announced a Q1
borrowing need of $177
billion on2/2/04
16.00
13.00
1.00
24.54
99.87
INET C A S H RAISED THIS Q U A R T E R :
2.46
93.13
177.13
US TREASURY FINANCING SCHEDULE FOR 2ND QUARTER 2004
BILLIONS OF DOLLARS
ISSUE
ANNOUNCEMENT
DATE
AUCTION SETTLEMENT
DATE
DATE
4-WK
4-WEEK AND
3&6 MONTH BILLS
3/25
3/29
4/1
4/9
4/5
4/1
4/8
4/12
4/20
4/26
4/15
4/22
4/29
4/16
4/23
4/30
18.00
18.00
16.00
13.00
11.00
8.00
8.00
20.00
23.00
20.00
20.00
16.00
15.00
OFFERED
AMOUNT
3-MO
18.00
18.00
18.00
18.00
17.00
17.00
16.00
16.00
16.00
18.00
18.00
17.00
17.00
640.00
NEW
MATURING
AMOUNT
MONEY
57.00
58.00
56.00
53.00
53.00
54.00
51.00
48.00
46.00
43.00
43.00
52.00
55.00
669.00
-5.00
-6.00
-6.00
-6.00
-9.00
-13.00
-11.00
4.00
9.00
11.00
11.00
-2.00
-6.00
-29.00
6-MO
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
17.00
17.00
5/3
5/6
5/14
5/21
5/28
5/10
5/17
5/24
5/31
5/13
5/20
5/27
6/4
6/7
6/11
6/18
6/14
6/21
6/10
6/17
6/24
4/2
4/5
20.00
20.00
0.00
5/4
5/5
15.00
15.00
0.00
6/3
6/4
20.00
20.00
0.00
24.32
16.00
8.00
12.00
2.68
5/7
6/3
CASH MANAGEMENT BILLS
10-Day Bill
9-Day Bill
11-Day Bill
4/1
Matures 4/15
5/3
Matures 5/14
6/2
Matures 6/15
COUPONS
CHANGE
IN SIZE
5-Year Note
10-year TIPS ( R )
20-year TIPS
2-Year Note
4/5
4/5
4/5
4/6
4/7
4/8
4/15
4/15
4/15
4/26
4/28
3-Year Note
5-Year Note
10-Year Note
5/3
5/3
5/3
2-Year Note
8.00
12.00
5/3
16.00
8.00
12.00
27.00
5/11
5/12
5/13
5/17
5/17
5/17
26.00
18.00
19.00
2.00
2.00
2.00
16.21
16.82
26.00
1.80
2.18
5/24
5/26
6/1
28.00
1.00
27.00
1.00
5-Year Note
10-Year Note (R)
6/7
6/7
6/9
6/10
6/15
6/15
18.00
15.00
2.00
2-Year Note
6/23
6/28
6/30
28.00
215.00
R = Reopening
A = Announced
i
Treasury announced a Q2
borrowing need of $75
billion on2/2/04
18.00
15.00
26.52
110.87
NET CASH RAISED THIS QUARTER:
1.48
104.13
75.13
.1138: T B A C Meeting Minutes: February 3, 2004
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
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February 4, 2004
JS-1138
Minutes Of The Meeting Of The
Treasury Borrowing Advisory Committee
Of The Bond Market Association
February 3, 2004
The Committee convened in closed session at the Hay-Adams Hotel at 11:35 a.m.
The following members of the Committee were not present: Thomas Marsico and
Richard Davis. Deputy Assistant Secretary for Federal Finance Timothy Bitsberger
welcomed the Committee.
The Committee first discussed the sensitivity of Treasury's financing needs due to
macroeconomic variables including G D P , inflation and interest rates, the first issue
on the Committee's charge (attached). Mr. Bitsberger presented charts (attached)
that depicted the long-run deficit projections of the Office of Management and
Budget ( O M B ) and Treasury's residual financing needs based on these projections.
Mr. Bitsberger pointed out that Treasury is well positioned to meet its borrowing
needs with its current issuance calendar if OMB's deficit forecasts are met. Mr.
Bitsberger also presented several charts showing the impact of changes in real
G D P growth, inflation and interest rates on deficits as estimated by the O M B . O n e
chart highlighted'the projected increase in deficits in the out years from both a 1 %
decrease in real G D P growth in 2004 and a 1 % decrease in real G D P growth every
year through 2009. A second chart showed the impact on the projected deficit of a
1 % increase in inflation and interest rates. O n e member observed that over the 5
year horizon, inflation has a greater absolute impact on the projected deficit.
One member noted that GDP growth is critical in determining deficits and
Treasury's longer term financing needs, but that there was a lot of uncertainty over
the next six to nine months. This generated discussion about tax refunds in the
current fiscal year, with one member asking if the models depicted in the charts
accounted for uncertainties such as spending that was announced but not
implemented and the level of tax refunds this year. O n e member asked whether the
risks Treasury faces are asymmetrical, while another member argued that they are
symmetrical. O n e member suggested that Treasury, at a later time, give a
presentation that better defines the explanatory variables discussed in the previous
charts and their statistical impact. Mr. Bitsberger asked the Committee to discuss
what further work Treasury should be undertaking to define and analyze some of
the risks already discussed. In general, the Committee agreed with Mr. Bitsberger's
statement that Treasury's issuance calendar is sufficient to meet the government's
forecasted borrowing needs. O n e member commented that maximum flexibility was
necessary and that the current calendar provided such flexibility.
The Committee next turned to the second question on the charge dealing with what
criteria Treasury should use to assess its overall portfolio, balancing short and longterm issuance as well as nominal and Treasury inflation-protected securities (TIPS)
issuance. Before the Committee discussed the issue, Mr. Bitsberger presented
charts showing Treasury's percentage breakdown of annual issuance across
maturities and distribution of marketable debt. Mr. Bitsberger also presented a chart
showing that a small amount of long-term debt as a percent of total issuance can
result in a larger percentage of the total portfolio held in long-term debt. Several
members discussed the point that setting TIPS as a fixed percentage of the
portfolio (either in nominal terms or as a percent of issuance) could be inflexible.
Page 1 ot
JS-1138: T B A C Meeting Minutes: February 3, 2004
O n e m e m b e r suggested looking at cash flows, noting the difference between TIPS,
nominal coupons and bills in this regard. O n e way to look at the portfolio would be
to determine how much of each type of cash flow Treasury would want. O n e
m e m b e r suggested setting a ceiling on bill issuance as a percentage of annual
issuance, a floor for issuance between 2-3 years, and a target for long-term
issuance, with the residual in TIPS. O n e m e m b e r asked if Treasury should also look
at how to manage its assets and not just liabilities.
Mr. Bitsberger then presented several charts showing demand for TIPS,
highlighting s o m e of the different investor demand at auction between TIPS and
nominal securities and increasing demand from public pension funds. The
Committee agreed that there is a growing demand for TIPS as a separate asset
class. However, several members cautioned against overstating the point that the
distribution of TIPS auction awards demonstrated a unique demand for the product.
They noted that because TIPS are less liquid, investors w h o want to own them
must buy at auction rather than in the secondary market, and that the auction data
m a y show market segmentation, with investors buying nominal securities for
liquidity purposes and TIPS for investment purposes.
Mr. Bitsberger then presented a chart showing the sensitivity of the real value of
longer-term liabilities to changes in inflation. The chart highlighted that TIPS reduce
the potential variability of the real value of Treasury's debt liabilities. The discussion
then turned back to the question of what criteria Treasury should use to assess its
overall portfolio. O n e m e m b e r expressed concern that Treasury w a s not taking the
level of interest rates into account when thinking about this issue. Another m e m b e r
noted that in thinking about issuing more TIPS, Treasury is correctly trying to
identify new demand and take advantage of that demand and broaden the investor
base. Another m e m b e r reiterated that flexibility is an important criteria for Treasury.
Mr. Bitsberger asked the Committee where Treasury should decrease issuance if
they introduce a new TIPS maturity point, assuming borrowing is held at its current
level. The Committee was somewhat divided on the response. O n e m e m b e r
suggested that Treasury should first look at the reasons for a smaller-than-expected
deficit, and that the first place to reduce issuance would be in the bill sector if the
reasons are of a more temporary nature. Several members agreed with this
assessment and one m e m b e r recommended Treasury do more analysis comparing
the cost of bill issuance versus TIPS issuance. However, other members thought
that the first place to reduce issuance would be in the 10- or 5-year sectors of the
nominal curve. O n e m e m b e r sighted the decrease in flexibility if Treasury adds a
20-year TIPS, and suggested that it would be logical to cut back on longer-dated
nominal issuance which is also more inflexible for Treasury. Another m e m b e r
thought that Treasury should place s o m e importance on the level of interest rates
when determining the best sector in which to reduce issuance.
The Committee then discussed the third question on the charge dealing with the
November refunding calendar and auction schedule, which is complicated by
several potential market-moving events and a holiday. Mr. Bitsberger presented
three options for the refunding auction schedule. The Committee said they would
take the options under consideration, and would look into possibly changing the
scheduled meeting date for the Committee in November.
The meeting adjourned at 1:03 p.m.
The committee reconvened at 3:05 p.m. and finalized its recommendation for
borrowing in this quarter and the April June quarter. Those charts are attached.
The committee made a presentation on Foreign Central bank purchases of
Treasury securities.
First, Barry Kasman of JP Morgan made a presentation that macro economic
conditions in both Asia and the U S over the last several years resulted in a situation
were the Asian governments have attempted to devalue their currencies and the
Federal reserve has been on hold. This low U S rate, low Asian currency
relationship w a s good policy and beneficial to the economies in both regions for a
Page 2 of4
S-1138: T B A C Meeting Minutes: February 3, 2004
period of time. There are perceptions that it can continue indefinitely. However,
economic fundamentals are changing with both Asia and the U S experiencing
growth and government policies of keeping U S rates low and Asian currencies
weak are artificial and do not match current macro economic conditions. Mr.
Kasman estimates that foreign central bank purchases are actually depressing
yields in the 2 to 3 year note sector by 60 to 80 basis points. H e argues that the
longer these policy positions ignore the macroeconomic fundamentals, the greater
and potentially more disruptive a return to equilibrium will be. H e saw 3 catalysts for
such a disruption. These include the potential of Asian governments to control
currency appreciation despite significant intervention activity, inflation in the U S
economy, and a pandemic such as S A R S or avian flu through-out Asia.
Next, economist Mickey Levy of Bank of America made a presentation suggesting
that trade imbalances reflect economic fundamentals, but are not inherently
economically "bad" nor do they portend future bad economic news. Fundamentally,
the current account deficits reflect the attractiveness of U S assets. Furthermore,
empirical evidence suggests that large current account deficits have little impact on
interest rates or foreign exchange rates. Interest rates are a function of real
economic growth, inflation expectations, and Fed policy. Foreign central banks
have been purchasing U S Treasuries and other U S fixed income assets for policy
reasons that are not necessary related to these three reasons that drive interest
rates. Mr. Levy thinks that there are no current catalysts on the horizon to change
foreign central bank policy.
The meeting adjourned at 4:15 p.m.
The Committee reconvened at the Hay-Adams Hotel at 5:35 p.m. The following
members of the Committee were not present: T h o m a s Marsico and Richard Davis.
The Chairman presented the Committee report to the Acting Under Secretary for
Domestic Finance, Brian Roseboro and Deputy Assistant Secretary for Federal
Finance, Tim Bitsberger. A brief discussion followed the Chairman's presentation
but did not raise significant questions regarding the report's content.
The meeting adjourned at 6:00 p.m.
Jeff Huther
Director
Office of Debt Management
February 3, 2004
Certified by:
Mark B. Werner, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
February 3, 2004
Treasury Borrowing Advisory Committee Quarterly Meeting Committee
Charge
Sensitivity of Financing Needs to GDP Estimates
We showed some of the financing risk associated with proposed or potential
legislation at the last Committee meeting. W e will now show the Committee slides
on the uncertainty of our financing needs due to macroeconomic variables including
real G D P , inflation and interest rates. Given this sensitivity and the central forecast
of our borrowing needs, w e would like the Committee's advice on whether
Treasury's financing calendar provides sufficient flexibility.
Treasury Inflation-Protected Securities
Page 3 of 4
J-1138: T B A C Meeting Minutes: February 3, 2004
W e believe our current issuance calendar can meet the government's projected
financing needs. W e are also committed to further growing the TIPS market. W e
would like the Committee's advice on what criteria to use to assess our overall
portfolio composition, keeping in mind our need to balance short and long term
issuance as well as both nominal and TIPS issuance.
Changes to Auction Calendar
The November refunding calendar is complicated by several potential marketmoving events and Veterans Day. W e would like the Committee's advice on the
scheduling of auctions in the final quarter of this year.
Financing this Quarter
We would like the Committee's advice on the following:
• The composition of Treasury notes to refund approximately $26.6 billion of
privately held notes and bonds maturing on February 15.
• The composition of Treasury marketable financing for the remainder of the
January - March quarter, including cash management bills.
• The composition of Treasury marketable financing for the April - June
quarter.
Other Issues
Are there other issues relating to the current state of the Treasury market that the
Committee would like to bring to Treasury's attention?
Related Documents:
• Q1 Tables
• Q 2 Tables
Page 4 of4
1-1139: TBAC's Report to the Secretary O f The Treasury: February 3, 2004
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
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February 4, 2004
JS-1139
Report to the Secretary Of The Treasury
from the
Treasury Borrowing Advisory Committee
of the
Bond Market Association
February 3, 2004
Dear Mr. Secretary:
Since the Committee's last meeting on November 4th, the economy has continued
to grow at a robust pace. G D P expanded at a 4 % pace in Q 4 of 2003 following the
8 % pace in Q 3 of 2003. Moreover, the latest economic readings point to a
continuation of strong growth in the first half of 2004. The ISM manufacturing report
for January hit a 20-year high of 63.6. The latest 4-week average of mortgage
applications for h o m e purchases hit a record high, pointing to a continued strong
housing market. The stronger trend in consumer spending since the fall is set to be
further reinforced by unusually large tax refunds over the next few months as a
result of the 2003 tax cuts. In contrast to this strength, growth in payrolls has
remained slow, averaging 48,000 per month over the past three months. However,
both continuing declines in initial claims and the result of business surveys suggest
that an upturn in hiring is likely over the next few months. Consensus for this week's
payroll report is expected to show that 160,000 new jobs were added in the month
of January.
Commodity prices, including energy prices, have been rising rapidly. These
increases have not yet translated into higher core inflation. To the contrary, the
latest reading for the core P C E price index slowed to a new low for the cycle at
0.7%. The annual rate of inflation has fallen below 2 % to 1.9%.
The Treasury market has been range-bound over the last three months and yields
have fallen modestly since our last meeting: 2-year yields have fallen by
approximately 10bp to 1.83% despite having risen to 2.10% during the period. The
2-year/10-year curve has flattened 12bp over the same period.
In line with a strong economic and corporate earnings performance, equity markets
continue to improve as well: the S & P 500 Index has risen approximately 8%, and
the N A S D A Q composite has risen approximately 6 % over the past three months.
Furthermore, a pick up in M & A activity would indicate an improvement in corporate
confidence.
Despite continued strong economic growth, the dollar has maintained its downward
trend over the past quarter. It has weakened approximately 8 % relative to the Euro
and approximately 4 % relative to the Japanese Yen.
Compared to previous quarters, budget expectations have been relatively stable.
While there is s o m e disparity in opinion among private forecasters about the longerterm budget outlook, most expect the budget deficit to be close to official
expectations over the next two to three years.
Page 1 of 3
-1139: TBAC's Report to the Secretary O f The Treasury: February 3, 2004
Against this economic and financial backdrop, the m e m b e r s of the Committee
began consideration of debt management questions included in the Quarterly
Charge. Following their new format, Treasury presented a chart package that will
be released as part of the Treasury refunding announcement.
The first section of the package considers the sensitivity of financing needs to
economic factors. Treasury discussed at a previous session that they believe their
financing is subject to different sensitivity factors—legislative, economic and
technical. In their slides they illustrated the uncertainty of their financing needs due
to economic variables including G D P , inflation and interest rates. The question
asked of the Committee w a s "does the Treasury financing calendar provide
sufficient flexibility?"
The first two charts outlined Treasury's financial requirements for the first and
second quarters of 2004. These projections had already been released to the
public.
The following charts considered the economic risk to the fiscal outlook. The charts
demonstrate the volatility of expected outcomes to the market. O n e m e m b e r of the
Committee recommended that Treasury m a k e the sensitivity analysis portion of the
package standard in each quarterly release. By so doing, Treasury will be better
able to communicate its borrowing needs under a variety of potential outcomes.
The Committee raised questions concerning the composition of Treasury's
forecasting models. While Treasury w a s comfortable that their models capture a
wide number of potential outcomes, the Committee encouraged them to continue to
refine these explanatory variables—both short term and long term—and to share
them with market participants.
The Committee largely agreed that the risk to the issuance calendar is minimal.
During the past year, new 3-year notes, a shift to monthly 5-year notes and the
reopening of 10-year notes have all been implemented by Treasury. The
Committee felt this evidences a high degree of flexibility to the issuance calendar.
Treasury next asked the Committee's advice on what criteria to use in assessing
the overall composition of its liability structure. Treasury re-emphasized its goals of
increasing the amount of TIPS outstanding both nominally and as a percentage of
total debt. Treasury also stressed its stated desire to balance short- and long-term
debt issuance.
To that point, Treasury provided slides that showed projected issuance amounts of
bills and notes well within bounds observed over the past twenty years. Treasury
also provided a slide that showed projections of TIPS outstanding both as a
percentage of issuance and as a percentage of total debt. Similarly, Treasury
included slides focusing on the benefits and characteristics of TIPS suggesting that
long-term investors tend to participate in the auction process and that state and
local pension plans are investing more in the product. Lastly, Treasury stressed the
diversification benefits of TIPS.
Committee members suggested several criteria by which to assess Treasury's
choice of liability composition as they increase TIPS issuance. S o m e m e m b e r s felt
that flexibility and liquidity concerns should predominate. Others felt that the level
and direction of nominal rates in Treasury's decision-making process w a s also
important. M e m b e r s felt that Treasury would be well served to further study the
variability of bill, note and TIPS issuance. Particularly, m e m b e r s felt that increasing
the amount of TIPS outstanding could affect Treasury's cash flow in an appreciable
manner without longer-term plans for bill and note issuance. Substitution of TIPS
issuance for either note or bill issuance w a s viewed by most m e m b e r s as a viable
strategy given the growing demand profile for the product.
Treasury then asked the Committee to offer its advice as to the scheduling of the
November 2004 refunding and offered three potential options. The Committee
agreed to consider the options and discuss this charge at the next meeting. T h e
scheduling at the November refunding is complicated by the general election, a
Page 2 of 3
1-1139: TBAC's Report to the Secretary O f The Treasury: February 3, 2004
meeting of the F O M C and a national holiday.
The Committee then addressed the question of the composition of Treasury notes
to refund approximately $11.82 billion of privately held notes and bonds maturing
on February 17th as well as the composition of Treasury marketable financing for
the remainder of the January-March quarter, including cash management bills and
for the April-June quarter. T o refund $11.82 billion of privately held notes and bonds
maturing February 17, 2004, the Committee recommended a $24 billion 3-year note
due 2/15/07, a $16 billion 5-year note due 2/15/09, and a $17 billion 10-year note
due 2/15/14. For the remainder of the quarter, the Committee recommended a $26
billion 2-year note issued in February and a $27 billion 2-year note issued in March,
a $16 billion 5-year note issued in March, a $13 billion reopening of the 10-year
note in March and a $8 billion reopening of the 10-year TIPS in April. The
Committee also recommended a $20 billion 11-day cash management bill issued
3/4/04 and maturing 3/15/04. For the April-June quarter, the Committee
recommended financing as contained in the attached table. Relevant features
include three monthly 2-year notes (one of $27 billion, and two of $28 billion), three
monthly 5-year notes (one of $16 billion and two of $18 billion), a $26 billion 3-year
note, a $19 billion 10-year note issued in May followed by a $15 reopening of that
10-year note in June. The Committee further recommended a $12 billion 20-year
TIPS for issuance in April.
Respectfully submitted,
Mark B. Werner
Chairman
Ian Banwell
Vice Chairman
Report(s):
• Q 1 Tables
• Q 2 Tables
Page 3 of 3
;-l 142: "Protecting the Financial Sector from Terrorism and Other Threats"
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
January 29, 2004
JS-1142
Remarks of
Michael A. Dawson
Deputy Assistant Secretary
for
Critical Infrastructure Protection and Compliance Policy
at the Conference on
Protecting the Financial Sector and Cyber Security Risk Management
Organized by the
Federal Deposit Insurance Corporation
Philadelphia, Pennsylvania
"Protecting the Financial Sector from Terrorism and Other Threats"
I am pleased to be here in Philadelphia today. With over ten major insurance
companies, a U.S. Mint, a Federal Reserve Bank, and one hundred FDIC-insured
institutions, Philadelphia houses a significant portion of the critical financial
infrastructure of the United States. In addition, the Philadelphia region is an
important base for mutual fund companies, such as Vanguard, SEI Investments and
Gartmore to n a m e but a few. You, as owners and operators, are already working
hard to protect your businesses, employees, and customers. Thank you for your
efforts.
The purpose of this conference is to share with you some of the policies and
programs that may further help your efforts at physical and cyber resilience and
security. In partnership with the FDIC, the Department of the Treasury and our
colleagues in the public and private sectors are holding conferences like this in
twenty-four cities across the United States. During the conferences, w e will reach
thousands of professionals like you, owners and operators of our financial
infrastructure. W e hope you will take advantage of these policies and programs that
can further strengthen the critical financial infrastructure of the United States.
Importance of Protecting Our Financial Infrastructure
The resiliency of the financial infrastructure is an issue that is very important to the
Department of the Treasury. At the Treasury, w e are responsible for developing and
promoting policies that create jobs and improve the economy. W e are also
concerned with developing and promoting policies that enhance the resilience of
the economy, policies that minimize the economic damage and speed economic
recovery from a terrorist attack. Because of these responsibilities, the President
named Treasury as the lead agency to enhance the resilience of the critical
financial infrastructure.
These two responsibilities are closely related. As Secretary Snow has said, the
financial system is the engine of our economy. In a very real sense, therefore, the
resilience of the American economy depends on the resilience of the American
financial system.
Fortunately, with an already resilient American economy, we are starting from a
very strong base. Over the past few years, w e have seen this resilience first hand,
as the American economy withstood an economic recession, the terrorist attacks of
September 11, corporate governance scandals, and the power outage of August
14-15. Many reasons have lead to the resilience of the American economy. Good
policies like the President's Jobs and Growth Initiative played an important part.
Page 1 of 4
-1142: "Protecting the Financial Sector from Terrorism and Other Threats"
S o has the strength and resilience of the American people w h o are determined to
protect our way of life.
Due in part to deregulation of the banking industry and innovation in technology, the
American financial system is becoming increasingly more resilient. A s recently as
this Monday, Federal Reserve Board Chairman Alan Greenspan commented on
this resilience, stating that "the more flexible an economy, the greater its ability to
self-correct in response to inevitable, often unanticipated, disturbances and thus to
contain the size and consequences of cyclical imbalances."
The successful performance of the financial system during the power outage of last
August exemplifies this resilience. With one exception, the bond and major equities
and futures markets were open the next day at their regular trading hours. Major
market participants were also well prepared, having invested in contingency plans,
procedures, and equipment such as backup power generators. The U.S. financial
sector withstood this historic power outage without any reported loss or corruption
of any customer data. This resilience mitigates the economic risks of terrorist
attacks and other disruptions, both to the financial system itself and to the American
economy as a whole.
Although we are starting from a strong base, the fact remains that terrorists
continue to target the U.S. economy and U.S. financial institutions. Therefore, w e
must continue our vigilant efforts to protect our critical financial infrastructure.
Guiding Principles
Four principles guide our efforts to enhance the resilience of our financial
infrastructure. These principles guided our actions as the financial system
recovered from the attacks of September 11th. They guided our actions during the
power outage of August 14-15. They guide our day to day actions as w e prepare for
the next disruption.
The first principle is to remember that the financial system is really about people.
People, not buildings or computers, produce financial services. And it is people w h o
benefit from financial services.
We depend on people - tellers, technicians, loan officers, technologists to run the
financial system and to see the system through during times of stress. Indeed, it
w a s the commitment of these professionals to their institutions, customers, and
colleagues that helped the financial system recover from the attacks of September
11 th and weather the power outage of August 14-15.
Just as we depend on people to operate the financial system, people depend on the
financial system to remain in operation. Every American depends on financial
services to get their paycheck, buy their groceries, purchase a house, finance their
children's education, or save for retirement. W e must ensure that people continue
to have confidence that the financial system will meet their needs.
The second principle is the importance of maintaining confidence. Confidence in the
ability of financial institutions to clear checks, execute transactions, and satisfy
insurance obligations helps the system weather significant disruption from evolving
threats. By relying on a sound financial system, Americans can m a k e business
decisions for the future and conduct necessary business in the present.
The third principle is to ensure that the financial system remains accessible and
open for business w h e n the safety of the employees permits. During times of
disaster, investors depend on markets to price the impact of the disruption on
assets. T h e longer markets are closed, the longer investors must go without
knowing what the impact will be. This uncertainty can itself be harmful to the
economy, compounding the impact of any disruption. The sooner w e can eliminate
this uncertainty, the more w e can mitigate the impact and speed recovery.
Fourth, we want to promote responsible decision-making and problem-solving
within the private sector. In general, financial institutions should m a k e the
Page 2 of 4
1142: "Protecting the Financial Sector from Terrorism and Other Threats"
appropriate decisions without waiting for guidance from Washington. After all, it is
the private sector that owns and operates the majority of the financial systems, and
therefore knows best how to mend these systems after a disruption.
Organization
With these principles in mind, w e have organized ourselves into two main groups.
O n e is the Financial and Banking Information Infrastructure Committee (FBIIC). T h e
FBIIC is sponsored by the President's Working Group on Financial Markets and
consists of m a n y state and federal regulators. The FDIC, which organized this
conference today, is a member. S o too are the Board of Governors of the Federal
Reserve System, the Securities and Exchange Commission, the Commodity
Futures Trading Commission, the National Association of Insurance
Commissioners, the Conference of State Banking Supervisors, and m a n y other
important regulators. Treasury chairs the FBIIC.
The other important group is the Financial Services Sector Coordinating Council
(FSSCC). The F S S C C consists of virtually every important financial services
association in the United States.
The structure of these organizations advances the principles I just spoke about. As
the President stated in his National Strategy for the Physical Protection of Critical
Infrastructures and Key Assets, "it is important to remember that protection of our
critical infrastructures and key assets is a shared responsibility. Accordingly, the
success of our protective efforts will require close cooperation between government
and the private sector at all levels." These two organizations facilitate that close
cooperation and encourage private sector responsibility to protect the critical
financial infrastructure without adding unnecessary layers of bureaucracy.
Policies
The four principles - protecting people, maintaining confidence, maintaining access
to financial institutions, and promoting de-centralized decision-making and
responsibility - shape our policies to enhance the resilience of the U.S. economy.
For example, they highlight the importance of developing accurate and timely
information about threats and sharing that information with the private sector. A s w e
share more and better information about threats, people in the private sector w h o
own and operate our financial infrastructure can better estimate the risks they bear
and can more effectively reduce the probability of a disruption through strategic
investments.
Furthermore, as more institutions invest in better security measures, the incentive
for other firms to invest will also increase as they realize they might be left behind
the competition. This tipping or cascading effect on businesses provides a very
efficient and effective m e a n s of encouraging optimal investment in our corporate
resilience. It also reduces the need for the government to impose costly, inflexible,
and potentially ineffective command-and-control security regulations on the private
sector.
Programs
I wish to highlight a few of the programs that w e have developed. These programs
provide you with specific, tangible services that can help m a k e your institutions and
your colleagues safer.
Recently, the FBIIC and the FSSCC launched the next generation Financial
Services Information Sharing and Analysis Center (FS/ISAC). Since 1999, the
FS/ISAC has been a leader in information sharing for the financial sector, allowing
m e m b e r s to receive and submit anonymous reports on security threats and
solutions. This next generation FS/ISAC, which n o w serves the entire financial
sector, includes both cyber and physical threat information and deploys a secure,
confidential technology platform where companies can exchange information in real
time as they identify vulnerabilities, address the vulnerabilities, and respond to
attempts to exploit the vulnerabilities.
Given the benefits of increased information sharing with the general public,
Treasury is pleased to support the next-generation FS/ISAC. I hope that all of you
Page 3 of 4
5-1142: 'Protecting the Financial Sector from Terrorism and Other Threats"
will consider joining the FS/ISAC as members. You can learn more about h o w your
financial institution can benefit from the FS/ISAC at www.fsisac.com.
Another important program is the Government Emergency Telecommunications
Service (GETS) program. This program, which is run by the National
Communications Service, provides critical members of the private sector priority
access to the telecommunication system. In times of emergency when the
telephone system experiences heavy traffic, G E T S users can complete their calls
faster so that they m a y discuss and coordinate emergency decisions. Since the
attacks of September 11, the G E T S program has expanded more than six-fold
within the financial sector. If you are interested in participating in this program,
please contact your primary regulator. Each of the participating regulators serves as
the administrative sponsor for the G E T S program. If you are already a G E T S user,
please remember to test your cards on a quarterly basis.
A third important program that the Treasury created is the Protective Response
Planning Program. This program brings together federal and local government
officials, members of law enforcement and individuals from important financial
institutions to develop and coordinate emergency responses to major disruptions at
these specific institutions.
During these exercises, government officials - from the local police chief, to the
county sheriff, the state police superintendent, the FBI, the United States Secret
Service, and still others coordinate their emergency response plans, in s o m e
cases for the first time. The success of these exercises have demonstrated the
power of a truly collaborative effort. The Protective Response Planning Program is
open to the most critical financial institutions. If you are interested, please contact
me.
Thank you for your time today. Thank you for attending this important conference.
Page 4 of 4
JS-i 143: Statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo... Page 1 of 4
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 3, 2004
JS-1143
Statement on the President's Fiscal Year 2005 Budget
by
Treasury Secretary John S n o w
before the
Committee on W a y s and Means
Tuesday, February 03, 2004
Thank you, Mr. Chairman.
Thank you all for having me here today to talk about the President's budget.
I believe you'll find that this budget reflects the priorities of our nation as well as the
leadership of President George W . Bush.
The over-riding theme of the budget, and the President's plan for the future, is that
a safer world is a more prosperous world. That's why I'll be discussing both national
and economic security here today.
Overview of the President's Priorities
Decisions about how to collect and spend taxpayer dollars - for this is what a
budget is - must be m a d e with both caution and vision.
The Fiscal Year 2005 budget proposal is, therefore, a plan that does three core
things:
One: Keeps Americans safe by providing the resources necessary to win the war
on terror and protect our homeland;
Two: Increases the economic security of our citizens as well, by strengthening our
economy; and
Three: Exercises the kind of spending discipline that is required by a government
that respects the source of its money (hard-working taxpayers!) and is unwilling to
live with a deficit.
Discussions of our budget and our economy are not, and should not, be separate.
The two are inextricably connected.
Today, our economy is doing better.
Homeownership is up, unemployment rates are heading down, and GDP growth
has been extremely strong.
This administration came to office when those indicators were not nearly as
positive.
The President inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
The President and his administration took these challenges seriously and we have
m a d e serious progress in changing the economic direction of this country.
The President's tax cuts - passed by you - have worked. They provided the
JS-i i<o: statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo... Page 2 of 4
stimulus that was necessary to turn the economic ship around... and they are now
encouraging and allowing for the economic growth that is continuing into the future.
Economic growth in the second half of 2003 was the fastest since 1984;
N e w h o m e construction w a s the highest in almost 20 years;
Homeownership levels are at historic highs;
Manufacturing activity is increasing;
Inflation and interest rates are low;
Over a quarter million jobs were created in the last five months of 2003.
Unemployment claims - both initial claims and continuing claims - are falling,
indicating improvement in the labor market;
And last Monday, the D o w closed at a 31-month-high. This translates into more
than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: We are on a path to
sustained economic growth.
However, there is more to do. We are not, by any means, satisfied.
There are still Americans who want to find work and cannot... and this
Administration will not rest until that most critical need is met and until every
American looking for work can find a job.
Our budget addresses that need by continuing to focus on improving our economy.
For example, the President's Jobs for the 21st Century plan, announced in his State
of the Union Address, directs the resources of several branches of government
toward matching skills with jobs, and helping workers acquire the skills they need to
qualify for the jobs in their community.
We can also encourage the creation of jobs by sticking to the President's six-point
plan for growth.
That includes making health care more affordable and costs more predictable.
We can do this by passing Association Health Plan legislation that would allow
small businesses to pool together to purchase health coverage for workers at lower
rates.
We also need to promote and expand the advantages of using health savings
accounts ... h o w they can give workers more control over their health insurance
and costs.
And we've got to reduce frivolous and excessive lawsuits against doctors and
hospitals. Baseless lawsuits, driven by lottery-minded attorneys, drive up health
insurance costs for workers and businesses.
The need to reduce the lawsuit burden on our economy stretches beyond the area
of health care. That's why President Bush has proposed, and the House has
approved, measures that would allow more class action and m a s s tort lawsuits to
be moved into Federal court -- so that trial lawyers will have a harder time shopping
for a favorable court.
These steps are the second key part of the President's pro-jobs, pro-growth plan.
Ensuring an affordable, reliable energy supply is a third part.
We must enact comprehensive national energy legislation to upgrade the Nation's
electrical grid, promote energy efficiency, increase domestic energy production, and
provide enhanced conservation efforts, all while protecting the environment.
Again, we need Congressional action: we ask that you pass legislation based on
the President's energy plan.
Streamlining regulations and reporting requirements are another critical reform
JS-nto: statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo...
element that benefit small businesses, who represent the majority of new job
creation: three out of every four net new jobs c o m e from the small-business sector!
Let's give them a break wherever w e can so they're free to do what they do best:
create those jobs.
Opening new markets for American products is another necessary step toward job
creation. That's why President Bush recently signed into law new free trade
agreements with Chile and Singapore that will enable U.S. companies to compete
on a level playing field in these markets for the first time - and he will continue to
work to open n e w markets for American products and services.
Finally, we've got to enable families and businesses to plan for the future with
confidence.
That means making the President's tax relief permanent.
Rate reductions, the increase in the child tax credit and the new incentives for
small-business investment - these will all expire in a few years. The accelerated
rate reductions that took effect in 2003 will expire at the end of this year. Expiration
dates are not acceptable - w e want permanent relief.
The ability of American families and businesses to make financial decisions with
confidence determines the future of our economy. And without permanent relief,
incentives upon which they can count, w e risk losing the m o m e n t u m of the recovery
and growth that w e have experienced in recent months.
The tax relief is the key stimulus for increased capital formation, entrepreneurship
and investment that cause true economic growth.
Budgets work better when the economy is growing... because a growing economy
means more jobs. That means more tax revenue... which leads to all-important
deficit reduction.
Which leads me to my next area of discussion.
Overview of the Budget Deficit Situation
Let me be clear on this:
The budget deficit that w e face today is unwelcome.
It needs to be addressed.
The President's budget calls for cutting the deficit in half over the next five years.
Wile addressing the deficit, w e must remember that it is not historically
overwhelming.
It is understandable, given the extraordinary circumstances of recent history.
R e m e m b e r that w e are fighting a type of war that w e have never fought before. W e
are fighting an enemy that requires a much broader variety of government
resources than anything we've ever confronted. And w e began this fight when w e
were economically wounded.
What's most important to remember is that we will be able to fight this war and
climb out of the deficit.
We can manage this deficit, and we can cut it in half over the next five years by
controlling spending and growing our economy.
Three-quarters of the discretionary spending increases during this Administration
have been related to the global war on terror and the response to 9/11.
Meanwhile, President Bush has reduced the rate of increase in non-security-related
spending every year he has been in office: to six percent in 2002, five percent in
2003, and to four percent in the current fiscal year.
For Fiscal Year 2005 we're going to reduce the rate of increase in non-security
spending to less than one percent.
Total annual appropriated spending will increase by less than four percent next
year.
Page 3 of 4
JS-i 14;*: statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo...
Holding the line on spending - while ensuring that our country is safe and our most
important needs, from jobs to health care, are met - will achieve deficit reduction
when coupled with all-important economic growth.
Again, this is why the budget cannot be discussed separately from the economy.
Separating the two is what gets government into trouble.
Make no mistake; President Bush is serious about the deficit.
We see it as unwelcome, but manageable... and we intend to achieve: rapid deficit
reduction.
A recent CBO report raised concerns about this matter, and it is important to note
that recent and short-term projected budget deficits and the existence of long-term
deficits for Social Security and Medicare are not connected.
These unfunded long-term net obligations are also a concern, and ones that this
Administration has highlighted and invited bipartisan dialogue on.
The President has been clear on this: younger workers should have the opportunity
to build a nest egg by saving part of their Social Security taxes in personal
retirement accounts. His vision for the program is economically wise, and it is that
w e should m a k e the Social Security system a source of ownership for the American
people.
Conclusion
Are w e dedicating ourselves to increased spending on the war on terror and
protecting the homeland? The answer is yes. Yes, without sacrificing other
necessities.
And that is because a nation must be safe in order for it to be prosperous.
A nation of entrepreneurs must also be able to plan, and to be relieved of as many
burdens as possible, in order to be prosperous.
All of the budget issues and policy proposals that I've discussed today may seem,
at times, to be a complicated recipe. But these ingredients combine to m a k e
something that is simply put, and is of utmost importance - and that is economic
growth.
Growth is the key to every economic problem we confront. That's why we urge
other countries to institute pro-growth policies. It's good for them, and it's good for
the global economy that w e are a significant part of.
Thank you for hearing my testimony today. I'll be happy to take your questions now.
Page 4 of 4
JS-I 144: layior statement on Collective Action Clauses
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 3, 2004
JS-1144
Statement of Under Secretary John B. Taylor Regarding the Decisions by
Countries to Issue Bonds with Collective Action Clauses (CACs)
Statement of Under Secretary John B. Taylor Regarding the Decisions by Countries
to Issue Bonds with Collective Action Clauses (CACs)
The United States strongly supports and welcomes the decision of a growing
number of countries to include collective action clauses in external bond issues.
Since the N e w Year, Chile, Panama, Colombia, Costa Rica and Venezuela
completed successful bond issues, including C A C s for the first time, while Brazil,
Turkey and Mexico's recent issues again included CACs. Belize, Guatemala,
Korea, Italy, Peru, Poland, South Africa and Uruguay included C A C s in bond issues
last year. These nations are helping make collective action clauses the market
standard in external sovereign bond issues under N e w York law, and strengthening
the international financial system. The Treasury encourages all countries that issue
external bonds under N e w York law to include collective action clauses in their
offerings.
Page 1 of 1
i i4D: treasury Releases "2004 Blue Book"
Page 1 of 1
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®.
February 2, 2004
js-1145
Treasury Releases "2004 Blue Book"
O n February 2, 2004 the Treasury Department released the General Explanations
of the Administration's Fiscal Year 2005 Revenue Proposals, the document also
known as the "Blue Book."
The text of the 2004 Blue Book is attached.
Related Documents:
• Blue Book
JS-i i<+u: aiaiement on tne President's Fiscal Year 2005 Budget by Treasury Secretary Jo... Page 1 ot 4
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 4, 2004
JS-1146
Statement on the President's Fiscal Year 2005 Budget
by
Treasury Secretary John S n o w
before the
House Committee on the Budget
Wednesday, February 04, 2004
Thank you, Mr. Chairman.
Thank you all for having me here today to talk about the President's budget.
I believe you'll find that this budget reflects the priorities of our nation as well as the
leadership of President George W . Bush.
The over-riding theme of the budget, and the President's plan for the future, is that
a safer world is a more prosperous world. That's why I'll be discussing both national
and economic security here today.
Overview of the President's Priorities
Decisions about how to collect and spend taxpayer dollars - for this is what a
budget is - must be m a d e with both caution and vision.
The Fiscal Year 2005 budget proposal is, therefore, a plan that does three core
things:
• One: Keeps Americans safe by providing the resources necessary to win the war
on terror and protect our homeland;
• Two: Increases the economic security of our citizens as well, by strengthening our
economy; and
• Three: Exercises the kind of spending discipline that is required by a government
that respects the source of its money (hard-working taxpayers!) and is unwilling to
live with a deficit.
Discussions of our budget and our economy are not, and should not, be separate.
The two are inextricably connected.
Today, our economy is doing better.
Homeownership is up, unemployment rates are heading down, and GDP growth
has been extremely strong.
This administration came to office when those indicators were not nearly as
positive.
The President inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
The President and his administration took these challenges seriously and we have
m a d e serious progress in changing the economic direction of this country.
JS-i 140: statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo...
The President's tax cuts - passed by you - have worked. They provided the
stimulus that w a s necessary to turn the economic ship around... and they are n o w
encouraging and allowing for the economic growth that is continuing into the future.
• Economic growth in the second half of 2003 was the fastest since 1984;
• N e w h o m e construction was the highest in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Over a quarter million jobs were created in the last five months of 2003.
• Unemployment claims - both initial claims and continuing claims - are falling,
indicating improvement in the labor market;
• And last Monday, the D o w closed at a 31-month-high. This translates into more
than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: We are on a path to
sustained economic growth.
However, there is more to do. We are not, by any means, satisfied.
There are still Americans who want to find work and cannot... and this
Administration will not rest until that most critical need is met and until every
American looking for work can find a job.
Our budget addresses that need by continuing to focus on improving our economy.
For example, the President's Jobs for the 21st Century plan, announced in his State
of the Union Address, directs the resources of several branches of government
toward matching skills with jobs, and helping workers acquire the skills they need to
qualify for the jobs in their community.
W e can also encourage the creation of jobs by sticking to the President's six-point
plan for growth.
That includes making health care more affordable and costs more predictable.
We can do this by passing Association Health Plan legislation that would allow
small businesses to pool together to purchase health coverage for workers at lower
rates.
We also need to promote and expand the advantages of using health savings
accounts ... how they can give workers more control over their health insurance
and costs.
And we've got to reduce frivolous and excessive lawsuits against doctors and
hospitals. Baseless lawsuits, driven by lottery-minded attorneys, drive up health
insurance costs for workers and businesses.
The need to reduce the lawsuit burden on our economy stretches beyond the area
of health care. That's why 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 will have a harder time shopping
for a favorable court.
These steps are the second key part of the President's pro-jobs, pro-growth plan.
Ensuring an affordable, reliable energy supply is a third part.
We must enact comprehensive national energy legislation to upgrade the Nation's
electrical grid, promote energy efficiency, increase domestic energy production, and
provide enhanced conservation efforts, all while protecting the environment.
Again, we need Congressional action: we ask that you pass legislation based on
the President's energy plan.
Streamlining regulations and reporting requirements are another critical reform
Page 2 of 4
JS-i 140: statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo...
element that benefit small businesses, who represent the majority of new job
creation: three out of every four net new jobs c o m e from the small-business sector!
Let's give them a break wherever w e can so they're free to do what they do best:
create those jobs.
Opening new markets for American products is another necessary step toward job
creation. That's why President Bush recently signed into law new free trade
agreements with Chile and Singapore that will enable U.S. companies to compete
on a level playing field in these markets for the first time -- and he will continue to
work to open n e w markets for American products and services.
Finally, we've got to enable families and businesses to plan for the future with
confidence.
That means making the President's tax relief permanent.
Rate reductions, the increase in the child tax credit and the new incentives for
small-business investment - these will all expire in a few years. The accelerated
rate reductions that took effect in 2003 will expire at the end of this year. Expiration
dates are not acceptable - w e want permanent relief.
The ability of American families and businesses to make financial decisions with
confidence determines the future of our economy. And without permanent relief,
incentives upon which they can count, w e risk losing the m o m e n t u m of the recovery
and growth that w e have experienced in recent months.
The tax relief is the key stimulus for increased capital formation, entrepreneurship
and investment that cause true economic growth.
Budgets work better when the economy is growing... because a growing economy
means more jobs. That means more tax revenue... which leads to all-important
deficit reduction.
Which leads me to my next area of discussion.
Overview of the Budget Deficit Situation
Let me be clear on this:
• The budget deficit that w e face today is unwelcome.
• It needs to be addressed.
• The President's budget calls for cutting the deficit in half over the next five years.
• While addressing the deficit, w e must remember that it is not historically
overwhelming.
• It is understandable, given the extraordinary circumstances of recent history.
R e m e m b e r that w e are fighting a type of war that w e have never fought before. W e
are fighting an enemy that requires a much broader variety of government
resources than anything we've ever confronted. And w e began this fight when w e
were economically wounded.
What's most important to remember is that we will be able to fight this war and
climb out of the deficit.
We can manage this deficit, and we can cut it in half over the next five years by
controlling spending and growing our economy.
Three-quarters of the discretionary spending increases during this Administration
have been related to the global war on terror and the response to 9/11.
Meanwhile, President Bush has reduced the rate of increase in non-security-related
spending every year he has been in office: to six percent in 2002, five percent in
2003, and to four percent in the current fiscal year.
For Fiscal Year 2005 we're going to reduce the rate of increase in non-security
spending to less than one percent.
Total annual appropriated spending will increase by less than four percent next
year.
Page 3 of 4
JS-1140: statement on the President's Fiscal Year 2005 Budget by Treasury Secretary Jo...
Holding the line on spending - while ensuring that our country is safe and our most
important needs, from jobs to health care, are met - will achieve deficit reduction
when coupled with all-important economic growth.
Again, this is why the budget cannot be discussed separately from the economy.
Separating the two is what gets government into trouble.
Make no mistake; President Bush is serious about the deficit.
We see it as unwelcome, but manageable... and we intend to achieve: rapid deficit
reduction.
A recent CBO report raised concerns about this matter, and it is important to note
that recent and short-term projected budget deficits and the existence of long-term
deficits for Social Security and Medicare are not connected.
These unfunded long-term net obligations are also a concern, and ones that this
Administration has highlighted and invited bipartisan dialogue on.
The President has been clear on this: younger workers should have the opportunity
to build a nest egg by saving part of their Social Security taxes in personal
retirement accounts. His vision for the program is economically wise, and it is that
w e should m a k e the Social Security system a source of ownership for the American
people.
Conclusion
Are w e dedicating ourselves to increased spending on the war on terror and
protecting the homeland? The answer is yes. Yes, without sacrificing other
necessities.
And that is because a nation must be safe in order for it to be prosperous.
A nation of entrepreneurs must also be able to plan, and to be relieved of as many
burdens as possible, in order to be prosperous.
All of the budget issues and policy proposals that I've discussed today may seem,
at times, to be a complicated recipe. But these ingredients combine to m a k e
something that is simply put, and is of utmost importance - and that is economic
growth.
Growth is the key to every economic problem we confront. That's why we urge
other countries to institute pro-growth policies. It's good for them, and it's good for
the global economy that w e are a significant part of.
Thank you for hearing my testimony today. I'll be happy to take your questions now.
Page 4 of 4
JS-114 /: Remarks of Wayne A. Abernathy Assistant Secretary of the Treasury to Americ... Page 1 of 5
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 4, 2004
JS-1147
Remarks of Wayne A. Abernathy
Assistant Secretary of the Treasury for Financial Institutions
American Enterprise Institute
Washington, D.C.
Formula O n e Regulation for G S E s
It is a pleasure to be here at AEI today, to leave the Do Tank to spend some time at
a Think Tank. I a m not embarrassed to reveal, having spent virtually m y whole
career at one place or another in government, that people in government draw a lot
of water from the deep wells of thought and creativity found in places such as the
American Enterprise Institute. I make little claim to original thinking, but I do make
a claim to being able to recognize good thinking. And I a m not shy to make use of
someone else's good ideas. I consider it part of the package enshrined in the
constitutional right to petition government.
I like to say, because it is true, that I get my best ideas by listening to the people
who have to live with the consequences of decisions made here in Washington. So
I take every opportunity to talk with business people and with their customers, when
they come to Washington, and when I travel throughout the country.
Let me cite an excellent example. We recently passed an important piece of
legislation, the Fair and Accurate Credit Transactions Act of 2003. Early last year,
President Bush determined that w e need to give consumers, law enforcers, and
businesses new tools to fight identity theft.
But what tools would work? We found out by consulting with victims of identity
theft, with law enforcement people, with regulators, with businesses. The result
was a powerful, important piece of legislation that President Bush signed into law in
December, that will strengthen the ability of consumers, law enforcement people,
and businesses to deter identity theft, to increase the chance of catching the
thieves, and to reduce the time it takes for victims to restore their good name.
A lot of thought went into that bill. Not all of the thoughts we heard went into the
bill. S o m e ideas w e heard were impractical, some not appropriate for the federal
level, some would have been counterproductive. But w e heard a lot of good
thoughts, c a m e up with a couple of our own—inspired by ideas that people shared
with us—and they m a d e up the bill. This year w e are in the process of
implementing that legislation. For a long time, many identity thieves have had it
easy. They won't have it so easy anymore.
I want to congratulate AEI for doing a lot of thinking, and encouraging others to do a
lot of thinking, for a long time, about our system of government sponsored
enterprises, particularly the G S E s that are chartered to focus on housing: Fannie
Mae, Freddie Mac, and the Federal H o m e Loan Banks. W e appreciate the high
priority that you have placed upon them, because this Administration places a high
priority on them as well.
It is no secret that these housing GSEs have an inadequate system of supervision.
And it is a poorly kept secret, that they have never had an adequate system of
supervision.
I am quick to admit that the supervision of Fannie Mae, Freddie Mac, and the
Federal H o m e Loan Banks has in fact improved recently. Supervisory resources
are greater and better focused, the regulators are hard-nosed about doing their job.
But despite the best efforts of the current leadership of the G S E supervisors, there
is only so much that they can do. There is only so much that can be done with the
JS-114 /: Remarks of Wayne A. Abernathy Assistant Secretary of the Treasury to Americ... Page 2 of 5
limited authorities and resources and stature that have been granted to these
regulators under the existing law. The G S E supervisors today are working hard
with what they have. They show no signs of letting up or easing off, and yet it is not
enough. The law does not give them what they need to do their job.
We have the world class—the world-leading—housing finance system, but we do
not have a world class supervisory system.
What do we do about it? That is the theme of the series of conferences that you
have held. And your conferences, and others on this subject, are stirring up
people's minds, getting the thought processes moving. They are stimulating
fundamental thinking. They are asking questions that need to be asked.
It is no surprise to many of you here, that while we strongly share and appreciate
the sense of importance and timeliness of the focus, the Administration does not
support the calls for "privatizing" the housing GSEs.
Fannie Mae and Freddie Mac have special status in the housing finance market
because they were created by Congress for a specific purpose: to increase
homeownership among low- and moderate- income families by creating a strong
secondary market to make it easier for these families to secure loans to buy
homes. The Administration shares that original commitment, and wants to ensure
that G S E s live up to their responsibilities, in a way that strengthens the safety and
soundness of mortgage markets and the economy at large. And that is part of the
reason why w e believe that meaningful substantive reform is needed.
Moreover, the accounting issues and management issues and earnings issues that
arose over the last year with respect to Fannie, Freddie, and several of the H o m e
Loan Banks give us good reason to avoid being complacent.
There is a metaphor that appeals to me. Congress created Fannie, Freddie, and
the H o m e Loan Banks as muscular workhorses to help with the plowing—and it
was tough, hard plowing at first. Congress put them in harness, to serve important
national purposes of promoting homeownership. Our focus at the Administration is
on how best to control the reins to ensure that these housing workhorses focus their
strength on straight and deep furrows, rather than on how to cut the reins and see
what they might do if left free to wander the pasture.
That control takes strong, effective hands. For that reason, while the Administration
does not support proposals for privatization of Fannie Mae, Freddie Mac, and the
Federal H o m e Loan Banks, w e also cannot support continuation of the status quo.
In fact, no one interested in promoting h o m e ownership in this nation should be
satisfied with the status quo. W e need a stable, dependable system of housing
finance to achieve and sustain the highest levels of homeownership, now and in the
future.
We are making great progress. In 2002, President Bush announced the goal of this
Administration to increase the number of minority homeowners by 5.5 million before
the end of the decade. W e are ahead of schedule. Already more than one and a
half million minority families have moved into their own h o m e since the
announcement of the President's goal. Statistics announced just yesterday reveal
that for the first time ever, more than half of minority households own the h o m e they
live in, and our national homeownership rate set a new record.
But there is still a lot more work to do, and we are doing it. On December 16, 2003,
the President signed into law the American Dream Downpayment Act of 2003, to
help approximately 40,000 families a year with their down payment and closing
costs, and further strengthen America's housing market.
That is why we are so determined to bring a new, higher standard of supervision
and accountability for Fannie, Freddie, and the Federal H o m e Loan Banks,
because w e are going to expect them to do even more to expand homeownership.
Second best will not do. W e need a supervisor that has all of the authorityincluding the stature and power to wield that authority consistently—that w e would
look for in any credible financial regulator. That includes the authority to review the
new activities of these government-sponsored enterprises. Since the government
sponsored them, then the government should be able to examine what they
propose to do with that sponsorship.
JS-1 i 4 /: Remarks of Wayne A. Abernathy Assistant Secretary of the Treasury to Americ... Page 3 of 5
What we do support is a prudential supervisor for Fannie, Freddie, and the Federal
H o m e Loan Banks that has full authority to set prudent capital levels, both minimum
and risk-based capital.
S o m e would suggest that authority over risk-based capital is all that is needed, that
if you are setting capital standards based entirely on risk, what more is wanted?
Just last week I had a frank conversation with some market place experts, experts
in G S E securities. I asked them, has the art of regulatory risk-based capital
progressed to the point where it captures all of the risk, where w e do not need
minimum capital standards? They shook their heads, and said, "No." I have not yet
found capital market experts w h o would argue otherwise, or, more importantly, w h o
would invest significant money on any other basis than a foundation of strong,
minimum capital.
There remain risks that we cannot yet quantify, that we cannot yet fully predict, that
w e cannot yet fully account for. Until w e can, for the unknown, unknowable, or
simply unpredictable and unidentifiable risks, w e will need minimum capital. A n d
the regulator needs full authority to define what that minimum capital level is, and to
change it as circumstances warrant.
I will tell you what else we support. We support a regulator with full receivership
authority for the orderly resolution of a government sponsored enterprise that gets
into serious financial difficulty. That includes full authority for the fair and equitable
distribution of assets to avoid a legal free-for-all that could disrupt and disorganize
our housing finance markets. That means all the authority to wind up affairs in an
orderly manner—reserving for Congress, in the case of Fannie and Freddie, the
power to revoke charters.
We support an independent funding source, outside of the appropriations process,
as Congress has already created for the federal bank, thrift, and credit union
supervisors. W h e n Congress w a s recently forced into a Continuing Resolution to
fund the government over the holidays, a lot of important programs were put on
hold. O n e of those w a s the much needed increase in resources for Fannie Mae's
regulator to hire the extra manpower to review the condition of Fannie Mae's
books. That crucial regulatory need was put on hold while Fannie Mae's regulator
waited for budget authority, authority that would be paid for entirely by Fannie M a e
and Freddie Mac, but which law requires the Congress to sign off on first. W e
should not m a k e the regulator of two of the four largest financial institutions in the
country wait each year for an Act of Congress to get the resources to do its job.
And we can support placing this new regulator within the Treasury Department,
provided s o m e basic standards are met to ensure that doing so will strengthen the
supervisory structure w e are creating, and not interfere with another important job
at Treasury, the wise and efficient receipt and use of taxpayer resources. A case
involving the Comptroller of the Currency demonstrates why that is so important.
Last year the supervisor of national banks, the Comptroller of the Currency,
prohibited certain national banks from renting their charter to so-called payday
lenders. Under this practice, a payday lender would pay a national bank to set up
operations in the bank's name, but the bank would have little say over the payday
lender's operations. Under such a scheme, the bank took on s o m e financial risk,
but it took on enormous reputational risk.
S o the Comptroller said, "You can't do that. The reputation of the national bank
charter is too important."
We cannot allow, no one in this nation should be willing to tolerate, renting the
Treasury's charter, its good name. But that is what w e would be doing if w e placed
a n e w regulator under the shield of the Treasury, but blocked the Treasury
Secretary from any meaningful role in the key policies of that agency.
A reporter not long ago asked me, where is the compromise in the Administration's
position? I replied that the question misunderstood the approach taken by the
Administration to the problem of adequate financial supervision. W e did not begin
this process by trying to stake out an excessive position from which to begin
bidding. W e conducted a detailed and thorough study to identify what are the
minimum elements of credible financial supervision. W e asked, what are the
fundamentals?
The result was the identification of a few key, first principles of prudential
supervision that m a k e for a safe and sound supervisory system. There cannot be
JS-1 LH i: Remarks of Wayne A. Abernathy Assistant Secretary of the Treasury to Americ... Page 4 of 5
and should not be any credibility in a system that is less than safe.
Earlier, I used the analogy of a work horse, which I think very appropriately applies
to the important, fundamental mission assigned to our housing G S E s . Let m e now
call upon another analogy that helps to understand the complex and sophisticated
financial institutions they have become.
I point you to the world of Formula One racing. From the perspective of speed and
technology, Formula O n e racing is at the top of the racing art. This from the official
website of Formula O n e racing:
"A modern Formula One car has almost as much in common with a jet fighter as it
does with an ordinary road car."
These cars achieve top speeds in excess of 200 mph. At these speeds the
tolerance for error is small. A small error m a y m e a n more than the loss of a race; it
m a y spell disaster for the driver and serious harm to other participants.
A lot of people have a lot of fun with the statistics that apply to our GSEs, probably
because it is so hard to grasp mentally the size of these institutions. Here are a few
statistical forays: Fannie Mae, Freddie Mac, and the Federal H o m e Loan Banks
include two of the four largest financial institutions in the United States. Only about
10 banks or thrifts in the United States have more assets than the largest Federal
H o m e Loan Bank, and fewer than 40 have more assets than the smallest.
Collectively, they offer more securities to the financial markets each year than does
the U. S. Treasury. Fannie and Freddie have about 40 per cent of the secondary
mortgage market, and so on.
The point is, they are big, very big. And their importance for our financial markets in
general and our housing markets in particular is big. In this case, size matters.
They are in the top tiers of financial institutions. At this size, the tolerance for error
is small.
Again from the official Formula One website:
"The construction of Formula One cars and the materials used are strictly controlled
by the regulations to maximise their safety.
"The main structure of the car comprises a safety cell which contains the cockpit
plus the fuel tank, which is housed immediately behind (but separated from) the
driver.
"This safety cell must meet minimum size requirements and must have an impactabsorbing structure immediately in front of it. The design of the car must also
include an additional impact-absorbing structure at the rear, behind the gearbox."
As with Formula One racing, wonderful innovations and achievements can be
encouraged and realized, because of important safety rules that are imposed and
enforced. A s the Formula O n e car has a safety cell to protect the driver, so must
the G S E have capital requirements and other prudential standards tailored to
protect the fundamental job of the G S E .
It is the view of the Administration that this kind of safety regime can be and must
be created. In doing so, w e provide for the safety of the spectators and the
participants alike.
Keeping Fannie Mae, Freddie Mac, and the Federal Home Loan Banks on track
means the highest safe speeds for our housing industry and all w h o benefit from it.
JS-i 148: Warshawsky Statement on Factory Orders and Non-Manufacturing Business Ac... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 4, 2004
JS-1148
Statement of Acting Assistant Secretary for Economic Policy Mark
Warshawsky on Factory Orders and Non-Manufacturing Business Activity
Reports out today suggest economic activity continues to gain momentum. An
index of non-manufacturing business activity jumped in January to its highest level
on record. O n the manufacturing front, factory orders rose in December to reach the
highest level in three years suggesting we'll see further pickup in production. An
index of manufacturing activity released earlier this week is at a twenty-year high.
These are encouraging signs which indicate the economy's fundamentals are
strong. But there is more to be done, and this Administration will continue its efforts
to strengthen the economy and boost job creation until every American looking for
work can find a job.
JS-i iw. statement by Treasury Spokesman Rob Nichols
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 5, 2004
JS-1149
Statement by Treasury Spokesman Rob Nichols
After the G7 Meeting of Finance Ministers and Central Bank Governors in Boca
Raton, Treasury Secretary John S n o w will visit Miami, T a m p a and Jacksonville,
Florida February 9-10 to discuss U.S. policy towards Cuba and the President's plan
to further strengthen the U.S. economy and create jobs.
On February 9th, in Miami, the Secretary will deliver remarks before an audience of
Cuban Americans about the economic embargo against Castro's regime and our
hopes for freedom for the Cuban people.
On February 10th, in Tampa, the Secretary will meet with local business leaders
and then tour Sun State International Trucks, a full service truck dealership. Later
that day in Jacksonville, the Secretary will tour Florida Community College's n e w
Advanced Technology Center, which provides workforce training in the following
emerging-economy career fields: information technology, biotechnology, advanced
manufacturing and transportation technology.
More than 5 million taxpayers in Florida have lower income tax bills as a result of
the President's recently enacted growth package.
A schedule of the Secretary's open press events will be posted on
www.treasury.gov on Friday, February 6th.
JS-i o u : Warshawsky Statement on 2003-Q4 Productivity Report
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 5, 2004
JS-1150
Statement of Acting Assistant Secretary for Economic Policy Mark
Warshawsky on 2003 Fourth Quarter Productivity Report
Statement of Acting Assistant Secretary for Economic Policy Mark Warshawsky on
2003 Fourth Quarter Productivity Report
Building on the third quarter's strong productivity gains, we saw further growth in
the fourth quarter of 2003. In the 12 quarters since the end of 2000, productivity
has grown at a 4.1 percent annual rate, the most rapid three-year change in
decades. Rapid productivity growth is making it more affordable to hire workers,
boosting profit margins, and keeping inflation low.
In addition to recent good news including gains in manufacturing, growth in the
services sector, higher consumer confidence and ongoing strength in the housing
market, today's productivity report illustrates that a solid economic recovery
continues. Yet, there is more to be done and w e remain dedicated to ensuring that
job opportunities are there for every American looking for work.
;r_SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 5, 2004
2004-2-5-15-22-2-12208
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 $85,368 million as of the end of that week, compared to $86,610 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 23, 2003
January 30, 2004
86,610
85,368
TOTAL
1. Foreign Currency Reserves '
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
8,508
14,810
23,318
8,386
14,862
23,248
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
13,774
2,975
16,749
13,606
2,986
16,592
b.ii. Banks headquartered in the U.S.
0
0
).ii. Of which, banks located abroad
0
0
\iii. Banks headquartered outside the U.S.
0
0
.iii. Of which, banks located in the U.S.
0
0
. IMF Reserve Position 2
22,744
22,887
. Special Drawing Rights (SDRs) 2
12,755
12,598
11,043
11,043
0
0
3
Gold Stock
Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 23, 2003
Euro
oreign currency loans and securities
Yen
January 30, 2004
TOTAL
Euro
0
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
January 23, 2003
Euro
1. Contingent liabilities in foreign currency
Yen
January 30, 2004
TOTAL
0
Euro
Yen
TOTAL
0
La. Collateral guarantees o n debt due within 1
year
1 .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.
Ic. With banks and otherfinancialinstitutions
Headquartered outside the U.S.
\. Aggregate short and long positions of
ptions in foreign
•urrencies vis-a-vis the U.S. dollar
.a. Short positions
.a.l. Bought puts
a.2. Written calls
b. Long positions
b.l. Bought calls
3.2. Written puts
Notes:
eludes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
MA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
)sits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
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 IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
ureau of the Public Debt: Public Debt Announces Activity for Securities In The STRIPS Program For ... Page 1 of 1
B u r e a u of *he
Public
l
ed Stare; Department
of r!\e J re
asm y
iblic Debt Announces Activity for Securities in the STRIPS Program for
nuary 2004
R IMMEDIATE RELEASE
ruary 5, 2004
Bureau of the Public Debt announced activity for the month of January 2004, of securities within the Separate Trading of Register
•est and Principal of Securities program (STRIPS).
In Thousands
cipal Outstanding (Eligible Securities) $2,578,568,532
I in Unstripped Form $2,402,044,105
in Stripped Form $176,524,427
instituted in December $12,462,630
ccompanying table, gives a breakdown of STRIPS activity by individual loan description. The balances in this table are subject to
and subsequent revision. These monthly figures are included in Table V of the Monthly Statement of the Public Debt, entitled
ngs of Treasury Securities in Stripped Form."
TRIPS table, along with the new Monthly Statement of the Public Debt, is available on Public Debt's Internet site at:
)ublicdebt.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
11 y
JS-i 1 JZ: aiatement ot Secretary John Snow on January Employment Report
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 6, 2004
JS-1152
Statement of Secretary John Snow on January Employment Report
Today's report on employment marks the fifth straight month of job growth, pushing
the number of jobs created over the past five months to over 360,000. The
unemployment rate has continued to drop since its peak in June, the largest sevenmonth decline since 1995. We're seeing solid gains in the underlying fundamentals.
Manufacturing is showing signs of progress, a services sector index hit its highest
level on record in January, consumer confidence is improved, and the housing
market continues to be a base of strength for the economy. Following exceptional
G D P growth in the third quarter, 2003 ended on solid ground, coming in above the
historical average. The President's Jobs and Growth Act, which provided needed
tax relief for millions of American families, continues to boost economic activity and
improve the environment for job creation.
I'm pleased by the strength of the recovery underway, but not satisfied. The
President will persist in his efforts to drive economic growth and job creation until
every American looking for work can find a job.
Page 1 ot i
Jo-n JO: ireasury issues Guidance to Clarify Treatment of Environmental Remediation ...
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 6, 2004
JS-1153
Treasury Issues Guidance to Clarify Treatment of Environmental Remediation
Costs
Today the Treasury Department and the IRS issued two revenue rulings to clarify
the tax treatment of hazardous waste clean-up costs.
The first, Revenue Ruling 2004-17, clarifies that the money taxpayers spend in a
current taxable year to clean up environmental contamination that occurred in
previous years does not qualify for a special rate adjustment.
The second, Revenue Ruling 2004-18, clarifies that the money taxpayers spend for
hazardous waste clean up costs m a y have to be capitalized into inventory costs.
Related Documents:
• Revenue Ruling 2004-17
• Revenue Ruling 2004-18
Parti
Section 1341 .BComputation of Tax Where Taxpayer Restores Substantial Amount Held
Under Claim of Right
26 C F R 1.1341-1: Restoration of amounts received or accrued under claim of right.
(Also ' 263A.)
Rev. Rul. 2004-17
ISSUES
Do amounts paid or incurred in the current taxable year to remediate
environmental contamination that occurred in prior taxable years qualify for treatment under
1
1341 of the Internal Revenue Code?
FACTS
Situation 1
N manufactures products that it sells to wholesalers and retailers. N=s
manufacturing process creates hazardous waste. N uses an accrual method of accounting
and the calendar taxable year. From the inception of its business in 1950 until 1979, N
buried the hazardous waste on land that it owned in accordance with then applicable state,
federal, and local environmental laws. N accounted for waste disposal costs as a
deducible expense under § 162.
Significantly stricter state, federal, and local hazardous waste disposal laws were
enacted in later years. In 2004, in order to comply with current environmental laws, N incurs
expenses for all necessary services to eliminate soil and water contamination caused by
the buried waste, transport the waste to a waste disposal facility that complies with current
environmental laws, and restore the land.
Situation 2
The facts are the same as in Situation 1 except that N accounted for waste disposal
costs as a production cost in calculating its inventory costs for all years.
LAW AND ANALYSIS
Section 1341 applies if: (1) the taxpayer included an item in gross income for a
2
prior taxable year (or years) because it appeared that the taxpayer had an unrestricted
right to the item, (2) a deduction is allowable to the taxpayer for the taxable year because it
w a s established after the close of the taxable year (or years) of inclusion that the taxpayer
did not have an unrestricted right to the item or to a portion of the item, and (3) the amount
of the deduction exceeds $3,000. Section 1341(a)(1) - (3).
If • 1341 applies, the chapter 1 tax for the taxable year equals the lesser of: (1) the
tax for the taxable year computed with the current deduction, or (2) the tax for the taxable
year computed without the deduction, less the decrease in tax for the prior taxable year (or
years) that would have occurred if the item or portion thereof had been excluded from gross
income in the prior taxable year (or years). Section 1341 (a)(4) and (5). Section 1341
ensures that the taxpayers position is not worse than the position the taxpayer would have
been in if the taxpayer had not included the item or portion thereof in gross income in the
earlier year (except for the time value of money).
Section 1.1341-1(a)(1) of the Income Tax Regulations provides that • 1341 applies
if the taxpayer is entitled to a deduction of more than $3,000 because of the restoration to
another of an item that w a s included in the taxpayers gross income for a prior taxable
year (or years) under a claim of right.
Under the claim of right doctrine, a taxpayer that receives an amount under a claim
of right without restriction on disposition must include the amount in gross income in the
taxable year received, notwithstanding that the taxpayers right to retain the amount
received m a y be uncertain and the taxpayer subsequently m a y be required to restore the
amount to the rightful owner. North American Oil Consol. v. Burnet, 286 U.S. 417, 424
(1932).
In United States v. Lewis, 340 U.S. 590 (1951), the Supreme Court concluded that a
taxpayer w h o w a s required under the claim of right doctrine to include a bonus in income in
the taxable year received, and w h o had to repay part of the bonus in a later year, could not
amend his tax return for the earlier year. The taxpayers only remedy w a s to deduct the
amount repaid in the taxable year in which the taxpayer restored it to the payor. T h e Court
followed the principle that income is properly reported under the claim of right doctrine in
the year received, consistent with a tax system based on annual rather than transactional
accounting. See Burnet v. Sanford & Brooks Co., 282 U.S. 359, 364, 365 (1931).
The application of the claim of right doctrine may result in an inequity when, because
of changes in tax rates or other circumstances, the tax increase resulting from the income
inclusion in the earlier year exceeds the tax decrease that results from the deduction in the
later year. Congress enacted ' 1341 to ameliorate this inequity in cases such as Lewis, in
which a taxpayer receives an amount that it is required in a later taxable year to restore or
repay to another claimant. See S. Rep. No. 1622, 83d Cong. 2d Sess. 118(1954)
3
(AUnder present law if a taxpayer is obligated to repay amounts which he had received in
a prior year and included in income because it appeared that he had an unrestricted right
to such amounts, he m a y take a deduction in the year of restitution®) (emphasis added);
H.R. Rep. No. 1337, 83d Cong. 2d Sess. 86 (1954) (same).
Section 1341(a)(2) requires that it be established after the close of the taxable year
or years that the taxpayer did not have an unrestricted right to the item of gross income or
portion thereof. To satisfy this test the taxpayer must repay or restore the item or portion of
the item to another claimant. Section 1.1341-1(a)(1); see also Chernin v. United States,
149 F.3d 805 (8th Cir. 1998) (relying on a Alegislative history [that] is replete with
references to repayment, restoration, and restitution®); S. Rep. No. 1622, 83d Cong. 2d
Sess. at 118; H.R. Rep. No. 1337, 83d Cong. 2d Sess. at 86.
For purposes of • 1341, to restore an item included in income, the repayment must
arise out of the s a m e circumstances, terms, and conditions as the original payment of the
item to the taxpayer. Griffiths v. United States, 54 Fed. CI. 198 (2002). The fact that the
amount of the repayment bears no relationship to the amount included in income indicates
that the repayment does not arise from the s a m e or specific circumstances, terms, and
conditions as the original transaction. Bailey v. Commissioner, 756 F.2d 44 (6th Cir.
1985); Uhlenbrock v. Commissioner, 67 T.C. 818 (1977).
In both Situation 1 and Situation 2, the environmental remediation costs N incurs in
2004 do not qualify for treatment under § 1341 (a). N did not include an item in gross
income that N is repaying or restoring in a later year. In these situations, the item of gross
income for purposes of ' 1341 (a) is the proceeds received from the sale of A/=s products
from 1950 to 1979. See Rev. Rul. 72-28, 1972-1 C.B. 269. During 1950 to 1979, N had
an unrestricted right to the proceeds received from the sale of A/=s products during those
years. In 2004, A/=s right to the sales proceeds received during 1950 to 1979 remains
unrestricted. A/=s payment of the environmental remediation costs does not restore in a
later taxable year any portion of the proceeds received from the original sale of A/=s
products in 1950 through 1979. Moreover, A/>s obligation to incur the environmental
remediation costs does not arise from the s a m e or specific circumstances, terms, or
conditions as the original sale of A/=s products in 1950 to 1979. The amount of A/=s
environmental remediation costs bears no relation to the amount of proceeds received
from the sale of A/=s products in 1950 to 1979. Accordingly, A/=s payment of
environmental remediation costs in 2004 is not a repayment or restoration of an item
included in gross income. A/=s environmental remediation costs do not satisfy the
repayment or restoration requirement of ' 1341 (a)(2).
Section 1341(a)(2) also requires, as a prerequisite to • 1341 treatment, that a
4
deduction must be allowable to the taxpayer for the repayment or restoration of the item
included in income. Section 1341 itself provides no right to a deduction. Instead, the
deduction must be allowable under another provision of the Code. Section 1.1341-1(a)(1);
Wood v. United States, 863 F.2d 417, 420 (5th Cir. 1989); MidAmerican Energy Co. v.
Commissioner, 114 T.C. 570, 583( 2000), aff=d, 271 F.3d 740 (8th Cir. 2001).
Inventory costs under • 263A are recovered through cost of goods sold when the
inventory is sold. Section 1.263A-1 (c)(4). Costs of goods sold, or inventory costs, are not
deductions but are properly treated as adjustments to gross income. Section 1.61-3(a).
Environmental remediation costs incurred by reason of a production activity must be
included in inventory costs. See Rev. Rul. 2004-18, 2004-8 I.R.B. (clarifying Rev. Rul. 9438, 1994-1 C.B. 35); ' 1.263A-1 (e)(3). Thus, under • 263A, A/=s environmental
remediation costs are inventory costs, not deductions. Furthermore, in Situation 2,
because the environmental remediation costs N incurs in 2004 would have been
accounted for under A/=s method of accounting as inventory costs in 1950 through 1979 if
incurred in those earlier years, the costs are properly treated as inventory costs under A/=s
method of accounting w h e n incurred in 2004. Therefore, A/=s environmental remediation
costs do not qualify for treatment under ' 1341 because the costs are inventory costs and
do not satisfy the deduction requirement of § 1341(a)(2).
Section 1341 (b)(2) provides that * 1341 (a) does not apply to any deduction
allowable with respect to an item included in gross income by reason of the sale or other
disposition of the taxpayers stock in trade (or other property of a kind that would have
been included in the taxpayers inventory if on hand at the close of the prior taxable year)
or property held by the taxpayer primarily for sale to customers in the ordinary course of its
trade or business. Thus, even if A/=s environmental remediation costs constituted
deductible expenses rather than inventory costs recovered through cost of goods sold,
1
1341(a) would not apply. A/=s environmental remediation costs are a consequence of
the manufacture and sale of A/=s products and, if not an inventory cost, would be deductible
as an ordinary and necessary business expense of selling A/=s products. Accordingly, in
both Situations 1 and 2, the environmental remediation costs would be allowable with
respect to an item that is included in gross income by reason of the sale of N=s products
and would not be eligible for • 1341 (a) treatment by reason of • 1341 (b)(2).
HOLDING
Amounts paid or incurred in the current taxable year to remediate environmental
contamination that occurred in prior taxable years do not qualify for treatment under
' 1341.
5
DRAFTING INFORMATION
The principal author of this revenue ruling is Forest Boone of the Office of Associate
Chief Counsel (Income Tax & Accounting). For further information regarding this revenue
ruling, contact Mr. Boone at 202-622-4960 (not a toll-free call).
Parti
Section 263A.BCapitalization and Inclusion in Inventory Costs of Certain Expenses
26 CFR 1.263A-1: Uniform capitalization of costs.
(Also ' 162.)
Rev. Rul. 2004-18
ISSUE
Are costs incurred to clean up land that a taxpayer contaminated with hazardous waste
by the operation of the taxpayers manufacturing plant includible in inventory costs under
1
263A of the Internal Revenue Code?
FACTS
X, a corporation using an accrual method of accounting, owns and operates a
manufacturing plant that produces property that is inventory in X = s hands. X s
manufacturing operations discharge hazardous waste. In the past, X buried this waste on
portions of X = s land. The land w a s not contaminated by hazardous waste when purchased
byX
In order to comply with applicable federal, state, and local environmental requirements,
X incurs costs (within the meaning of ' 461 (h)) to remediate the soil and groundwater that
had been contaminated by the hazardous waste, and to establish an appropriate system
for the continued monitoring of the groundwater to ensure that the remediation removes all
hazardous waste. The costs X incurs are not research and experimental expenditures
within the meaning of ' 174 or environmental management policy costs. The soil
remediation and groundwater treatment restores X s land to essentially the s a m e physical
condition that existed prior to the contamination. During and after the remediation and
treatment, X continues to use the land and operate the plant in the s a m e manner as X did
prior to the cleanup except that X disposes of any hazardous waste in compliance with
environmental requirements.
LAW
Section 263A(a) provides that the direct costs and indirect costs properly allocable to
property that is inventory in the hands of the taxpayer shall be included in inventory costs.
Section 1.263A-1 (a)(3)(H) of the Income Tax Regulations provides, in part, that
taxpayers that produce tangible personal property must capitalize (1) all direct costs of
2
producing the property, and (2) the property=s allocable share of indirect costs.
Section 1.263A-1(e)(3)(i) provides, in part, that indirect costs are properly allocable to
property produced when the costs directly benefit or are incurred by reason of the
performance of production activities. Cost recovery, production facility repair and
maintenance costs, and scrap and spoilage costs, such as waste removal costs, are
examples of indirect costs that must be capitalized to the extent the costs are properly
allocable to produced property. S e e • 1.263A-1 (e)(3)(ii) (I), (O) and (Q).
Section 1.263A-1(e)(4)(iv)(l) provides that costs incurred for environmental
management policy generally are not allocated to production or resale activities (except to
the extent that the costs of any system or procedure benefit a particular production or
resale activity).
Section 1.263A-1 (c)(2)(ii) provides that the amount of any cost required to be
capitalized under • 263A m a y not be included in inventory or charged to capital account or
basis before the taxable year during which the amount is incurred within the meaning of '
1.446-1 (c)(1 )(ii). Pursuant to ' 461 (h), in determining whether an accrual method taxpayer
has incurred an amount for any item during the taxable year, the all events test shall not be
treated as met any earlier than w h e n economic performance occurs.
Section 1.263A-2(a)(3)(i) provides that any cost required to be capitalized by ' 263A
must be capitalized regardless of whether the cost w a s incurred before, during, or after
production.
Rev. Rul. 94-38, 1994-1 C.B. 35, analyzes whether costs incurred to clean up land and
to treat groundwater that a taxpayer contaminated with hazardous waste from the
taxpayers manufacturing business are capital expenditures. The ruling holds that the
costs to clean up land used in the taxpayers manufacturing process and to treat
groundwater are not capital expenditures because these costs do not prolong the useful life
of the land or adapt the land to a n e w or different use. Therefore, costs incurred to clean up
land and to treat groundwater that a taxpayer contaminated with hazardous waste from the
taxpayers business are deductible by the taxpayer as business expenses under • 162.
Costs properly allocable to constructing groundwater treatment facilities, however, are
capital expenditures under ' 263.
Rev. Rul. 98-25, 1998-1 C.B. 998, holds that costs incurred to replace underground
storage tanks containing waste by-products under the circumstances in the ruling are not
capital expenditures under • 263, but are ordinary and necessary expenses under • 162.
ANALYSIS
3
The discussion in Rev. Rul. 94-38 of Plainfield-Union Water Co. v. Commissioner, 39
T.C. 333 (1962), nonacq., 1964-2 C.B. 8, demonstrates that the revenue ruling w a s
intended to address whether the costs to clean up the land and to treat the groundwater are
capital expenditures that must be capitalized into the basis of the land under • 263(a) or
whether the costs are ordinary and necessary repair expenses under • 162. Rev. Rul. 9438 does not address the treatment of these costs as inventory costs under • 263A.
Similarly, Rev. Rul. 98-25 does not address whether amounts incurred to replace
underground storage tanks must be included in inventory costs under ' 263A.
The holding of Rev. Rul. 94-38 that the costs to construct a groundwater treatment facility
must be capitalized under ' • 263(a) and 263A rather than deducted under • 162
demonstrates the distinction between capital expenditures and costs that are more in the
nature of repairs than capital improvements. A s with other types of deductible business
costs, such as labor costs, taxes, rent, and supplies, once repair costs are determined to
be deductible under • 162, a taxpayer with inventories must still apply the rules of ' 2 6 3 A
to determine whether the repair costs must be included in inventory. Section 1.263A1(e)(3). In addition, if repair costs must be capitalized under • ' 263(a) and 263A to a
depreciable asset, a taxpayer with inventories must still apply the rules of ' 2 6 3 A to
determine whether the depreciation expense must be included in inventory. Section
1.263A-1(e)(3)(ii)(l).
In this situation, X incurs environmental remediation costs to clean up land that was
contaminated as part of the ordinary business operations of X = s manufacturing of
inventory. X = s environmental remediation costs are incurred by reason of X = s production
activities within the meaning of • 1.263A-1 (e)(3)(i). The costs are properly allocable to
property produced by X that is inventory in X = s hands under • 1.263A-1(e)(3)(i).
Accordingly, X must capitalize the otherwise deductible environmental remediation costs
by including the costs in inventory costs in accordance with • 1.263A-1 (c)(3). Similarly,
costs incurred to replace underground storage tanks and depreciation cost recoveries of
the groundwater treatment facility must be included in inventory costs to the extent properly
allocable to inventory.
HOLDING
Environmental remediation costs are subject to capitalization under • 263A. Therefore,
costs incurred (within the meaning of ' 461(h) and ' 1.263A-1(c)(2)(ii)) to clean up land
that a taxpayer contaminated with hazardous waste by the operation of the taxpayers
manufacturing plant must be included in inventory costs under ' 263A.
TRANSITION RULE
This paragraph applies to costs that would have been properly deducted in the taxable
4
year but for the requirement to capitalize the costs to inventory under § 263A, and for which
the taxpayer's method of accounting was to deduct the costs. The Internal Revenue
Service will not challenge the treatment of environmental remediation costs to which this
paragraph applies as deductible expenses rather than as costs properly capitalized to
inventory under § 263A in any taxable year ending on or before February 6, 2004.
Therefore, the treatment of environmental remediation costs to which this paragraph
applies as amounts properly capitalized to inventory under § 263A will not be raised as an
issue in any taxable year ending on or before February 6, 2004, and, if the treatment of
such environmental remediation costs as deductible expenses rather than as amounts
properly capitalized to inventory under § 263A has already been raised as an issue in
examination or before Appeals or the Tax Court in a taxable year ending on or before
February 6, 2004, the issue will not be further pursued. The Service will not impose
penalties on taxpayers or preparers for treating environmental remediation costs to which
this paragraph applies as deductible expenses rather than as costs properly capitalized to
inventory under § 263A in taxable years ending on or before February 6, 2004.
CHANGE IN METHOD OF ACCOUNTING
A taxpayer using a method of accounting that does not comply with this revenue ruling
using an impermissible method of accounting. Any change in a taxpayer's treatment of
environmental remediation costs to conform with this revenue ruling is a change in method
of accounting to which the provisions of ' ' 446 and 481 and the regulations thereunder
apply. A taxpayer changing its method of accounting to comply with this revenue ruling
must file a Form 3115 in accordance with the automatic change in method of accounting
provisions of Rev. Proc. 2002-9, 2002-1 C.B. 327, as amplified, clarified and modified by
Rev. Proc. 2002-54, 2002-2 C.B. 432, and Rev. Proc. 2002-19, 2002-1 C.B. 696, with the
following modifications: (1) the scope limitations in section 4.02 of Rev. Proc. 2002-9 do
not apply to a taxpayer that wants to make the change for its first taxable year ending after
February 6, 2004; and (2) a taxpayer that files a Form 3115 in accordance with this
revenue ruling to make the change in method of accounting for its first taxable year ending
after February 6, 2004, may effect the change using either a ' 481 (a) adjustment as
provided in sections 5.03 and 5.04 of Rev. Proc. 2002-9 or a cut-off method. For purposes
of Line 1 a of Form 3115 (revised December 2003), the designated number for the
automatic accounting method change authorized by this revenue ruling is "77." A taxpayer
making the automatic change in method of accounting authorized by this revenue ruling
and another automatic change in method of accounting under § 263A for the same taxable
year may file one Form 3115 to make both changes, but must comply with the ordering
rules of § 1.263A-7(b)(2) and must enter the automatic accounting method change
numbers for both changes on Line 1a of Form 3115 (revised December 2003).
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 98-25 and Rev. Rul. 94-38 are clarified by providing that the otherwise
5
deductible amounts at issue in Rev. Rul. 98-25 and Rev. Rul. 94-38 are subject to
capitalization to inventory under • 263A.
Rev. Proc. 2002-9 is modified and amplified to include in the APPENDIX the automatic
change provided in this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue ruling is John Moriarty of the Office of Associate
Chief Counsel (Income Tax & Accounting). For further information regarding this revenue
ruling, contact Mr. Moriarty at 202-622-4930 (not a toll-free call).
•1154: Secretary hosts G-7 Finance Ministers
PRESS ROOM
F R O M T H E OFFICE OF PUBLIC AFFAIRS
February 8, 2004
JS-1154
Secretary John Snow hosts G-7 Finance Ministers
Secretary John Snow hosts G-7 Finance Ministers
Media Contact Secretary John Snow hosts G-7 Finance Ministers
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JS-i iDO: rnoto: treasury Secretary John Snow hosts the G-7 event at Boca Raton, FL.
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 7, 2004
JS-1155
Photo: Treasury Secretary John Snow hosts the G-7 event at Boca Raton, FL.
(Left to Kignt) sinan Al-Shabibi, Governor, Central Bank of Iraq, Kamel Al-Gailani
Minister of Finance, Secretary John Snow and Chairman Alan Greenspan.
Media Contact
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Only call this number if you are a member of the media.
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February 7, 2004
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Photo: Treasury Secretary John Snow greets Minister of Finance Sadakazu
Tanigaki of Japan at the G7 conference held in Boca Raton, FL.
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Media Contact
All media queries should be directed to the
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February 7, 2004
JS-1157
Photo: Treasury Secretary John Snow greets Minister of Finance Sadakazu
Tanigaki of Japan at the G 7 conference held in Boca Raton, FL.
Media Contact
All media queries should be directed to the
Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
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JS-i u o . oiaiement ot u-7 Finance Ministers and Central Bank Governors
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February 7, 2004
JS-1158
Statement of G-7 Finance Ministers and Central Bank Governors
The global economic recovery has strengthened significantly since our meeting in
Dubai and risks have diminished. Growth projections for 2004 have been revised
upward to their highest in three years. Fiscal and monetary policies have helped
bring about these welcome changes.
Yet much more remains to be done. The pace of growth among our economies
remains uneven. In our Agenda for Growth initiative, w e emphasize supply-side
structural policies that increase flexibility and raise productivity growth and
employment. Today w e released a progress report on our Agenda for Growth. This
Agenda and sound fiscal policies over the medium-term are key to addressing
global current account imbalances. W e outlined strategies for sustained mediumterm fiscal consolidation as economies recover. International trade is vital; w e call
for further efforts and for countries to take the steps to resume the Doha Round,
which is pivotal to global growth and the alleviation of world poverty.
We reaffirm that exchange rates should reflect economic fundamentals. Excess
volatility and disorderly movements in exchange rates are undesirable for economic
growth. W e 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 that lack such flexibility to promote
smooth and widespread adjustments in the international financial system, based on
market mechanisms.
To combat terrorist financing, we urge all countries to strengthen their asset
freezing regimes and to combat abuse of the informal financial sector and non-profit
organizations. The IMF/World Bank should make permanent and comprehensive
their assessments of countries' efforts to combat terrorism financing.
We are committed to further enhance transparency and supervisory standards in
financial markets, in particular non-compliant off-shore centers.
We have a shared interest in seeing strengthened economic growth in the greater
Middle East. W e had a productive meeting with our counterparts from Afghanistan
and Iraq. W e welcome the completion of the currency exchange in Iraq and the
removal of interest rate controls, and w e look forward to the approval of the new
central bank law. W e welcome progress on reform and reconstruction in
Afghanistan and the renewed efforts to collect revenues from the provinces. W e
call on others to join us in reducing the debt burdens of Iraq and Afghanistan. W e
welcome the plans of the IMF and the World Bank to provide financial and technical
assistance to Iraq and Afghanistan.
The private sector plays a critical role in fighting global poverty and creating jobs in
developing countries. W e encourage the M D B s to work with governments to
improve investment climates and provide more resources to support the private
sector. Remittances are an important source of income for many developing
economies. W e aim to reduce the impediments that raise the cost of sending
remittances. W e reaffirm our commitment to fight global poverty and to help
countries achieve the international development goals of the Millennium Declaration
through our work on debt sustainability, aid effectiveness, absorption capacity, and
financing facilities.
We discussed the progress in our efforts to reform the international financial
JL.- x i j6: statement of G-7 Finance Ministers and Central Bank Governors
system, including improved surveillance, collective action clauses, limits on
exceptional access, measuring results, and the use of other mechanisms, including
grants, to avoid heavy debt burdens. W e also discussed how to consolidate and
build upon these reforms. W e welcome the improvement in financial conditions,
and the higher economic growth in many emerging market countries. W e welcome
the efforts by creditors and issuing countries to develop a code of conduct, which
will be discussed in the G-20. W e call on Argentina to implement policies in line
with its IMF program. Argentina should engage constructively with its creditors to
achieve a high participation rate in its restructuring.
Related Documents:
• Action Plan on Afghanistan
• Agenda for Growth Progress Report
Page 2 of 2
Action Plan on Afghanistan
February 7, 2004
W e met today with the Finance Minister and Central Bank Governor of Afghanistan, and w e
agreed on steps to support the Afghan Government's efforts to accelerate the creation of a
dynamic market economy and to secure Afghanistan's future. The G-7 will continue to support
the Government's development priorities in accordance with the National Development
Framework. T o that end, w e will provide assistance that will produce visible and measurable
results before June, as part of our long-term commitment to the country.
Human Capital: Afghanistan is making significant commitments to education and healthcare.
The G-7 will continue to support these efforts to invest in Afghanistan's most valuable assets its children - by building schools, training teachers, and providing textbooks. The G-7 will also
continue to help the Government build additional health care facilities, and to support efforts to
improve the status of w o m e n in Afghanistan.
Physical Capital: Improving the country's infrastructure, including its transport, electricity, and
telecommunications systems, is a priority for the Afghan Government. W e will help it reach its
goals - such as a doubling of the percentage of paved roads in six years - by completing the
Kandahar-Herat highway, and by supporting the efforts of international bodies to complete, by
the end of 2004, roads they are constructing.
Private Sector Development: We will continue to support the Government's efforts to foster a
climate where the private sector can flourish, including by providing assistance to the
Government on trade and investment, and supporting microfmance lending. W e urge bilateral
and multilateral institutions to consider what support they can provide to those wanting to do
business in and with Afghanistan, within their rules and Afghanistan's capacity.
Economic Governance: We will support the Government's efforts to ensure an adequate revenue
base through improvements in provincial revenue collection, and to strengthen expenditure
management, internal debt management systems and statistical capacity. W e will provide
technical assistance to support the Government's strengthening of key institutions and
improvement of the civil service, and will also work with all creditors to ensure that
Afghanistan's debt situation is sustainable, and with bilateral donors to provide as m u c h
assistance as possible in the form of grants.
Security and Rule of Law: The Government has noted the risks to private sector development
and to the well-being of the Afghan people arising from weak security and rule of law. W e will
continue to support the Government in its efforts to address these problems, including through
reforms to the police and legal systems; the disarmament, demobilization and reintegration of excombatants; and expanding security outside Kabul through the Provincial Reconstruction Teams.
W e recognize that opium production poses a major threat to security, economic growth and
reconstruction in Afghanistan. W e call upon the international community and the Afghan
authorities to join together to eliminate opium production.
Finally, we pledge to provide support to Afghanistan over both the short and long term, and to
help ensure the success of the international conference in March. W e will increase our
assistance, through bilateral and multilateral efforts, such as the Afghanistan Reconstruction
Trust Fund.
A g e n d a for G r o w t h
Progress Report
February 7, 2004
In September 2003, w e adopted the Agenda for Growth initiative to focus our efforts on the need
to undertake supply-side and structural policy changes to increase flexibility, raise productivity
growth and employment, and achieve higher, sustained growth in our countries. Such reforms
sometimes m a y entail short-term costs, but have proven critical to advancing long-term growth.
W e also committed to experience-sharing, to reviewing our results together, and to reporting on
our progress. Our focus is on cooperation. Today, in Boca Raton, w e reviewed our
accomplishments thus far and outlined our future priorities. In this Progress Report, w e list
selected accomplishments since September 2003 -- one for each country — and review upcoming
reform plans.
Accomplishments since September. Germany enacted key elements of the reform Agenda 2010,
including labor market measures that improve work incentives and further tax reduction. Canada
completed the full implementation of its five-year, $100 billion tax reduction plan. Japan
formulated a pension reform plan in December 2003 with a view to securing long-term
sustainability of the pension system, and is preparing for legislation to implement the reform.
France is implementing key provisions of its pension reform law that significantly improves the
sustainability of its public finances. The United Kingdom announced n e w measures to help
small business raise finance and to help promote a culture of enterprise, and to improve access to
its R & D tax credit. Tax rate cuts in the United States worked their w a y through the economy to
promote record growth. Italy's recent labor market reforms entered fully into force in October,
contributing to the further reductio n in the unemployment rate.
Upcoming Reform Plans. Our governments remain committed to pursuing additional progrowth policies. The United States plans to spur saving by creating lifetime and retirement
savings accounts and reducing the structural budget deficit, and to support job creation by
making health care more affordable and pressing for tort reform. In an effort to raise
productivity, the United K i n g d o m is targeting reductions in enterprise regulatory requirements
including a collaborative initiative on regulatory reform across the E U over the next two years,
establishing a long-term strategy for funding innovation and scientific research, and extended
skills training programs. While continuing its steady reduction in the debt-to-GDP ratio, Canada
will provide municipalities with the resources they need for infrastructure investment by
exempting them from the Goods and Services Tax they n o w pay (worth $7 billion over the next
decade) and examining other fiscal mechanisms to provide further predictable funding. Italy
expects to push forward with its pension and corporate tax reform, including tax exemptions on
dividends and capital gains, in 2004. France plans to advance health care reforms this year,
while continuing to press for fewer labor market constraints. Japan will work on further fiscal
expenditure and revenue reforms, including in social security, and will continue to address
financial sector reforms. Pension and tax code reform remain key priorities in Germany,
combined with further improvements in the framework for innovation.
JS-1159: Statement by Secretary John Snow following the G-7 Finance Ministers' Meeting
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 7, 2004
JS-1159
Statement by U.S. Treasury Secretary John Snow
following the G-7 Finance Ministers' Meeting
Boca Raton, Florida, February 7, 2004
Good afternoon. I was extremely pleased to host my fellow G-7 Finance Ministers
and Central Bank Governors in Florida this weekend.
The need for increased global growth was at the top of our agenda. We were all
encouraged to see that the global economic recovery has accelerated since w e met
in Dubai in September. Economic stability is also improving, and risks have
diminished. W e welcomed these developments. W e all depend on each other.
Stronger global growth is in the U.S. interest, and of the G-7, and the world. W e
also recognize that more work is needed to ensure growth that is broad-based and
sustainable, and is less reliant on a single engine.
We reaffirmed our commitment to the Agenda for Growth initiative launched last
September. This initiative focuses on supply-side reforms to boost productivity,
raise growth and employment, and thereby increase living standards. I refer you to
the progress report that w e released summarizing actions taken in each country
and outlining next steps.
For our part, I was proud to report on what we have achieved in the United States
since the Dubai meeting. Due to the President's economic leadership, the U.S.
economy is in a strengthening recovery. The President's tax cuts have worked.
They provided the stimulus that was necessary to turn the economic ship around
and they are now encouraging and allowing for the economic growth that is
continuing into the future.
• Economic growth in the second half of 2003 was the fastest since 1984;
• N e w h o m e construction was the highest rate in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Jobs are coming back;
• Unemployment claims both initial claims and continuing claims - are falling,
indicating improvement in the labor market;
• There is more than three trillion dollars of growth in value in the markets.
• These economic indicators all point to the same conclusion: W e are on a
path to sustained economic growth. However, there is more to do. W e are
not, by any means, satisfied. W e will keep working until every American w h o
wants work can find a job.
I also discussed initiatives we will be pursuing in coming months. I detailed for my
colleagues the commitments that President Bush has made to maximize growth
and job creation, including spurring saving through changes to the tax system;
making health care more affordable; working to prevent frivolous lawsuits from
diverting money from job creation; streamlining regulations; preparing American
workers for the demands of the 21st century job market; and working to make tax
relief permanent, so that families and businesses alike can plan for the future.
I was also pleased to hear the details of others' efforts and their dedication to going
further to increase labor and product market flexibility, boost productivity and raise
employment. But words are not enough. Our actions will be the measure of
success.
During our discussion, I reaffirmed our policy in support of a strong dollar. A strong
JS-1 uy. oiaiement oy secretary John Snow following the G-7 Finance Ministers' Meeting
dollar is in the national interest. The relative values of currencies are best set in
open, competitive markets.
Sound fiscal policies are also a key ingredient for sustained growth, and it will be
important that w e all reduce our budget deficits as our economies recover. I
underscored to m y colleagues that President Bush is serious about deficit
reduction. If w e stick to his strong, pro-growth economic policies and proposed
measures for spending restraint, w e expect to cut the deficit in half, to about 2
percent of G D P , over the next five years.
I want to turn now to Afghanistan and Iraq, another key item on our agenda here
today. It w a s m y pleasure to include representatives from these two countries in our
deliberations. The economic revival of these nations is vital to their citizens and
important to the war on terror. These impressive leaders are playing an
extraordinarily important role, and w e all c o m m e n d their efforts. W e took particular
note of the completion of the currency exchange in Iraq - a vital step forward as
well as the deregulation of interest rates and the increasing openness of the
banking sector to foreign investment.
On Afghanistan, the G-7 took an important step in laying out an action plan aimed
at helping to accelerate the creation of a functioning and sustainable market
economy in a post-conflict country. Key steps are education, healthcare,
infrastructure repair and construction, private sector development, improved
revenue collection, and security sector reform. W e each committed our support for
the Afghan government with the goal of producing visible and measurable on-theground results before midyear. And, more broadly, w e all agreed that w e share an
interest in strengthening economic growth and raising living standards in the greater
Middle East.
Our commitment to combating terrorist financing continues. We agreed to a
timetable of specific actions with measurable deadlines for this year to strengthen
asset freezing regimes and combat abuse of the informal financial sector and nonprofit organizations. W e also called on the IMF and World Bank to assess
compliance with the entire set of FATF recommendations on a permanent basis.
W e are extremely pleased with the extensive collaboration on this issue, which
goes well beyond the G-7. W e look forward to continuing this cooperative work to
m a k e it much harder for terrorist financiers to do business.
Turning to the poorest countries, I emphasized today that creating an environment
that allows private businesses to flourish should be a higher priority on the
development agenda. W e all agreed that the World Bank and regional banks should
work to improve investment climates and direct more resources to the private
sector.
We focused on the flow of remittances, which are a tremendous source of capital
flowing directly into the hands of consumers and households in the developing
world. W e agreed to work on reducing the roadblocks for people sending money
back to their families. This means identifying and removing the barriers that slow
the flow of remittances, m a k e transactions expensive or encourage money to flow
through informal channels. Improving access to financial services and infrastructure
is particularly important. W e in the United States have already been working closely
with our key remittance partners, such as Mexico and the Philippines, to tackle
these issues. I urged m y counterparts to do what they can in this regard.
Looking at the international financial system more broadly, we took note of the
progress m a d e in the past year in advancing reform. Collective action clauses are
taking hold as the market standard in external sovereign bond issues under N e w
York law in external bond issues. Widespread use of these clauses will help
increase predictability. W e also took note of reforms implemented to limit
exceptional access in the IMF, measure and account for results in the M D B s and
shift to grants in the M D B s to help avoid building heavy debt burdens.
We recognize the critical importance of Argentina to live up to its IMF commitments
and urge them to m o v e forward on their needed reforms.
Thank you.
Page 2 of 2
JS-i IOU: ireasury Secretary John W . Snow Remarks to Cuban American Leaders
Page 1 of4
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 9, 2004
JS-1160
Treasury Secretary John W. Snow
Remarks to Cuban American Leaders
Miami, FL
Thank you; it's great to be here in Miami. I've been at the G-7 summit this weekend
just a few miles north in Boca Raton, and w e had a very productive meeting. I w a s
pleased to be able to report to that group some very good economic news from the
U.S., and I'd like to share that news with you as well.
But first, there is another area of economic policy that I really want to talk to you
about today, and that's the United States' policy on Cuba. Let m e be perfectly clear
and candid: The President loathes what the Cuban government has done to Cuba.
Castro's regime has crushed freedom and has held Cuba back from its enormous
potential as an economic power and a friend to the United States.
The President is, however, very dedicated to the people of Cuba, who long for
freedom and have suffered so much under Castro. Because of his
dedication to the people of Cuba, President Bush offered, in 2002, to ease U.S.
bans on trade and travel... but only if the Cuban government held free and fair
elections and allowed free speech and free enterprise.
Rather than take this opportunity to move toward a new day for the Cuban people,
Castro w a s contemptuous in response to that offer. Instead, he followed with a n e w
round of brutal oppression of the Cuban opposition that sickened all those w h o
respect human life, dignity and freedom.
You know this better than anyone: Until Castro's reign is ended, any money that is
spent in Cuba - for products or tourism - benefits only that oppressive government,
not the hard-working people of Cuba. Any economic benefit is used not to benefit
the Cuban people, but instead to perpetuate the regime's strangulation of its
population.
That is why sanctions, especially on travel, are being vigorously enforced by the
Bush administration, and why the President told Congress he would veto any
attempt to weaken the prohibitions on travel and trade. As you know all too well,
dollars spent at Cuban hotels go to the dictator's government coffers. That
government in turn pays only a few measly pesos to the staff w h o work at those
hotels.
We must not and we can not have American dollars lining Fidel Castro's pockets
and those w h o would perpetuate his oppressive regime... and enforcement actions
by the Department of the Treasury, along with the Department of Homeland
Security (DHS), are making sure that does not happen.
Treasury's Office of Foreign Assets Control (OFAC) is working closely with
Customs agents on inspecting all direct flights to Cuba at Miami, JFK and LAX.
That's hundreds of aircraft and tens of thousands of passengers... and agents are
being extremely meticulous.
OFAC has provided on-site training, specifically on Cuba embargo travel
restrictions, to over 500 D H S Customs inspectors. W e have accomplished this
training on-site in Miami, Los Angeles and JFK, and are now expanding our training
efforts to reach Customs inspectors stationed at U.S. Customs Preclearance
Facilities in the Caribbean and Canada. We've already trained Preclearance
JS-i iou; ireasury secretary John W . Snow Remarks to Cuban American Leaders
Customs staff in Bermuda, Nassau and Aruba. The training will assist inspectors in
their efforts to detect illegal U.S. tourist travelers
to Cuba.
We are also providing training to Customs inspectors on a monthly basis at the
Federal Law Enforcement Training Center in Brunswick, Georgia.
OFAC's Miami Office is working with the Coast Guard to provide Cuba travel
embargo training for its personnel.
By increasing training and awareness of existing law, we are tightening the
economic noose around the regime. W e expect that this will result in an increase in
O F A C civil penalties imposed.
Since October 10th, 264 cases have already been opened by OFAC's enforcement
division for investigation of alleged travel to Cuba. Three cases have been referred
for criminal investigation.
Also since the training and inspection efforts have intensified, at the direction of
President Bush, nearly three hundred passengers have been denied travel after an
examination revealed they did not qualify under any legitimate license category for
travel to Cuba.
Stepped-up inspection efforts have also had a positive ripple-effect on our financial
offensive. For example, using information gathered from these inspections, O F A C
has been able to suspend licenses issued to two organizations previously
authorized to engage in travel transactions allegedly related to humanitarian or
religious activities in Cuba. O F A C is now investigating allegations that the licensees
may have engaged in activities outside the scope of their licenses.
Homeland Security has assisted the OFAC sanctions program against Castro with
almost 400 seizures of products like Cigars and alcohol... again, Cuban profit on
these items is Castro's profit, not the Cuban people's, and that will not be tolerated
by the United States government.
On March 24th, new OFAC rules eliminated the "people to people" educational
license that had allowed educational travel unrelated to academic coursework. The
license had increasingly been abused for trips that amounted to little more than
tourist travel, thus undermining the intentions of the U.S. sanctions against Cuba.
So w e got rid of it. Because we're serious about enforcing the sanctions.
I'm pleased to announce to you, today, another enforcement action that is part of
these rigorous efforts to choke off Castro's supply of dollars:
OFAC is identifying and blocking ten entities that it has determined are owned or
controlled by the Government of Cuba or Cuban nationals. They include entities
organized and located in Cuba as well as entities organized and located in
Argentina, the Bahamas, Canada, Chile, the Netherlands, and England. Nine of the
ten are travel companies specializing in Cuba travel and one is a forwarder of gift
packages to Cuba.
As a result of today's action, all property of these entities that is in the possession of
persons subject to U.S. jurisdiction is blocked and no persons subject to U.S.
jurisdiction may engage in any transactions with these entities unless authorized by
OFAC.
These companies have been providing easy access to Cuba to those U.S.
individuals w h o chose to break the law. Today's action will put a stop to that, and a
stop to another illegal pathway for U.S. dollars to Castro's wallet.
We're cracking down. We mean business. We're cutting off American dollars
headed to Fidel Castro, period. At the same time, we're reaching out to the
freedom-hungry people of Cuba.
While we will not tolerate illegal travel to Cuba, we sympathize with those desperate
to travel here from Cuba. Because until Cuba is free, people will risk their lives to
rage z o i t
JS-1 iou: ireasury secretary John W . Snow Remarks to Cuban American Leaders
come to these shores of freedom.
That's why President Bush's administration is dedicated to finding safe routes for
Cubans w h o are fleeing Castro.
The President also established the Commission for Assistance to a Free Cuba. The
purpose of that Commission, as the President said when he announced its creation,
is to "plan for the happy day when Castro's regime is no more and democracy
comes to the island."
The Commission will draw upon experts in our government to plan for Cuba's
eventual transition for example, best practices on the establishment of democratic
institutions; how to ensure a respect for human rights and rule of law; how to create
the core institutions of a free economy; how to modernize infrastructure; and how to
quickly meet basic needs in areas of health, education, housing, and human
services.
President Bush is also breaking the information embargo that Cuban government
has imposed on its own people. We're doing that by increasing the amount and
expanding the distribution of printed material to Cuba, of Internet-based information
inside of Cuba, and of A M - F M and shortwave radios for Cubans.
Radio and TV Marti are bringing the message of freedom to the Cuban people.
Earlier this year, w e launched a new satellite service to expand our reach to Cuba.
O n May 20th, w e staged the historic flight of C o m m a n d o Solo, an airborne
transmission system that broke through Castro's jamming efforts. O n that day, our
President was honored to speak to the Cuban people in the native tongue.
Until the Cuban people are free, President Bush and his administration will do
everything in our power to keep dollars out of Castro's pocket while extending the
hand of freedom to the Cuban people.
Because we know that these efforts will lead us to a day when we will celebrate
Cuba's freedom together. A day when w e will see and embrace Dr. Oscar Elias
Biscet, Martha Beatriz Roque, Oscar Espinosa Chepe, Leonardo Bruzon Avila,
Juan Carolos Gonzalez Leyva... you know the names. They are in your hearts and
prayers every day.
I look forward to that day of Cuban liberation, and dedicate myself and my office to
speeding its arrival.
Before I leave here today, I want to share with you some good economic news that
I hope is serving as inspiration to the leaders of the G-7 countries that I met with
this weekend.
In recent months, it has become clear that President Bush's tax cuts did precisely
what they were intended to do: unleash the economic potential of this great country.
Our economic indicators are now positive, across the board. Homeownership is up,
unemployment rates are heading down, G D P growth has been extremely strong,
and jobs are being created.
As you know, this administration came to office when those indicators were not
nearly as positive. The President inherited an economy that was in decline... one
that w a s then battered by terrorist attacks and revelations of corporate corruption
dating back to the 1990s.
The President and his administration took these challenges seriously and we have
m a d e serious progress in changing the economic direction of this country.
As you've seen here in Florida - your economy is doing generally even better than
the national economy - the President's tax cuts have worked. They provided the
stimulus that w a s necessary to turn the economic ship around...and they are now
encouraging and allowing for the economic growth that is continuing into the future.
• Economic growth in the second half of 2003 was the fastest since 1984;
• N e w h o m e construction was the highest in almost 20 years;
Page J ot 4
JS-i iou: ireasury secretary John W . Snow Remarks to Cuban American Leaders
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Over a quarter million jobs were created in the last five months of 2003, and over
100,000 were created in the first month of 2004;
• Unemployment claims - both initial claims and continuing claims - are falling,
indicating improvement in the labor market;
• And two weeks ago, the D o w closed at a 31-month-high. This translates into more
than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: We are on a path to
sustained economic growth.
However, there is more to do. We are not, by any means, satisfied. There are still
Americans w h o want to find work and cannot... and this Administration will not rest
until that most critical need is met and until every American looking for work can
find a job.
We can encourage the creation of jobs by sticking to the President's six-point plan
for growth.
That includes making health care more affordable and costs more predictable;
passing tort reform measures to m a k e the cost of doing business lower and less
like Russian Roulette; passing an affordable, reliable energy supply; streamlining
regulations and reporting requirements - particularly for small businesses, w h o
create the majority of new jobs; opening new markets for American products; and
enabling families and businesses to plan for the future with confidence by making
the President's tax relief permanent.
I talked about all of these things before Congress last week, as part of the release
of the President's budget. It's a good budget, one that speaks to our national
priorities of both national and economic security.
The budget combines fiscal restraint with growth-friendly policies that will ultimately
add up to deficit reduction.
That's where we are on our economy, and our economic policy right now... we're in
very good shape, and credit goes to hard-working Americans like you.
Thank you for all you do for our country and our economy, and for the people of
Cuba.
Thank you so much for having m e here today.
Page 4 of 4
js-i ioi: ireasury Designates & Blocks 10 Entities for<BR> Cuban Embargo Violations
Page 1 of 5
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 9, 2004
js-1161
Treasury Designates & Blocks 10 Entities for
Cuban Embargo Violations
MIAMI-Today Treasury Secretary John Snow announced that Treasury's Office of
Foreign Assets Control ("OFAC") is identifying ten entities, listed below, that it has
determined are owned or controlled by the Government of Cuba or Cuban
nationals. These ten include entities organized and located in Cuba as well as
entities located in Argentina, the Bahamas, Canada, Chile, the Netherlands, and
England. Nine of the ten are travel companies specializing in Cuba travel, and one
is a gift forwarder to Cuba.
All property of these entities that is in the possession of persons subject to U.S.
jurisdiction is blocked and no persons subject to U.S. jurisdiction may engage in
any transactions with these entities unless authorized by O F A C .
OFAC is taking action today in furtherance of President Bush's October 2003
initiative to strengthen enforcement of U.S. laws prohibiting transactions related to
travel to Cuba and to hasten the arrival of a new, free, democratic Cuba. The
foreign travel companies identified today provide easy access to Cuba to those U.S.
individuals who choose to break the law. Many of these entities use the Internet to
advertise and sell Cuban tourism to the U.S. public. U.S. law enforcement officials
have intercepted a number of unauthorized travelers whose tour packages were
purchased through one of these entities.
ENTITIES PROPOSED FOR DESIGNATION
Cimex Companies (6):
1. 2904977 CANADA INC.
Montreal, Quebec, Canada
(http://www.caribesol.ca)
2904977 C A N A D A INC., a.k.a. Caribe Sol, a.k.a. Havanatur Canada Inc., is a
travel agency owned by Cimex, a holding company of the Government of
Cuba.
2. CORPORACION CIMEX S.A.
Havana, Cuba (and all other locations worldwide)
(http://www.cimexweb.com)
C O R P O R A C I O N CIMEX S.A., a.k.a. Cimex, a.k.a. Cimex Cuba, a.k.a. Comercio
Interior, Mercado Exterior, has approximately 107 offices throughout Cuba. A
holding company, CIMEX S.A., is owned by the Government of Cuba and
o w n s travel service providers. It was organized to promote n e w products and
services in Cuba.
3. HAVANATUR S.A.
Havana, Cuba (and other cities in Cuba)
(http://www.havanatur.cu)
H A V A N A T U R S.A. is the leading tour operator in Cuba, with offices
throughout Cuba. Its corporate parent is CIMEX.
4. HAVANATUR S.A.
Buenos Aires, Argentina
H A V A N A T U R S.A. is a travel agency specializing in trips to Cuba. It is owned
by Cimex.
js-11 o i: i reasury Designates & Blocks 10 Entities for<BR> Cuban Embargo Violations
Page 2 of 5
5. HAVANATUR BAHAMAS LTD.
Nassau, Bahamas
HAVANATUR B A H A M A S LTD. is a travel agency specializing in trips to Cuba.
It is controlled by the Government of Cuba.
6. HAVANATUR CHILE S.A.
Santiago, Chile
HAVANATUR CHILE S.A., f.k.a. Guamatur S.A., is a travel operation
specializing in trips to Cuba. It is controlled by Cimex.
Cubanacan Companies (4):
1. LACOMPANiATIENDASUNIVERSOS.A.
Cuba
(http://www.cuba-shop.net)
LA COMPANIA TIENDAS UNIVERSO S.A, which is owned by the Cubanacan
Group, operates the e-commerce portal CUBA-SHOP.NET.
Through CUBA-SHOP.NET, U.S. persons may purchase a wide range of
products, including but not limited to televisions, refrigerators, ovens, food,
perfume, cosmetics and bicycles for friends and family in Cuba. Prices are in
U.S. dollars.
2. CUBANACAN GROUP
Havana, Cuba
CUBANACAN GROUP, owned by the Government of Cuba, is a tourism and
trading business, hosting approximately 4 0 % of all visitors to Cuba.
3. CUBANACAN INTERNATIONAL B.V.
Zevenhuizen, Netherlands
C U B A N A C A N INTERNATIONAL B.V. specializes in organizing trips and
accommodations for travel to Cuba.
4. CUBANACAN U.K. LIMITED
London, England, United Kingdom
C U B A N A C A N U.K. LIMITED is a travel agency specializing in travel to Cuba
and is a promoter and representative of CUBANACAN GROUP.
OFFICE OF FOREIGN ASSETS CONTROL
STATUS REPORT ON IMPLEMENTATION OF ENHANCED C U B A TRAVEL
ENFORCEMENT
Date: February 9, 2004
On October 10, 2003, President Bush directed the Departments of Treasury and
Homeland Security ("DHS") to step-up enforcement of Cuba embargo travel
restrictions by increasing inspections of travelers and shipments to and from Cuba,
and by targeting those who travel to Cuba illegally through third countries and by
private vessel for illegal business or tourism purposes or to carry unlicensed
currency to Cuba.
The Office of Foreign Assets Control ("OFAC") reports the following actions and
progress to date to fully implement and enforce the President's initiative.
Inspection of Cuba Flights
• DHS committed Bureau of Customs and Border Patrol ("Customs") to inspecting
up to 100% of direct flights at Miami, JFK and LAX for a 90-day period. After 90
days, the level of future inspections will be reviewed and evaluated.
• OFAC's staff in Miami, augmented by staff from Washington, worked hand-inhand with Customs inspectors in Miami during the first 90-day period to provide
daily post-October 10 coverage of direct charter flights that depart several times
each day for Cuba.
• Since October 10, OFAC has participated with Customs to inspect the weekly
js-noi. ireasury Designates & Blocks 10 Entities for<BR> Cuban Embargo Violations
charter flights at LAX and JFK twice at each port and we are in direct
communication with D H S as questions arise.
• Inspection Activity to Date:
569 aircraft with passengers destined for Cuba, mostly direct charter flights, were
targeted for outbound inspection. Over 44,000 passengers were screened as they
departed the United States for Cuba and over 50,915 passengers were screened
on their return to the United States on charter flights.
275 travelers were denied travel on charter flights after examination revealed they
did not qualify under any O F A C license category.
1007 aircraft with passengers returning to the United States from Cuba were
targeted for inbound inspections. This number includes returning charter flights
and other flights arriving in the United States from third countries. Over 50,915
passengers and crew were subjected to extensive examination.
376 OFAC-related seizures were accomplished, most of which related to the
unlicensed importation of Cuban cigars and alcohol.
Training
• Since October 10, OFAC has provided on-site training on Cuba embargo travel
restrictions to over 500 D H S Customs inspectors. W e have accomplished this
training on-site in Miami, Los Angeles and JFK, the ports of departure for direct
charter flights, and w e are now expanding our training efforts to reach Customs
inspectors stationed at U.S. Customs Preclearance Facilities in the Caribbean and
Canada. This training will assist inspectors in their efforts to detect illegal U.S.
tourist travelers to Cuba. O F A C has already completed training in Bermuda,
Nassau and Aruba. In the next few weeks, O F A C will provide training to inspectors
at 6 Preclearance Facilities in Canada.
In addition to these training sessions, OFAC provides training to Customs
inspectors on a monthly basis at the Federal Law Enforcement Training Center in
Brunswick, G A .
OFAC's Miami Office is working with the Coast Guard to provide Cuba embargo
travel training for its personnel.
OFAC fully expects that these training initiatives will result in a significant number of
travel referrals from Customs to O F A C for civil penalties.
Travel Enforcement Investigations
Civil • 264 cases have been opened to date by OFAC's Enforcement Division for
investigation of alleged post October 10, 2003, travel to Cuba.
Criminal
• 3 cases have been referred for criminal investigation by OFAC Enforcement
directly to federal law enforcement agencies, primarily the Bureau of Immigration
and Customs Enforcement. O F A C is working with special agents and Assistant
U.S. Attorneys on a number of potential criminal cases.
• On December 4, 2003, OFAC hosted a highly successful meeting in Miami with
the U.S. Attorney for the Southern District of Florida, C o m m a n d e r of the 7th U.S.
Coast Guard District, D H S (ICE and Bureau of Customs and Border Patrol), and
Department of C o m m e r c e , to coordinate efforts to implement the President's
initiative. The U.S. Attorney voiced the support of his Office. It w a s agreed that
working groups from participant agencies will meet quarterly, beginning in March
Page 3 of 5
js-11 o i: I reasury Designates & Blocks 10 Entities for<BR> Cuban Embargo Violations
2004, to review promising criminal cases. The Commander, USCG 7th District,
stated that his organization will (1) redraft the Security Zone Permit to capture the
O F A C and C o m m e r c e licensing category of the applicant, and will (2) step-up their
boarding of pleasure vessels going to and from Cuba. O F A C agreed to provide
Cuba travel training to U S C G personnel in South Florida and to implement a
feedback program for Customs and U S C G to report the status of Cuba travel cases
those agencies refer to O F A C for civil penalties.
Penalties
• OFAC's Civil Penalties Division plans to expedite action on those violations
occurring after the President's Rose Garden directive to increase enforcement while
continuing to issue penalties on currently ongoing cases.
- OFAC's Civil Penalties Division currently has a docket of nearly 2,000 actions
relating to Cuban embargo violations, the majority of which will likely result in
monetary penalties paid to O F A C .
• Increased Initiation of New Penalty Actions - Since the President's announcement
on October 10th, the Civil Penalties Division has accelerated the issuance of
Prepenalty Notices initiating OFAC's civil penalty cases. By the end of November,
all prepenalty notices in the pipeline were issued. Between October 10 and
November 30, 2003, O F A C issued a total of approximately 348 new notices
opening penalty actions.
• Implementation of Expedited Penalty Process - OFAC's Civil Penalties Division
has implemented an expedited civil penalty process. For all post-Rose Garden
announcement violations detected by D H S and referred to O F A C , OFAC's Civil
Penalties Division will initiate appropriate civil penalty action within 60 days of the
division's receipt of D H S ' evidence of violation. Given the cumulative effect of the
enhanced multi-agency enforcement strategy, w e anticipate that at least initially an
increase of cases by several orders of magnitude will be received in the Civil
Penalties Division.
- Major Case Squad Set Up for Cuban Commercial Cases - OFAC's Civil
Penalties Division has set up a Major Case Squad targeting Cuban commercial
cases in response to the President's Rose Garden directive for increased Cuban
embargo enforcement. The Major Case Squad identified cases awaiting O F A C
Civil Penalties Division action against banks, companies and other entities involved
in commerce with Cuba. The Squad has contacted more than 60 violators and
informed the majority of them of OFAC's pending penalty actions against them.
Settlements totaling nearly $200,000 have already been reached in 20 of the Major
Cases.
-- OFAC's Civil Penalties Division publishes details of penalty settlements and
assessments on OFAC's website. This information is updated each month.
Penalties settled by and assessed against Cuban travel ban violators appear in the
aggregate for informational purposes on the website.
• Administrative Law Judges OFAC now has 3 ALJs in place to hear civil penalty
cases and the ALJs have begun issuing orders of hearing to violators. To date,
O F A C has initiated action in cases by forwarding them to the 3 ALJs residing at the
Justice Department and the Federal Mine Safety and Health Commission. Twelve
cases are on the ALJs' docket as the balance has settled their cases with O F A C
with penalty payments. O n e hundred eleven violators have been given
acknowledgments of timely hearing requests along with advisories that orders
instituting proceedings before the ALJs will be forthcoming in short order absent
settlement of the case.
Of these 111 ALJ hearing-noticed cases, 63 violators have already sent in
settlement payments with the deadline to pay in the other cases to run in 2 weeks.
Additional settlements are expected.
Other OFAC Actions
• Licensing Actions - OFAC Licensing and Enforcement Divisions have established internal procedures
to quickly suspend and investigate allegations of abuse of licenses issued to
Page 4 of 5
js-11 o i: i reasury Designates & Blocks 10 Entities for<BR> Cuban Embargo Violations
humanitarian and religious organizations.
- Using information derived from charter flight inspections, OFAC has suspended
licenses issued to 2 organizations previously authorized to engage in travel
transactions related to humanitarian or religious activities in Cuba. O F A C is
investigating allegations that the licensees m a y have engaged in activities outside
the scope of their licenses. Four other organizational licenses are under review for
possible suspension and investigation.
OFAC has taken action to limit the number of travel days in Cuba for licenses
issued for humanitarian purposes, such as for the delivery of donated goods in
Cuba.
• Regulatory / Policy Changes:
- OFAC is working with the State Department to review the current authorization
which allows licensed travelers to import up to $100 worth of Cuban origin goods,
including cigars and rum, as accompanied baggage. A revocation of this
authorization would result in a significant decrease in U.S. dollars going directly to
the state-owned tobacco and alcohol industry. Revocation would also serve to
reinforce the seriousness of the U.S. Government's Cuba travel enforcement
efforts.
Public Support
• Calls are regularly received at the OFAC hotline in Miami at (305) 810-5170 to
report embargo violations.
Page 5 of 5
JS-i IOZ: ireasury Designation of Thirteen Individuals Obstructing the Dayton Peace Ace... Page 1 ot 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 9, 2004
JS-1162
Operation Balkan Vice III: TREASURY DESIGNATION OF Thirteen Individuals
Obstructing the Dayton Peace Accords in Bosnia
Treasury Secretary John Snow announced today that Treasury's Office of Foreign
Assets Control designated thirteen individuals under the Western Balkans
Executive Order 13219, as amended by Executive Order 13304. Today's
designation will allow the U.S. Treasury to block the assets in the U.S. of these
individuals and to prohibit financial transactions with them by U.S. persons.
The 13 individuals were designated for obstructing, or the risk they pose for
obstructing, or support for obstructing the Ohrid Framework Agreement of 2001
relating to Macedonia, and the Dayton Accords, including the decisions of the High
Representative, relating to Bosnia and Herzegovina, or for assisting or supporting
persons, or for having acted or purported to act on behalf of persons, designated
pursuant to the order.
Those designated today were Dragan Basevic, Beljko Borovcanin, Samojko Djorda,
Ljuban Ecim, Avdyl Jakupi, Radomir Kojic, Tomislav Kovac, Predrag Kujundzic,
Milovan Marijanovic, Ivan Sarac, Mirko Saravic, Xhezair Shaqiri, and Menduh
Thaci.
In a parallel action, at a news conference at -1 p.m. (7 a.m. EST) in Sarajevo,
Bosnia and Herzegovina, Paddy Ashdown, the High Representative and E U
Special Representative to Bosnia and Herzegovina, announced the blocking of the
assets of 10 of the individuals in Bosnia and Herzegovina, the removal of three
individuals from their positions as police officers and the removal of Mirko Sarovic
from his position as vice president of the Serb Democratic Party.
Information available to the U.S. government indicates that, among other
sanctioned activities, seven of these persons - Dragan Basevic, Beljko Borovcanin,
Samojko Djorda, Ljuban Ecim, Tomislav Kovac, Ivan Sarac, and Mirko Sarovic have used their positions in public office for the benefit of Milovan Bjelica, a person
designated pursuant to E.O. 13219. T w o of these persons - Radomir Kojic and
Milovan Marijanovic - own or control commercial businesses suspected of
providing support to persons indicted for war crimes (PIFWC's) by the International
Criminal Tribunal for the former Yugoslavia or other persons designated pursuant to
Executive Order 13219. Four of these persons - Avdyl Jakupi, Predrag Kujundzic,
Xhezair Shaqiri, and Menduh Thaci - are leaders of armed militant groups opposed
to the United Nations efforts to establish peace in Bosnia and Herzegovina.
Under Executive Order 13219, the President of the United States exercised his
statutory authority to declare a national emergency in response to the unusual and
extraordinary threat to national security and foreign policy of the U.S. by persons
engaged in, or assisting, sponsoring, or supporting acts of obstructing
implementation of the Dayton Peace Accords in Bosnia.
The United States has a vital interest in assuring peace and stability in Europe. In
the Western Balkans, the U.S. is engaged, together with N A T O Allies, the
Organization for Security and Cooperation in Europe, U N missions, the EU, and
other international organizations in an effort to achieve peace, stability,
reconciliation, and democratic development and to facilitate the region's integration
into the European mainstream. The U.S. views full implementation of the Dayton
Peace Accords in Bosnia as critical to these efforts.
JS-i 105: uonnrmation Hearing Statement ot Samuel W. Bodman
Page 1 ot 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 10, 2004
JS-1163
Statement of Samuel W. Bodman,
Nominee to be Deputy Secretary of the Treasury,
to the Senate Committee on Finance
Mr. Chairman, Senator Baucus, Members of the Committee, thank you for the
opportunity to appear before you today. I a m honored to be President Bush's
nominee to serve as Deputy Secretary of the Treasury Department, and I a m most
grateful to Secretary S n o w for his confidence and support. As Deputy Secretary of
the Commerce Department, I have had the privilege to serve President Bush and
the American people since 2001. In that position, I've had the good fortune to work
closely with several of you, and I look forward to what I know will be a productive
relationship with this Committee.
I am most pleased that my wife, Diane, is here with me. I am the proud father of
five children and eight grandchildren, and I'm blessed to have their continued
support.
I was born in Chicago and raised in a small Illinois community, but I spent most of
m y adult life in Massachusetts. I went to Boston as an MIT graduate student and
ended up staying for 40 years. I started out m y career as a professor of chemical
engineering at MIT In 1970, I joined a then-fledgling investment firm called Fidelity
Investments. During m y seventeen years there, the last ten as president, I helped
orchestrate the transformation of a small company into one of the nation's largest
financial service enterprises.
Following my time at Fidelity, I spent fifteen years serving as Chairman and CEO of
Cabot Corporation, a specialty chemical manufacturer and one of Boston's oldest
industrial companies. Operating 45 manufacturing plants in 25 countries, m y
colleagues and I faced many of the challenges that confront American companies in
today's global marketplace - from international trade, to technology integration, to
safety and security.
Three years ago, I resigned my job at Cabot; and Diane and I moved to Washington
so that I might serve as Deputy Secretary of Commerce. Collectively, m y
experiences have instilled in m e a strong belief in the power of the American free
enterprise system, the engine of innovation, productivity, and job creation that
drives our nation forward. And m y time in Washington has reinforced m y belief that
government does have a crucial role to play in maintaining our economic health. As
President Bush has said many times, government does not create wealth; the
private sector does that. But government must create an environment that
encourages the entrepreneur, that allows companies to plan, that provides the
flexibility necessary to create and grow, and sometimes, to fail and start over.
It has been my privilege to work with the fine men and women of the Commerce
Department to advance this vision for government. Under Secretary Evans's
leadership, w e have worked hard to open markets around the world, to promote
free and fair trade, and to protect intellectual property. W e have saved lives,
homes, and businesses with more accurate and timely severe weather forecasts.
W e have promoted economic development and job growth throughout this nation.
And, w e have strengthened the management of our programs and Department.
There is more work to be done, and that's why I am so pleased that President Bush
has extended the opportunity for m e to continue m y public service at the Treasury
Department. The Treasury is at the forefront of many critical policy challenges:
stopping the flow of funds to terrorists around the world; reforming and modernizing
JS-i 10J: Confirmation Hearing Statement of Samuel W . Bodman
the IRS; and ensuring that our current economic m o m e n t u m translates into lasting
prosperity for our citizens.
I'm proud to be afforded the great opportunity to serve the American people with
President Bush, Secretary Evans, Secretary Snow, and now this Committee. With
that, I would be pleased to take any questions that you m a y have.
Page 2 of 2
JS-i lot: secretary John w. Snow's Remarks to lampa Business Leaders Tampa F L
Page 1 01 5
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 10, 2004
JS-1164
Secretary John W. Snow's Remarks to Tampa Business Leaders
T a m p a FL
Thank you; it's great to be here in Florida.
This is a state that is leading the way, economically, serving as an example to
follow for other states.
Generally speaking, you are out-performing the nation overall... in spite of the fact
that a major industry in this state - tourism - was so deeply impacted by the
terrorist attacks on our country in September of 2001.
That's one of the reasons why it is so impressive that your unemployment rate was
down to 4.7 in December - that's the lowest since July of 2001 and well below the
national rate.
It is also impressive that your total personal income is on the rise.
And even your international sector, which was hard hit by the woes of its key
overseas trading partners, is showing some life. Total international merchandise
trade rose by more than three percent in the third quarter of last year.
You're doing well, and your business community deserves credit for this economic
growth. Florida's entrepreneurs are showing what the American free market can do
when its potential is unleashed.
Unleashing our economic potential was the driving idea behind President Bush's
tax cuts... and it sure looks like the idea came to fruition here in Florida.
More than 5 million of Florida's taxpayers had lower income tax bills in 2003 under
the President's growth package. More than 1.2 million Florida businesses had the
opportunity to use their tax savings to invest in new equipment, hire additional
workers, and increase pay to their employees.
The tax cuts worked nationally as well. Economic indicators are positive, across the
board.
Homeownership is up, unemployment rates are heading down, and GDP growth
has been extremely strong.
This administration came to office when those indicators were not nearly as
positive.
The President inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
The President and his administration took these challenges seriously and we have
m a d e serious progress in changing the economic direction of this country.
As you've seen here in Florida, the President's tax cuts have worked. They
provided the stimulus that was necessary to turn the economic ship around... and
they are now encouraging and allowing for the economic growth that is continuing
JS-i 10^: secretary John w. Snow's Remarks to lampa Business Leaders lampa P L
into the future.
• Economic growth in the second half of 2003 was the fastest since 1984;
• N e w h o m e construction was the highest in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Over a quarter million jobs were created in the last five months of 2003;
• Unemployment claims - both initial claims and continuing claims - are falling,
indicating improvement in the labor market;
• And last Monday, the D o w closed at a 31-month-high. This translates into more
than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: We are on a path to
sustained economic growth.
However, there is more to do. We are not, by any means, satisfied.
There are still Americans who want to find work and cannot... and this
Administration will not rest until that most critical need is met and until every
American looking for work can find a job.
We can encourage the creation of jobs by sticking to the President's six-point plan
for growth.
That includes making health care more affordable and costs more predictable by
passing Association Health Plan legislation that would allow small businesses to
pool together to purchase health coverage for workers at lower rates.
We also need to promote and expand the advantages of using health savings
accounts ... how they can give workers more control over their health insurance
and costs.
And we've got to reduce frivolous and excessive lawsuits against doctors and
hospitals. Baseless lawsuits, driven by lottery-minded attorneys, drive up health
insurance costs for workers and businesses.
The need to reduce the lawsuit burden on our economy stretches beyond the area
of health care. That's why 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 will have a harder time shopping
for a favorable court.
These steps are the second key part of the President's pro-jobs, pro-growth plan.
Ensuring an affordable, reliable energy supply is a third part.
We must enact comprehensive national energy legislation to upgrade the Nation's
electrical grid, promote energy efficiency, increase domestic energy production, and
provide enhanced conservation efforts, all while protecting the environment.
Again, we need Congressional action: we are asking that Congress pass legislation
based on the President's energy plan.
Streamlining regulations and reporting requirements are another critical reform
element that benefit small businesses, w h o represent the majority of new job
creation: three out of every four net new jobs c o m e from the small-business sector!
So w e need to give them a break wherever w e can so they're free to do what they
do best: create those jobs.
Opening new markets for American products is another necessary step toward job
creation. That's why President Bush recently signed into law new free trade
agreements with Chile and Singapore that will enable U.S. companies to compete
on a level playing field in these markets for the first time -- and he will continue to
work to open n e w markets for American products and services.
rage 201 5
JS-i 104: Secretary John W . Snow's Remarks to Tampa Business Leaders Tampa F L
Finally, we've got to enable families and businesses to plan for the future with
confidence.
That means making the President's tax relief permanent.
Rate reductions, the increase in the child tax credit and the new incentives for
small-business investment - these will all expire in a few years. The accelerated
rate reductions that took effect in 2003 will expire at the end of this year. Expiration
dates are not acceptable - w e want permanent relief.
The ability of American families and businesses to make financial decisions with
confidence determines the future of our economy. And without permanent relief,
incentives upon which they can count, w e risk losing the m o m e n t u m of the recovery
and growth that w e have experienced in recent months.
The tax relief is the key stimulus for increased capital formation, entrepreneurship
and investment that cause true economic growth.
Budgets work better when the economy is growing... because a growing economy
means more jobs. That means more tax revenue... which leads to all-important
deficit reduction.
Again, I want to congratulate the hard-working families and businesses of Florida
on great economic progress. With the help of your members of Congress, w e hope
to continue to bring relief from Washington, D C , so you can continue to do what you
do best: work hard, grow the economy and create jobs.
Thank you.
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JS-i 163: John Taylor Under Secretary 01 the Ireasury Remarks on Financial Reconstructi... Page 1 ot 4
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 11, 2004
JS-1165
Financial Reconstruction in Iraq"
John B. Taylor
Under Secretary of the Treasury for International Affairs
before the
Senate Banking, Housing, and Urban Affairs Committee
Subcommittee on International Trade and Finance
Introduction
Chairman Hagel, Ranking Member Bayh and other members of the Subcommittee,
thank you for inviting m e back to testify on the financial reconstruction of Iraq.
There have been many significant, positive developments since I last testified in
September, and I welcome the opportunity to discuss them with you today.
Just this weekend, during the G-7 finance ministers' meeting in Boca Raton, we had
an opportunity to hear from Iraq's Central Bank Governor, Sinan Shabibi, and
Finance Minister, Kamel Gailani, about their reform priorities. Both officials
participated in a session with the G-7 Ministers, and took the opportunity to
underscore their commitment to moving ahead with sound, market-oriented reforms
that will underpin private sector-led growth.
They also stressed that their vision of a new Iraqi economy shares the following key
principles: 1) openness and transparency of Iraq's institutions; 2) the creation of
strong incentives for private sector development; 3) close economic and financial
integration with the international community; 4) implementation of international
standards and best practices; and 5) a social safety net that addresses the needs of
all Iraqis.
These officials are already taking meaningful actions to back up their statements.
For example, Iraq's Central Bank Governor recently announced three major actions
that will have far- reaching consequences for the development of Iraq's financial
sector: 1) the selection of three foreign banks to receive a license to operate in
Iraq; 2) a plan to liberalize interest rates by March 1; and 3) passage, soon, of a
new Central Bank law.
Today, I would like to tell you more about these developments, as well as update
you on the progress that has been made on currency reform, reducing Iraq's
international debt burden, and mobilizing international support to meet Iraq's
reconstruction needs.
Currency Reform
I would like to begin by highlighting one of the most important accomplishments in
the financial sector - the successful introduction of a new currency in Iraq. W h e n I
last spoke before this committee, I laid out our strategy for replacing the old national
currencies - the Swiss dinar and the Saddam dinar - with a new, unified national
currency. I a m happy to report that this plan was successfully implemented as
scheduled between October 15 and January 15.
Printing and delivering this currency on time was an enormous feat - the equivalent
of twenty-seven 747 plane loads of currency were delivered to Iraq and distributed
to the public through approximately 240 exchange sites, mostly bank branches,
under a significant security threat.
By all accounts, the Iraqis have wholeheartedly embraced their new dinars. Not
JS-i 165: John Taylor Under Secretary of the Treasury Remarks on Financial Reconstruct... Page 2 ot 4
only are the new notes much more difficult to counterfeit - a chronic problem under
the old currency regime -- the Iraqis now have six denominations available, up from
only two. And the value of the currency has steadily increased since its
introduction. N o w the challenge is to manage this new currency in such a way as to
provide a stable monetary foundation for a healthy financial system and vigorous
reconstruction.
Restoring and Revitalizing the Banking Sector
Another area where meaningful progress has been made is in the banking sector.
In m y last testimony, I reported that Treasury advisors were assessing the
conditions of Iraqi's state-owned and private banks. Since then, w e have learned
that Rasheed and Rafidain banks - the two large state-owned banks which
controlled over 8 5 % of banking assets - are at best marginally capitalized, and
have loan portfolios with a high concentration of non-performing loans.
Compounding these problems is the lack of comprehensive, modern accounting
standards and systems. W e also discovered that although these two banks have
an extensive network of more than 360 branches throughout the country, each
branch has operated largely as an independent unit. A s a result, Iraq lacks
centralized management and an integrated system for making and clearing
payments.
An evaluation of the private banks uncovered significant problems as well. It turns
out the 17 private banks in Iraq served predominantly to take deposits rather than
finance investments, and that the largest of these private banks had only $1 million
in capital.
Finally, our evaluation of Iraq's legal regime showed that Iraq lacked a competent
supervisory or effective regulatory structure to oversee the financial sector.
Despite this bleak assessment, the Iraqi bankers we engaged with from the private
and public sectors - as well as key finance officials - shared an eagerness to adopt
the reforms necessary to develop a modern, efficient financial sector. Though they
lack technology, resources and experience, after only a few months, significant
progress has already been m a d e toward this goal.
First, the Iraqis are moving towards the establishment of a modern legal and
regulatory framework for the financial sector. For example, working with experts
from central banks and other governments and the International Monetary Fund, w e
helped Iraq to prepare a modern Banking Law and a new Central Bank Law, both
based on international best practices. The Banking Law w a s enacted in late
September and contains many provisions designed to support the development of a
strong, robust banking sector, including higher minimum capital requirements (10
billion dinars, or more than $6 million), and more rigorous standards for bank
licensing and for bank governance.
We expect the Central Bank Law to be adopted soon by the Iraqi Governing
Council. It will not only confirm the independence of the Central Bank established
by a July 7 C P A order, but will also prevent the Central Bank from engaging in
inflationary financing of the government. Indeed, it establishes price stability as the
primary macroeconomic objective of monetary policy.
Second, the Central Bank Governor announced that interest rates on all domestic
financial instruments - loans, deposits and securities - will be fully liberalized by
March 1. This measure is an important step in the direction of creating a modern,
efficient financial sector, because it will enable lenders and borrowers to m a k e their
own decisions rather than having them determined by fiat and top-down directives
issued by the Central Bank.
And third, the Iraqis have taken significant steps to reinvigorate private banks in
Iraq. Under Saddam's regime, private banks fared poorly - they controlled less
than 8 % of total banking assets, used antiquated technology, and offered very
limited services. Despite their weaknesses, Iraq's private bank mangers have been
eager to develop their capacity to operate as modern, commercial bankers. A s
provided under the n e w Banking Law, these banks can n o w provide new services
to their clients. Already, ten banks are receiving international payments and
remittances, and issuing letters of credit. With 143 functioning branches,
international payments and remittances are now estimated at more than $5 million
JS-i 165: John Taylor under Secretary of the Treasury Remarks on Financial Reconstructi... Page 3 ot 4
per day into Iraq. This influx of funds will play a major role in financing investment
and consumption.
While some of the existing private banks are expected to develop into fully
functioning financial institutions, Iraqi authorities decided that it would be important
for foreign banks to operate in Iraq because of the experience, technology and
resources they can offer. The n e w bank law permits up to six foreign banks to
enter the Iraqi market over the next four years. This is in sharp contract to the
previous regime, which permitted only Arab banks to enter Iraq's market.
Following a request for applications issued in November, Iraq received fifteen
applications for a foreign bank license. O n January 31, the Central Bank Governor
announced the three finalists for the first set of licenses to be awarded - Hong
Kong Shanghai Banking Corporation, the National Bank of Kuwait, and Standard
Chartered Bank from the U.K. The Central Bank anticipates that all three will be
granted a license by mid-March. Already, the National Bank of Kuwait has
announced its intent to purchase 8 5 % of one of the existing private banks.
Next on the agenda is reform of the state-owned banks. Substantial and sustained
restructuring of management, organization, personnel and systems is needed to
m a k e these banks competitive. The Iraqi authorities are now working with Treasury
advisors to develop a strategy for dealing with the state-owned banks so they can
operate profitably and provide a wide array of financial services to the Iraqi
economy. In the meantime, w e are working with the Iraqis to ensure that the stateowned banks can provide basic services, such as taking deposits, clearing checks
and making loans to support business activity. For the quarter ending November
30, 2003, Iraq's two large state-owned commercial banks, Rafidain and Rasheed,
extended loans totaling about $6 million, primarily to small and medium enterprises.
Trade Bank of Iraq
Given the limited capacity of the Iraqi banking system, we also went forward with a
plan to open a Trade Bank in order to facilitate the imports and exports urgently
needed to support Iraq's reconstruction and the transition from the UN's oil for food
program. W h e n I reported on this initiative last September, the C P A had completed
a competitive bidding process for management of the Bank, and negotiations for its
establishment were underway. The Bank opened on December 4, 2003, and is
now fully operational. T o date, the Trade Bank of Iraq has issued over 200 Letters
of Credit worth $190 million for most Ministries and several state-owned
enterprises.
In addition, sixteen export credit agencies have signed an agreement with the CPA
and the Trade Bank under which they will provide guarantees and short-term credit
lines valued at $2.4 billion.
Iraq's International Debt
I want to turn now to the issue of Iraq's substantial foreign debt problem. Last
September, the G-7 Finance Ministers committed to making their best efforts to
resolve this issue by the end of 2004. W e have m a d e significant progress towards
this goal.
As an indication of the priority we place on this issue, the President asked former
Secretary of the Treasury and of State James Baker to serve as his Special
Presidential Envoy to work with the world's governments at the highest levels in
seeking to restructure Iraq's official debt burden.
Over the past two months, Secretary Baker successfully secured commitments
from leaders throughout Western Europe, Asia, and the Gulf States to provide at
least substantial debt reduction for Iraq in 2004. Final agreement on the amount
and terms of this reduction will be negotiated between Iraq and its creditors,
including through the Paris Club.
We are also continuing our efforts to obtain the best possible data on how much
debt Iraq owes. Current estimates put Iraq's external debt burden around $120
billion Paris Club m e m b e r s are owed roughly $40 billion -- $21 billion in principal
and roughly an equivalent amount in late interest. Non-Paris Club governments,
chiefly the Gulf States, and private creditors hold the rest.
Roseboro Testimony on Postal Reform
efficient provider of services, a quality employer, and a fair competitor long into the
21st century.
While the Administration may not agree with every aspect of each of the 35
recommendations, w e encourage Congressional leaders to carefully consider h o w
the full range of recommendations for legislative consideration might be
incorporated in meaningful, comprehensive postal reform.
According to the Commission, 16 of the 35 recommendations do not require any
legislative action. T h e Commission concluded that the Postal Service could
implement each of these without any undue delay connected with legislative
changes. I also note that the Postal Service's Transformation Plan of April 2002
and the Commission's recommendations are not incongruous; in fact, they are
remarkably similar. While I understand that the Postal Service's m a n a g e m e n t is
prudent to take time to carefully analyze proposed changes and implement reform
actions in a sound manner, I take this opportunity to underscore the
Administration's strong support for the Postal Service's efforts to implement reforms
as expeditiously as possible. A s Postmaster General Potter has frequently stated,
the Transformation Plan is a blueprint for positive change and should remain a
guideline for future changes. W e agree, and would add the Commission's
recommendations to this action list.
In outlining the circumstances that led to where we are today, we must add the Civil
Service Retirement System ( C S R S ) Postal Funding Reform Act, signed into law by
the President in April 2003. A s you well know, this Act contributed significantly to
financial recovery of the Postal Service, and is a tribute to the hard work and
dedication of the m e m b e r s of this panel in particular. Thanks to this legislation,
which allowed a transformation of the Postal Service's C S R S regime into a
calculation mechanism that matches the Federal Employee Retirement System
(FERS), the Postal Service immediately yielded an estimated $78 billion financial
gain. W e believe that this has established the appropriate funding provisions for
C S R S . Despite this enormous one-time gain, the Postal Service is not yet "out of
the woods." Even with the strong leadership of Postmaster General Potter and the
Postal Service's Board of Governors to drive an ever more competitive
organization, more needs to be done. That is w h y w e are here today.
Last month the Administration announced its support for comprehensive postal
reform and articulated five principles to guide congressional debate. The
Administration deliberately chose not to be overly prescriptive. W e feel strongly
that the following five guiding principles can frame a long-term, comprehensive,
solution for the challenges that loom on the short and long-term horizon.
Implement best practices The Administration supports comprehensive reform that
ensures that the Postal Service's governing body is equipped to meet the
responsibilities and objectives of a business of this size and scope. W e recognize
the hard work of the present and past Board of Governors, as well as postal
m a n a g e m e n t and its workforce. However, w e believe that it is time to reflect on
whether improvements in corporate governance can be incorporated that will add
further value for ratepayers, taxpayers, and the Postal Service's workforce and
management. A s w a s stated in the President's Commission Report: "The Postal
Service should meet the highest standard of corporate leadership...applying the
best business practices of the private sector to delivering the nation's mail."
Enhance transparency In keeping with our desire to implement best practices, we
seek postal reform legislation that takes steps to ensure that important factual
information on the Postal Service's operations and performance is accurately
measured and m a d e available to the public. The Postal Service should provide
more detailed financial information, including product-by-product financial
statements and expanded financial reporting, e.g., voluntary S E C reporting. W e
also believe there is merit to recognizing the aggregate unfunded post-retirement
health liabilities and the annual current cost of such liabilities, either directly on the
balance sheet or, at least, in notes to the financial statements. Given the important
service this organization provides to the American people, I believe that efforts to
facilitate greater access to information can contribute to better decision-making,
further enhance trust a m o n g stakeholders, and improve oversight.
Page 2 of 3
166: Roseboro Testimony on Postal Reform
Provide for greater operating flexibility In return for increased transparency and
accountability, and given its self-financing obligation, the Administration believes
that the Postal Service's governing body and m a n a g e m e n t should have greater
authority to reduce costs, set rates, and adjust key aspects of its business in order
to meet its obligations to customers in a dynamic marketplace. In doing so, w e
urge caution and care to avoid unintended disruption of market forces.
Foster greater accountability Given its existing monopoly, potentially greater
flexibility for operations, and its competitive position in s o m e important segments in
the delivery marketplace, w e urge Congress to enact legislation that ensures that
there is appropriate independent oversight to protect consumer welfare and
universal mail service. W e would like to see reform legislation that provides the
corporate governing body with necessary tools to properly motivate postal
m a n a g e m e n t to achieve key objectives such as increasing productivity, enhancing
service, and improving labor relations. A n independent regulatory body must have
sufficient authority to fulfill its oversight responsibilities.
Ensure self-financing The Administration is committed in its desire to see a Postal
Service that is financially self-sufficient, covering all of its obligations. W e believe
that ratepayers should be responsible for covering liabilities, including the offbalance sheet, unfunded liabilities. By so doing, the Postal Service remains
motivated to operate in a manner that strengthens the financial and operational
health of the Postal Service.
Postal reform is not the only pressing matter involving the Postal Service that is
currently before the Congress. T h e matter of enacting a comprehensive postal
reform bill c o m e s at virtually the s a m e time as a related matter currently under
consideration by Congress - modification of the C S R S Postal Funding Reform Act.
There are two issues under consideration. First, whether Treasury or the Postal
Service 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. In this regard, as mentioned earlier, the Administration
continues to believe that the Postal Service should remain responsible for these
costs and would oppose a modification to the Act. Second, whether the Postal
Service should be required to maintain an escrow account that will be disbursed at
the discretion of the Congress. T h e Administration believes that it is optimal for
Congress to act expeditiously on both postal reform and the disposition of the
escrow as a bundled whole.
The Administration sees postal reform as an integrated whole. It is crucial to
address all major aspects of the Postal Service's cost and revenue lines, its
balance sheet and off-balance sheet components, its corporate governance, its
competitors, as well as the taxpayers and ratepayers. Reform should be
characterized by the five principles that, w h e n implemented, will ask each
stakeholder to accept shared sacrifice in order to achieve a better, stronger, more
accountable and transparent, Postal Service.
Issues surrounding postal reform are, indeed, complex. We are in the presence
today of Congressional leaders, such as Congressman M c H u g h and others, w h o
have spent a tremendous amount of time dedicated to making the Postal Service
better. Postmaster General Potter's sustained dedication to achieve this objective
must also be recognized. T h e issues that are involved with postal reform are
complex; however, the Administration stands ready to work with you to take this
critical issue forward.
Thank you. I will be pleased to answer any questions that you may have.
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 12, 2004
JS-1167
Testimony Of Pamela F. Olson
Assistant Secretary (Tax Policy)
United States Department Of The Treasury
Before The Committee O n W a y s A n d M e a n s
United States House Of Representatives
Mr. Chairman, Congressman Rangel, and distinguished members of the
Committee:
Thank you for the opportunity to appear before you today to discuss the tax
proposals included in the President's Fiscal Year 2005 Budget.
Over the last three years, the President and Congress have responded with
courage to the recession and to a number of external crises that put additional,
extraordinary, strain on that economy. The end of the high-tech bubble and its
consequences for the stock market, the revelation of years of wrong-doing on the
part of certain corporations and their executives, the impact of the September 11
attacks, and the uncertainties of the war on terror and the conflicts in Afghanistan
and Iraq, are all at the root of the recent economic difficulties. These events
worsened and prolonged the weaknesses in the economy.
Fiscal policy has played a crucial role in responding to these events. The tax cuts
enacted in 2001 were an important factor in making the downturn one of the
shallowest on record. Together with an expansionary monetary policy embodied in
a series of deep interest rate cuts, the tax cuts provided support to a weakening
economy at a critical juncture. The stimulus bill enacted in 2002 provided vital
support to the economy in a key area of weakness - corporate investment. T h e
temporary bonus depreciation provision, for example, provided the needed
incentive for new corporate investment at just the right time.
While the tax cuts of 2001 were essential to keep the recession from deepening,
the 2003 tax cut provided the needed lift to allow the nascent recovery to continue
and gain strength. Immediate support to the economy w a s provided through the
acceleration of the lower tax rates, expansion of the child credit, and marriage
penalty relief. Weakness in corporate investment w a s addressed by reducing the
double tax on corporate income through the lower tax rate on dividends and capital
gains. This change lowered the cost of equity capital and provided an important
stimulus to corporate investment. The increase in small business expensing and
bonus depreciation provided additional stimulus to corporate investment.
With these vital changes in tax policy, we now have a robust economic recovery
with strong economic growth and tightening labor markets that are beginning to put
Americans back to work. Moreover, the tax cuts already enacted will continue to
spur economic growth. The Jobs and Growth Tax Relief Reconciliation Act
( J G T R R A ) will put another $146 billion into the economy this year with $100 billion
in the first half of the year.
The tax cuts have lowered the marginal effective tax rate on
new investment
Corporate
Sector
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Non-Corporate
Business Sector
Business
Sector
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Without the
Tax cuts
31.9%
20.8%
27.6%
With the Tax
cuts
26.3%
18.9%
23.4%
% Change
17.6%
-9.1%
-15.2%
But the tax changes enacted over the past three years have done m u c h more than
address and respond to the economic difficulties and crises w e have faced. They
also laid the ground work for strong economic growth in the future. The lower tax
rates improve incentives. After-tax rewards from working are n o w substantially
higher. The taxes paid by entrepreneurs, w h o tend to pay taxes through the
individual income tax, are n o w lower. The rewards to their innovation and risk taking
are greater. The cost of equity capital and investing has been reduced. More risktaking, investment, and innovation m e a n higher productivity and greater capital
accumulation. A larger capital stock translates into higher living standards for all in
the future.
Moreover, the tax changes enacted over the past several years have been fair and
balanced. Without the tax cut, the bottom 50 percent of taxpayers would have paid
slightly more than 4 percent of individual income taxes. A s shown on the chart
below, n o w they pay even less - 3.6 percent. In contrast, the top 5 percent of
taxpayers pay a larger share - 52.8 percent of individual income taxes rather than
50.2 percent without the tax cuts. The s a m e is true for the highest income
taxpayers - the top 1 percent.
Higher income taxpayers pay a larger share of individual
income taxes under the President's tax cuts
Top
1%
Top
Top
5%
10%
Top
25%
Top
50%
Bottom
50%
Share of Individual Income Taxes [Share of Adjusted Gross
Income]
With the Tax
Cuts
32.3
52.8
64.8
83
96.4
3.6
Without Tax
Cuts
30.5
50.2
62.6
81.8
95.9
4.1
Note: Calculations are for 2004. U.S. Treasury, Office of Tax
Analysis.
This group n o w pays 32.3 percent of all individual income taxes, rather than 30.5
percent before the tax cuts were enacted.
Much remains to be done, however. Making the tax cuts enacted in 2001 and 2003
permanent, promoting savings, making health care more affordable, reducing the
barriers to homeownership, simplifying the tax system, ensuring the integrity of the
tax system by preventing abusive transactions, and responding to the W T O
decision on the extraterritorial income exclusion (ETI) provisions are all important
priorities reflected in the President's budget proposals. I will focus on each of these
priorities in turn.
Permanence: A Stable, Certain Tax Code
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The tax reductions made in the Economic Growth and Tax Relief Reconciliation Act
of 2001 ( E G T R R A ) and J G T R R A proved essential for promoting economic growth
and will help to ensure higher living standards in the future. If these provisions are
allowed to sunset, taxes will increase: for m a n y individuals after 2004, for m a n y
small businesses in 2006; for investors beginning in 2009, and again for most
taxpayers beginning in 2011.
An uncertain tax code imposes real costs on the economy. Uncertainty makes it
difficult for workers and businesses to plan for the future and increases investment
risk. The possibility of higher taxes increases the cost of equity capital to
businesses and reduces individuals' after-tax rewards to working and investing. A
higher cost of equity capital and lower rewards to workers and investors d a m p e n
long-run economic growth.
Permanent extension of the tax cuts enacted by the President and the Congress
will provide a more certain tax environment for workers and businesses to plan and
invest, both reducing complexity and continuing to support a growing economy. The
revenue cost of making the tax cuts permanent ($989 billion) is only a small
percentage of the revenue of the federal government over the 10-year budget
window. Moreover, the cost is only a tiny fraction of the United States economy
over this s a m e period.
In addition to uncertainty, failure to make the tax cuts permanent will inflict a real
blow to the economy. Allowing the tax cuts to expire amounts to nothing more than
a massive tax increase on the vast bulk of individual and business taxpayers.
Towards a Long-Term Solution to the AMT
The expected growth in the individual alternative minimum tax (AMT) is a major
problem in the tax code that must be addressed. The A M T w a s first enacted in the
late 1960s to target a small number of very high income taxpayers w h o paid little or
no tax. The stage w a s set for the AMT's growth when the regular tax w a s indexed
in the early 1980s but the A M T w a s not. Other changes throughout the 1980s and
1990s compounded the problem.
Now the AMT is a tax that is beginning and will continue to affect increasing millions
of taxpayers. It will reach into the ranks of the middle class, potentially denying
taxpayers the benefit of many of the deductions, credits and lower tax rates
available under the regular tax system. The A M T also significantly increases the
complexity of tax filing for taxpayers subject to the A M T and for millions of
additional taxpayers w h o must complete A M T forms only to determine they are not
subject to the A M T
The AMT's future growth must be addressed. The President's budget extends
through 2005 the temporary increase in the A M T exemption amounts and the
provision that allows certain personal credits to offset the A M T . These temporary
provisions will keep the number of taxpayers affected by the A M T from rising
significantly in the near-term. More importantly, they will allow the Treasury
Department the time necessary to develop a comprehensive set of proposals to
deal with the A M T in the long-term. Because of the revenues involved and the
number of taxpayers affected, any long-term solution to the A M T could well require
significant changes to the regular income tax. The Treasury Department looks
forward to its task and to working with this Committee to find a long-term solution.
Simpler Savings Options for All
Americans continue to save at a very low rate relative to historical standards and
our major trading partners. The President has put forward in this year's Budget a
modified version of his savings proposal to help address this low rate of saving. The
proposal carefully balances the need for a simpler approach for providing
accessible tax-preferred savings options to all Americans and preserving the
employer-provided pension system, which has been the foundation for meeting the
retirement savings needs for millions.
Saving is made simpler by replacing the existing web of tax-preferred saving
options with two n e w savings vehicles: Retirement Savings Account (RSAs) and
Lifetime Savings Accounts (LSAs). These savings vehicles allow everyone to
contribute regardless of age or income. The simplicity of these n e w savings
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vehicles will help encourage individuals, especially lower income individuals, to
save.
Lower income individuals often do not have the resources to save for the distant
future and are unwilling to take the risk of locking up their savings in tightly
restricted accounts. In addition, these individuals tend not to have access to the
sophisticated advice needed to navigate the complex, and often conflicting, rules
that govern the existing savings vehicles. LSAs have been designed to m a k e the
decision easy: it is a savings vehicle accessible for all, especially low and moderate
income individuals. Any m o n e y contributed can be withdrawn at any time without
penalty. Treasury believes that these more relaxed rules will encourage individuals
to save w h o might otherwise not do so in targeted savings plans because of
restrictions on and penalties for withdrawals. A s individuals learn to save, and
b e c o m e comfortable doing so, they will do more of it. The lower $5,000 contribution
limit, as compared to the proposal in the F Y 2004 Budget, will minimize the effect of
these proposals on employer plans.
The proposal for RSAs would simplify the range of choices for taxpayers saving for
retirement. The proposal takes the easy to understand Roth IRA and m a k e s it
available to all. Any taxpayer can contribute up to the lesser of $5,000 or their
earned income. Unlike current law, however, withdrawals could only be m a d e for
retirement, beginning at age 58. R S A s are the perfect complement to LSAs:
targeted, tax-favored savings coupled with savings for any reason.
The proposal for Employer Retirement Savings Accounts (ERSAs) would
consolidate six different types of employer contributory plans into a universal
account. The proposal has been modified from the previous F Y 2004 Budget
proposal to enhance flexibility and encourage small businesses (10 or fewer
employees) to fund an E R S A by contributing to a custodial account, which is similar
to a current-law IRA.
A third proposal would credit Individual Development Accounts (IDAs) to encourage
and assist lower-income individuals save. This proposal would provide dollar-fordollar matching contributions of up to $500 targeted to lower income individuals.
Matching contributions would be supported by a 100 percent credit to sponsoring
financial institutions.
Together, these proposals further promote an ownership society by removing
barriers to savings, reducing complexity, and improving fairness by providing the
benefits of tax preferred savings to everyone, regardless of financial sophistication
or capacity to save for the very long-term.
Reducing Barriers to Homeownership
A significant barrier to homeownership continues to be the supply of affordable
housing for lower income individuals. To address that need, the President has
proposed a $2.4 billion ($16 billion over 10 years), 5-year Single-Family Affordable
Housing Tax Credit of up to 50 percent of the project costs of rehabilitation and
construction of affordable homes, provided they are offered to homebuyers with
incomes of not more than 80 percent of area median income. The tax credit would
eventually result in an additional 200,000 affordable single-family h o m e s becoming
available through construction or rehabilitation.
Affordable Health Care is a Priority
Expanding access to health insurance remains an important goal of the President
and is reflected by his continued commitment in this area. The lack of access to
affordable health insurance is a complex problem that requires a comprehensive
approach focusing on different segments of the uninsured with policies tailored to
meet their needs. There is no one size fits all solution; a policy that excels in one
dimension m a y do poorly in others. The high and rising cost of health insurance is a
key factor that limits access. Policies that help control costs will m a k e insurance
more affordable through lower premiums.
Health Savings Accounts (HSAs), enacted as part of the recently-passed Medicare
Reform legislation, are a significant step towards promoting cost consciousness
through greater reliance on individual choice and high deductible plans. H S A s , n o w
part of current law, are complemented by a n e w proposal in the President's Budget
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for an above-the-line deduction for premiums to purchase the high deductible health
plans ( H D H P ) necessary in order to have an H S A . The proposal generally helps
level the playing field for a segment of the population that does not have employersponsored coverage.
The proposal for a refundable, advanceable health insurance tax credit would help
m a k e insurance more affordable for lower income individuals. The credit amount
under the proposal would vary with family size, mirroring the relationship of actual
health insurance premiums. The credit is targeted to low-income individuals and
families, w h o are the least likely to have employer-based health insurance, resulting
in the efficient use of the subsidy. Together, these policies promote affordability and
access, and help encourage greater cost consciousness by giving individuals a
greater stake in their health care choices.
Protecting Defined Benefit Plans and Promoting Fair Treatment for Older
Workers in Conversions to Cash Balance Plans
The President's budget reflects the importance of preserving defined benefit
pension plans and the benefits they provide to workers and their families. In
addition to the proposal to fix the flawed interest rate used to determine the amount
of contributions a plan sponsor must m a k e to its defined benefit plan, the budget
contains three interrelated proposals that recognize the importance of cash balance
plans in providing retirement security to millions of Americans. The first proposal
would ensure that companies converting from a traditional defined benefit plan to a
cash balance pension include a fair transition for older workers. A five-year hold
harmless provision would be required in a cash balance conversion, so that workers
would continue to earn benefits under the greater of the prior plan formula or the
cash balance formula for five years after the conversion. The second proposal
would clarify that cash balance plans do not violate the age-discrimination rules that
apply to pension plans as long as they treat older workers at least as well as
younger workers. This would remove uncertainty created by inconsistent federal
court decisions and would ensure the future of cash balance plans. The final
proposal would eliminate the "whipsaw" effect, which acts as an effective cap on the
interest credits that cash balance plans can provide to workers. This would permit
companies to give higher interest credits, allowing larger retirement accumulations
for workers.
Simplification of an Overly Complex Tax Code
In a sophisticated economy, a tax code with complex provisions may be
unavoidable. It is the price w e pay to ensure fairness, to limit government
interference with personal and business decisions, and to prevent abuse. O n the
other hand, unnecessary complexity imposes tremendous burdens on honest
taxpayers simply doing their best to comply with the law. The present tax system
imposes compliance costs on taxpayers estimated to range from $70 billion to $100
billion per year from the individual income tax alone. Compliance costs also are
onerous for business taxpayers, especially small businesses, while the typical
Fortune 500 company spends almost $4 million a year on tax matters.
For these reasons, it is crucial that we continue efforts to simplify the tax laws. The
2005 Budget includes several n e w simplification proposals. All of these proposals
address complexities borne by individuals and families. They do not represent an
exhaustive list; instead, they serve as examples of the m a n y steps that can and
should be taken to m a k e the tax code easier to understand and comply with. T h e
Treasury Department looks forward to working with this Committee to identify other
areas where significant improvements can and should be made.
Stopping Abusive Transactions
Voluntary compliance with the tax laws is undermined when taxpayers use abusive
transactions to avoid paying the taxes they rightfully owe. For the past three years,
the Administration has acted aggressively to restore confidence in the tax system
by halting the promotion of abusive transactions and bringing taxpayers back into
compliance with the tax laws. The President's Budget builds on these efforts and
information gathered through IRS compliance programs. The n e w legislative
proposals close loopholes and target identified abusive transactions and practices.
A s other abusive transactions are identified, the IRS will challenge the transactions
in audits, and the Treasury Department and the IRS will work with Congress to
enact any legislation necessary to address such transactions.
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One proposal deserves particular mention. The Administration has proposed to limit
certain types of abusive leasing transactions, known as SILOs.
These arrangements are entered into with tax-indifferent parties, such as foreign
governments, domestic municipalities, and tax-exempt organizations. They purport
to be leasing transactions but, in substance, provide no financing to the taxindifferent party aside from a fee. These arrangements have no meaningful financial
or economic utility other than the transfer of tax benefits to a U.S. taxpayer (by
m e a n s of a purported "sale" of property) in exchange for the payment of an
accommodation fee to the tax-indifferent party.
Although Treasury has been aware of SILOS for some time, the extent of the
problem has only recently c o m e to light. Our data indicates that as m u c h as $750
billion dollars of SILOs have been done in just the last four years. W e have every
reason to believe that, left unchecked, this trend will continue and grow. Because
these transactions essentially involve no risk to either party, and require very little in
the w a y of actual cash investment, corporations seeking to reduce their U.S. tax
liability will face no economic bar to seeking out these arrangements on an
increasing basis.
SILOs represent a threat to the viability of the corporate tax base. They present a
ready-made tool for self-help tax relief for large corporations and consortiums of
smaller ones. Indeed, the magnitude of SILO transactions is such that the Treasury
Department had to re-estimate and reduce its baseline estimate of corporate tax
receipts over the ten-year budget window. It is essential that Congress deal with
this issue. Otherwise, any corporation with the wherewithal to do so could plan itself
out of the corporate income tax. The American citizenry rightfully expect their
government to ensure that all taxpayers pay the taxes they owe, unreduced by
artificial transactions. Congress should act promptly to ensure that SILOs are not
permitted to continue.
At the same time, in addressing the SILO problem, it is not Our goal to interfere with
garden variety leasing transactions that have been entered into for m a n y years and
that involve legitimate financing or refinancing of assets. The detailed SILO
proposal in the President's budget permits legitimate lease transactions to continue.
W e look forward to working with this Committee to ensure that legislation is enacted
that leaves legitimate transactions unscathed while preventing abusive lease
transactions from going forward.
Responding to WTO Decisions on ETI Provisions
The Extraterritorial Income ("ETI") provisions of our tax law, like the prior-law
foreign sales corporation provisions, have been found to be inconsistent with World
Trade Organization ( W T O ) rules. The W T O has authorized the imposition of trade
sanctions against U.S. exports up to the level of $4 billion per year, and the
European Union has adopted a plan providing for sanctions to be phased in
beginning next month if the ETI provisions remain in the law.
Honoring our WTO obligations requires repeal of the ETI provisions. At the same
time, meaningful changes to our tax law are required to preserve and enhance the
competitiveness of U.S. businesses operating in the global marketplace. Thus, the
necessary repeal of the ETI provisions should be coupled with other tax changes
that promote the competitiveness of American manufacturers and other job-creating
sectors of the U.S. economy. Tax law changes that would provide a benefit to these
vital contributors to the U.S. economy include across-the-board corporate tax rate
reduction, expansion and permanence of the research credit, improvements in
depreciation rules, extension of N O L carryback rules, A M T reform, business tax
simplification, and rationalization of the international tax rules. The Administration
intends to continue to work with this Committee and the Congress on prompt
enactment of legislation that brings our tax law into compliance with W T O rules and
m a k e s changes to the tax law to enhance the global competitiveness of American
businesses and the workers they employ.
Conclusion
Thank you again, Mr. Chairman and members of the Committee, for the opportunity
to appear before you today. W e look forward to working together with this
Committee and others in the Congress to promote tax policies that continue to
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provide a sound foundation for economic growth.
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-1168: Secretary John W . Snow Testimony on Revenue Proposals in the President's F Y 2005 Budget
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 12, 2004
JS-1168
Secretary John W. Snow
Opening Statement before the Senate Finance Committee
Testimony on Revenue Proposals in the President's F Y 2005 Budget
Thursday, February 12, 2004
Thank you, Mr. Chairman.
Thank you all for having me here today to talk about the President's budget.
I believe you'll find that this budget reflects the priorities of our nation as well as the
leadership of President George W . Bush.
The over-riding theme of the budget, and the President's plan for the future, is that
a safer world is a more prosperous world. That's why I'll be discussing both national
and economic security here today.
Decisions about how to collect and spend taxpayer dollars - for this is what a
budget is - must be m a d e with both caution and vision.
The Fiscal Year 2005 budget proposal is, therefore, a plan that does three core
things:
• One: Keeps Americans safe by providing the resources necessary to win the war
on terror and protect our homeland;
• Two: Increases the economic security of our citizens as well, by strengthening our
economy; and
• Three: Exercises the kind of spending discipline that is required by a government
that respects the source of its money (hard-working taxpayers!) and is unwilling to
live with a deficit.
Discussions of our budget and our economy are not, and should not, be separate.
The two are inextricably connected.
Today, our economy is doing better.
Homeownership is up, unemployment is heading down, and GDP growth has been
strong.
This administration came to office when those indicators were not nearly as
positive.
The President inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
The President and his administration took these challenges seriously and we have
m a d e serious progress in changing the economic direction of this country.
The President's tax cuts - passed by you - have worked. They provided the
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•1168: Secretary John W . Snow Testimony on Revenue Proposals in the President's F Y 2005 Budget
stimulus that w a s necessary to turn the economic ship around... and they are n o w
encouraging and allowing for the economic growth that is continuing into the future.
• Economic growth in the second half of 2003 was the fastest since 1984;
• N e w h o m e construction w a s the highest in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Over 360,000 jobs have been created in the past five months;
• Unemployment claims - both initial claims and continuing claims - are well off
their peaks last year, indicating improvement in the labor market;
• This Wednesday, the D o w closed at a 32-month-high. This translates into more
than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: economic growth is
robust and will be sustained.
However, there is more to do. We are not, by any means, satisfied.
There are still Americans who want to find work and cannot... and this
Administration will not rest until that most critical need is met and until every
American looking for work can find a job.
Our budget addresses that need by continuing to focus on improving our economy.
For example, the President's Jobs for the 21st Century plan, announced in his State
of the Union Address, directs the resources of several branches of government
toward matching skills with jobs, and helping workers acquire the skills they need to
qualify for the jobs in their community.
We can also encourage the creation of jobs by sticking to the President's six-point
plan for growth.
That includes making health care more affordable and costs more predictable.
We can do this by passing Association Health Plan legislation that would allow
small businesses to pool together to purchase health coverage for workers at lower
rates.
We also need to promote and expand the advantages of using health savings
accounts ... h o w they can give workers more control over their health insurance
and costs.
And we've got to reduce frivolous and excessive lawsuits against doctors and
hospitals. Baseless lawsuits, driven by lottery-minded attorneys, drive up health
insurance costs for workers and businesses.
The need to reduce the lawsuit burden on our economy stretches beyond the area
of health care. That's w h y President Bush has proposed, and the House has
approved, measures that would allow more class action and m a s s tort lawsuits to
be moved into Federal court -- so that trial lawyers will have a harder time shopping
for a favorable court.
These steps are the second key part of the President's pro-jobs, pro-growth plan.
Ensuring an affordable, reliable energy supply is a third part.
We must enact comprehensive national energy legislation to upgrade the Nation's
electrical grid, promote energy efficiency, increase domestic energy production, and
provide enhanced conservation efforts, all while protecting the environment.
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-1168: Secretary John W . Snow Testimony on Revenue Proposals in the President's F Y 2005 Budget
Again, w e need Congressional action: w e ask that you pass legislation based on
the President's energy plan.
Streamlining regulations and reporting requirements are another critical reform
element that benefit small businesses, w h o represent the majority of n e w job
creation: three out of every four net n e w jobs c o m e from the small-business sector!
Let's give them a break wherever w e can so they're free to do what they do best:
create those jobs.
Opening new markets for American products is another necessary step toward job
creation. That's w h y President Bush recently signed into law n e w free trade
agreements with Chile and Singapore that will enable U.S. companies to compete
on a level playing field in these markets for the first time -- and he will continue to
work to open n e w markets for American products and services.
Finally, we've got to enable families and businesses to plan for the future with
confidence.
That means making the President's tax relief permanent.
Rate reductions, the increase in the child tax credit and the new incentives for
small-business investment - these will all expire in a few years. The accelerated
rate reductions that took effect in 2003 will expire at the end of this year. Expiration
dates are not acceptable - w e want permanent relief.
The ability of American families and businesses to make financial decisions with
confidence determines the future of our economy. And without permanent relief,
incentives upon which they can count, w e risk losing the m o m e n t u m of the recovery
and growth that w e have experienced in recent months.
The tax relief is the key stimulus for increased capital formation, entrepreneurship
and investment that cause true economic growth.
Budgets work better when the economy is growing... because a growing economy
m e a n s more jobs. That m e a n s more tax revenue... which leads to all-important
deficit reduction.
Which leads me to my next area of discussion.
Let me be clear on this:
• T h e budget deficit that w e face today is unwelcome.
• It needs to be addressed.
• The President's budget calls for cutting the deficit in half over the next five years.
• While addressing the deficit, w e must remember that it is not historically
overwhelming.
• It is understandable, given the extraordinary circumstances of recent history.
R e m e m b e r that w e are fighting a type of war that w e have never fought before. W e
are fighting an e n e m y that requires a m u c h broader variety of government
resources than anything we've ever confronted. And w e began this fight w h e n w e
were economically wounded.
What's most important to remember is that we will be able to fight this war and
climb out of the deficit.
We can manage this deficit, and we can cut it in half over the next five years by
controlling spending and growing our economy.
Three-quarters of the discretionary spending increases during this Administration
have been related to the global war on terror and the response to 9/11.
Meanwhile, President Bush has reduced the rate of increase in non-security-related
discretionary spending every year he has been in office: to six percent in 2002, five
Page 3 of 4
1168: Secretary John W . Snow Testimony on Revenue Proposals in the President's F Y 2005 Budget
percent in 2003, and to four percent in the current fiscal year.
For Fiscal Year 2005 we're going to reduce the rate of increase in non-security
discretionary spending to less than one percent.
Total annual appropriated discretionary spending will increase by less than four
percent next year.
Holding the line on spending - while ensuring that our country is safe and our most
important needs, from jobs to health care, are met - will achieve deficit reduction
w h e n coupled with all-important economic growth.
Again, this is why the budget cannot be discussed separately from the economy.
Separating the two is what gets government into trouble.
Make no mistake; President Bush is serious about the deficit.
We see it as unwelcome, but manageable... and we intend to achieve: rapid deficit
reduction.
A recent CBO report raised concerns about this matter, and it is important to note
that recent and short-term projected budget deficits and the existence of long-term
deficits for Social Security and Medicare are not connected.
These unfunded long-term net obligations are also a concern, and ones that this
Administration has highlighted and invited bipartisan dialogue on.
The President has been clear on this: younger workers should have the opportunity
to build a nest egg by saving part of their Social Security taxes in personal
retirement accounts. His vision for the program is economically wise, and it is that
w e should m a k e the Social Security system a source of ownership for the American
people.
Are we dedicating ourselves to increased spending on the war on terror and
protecting the homeland? The answer is yes. Yes, without sacrificing other
necessities.
And that is because a nation must be safe in order for it to be prosperous.
A nation of entrepreneurs must also be able to plan, and to be relieved of as many
burdens as possible, in order to be prosperous.
All of the budget issues and policy proposals that I've discussed today may seem,
at times, to be a complicated recipe. But these ingredients combine to m a k e
something that is simply put, and is of utmost importance - and that is economic
growth.
Growth is the key to every economic problem we confront. That's why we urge
other countries to institute pro-growth policies. It's good for them, and it's good for
the global economy that w e are a significant part of.
Thank you for hearing m y testimony today. I'll be happy to take your questions now.
Page 4 ot 4
JS-1169.: Treasury and IRS make it easier for States to use the Health Coverage Tax Credit
PRESS ROOM
Page I ot 1
^C5^'
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 12, 2004
JS-1169
Treasury and IRS make it easier for States to use
the Health Coverage Tax Credit
Today, the Treasury Department and the IRS issued guidance to make it easier for
state governments to elect qualified health insurance that will be eligible for the
Health Coverage Tax Credit.
The Health Coverage Tax Credit, which President Bush signed into law as part of
the Trade Act of 2002, provides valuable assistance for many Americans w h o are
participating under the Trade Adjustment Assistance program or w h o are receiving
benefits under a pension plan that has been assumed by the Pension Benefit
Guaranty Corporation. This assistance consists of an advanceable, refundable tax
credit equal to 6 5 % of the cost of qualified health insurance. The principal types of
qualified health insurance are private health plans elected by states. This guidance
issued today formalizes and clarifies guidance that has been provided to each of
the states' governors.
Treasury and the IRS have been working with all the states to get a qualifying
program in place for all eligible individuals. So far, 27 states and the District of
Columbia have elected plans for all their residents w h o are eligible individuals. " W e
want to ensure that everyone eligible for the Health Coverage Tax Credit can have
the opportunity to sign up for it. W e are concerned about people in the remaining 23
states w h o are eligible for the credit but cannot use it," said Roy Ramthun, senior
advisor for health initiatives to the Secretary of the Treasury. "We are working
closely with numerous government officials and health plans in these states to
encourage them to make this valuable Health Coverage Tax Credit available to
their eligible residents. W e believe this guidance will make the election process
easier."
Related Documents:
• The text of the Revenue Procedure.
• List of states with qualifying health programs.
Part III
Administrative, Procedural, and Miscellaneous
Section 35: Health Insurance Costs of Eligible Individuals
Rev. Proc. 2004-12
SECTION 1. PURPOSE
This revenue procedure provides guidance on how a state elects a health program to be
qualified health insurance for purposes of the health coverage tax credit ( H C T C ) under section
35 of the Internal Revenue Code.
SECTION 2. B A C K G R O U N D
.01 On August 6, 2002, President Bush signed into law the Trade Act of 2002 ("the
Act"), Pub. L. 107-210, 116 Stat. 933 (2002). Title II of the Act contains provisions that make
assistance available to certain individuals participating in the Trade Adjustment Assistance
program ( T A A ) or receiving payments from the Pension Benefit Guaranty Corporation (PBGC),
to enable them to purchase health insurance. The primary mechanism for such assistance is a
federal tax credit that is equal to 65 percent of the amount paid by the eligible individual for
coverage for the individual and qualifying family members under qualified health insurance.
The health coverage tax credit became available on December 1, 2002 and is claimed on the
eligible individual's income tax return. Beginning August 1, 2003, the H C T C is also available
on a monthly basis as the premium is paid. Under the advance H C T C program, the
government's share — 65 percent of the premium amount paid by the individual — is combined
with the eligible individual's payment of the other 35 percent and paid on a monthly basis, in
general to the qualified health plan in which the individual has enrolled.
.02 There are two basic categories of individuals who may be eligible for the HCTC:
(1) TAA recipients (as described in section 2.03 of this revenue procedure), and
(2) PBGC pension recipients who have attained age 55 but who do not have
Medicare coverage (as described in section 2.04 of this revenue procedure).
.03 A TAA recipient is any individual who is receiving a trade readjustment allowance
under the Trade Act of 1974 for any day of a month, or any individual w h o would be eligible for
such an allowance except that the individual has not exhausted the individual's regular
unemployment insurance benefits. In addition, for purposes of this revenue procedure, any
individual receiving benefits under the alternative trade adjustment assistance program,
established under § 246 of the Trade Act of 1974, 19 U.S.C. §§ 2271-2275 (2003), is also a T A A
recipient. All T A A recipients remain eligible for the H C T C (and thus are still considered T A A
recipients) for ore month after the end of the month that their eligibility for T A A ceases.
.04 A PBGC pension recipient is a person who is receiving a benefit payment from the
P B G C for a month and w h o has attained age 55 (but w h o is not entitled to Medicare) on the first
day of the month.
.05 There are ten categories of health insurance that may be qualified coverage for
purposes of the H C T C :
(1) COBRA coverage: Coverage under a COBRA continuation provision (under
§ 4980B of the Code; part 6 of subtitle B of title I of the Employee Retirement Income Security
Act of 1974, 29 U.S.C. §§ 1161-1168 (2003); or title XXII of the Public Health Service Act, 42
U.S.C. §§ 300bb-l-300bb-8 (2003));
(2) State-based continuation coverage: Coverage under a state law that requires
continuation coverage;
(3) High risk pool: Coverage offered through a qualified state high risk pool (as
defined in section 2744(c)(2) of the Public Health Service Act, 42 U.S.C. § 300gg-44(c)(2)
(2003));
(4) State employees' health plan: Coverage under a health insurance program
offered for state employees;
(5) Comparable state employees' health plan: Coverage under a state-based
health insurance program that is comparable to the health insurance program offered for state
employees;
(6) State arrangement: An arrangement to offer coverage to HCTC eligible
individuals entered into by a state with —
(a) an issuer of health insurance coverage;
(b) an administrator;
(c) an employer; or
(d) a group health plan (including a multiemployer plan);
(7) Private purchasing pool: Coverage offered through a state arrangement with a
private sector health care coverage purchasing pool;
(8) Other state plans: Coverage under a state-operated health plan that does not
receive any federal financial assistance;
(9) Spousal coverage: Coverage under a group health plan that is available
through the employment of the H C T C eligible individual's spouse (but only if the spouse's
employer contributes less than 50 percent of the total cost of coverage for the spouse, the eligible
individual, and any dependents); and
(10) Individual health insurance: Coverage under individual health insurance if
the H C T C eligible individual was covered under the insurance during the entire 30-day period
that ended on the date that the individual became separated from the employment that qualifies
2
the individual as a T A A or P B G C recipient.
.06 Coverage described in paragraphs (1), (9), and (10) of section 2.05 of this revenue
procedure — C O B R A coverage, spousal coverage, and individual health insurance — satisfies the
requirements for "qualified health insurance" for all H C T C eligible individuals without any
action required by any state.
.07 Coverage described in paragraphs (2) through (8) of section 2.05 of this revenue
procedure (state-based continuation coverage or other state-based plans) satisfies the
requirements for qualified health insurance only if the state elects to have such coverage treated
as qualified health insurance and the coverage satisfies the following requirements:
(1) Qualifying individuals (as defined in section 2.08 of this revenue procedure)
must be guaranteed enrollment regardless of their medical status and must be permitted to remain
enrolled so long as the y pay the premium;
(2) No preexisting condition restriction may be imposed on qualifying
individuals;
(3) The premium charged for a qualifying individual may not be greater than the
premium for a similarly situated individual w h o is not a qualifying individual; and
(4) Benefits for qualifying individuals are the same as (or substantially similar to)
the benefits provided to similarly situated individuals w h o are not qualifying individuals.
.08 "Qualifying individuals" are HCTC eligible individuals who have at least 3 months
of "creditable coverage" (within the meaning of § 9801 of the Code) prior to seeking enrollment
in coverage described in paragraphs (2) through (8) of section 2.05 of this revenue procedure.
SECTION 3. PROCEDURE FOR ELECTING TREATMENT AS QUALIFIED HEALTH
INSURANCE
.01 This section sets forth the procedures that a state must follow in order to elect to have
coverage described in paragraphs (2) through (8) of section 2.05 of this revenue procedure (statebased continuation coverage or coverage under other state-based plans) treated as qualified
health insurance. A s described in section 2.07 of this revenue procedure, such coverage is not
qualified health insurance unless such an election is made.
.02 To make an election, a state must provide a letter that contains the following
information:
(1) Identifies and is signed by the governor or other state official responsible for
implementing this decision, including address and telephone number;
(2) Specifies the category or categories of health coverage chosen by the state
(from among the categories described in paragraphs (2) through (8) of section 2.05 of this
3
revenue procedure (state-based continuation coverage or other state-based plans));
(3 ) Provides the name and policy form number or other unique identifier for
each qualifying plan in each category, and provides a name and contact number for the plan
administrator or insurance carrier official w h o can provide additional information, if necessary.
This information is required only for coverage described in paragraphs (3) through (8) of section
2.05 of this revenue procedure; it need not be provided for state-based continuation coverage
described in paragraph (2) of section 2.05 of this revenue procedure; and
(4) Certifies that the four requirements described in section 2.07 of this revenue
procedure are met for each plan being elected under each category.
.03 The letter must be sent to:
Director, Health Coverage Tax Credit
Internal Revenue Service
1111 Constitutbn Ave, N . W .
W : H C T C / C N N 750
Washington, D.C. 20224
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective March 1, 2004. Elections made before the effective
date of this revenue procedure continue to be effective, including those sent to a different
address; they do not need to be renewed.
S E C T I O N 5. P A P E R W O R K R E D U C T I O N A C T
The collection of information contained in this revenue procedure has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control number 1545-1875.
An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays a valid O M B control
number.
The collection of information in this revenue procedure is in section 3. This information
will be used to determine if a state health plan is qualified health insurance for purposes of the
H C T C . This information collection is voluntary. If a state makes an election, eligible residents
of the state m a y be able to more easily find qualified health insurance for which they can claim
the H C T C .
The likely respondents are states. The estimated total annual reporting burden is 26
4
hours. The estimated annual burden per respondent varies from 1/4 hour to 1 hour, depending on
individual circumstances, with an estimated average ofXA hour. The estimated total number of
respondents is 51. The estimated frequency of responses is one-time.
Books or records relating to a collection of information must be retained as long as their
contents m a y 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.
DRAFTING INFORMATION
The principal author of this revenue procedure is Shoshanna Tanner of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further
information regarding this revenue procedure contact Mr. Stephen Finan on (202) 622-1446 or
M s . Tanner on (202) 622-6080 (not toll-free numbers).
5
•
State
Alabama
Alaska
Arkansas
Colorado
Connecticut
District of
Columbia
Florida
Illinois
Indiana
Iowa
Maine
Maryland
Michigan
Minnesota
Montana
N e w Hampshire
N e w York
North Carolina
North Dakota
Ohio
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Vermont
Virginia
West Virginia
Total: 28
State Qualified Plans
(28 States with Qualified
Plans)
iigh Risk
Private
Pool
Plans
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
14
X
X
X
X
X
16
JS-1170: Treasury Clarifies 2/9/04 Bosnian Designation
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 12, 2004
JS-1170
TREASURY CLARIFIES BOSNIAN DESIGNATION
Clarification to Treasury N e w s Release, "Operation Balkan Vice III:
Designation of Thirteen Individuals Obstructing the Dayton Peace Accords
in Bosnia," February 9, 2004
Three of the thirteen persons designated by Treasury's Office of Foreign Assets
Control pursuant to Executive Order 13219, Avdyl Jakupi, Xhezair Shaqiri, and
Menduh Thaci were designated for extremist activities, including obstructing, or
otherwise acting to undermine the Ohrid Framework Agreement of 2001 and peace
and stability in Macedonia, or for acting or purporting to act for or on behalf of any
person designated pursuant to the order.
SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 12, 2004
2004-3-1-13-8-9-22196
U.S. International Reserve Position
'he Treasury Department today released U.S. reserve assets data for the latest week. A s indicated in this table, U.S. reserve assets
)taled $86,014 million as of the end of that week, compared to $85,368 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 30, 2003
February 6, 2004
85,368
86,014
TOTAL
. Foreign Currency Reserves ]
Securities
Euro
Yen
TOTAL
Euro
Yen
TOTAL
8,386
14,862
23,248
8,570
14,900
23,469
f which, issuer headquartered in the U.S.
0
0
Total deposits with:
:
. Other central banks and BIS
13,606
2,986
16,592
13,876
2,993
16,869
i. Banks headquartered in the U.S.
0
0
i. Of which, banks located abroad
0
0
7. Banks headquartered outside the U.S.
0
0
i. Of which, banks located in the U.S.
0
0
M F Reserve Position
21,887
21,981
pecial Drawing Rights (SDRs) 2
12,598
12,652
old Stock3
11,043
11,043
0
0
ther Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 30, 2003
Euro
•ign currency loans and securities
Yen
February 6. 2004
TOTAL
Euro
0
egate 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
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 30, 2003
Euro
1. Contingent liabilities in foreign currency
Yen
February 6, 2004
TOTAL
Euro
Yen
TOTAL
0
0
1. Foreign currency securities with embedded
>ptions
0
0
. Undrawn, unconditional credit lines
0
0
0
0
l.a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
.a. With other central banks
b. With banks and other financial institutions
eadquartered in the U.S.
c. With banks and other financial institutions
zadquartered outside the U.S.
Aggregate short and long positions of
tions in foreign
rrencies vis-a-vis the U.S. dollar
. Short positions
1. Bought puts
2. Written calls
Long positions
1. Bought calls
I. Written puts
Notes:
des holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
s reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1171: Secretary John W . Snow: Testimony on Revenue Proposals in the President's F... Page 1 of 4
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 13, 2004
JS-1171
Secretary John W. Snow
Opening Statement before the Senate Committee on the Budget
Testimony on Revenue Proposals in the President's F Y 2005 Budget
Friday, February 13, 2004
Thank you, Mr. Chairman.
Thank you all for having me here today to talk about the President's budget.
I believe you'll find that this budget reflects the priorities of our nation as well as the
leadership of President George W . Bush.
The over-riding theme of the budget, and the President's plan for the future, is that
a safer world is a more prosperous world. That's why I'll be discussing both national
and economic security here today.
Decisions about how to collect and spend taxpayer dollars - for this is what a
budget is - must be m a d e with both caution and vision.
The Fiscal Year 2005 budget proposal is, therefore, a plan that does three core
things:
• One: Keeps Americans safe by providing the resources necessary to win
the war on terror and protect our homeland;
• Two: Increases the economic security of our citizens as well, by
strengthening our economy; and
• Three: Exercises the kind of spending discipline that is required by a
government that respects the source of its money (hard-working taxpayers!)
and is unwilling to live with a deficit.
Discussions of our budget and our economy are not, and should not, be separate.
The two are inextricably connected.
Today, our economy is doing better.
Homeownership is up, unemployment is heading down, and GDP growth has been
strong.
This administration came to office when those indicators were not nearly as
positive.
The President inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
The President and his administration took these challenges seriously and we have
m a d e serious progress in changing the economic direction of this country.
The President's tax cuts - passed by you - have worked. They provided the
stimulus that w a s necessary to turn the economic ship around... and they are now
encouraging and allowing for the economic growth that is continuing into the future.
•
Economic growth in the second half of 2003 was the fastest since 1984;
JS-1171: Secretary John W . Snow: Testimony on Revenue Proposals in the President's F... Page 2 of 4
• New home construction was the highest in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Over 360,000 jobs have been created in the past five months;
• Unemployment claims - both initial claims and continuing claims - are well
off their peaks last year, indicating improvement in the labor market;
• This Wednesday, the D o w closed at a 32-month-high. This translates into
more than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: economic growth is
robust and will be sustained.
However, there is more to do. We are not, by any means, satisfied.
There are still Americans who want to find work and cannot... and this
Administration will not rest until that most critical need is met and until every
American looking for work can find a job.
Our budget addresses that need by continuing to focus on improving our economy.
For example, the President's Jobs for the 21st Century plan, announced in his State
of the Union Address, directs the resources of several branches of government
toward matching skills with jobs, and helping workers acquire the skills they need to
qualify for the jobs in their community.
We can also encourage the creation of jobs by sticking to the President's six-point
plan for growth.
That includes making health care more affordable and costs more predictable.
We can do this by passing Association Health Plan legislation that would allow
small businesses to pool together to purchase health coverage for workers at lower
rates.
We also need to promote and expand the advantages of using health savings
accounts ... h o w they can give workers more control over their health insurance
and costs.
And we've got to reduce frivolous and excessive lawsuits against doctors and
hospitals. Baseless lawsuits, driven by lottery-minded attorneys, drive up health
insurance costs for workers and businesses.
The need to reduce the lawsuit burden on our economy stretches beyond the area
of health care. That's w h y President Bush has proposed, and the House has
approved, measures that would allow more class action and m a s s tort lawsuits to
be moved into Federal court -- so that trial lawyers will have a harder time shopping
for a favorable court.
These steps are the second key part of the President's pro-jobs, pro-growth plan.
Ensuring an affordable, reliable energy supply is a third part.
We must enact comprehensive national energy legislation to upgrade the Nation's
electrical grid, promote energy efficiency, increase domestic energy production, and
provide enhanced conservation efforts, all while protecting the environment.
Again, we need Congressional action: we ask that you pass legislation based on
the President's energy plan.
Streamlining regulations and reporting requirements are another critical reform
element that benefit small businesses, w h o represent the majority of n e w job
creation: three out of every four net n e w jobs c o m e from the small-business sector!
Let's give them a break wherever w e can so they're free to do what they do best:
create those jobs.
JS-1171: Secretary John W . Snow: Testimony on Revenue Proposals in the President's F... Page 3 of 4
Opening new markets for American products is another necessary step toward job
creation. That's why President Bush recently signed into law n e w free trade
agreements with Chile and Singapore that will enable U.S. companies to compete
on a level playing field in these markets for the first time -- and he will continue to
work to open n e w markets for American products and services.
Finally, we've got to enable families and businesses to plan for the future with
confidence.
That means making the President's tax relief permanent.
Rate reductions, the increase in the child tax credit and the new incentives for
small-business investment - these will all expire in a few years. The accelerated
rate reductions that took effect in 2003 will expire at the end of this year. Expiration
dates are not acceptable - w e want permanent relief.
The ability of American families and businesses to make financial decisions with
confidence determines the future of our economy. And without permanent relief,
incentives upon which they can count, w e risk losing the m o m e n t u m of the recovery
and growth that w e have experienced in recent months.
The tax relief is the key stimulus for increased capital formation, entrepreneurship
and investment that cause true economic growth.
Budgets work better when the economy is growing... because a growing economy
m e a n s more jobs. That m e a n s more tax revenue... which leads to all-important
deficit reduction.
Which leads me to my next area of discussion.
Let me be clear on this:
• The budget deficit that we face today is unwelcome.
• It needs to be addressed.
• The President's budget calls for cutting the deficit in half over the next five
years.
• While addressing the deficit, w e must remember that it is not historically
overwhelming.
• It is understandable, given the extraordinary circumstances of recent
history. R e m e m b e r that w e are fighting a type of war that w e have never
fought before. W e are fighting an enemy that requires a m u c h broader
variety of government resources than anything we've ever confronted. And
w e began this fight w h e n w e were economically wounded.
What's most important to remember is that we will be able to fight this war and
climb out of the deficit.
We can manage this deficit, and we can cut it in half over the next five years by
controlling spending and growing our economy.
Three-quarters of the discretionary spending increases during this Administration
have been related to the global war on terror and the response to 9/11.
Meanwhile, President Bush has reduced the rate of increase in non-security-related
discretionary spending every year he has been in office: to six percent in 2002, five
percent in 2003, and to four percent in the current fiscal year.
For Fiscal Year 2005 we're going to reduce the rate of increase in non-security
discretionary spending to less than one percent.
Total annual appropriated discretionary spending will increase by less than four
percent next year.
Holding the line on spending - while ensuring that our country is safe and our most
important needs, from jobs to health care, are met - will achieve deficit reduction
JS-1171: Secretary John W . Snow: Testimony on Revenue Proposals in the President's F...
when coupled with all-important economic growth.
Again, this is why the budget cannot be discussed separately from the economy.
Separating the two is what gets government into trouble.
Make no mistake; President Bush is serious about the deficit.
We see it as unwelcome, but manageable... and we intend to achieve: rapid deficit
reduction.
A recent CBO report raised concerns about this matter, and it is important to note
that recent and short-term projected budget deficits and the existence of long-term
deficits for Social Security and Medicare are not connected.
These unfunded long-term net obligations are also a concern, and ones that this
Administration has highlighted and invited bipartisan dialogue on.
The President has been clear on this: younger workers should have the opportunity
to build a nest egg by saving part of their Social Security taxes in personal
retirement accounts. His vision for the program is economically wise, and it is that
w e should m a k e the Social Security system a source of ownership for the American
people.
Are we dedicating ourselves to increased spending on the war on terror and
protecting the homeland? The answer is yes. Yes, without sacrificing other
necessities.
And that is because a nation must be safe in order for it to be prosperous.
A nation of entrepreneurs must also be able to plan, and to be relieved of as many
burdens as possible, in order to be prosperous.
All of the budget issues and policy proposals that I've discussed today may seem,
at times, to be a complicated recipe. But these ingredients combine to m a k e
something that is simply put, and is of utmost importance - and that is economic
growth.
Growth is the key to every economic problem we confront. That's why we urge
other countries to institute pro-growth policies. It's good for them, and it's good for
the global economy that w e are a significant part of.
Thank you for hearing my testimony today. I'll be happy to take your questions now.
Page 4 of 4
JS-1172:. Treasury and IRS shut d o w n abusive Life Insurance Policies in Retirement Plans
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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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February 13, 2004
JS-1172
Treasury and IRS shut down abusive
Life Insurance Policies in Retirement Plans
Today, the Treasury Department and the Internal Revenue Service issued guidance
to shut down abusive transactions involving specially designed life insurance
policies in retirement plans, section "412(i) plans." The guidance designates certain
arrangements as "listed transactions" for tax-shelter reporting purposes.
A "section 412(i) plan" is a tax-qualified retirement plan that is funded entirely by a
life insurance contract or an annuity. The employer claims tax deductions for
contributions that are used by the plan to pay premiums on an insurance contract
covering an employee. The plan may hold the contract until the employee dies, or it
may distribute or sell the contract to the employee at a specific point, such as when
the employee retires.
"The guidance targets specific abuses occurring with section 412(i) plans," stated
Assistant Secretary for Tax Policy P a m Olson. "There are many legitimate section
412(i) plans, but s o m e push the envelope, claiming tax results for employees and
employers that do not reflect the underlying economics of the arrangements."
"Again and again, we've uncovered abusive tax avoidance transactions that game
the system to the detriment of those who play by the rules," said IRS Commissioner
Mark W . Everson. "Today's action sends a strong signal to those taking advantage
of certain insurance policies that these abusive schemes must stop."
The guidance covers three specific issues. First, a set of new proposed regulations
states that any life insurance contract transferred from an employer or a taxqualified plan to an employee must be taxed at its full fair market value. S o m e firms
have promoted an arrangement where an employer establishes a section 412(i)
plan under which the contributions m a d e to the plan, which are deducted by the
employer, are used to purchase a specially designed life insurance contract.
Generally, these special policies are m a d e available only to highly compensated
employees. The insurance contract is designed so that the cash surrender value is
temporarily depressed, so that it is significantly below the premiums paid. The
contract is distributed or sold to the employee for the amount of the current cash
surrender value during the period the cash surrender value is depressed; however
the contract is structured so that the cash surrender value increases significantly
after it is transferred to the employee. Use of this springing cash value life
insurance gives employers tax deductions for amounts far in excess of what the
employee recognizes in income. These regulations, which will be effective for
transfers m a d e on or after today, will prevent taxpayers from using artificial devices
to understate the value of the contract. A revenue procedure issued today along
with the proposed regulations provides a temporary safe harbor for determining fair
market value.
Second, a new revenue ruling states that an employer cannot buy excessive life
insurance (i.e., insurance contracts where the death benefits exceed the death
benefits provided to the employee's beneficiaries under the terms of the plan, with
the balance of the proceeds reverting to the plan as a return on investment) in order
to claim large tax deductions. These arrangements generally will be listed
transactions for tax-shelter reporting purposes.
Third, another new revenue ruling states that a section 412(i) plan cannot use
differences in life insurance contracts to discriminate in favor of highly paid
JS-1172: Treasury and IRS shut down abusive Life Insurance Policies in Retirement Plans
employees.
Related Documents:
• Proposed Regulations
• Rev Rul. 2004-20
• Rev Rul. 2004-21
• Rev Proc. 2004-16
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[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-126967-03]
RIN1545-BC20
Value of Life Insurance Contracts when Distributed from a Qualified Retirement Plan
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed amendments to the regulations under
section 402(a) of the Internal Revenue Code regarding the amount includible in a
distributee's income when life insurance contracts are distributed bya qualified
retirement plan and the treatment of property sold by a qualified retirement plan to a
plan participant or beneficiary for less than fair market value. This document also
contains proposed amendments to the regulations under sections 79 and 83 conforming
the language in those regulations to the language in the proposed amendments to the
section 402(a) regulations. These regulations will affect administrators of, participants
in, and beneficiaries of qualified employer plans. These regulations also provide
guidance to employers who provide group-term life insurance to their employees that is
includible in the gross income of the employees and to employers who transfer life
insurance contracts to persons in connection with the performance of services. This
document also provides notice of a public hearing on these proposed regulations.
2
DATES: Written or electronic comments must be received by May 13, 2004. Requests
to speak and outlines of topics to be discussed at the public hearing scheduled for June
9, 2004, at 10 a.m., must be received by May 19, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR(REG-126967-03), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday between the hours of 8
a.m. and 4 p.m. to: CC:PA:LPD:PR(REG-126967-03), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington D.C. Alternatively,
taxpayers may submit comments electronically directly to the IRS Internet site at
www.irs.gov/regs. The public hearing will be held in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, D.C.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed amendments to
the section 79 regulations, Betty Clary at (202) 622-6080; concerning the proposed
amendments to the section 83 regulations, Robert Misner at (202) 622-6030;
concerning the proposed amendments to the 402 regulations, Linda Marshall at (202)
622-6090; concerning submissions and the hearing and/or to be placed on the building
access list to attend the hearing, Robin Jones at (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax Regulations
(26 CFR Part 1) under section 402(a) of the Internal Revenue Code (Code) relating to
the amount includible in a distributee's income when a life insurance contract,
retirement income contract, endowment contract, or other contract providing life
3
insurance protection is distributed by a retirement plan qualified under section 401(a) of
the Code and to the sale of property by a retirement plan to a plan participant or
beneficiary for less than the fair market value of the property. This document also
contains proposed amendments to the regulations under sections 79 and 83 relating,
respectively, to employer-provided group-term life insurance and life insurance
contracts transferred in connection with the performance of services.
Section 402(a) provides generally that any amount actually distributed to any
distributee by any employees' trust described in section 401(a) which is exempt from tax
under section 501(a) shall be taxable to the distributee, in the taxable year of the
distributee in which distributed, under section 72.
Section 1.402(a)-1(a)(1)(iii) of the current regulations provides, in general, that a
distribution of property by a section 401(a) plan shall be taken into account by the
distributee at its "fair market value." Section 1.402(a)-1 (a)(2) of the regulations
provides, in general, that upon the distribution of an annuity or life insurance contract,
the "entire cash value" of the contract must be included in the distributee's income. The
current regulations do not define "fair market value" or "entire cash value" and questions
have arisen regarding the interaction between these two provisions and whether "entire
cash value" includes a reduction for surrender charges.
Prohibited Transaction Exemption (PTE) 77-8 (1977-2 C.B. 425), subsequently
amended and redesignated as Prohibited Transaction Exemption 92-6, was jointly
issued in 1977 by the Department of Labor and the Internal Revenue Service. PTE
77-8 permits an employee benefit plan to sell individual life insurance contracts and
annuities to (1) a plan participant insured under such policies, (2) a relative of such
4
insured participant who is the beneficiary under the contract, (3) an employer any of
whose employees are covered by the plan, or (4) another employee benefit plan, for the
cash surrender value of the contracts, provided the conditions set forth in the exemption
are met.
The preamble to PTE 77-8 (citing Rev. Rul. 59-195; 1959-1 C.B. 18) notes that,
for Federal income tax purposes, the value of an insurance policy is not the same as,
and may exceed, its cash surrender value, and that a purchase of an insurance policy at
its cash surrender value may therefore be a purchase of property for less than its fair
market value. The regulations under section 402 do not address the consequences of a
sale of property by a section 401(a) plan to a plan participant or beneficiary for less than
the fair market value of that property. In this regard, the preamble to PTE 77-8 states
that the Federal income tax consequences of such a bargain purchase must be
determined in accordance with generally applicable Federal income tax rules but that
any income realized by a participant or relative of such participant upon such a
purchase under the conditions of PTE 77-8 will not be deemed a distribution from the
plan to such participant for purposes of subchapter D of chapter 1 of the Internal
Revenue Code (i.e., sections 401 to 424 of the Code) relating to qualified pension,
profit-sharing, and stock bonus plans.
Section 79 of the Code generally requires that the cost of group-term life
insurance coverage provided by an employer on the life of an employee that is in
excess of $50,000 of coverage be included in the income of the employee. Pursuant to
§1.79-1(b) of the regulations, under specified circumstances, group-term life insurance
may be combined with other benefits, referred to as permanent benefits. A permanent
5
benefit is defined in §1.79-0 of the regulations as an economic value extending beyond
one policy year (for example, a paid-up or cash surrender value) that is provided under
a life insurance policy. The regulations further provide that certain features are not
permanent benefits, including (a) a right to convert (or continue) life insurance after
group life insurance coverage terminates, (b) any other feature that provides no
economic benefit (other than current insurance protection) to the employee, and (c) a
feature under which term life insurance is provided at a level premium for a period of
five years or less.
Permanent benefits provided to an employee are subject to taxation under rules
described in §1.79-1 (d) of the regulations. Under those rules, the cost of the permanent
benefits, reduced by the amount paid for those benefits by the employee, is included in
the employee's income. The regulations provide the cost of the permanent benefits can
be no less than an amount determined under a formula set forth in the regulations. One
of the factors used in this formula is "the net level premium reserve at the end of that
policy year for all benefits provided to the employee by the policy or, if greater, the cash
value of the policy at the end of that policy year."
Section 83(a) provides that when property is transferred to any person in
connection with the performance of services, the service provider must include in gross
income (as compensation income) the excess of the fair market value of the property,
determined without regard to lapse restrictions, and determined at the first time that the
transferee's rights in the property are either transferable or not subject to a substantial
risk of forfeiture, over the amount (if any) paid for the property. Section 1.83-3(e) of the
regulations generally provides that i n the case of "a transfer of a life insurance contract,
6
retirement income contract, endowment contract, or other contract providing life
insurance protection, only the cash surrender value of the contract is considered to be
property."
In TD 9092, published in the Federal Register on September 17, 2003 (68 FR
54336), relating to split-dollar life insurance arrangements, §1.83-3(e) was amended to
add the following sentence: "Notwithstanding the previous sentence, in the case of a
transfer of a life insurance contract, retirement income contract, endowment contract, or
other contract providing life insurance protection, or any undivided interest therein, that
is part of a split-dollar life insurance arrangement (as defined in §1.61 -22(b)(1) or (2))
that is entered into, or materially modified (within the meaning of §1.61-22(j)(2)), after
September 17, 2003, the policy cash value and all other rights under such contract
(including any supplemental agreements thereto and whether or not guaranteed), other
than current life insurance protection, are treated as property for purposes of this
section."
Explanation of Provisions
A. Overview
These proposed amendments to the regulations under section 402(a) clarify that
the requirement that a distribution of property must be included in the distributee's
income at fair market value is controlling in those situations where the existing
regulations provide for the inclusion of the entire cash value. Thus, these proposed
regulations provide that, in those cases where a qualified plan distributes a life
insurance contract, retirement income contract, endowment contract, or other contract
providing life insurance protection, the fair market value of such a contract (i.e., the
7
value of all rights under the contract, including any supplemental agreements thereto
and whether or not guaranteed) is generally included in the distributee's income and not
merely the entire cash value of the contracts.
These proposed regulations also provide that if a qualified plan transfers property
to a plan participant or beneficiary for consideration that is less than the fair market
value of the property, the transfer will be treated as a distribution by the plan to the
participant or beneficiary to the extent the fair market value of the distributed property
exceeds the amount received in exchange. Thus, in contrast to the statement to the
contrary in the preamble to PTE 77-8, any bargain element in the sale would be treated
as a distribution under section 402(a). It is also intended that any bargain element
would be treated as a distribution for other purposes of the Code, including the
limitations on in-service distributions from certain qualified retirement plans and the
limitations of section 415.
These proposed regulations also amend the current regulations under sections
79 and 83 to clarify that fair market value is also controlling with respect to life insurance
contracts under those sections and, thus, that all of the rights under the contract
(including any supplemental agreements thereto and whether or not guaranteed) must
be considered in determining that fair market value. With respect to section 79, these
proposed regulations would amend §1.79-1 (d) to remove the term cash value from the
formula for determining the cost of permanent benefits and substitute the term fair
market value. With respect to section 83, these proposed regulations would amend
§1.83-3(e) generally to apply the definition of property for new split-dollar life insurance
arrangements to all situations involving the transfer of life insurance contracts. Section
8
83(a) requires that the excess of the fair market value of the property over the amount
paid for the property be included in income. The current definition of property outside
the context of a split-dollar life insurance arrangement may lead taxpayers to believe
that it is appropriate upon receiving a transfer of a life insurance contract to include only
its cash surrender value on the day of the transfer when, due to supplemental
agreements, the fair market value of the transferred property is much greater. The
purpose of the changes to these regulations is to clarify that, unless specifically
excepted from the definition of permanent benefits or fair market value, the value of all
features of a life insurance policy providing an economic benefit to a service provider
(including, for example, the value of a springing cash value feature) must be included in
determining the employee's income.
The proposed regulations will not affect the relief granted by the provisions of
Section IV, paragraph 4 of Notice 2002-8 (2002-1 C.B. 398) to the parties to any
insurance contract that is part of a pre-January 28, 2002, split-dollar life insurance
arrangement. Also, consistent with the effective date of the final split-dollar life
insurance regulations, §1.61-22, these proposed regulations will not apply to the
transfer of a life insurance contract which is part of a split-dollar life insurance
arrangement entered into on or before September 17, 2003, and not materially modified
after that date. However, taxpayers are reminded that, in determining the fair market
value of property transferred under section 83, lapse restrictions (such as life insurance
contract surrender charges) are ignored.
B. Determination of Fair Market Value
9
As noted above, §1.402(a)-1 (a)(1 )(iii) does not define fair market value. In Rev.
Rul. 59-195, the Service ruled that, in situations similar to those in which an employer
purchases and pays the premiums on an insurance policy on the life of one of its
employees and subsequently sells such policy, on which further premiums must be
paid, the value of such policy for computing taxable gain in the year of purchase should
be determined under the method of valuation prescribed in §25.2512-6 of the Gift Tax
Regulations. Under this method, the value of such a policy is not its cash surrender
value but the interpolated terminal reserve at the date of sale plus the proportionate part
of any premium paid by the employer prior to the date of the sale which is applicable to
a period subsequent to the date of the sale. Section 25.2512-6 of the Gift Tax
Regulations also provides that if "because of the unusual nature of the contract such
approximation is not reasonably close to the full value, this method may not be used."
Thus, this method may not be used to determine the fair market value of an insurance
policy where the reserve does not reflect the value of all of the relevant features of the
policy.
In Q&A-10 of Notice 89-25 (1989-1 C.B. 662), the IRS addressed the question of
what amount is includible in income under section 402(a) when a participant receives a
distribution from a qualified plan that includes a life insurance policy with a value
substantially higher than the cash surrender value stated in the policy. The Notice
noted the practice of using cash surrender value as fair market value for these purposes
and concluded that this practice is not appropriate where the total policy reserves,
including life insurance reserves (if any) computed under section 807(d), together with
10
any reserves for advance premiums, dividend accumulations, etc., represent a much
more accurate approximation of the policy's fair market value.
Since Notice 89-25 was issued, life insurance contracts have been marketed that
are structured in a manner which results in a temporary period during which neither a
contract's reserves nor its cash surrender value represent the fair market value of the
contract. For example, some life insurance contracts may provide for large surrender
charges and other charges that are not expected to be paid because they are expected
to be eliminated or reversed in the future (under the contract or under another contract
for which the first contract is exchanged), but this future elimination or reversal is not
always reflected in the calculation of the contract's reserve. If such a contract is
distributed prior to the elimination or reversal of those charges, both the cash surrender
value and the reserve under the contract could significantly understate the fair market
value of the contract. Thus, in some cases, it would not be appropriate to use either the
net surrender value (i.e. the contract's cash value after reduction for any surrender
charges) or, because of the unusual nature of the contract, the contract's reserves to
determine the fair market value of the contract. Accordingly, Q&A-10 of Notice 89-25
should not be interpreted to provide that a contract's reserves (including life insurance
reserves (if any) computed under section 807(d), together with any reserves for
advance premiums, dividend accumulations, etc.) are always an accurate
representation of the contract's fair market value.
For example, it would not be appropriate to use a contract's reserve or the net
surrender value of the contract as fair market value at the time of distribution if under
that contract those amounts are significantly less than the aggregate of: (1) the
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premiums paid from the date of issue through the date of distribution, plus (2) any
amounts credited (or otherwise made available) to the policyholder with respect to those
premiums (including interest, dividends, and similar income items), or, in the case of
variable contracts, all adjustments made with respect to the premiums paid during that
period that reflect investment return and the current market value of segregated asset
accounts, minus (3) reasonable mortality charges and reasonable charges (other than
mortality charges) actually charged from the date of issue to the date of distribution and
expected to be paid.
The following example provides an illustration of a contract where it would not be
appropriate to use a contract's reserve or its net surrender value as its fair market value:
A participates in a plan intended to satisfy the requirements of section 401(a). In
Year 1, the plan acquires a life insurance contract on A's life that is not a variable
contract and with a face amount of $1,400,000. In that year and for the next four years,
the plan pays premiums of $100,000 per year on the contract. The contract provides for
a surrender charge that is fixed for the first five years of the contract and decreases
ratably to zero at the end of ten years. The contract also imposes reasonable mortality
and other charges as defined by section 7702(c)(3)(B)(i) and (ii) of the Code.
The contract provides a stated cash surrender value for each of the first ten
years (the first five years are guaranteed), as set forth in the table below. The reserves
under the contract, including life insurance reserves and reserves for advance
premiums, dividend accumulations, etc. (calculated using the rules in section 807(d) of
the Code) at the end of the fifth year are $150,000.
12
Year
Premium
Net Surrender Value
Cash Value
Determined without
Reduction for
Surrender Charges
1
$100,000
2
$100,000
3
$100,000
4
$100,000
5
$100,000
$100,000
$450,000
6
$195,000
$475,000
7
$290,000
$500,000
8
$385,000
$525,000
9
$480,000
$550,000
10
$575,000
$575,000
At the end of Year 5, A retired and received a distribution of the insurance contract that
was purchased on his life.
These regulations clarify that the contract is included in A's income at its fair
market value rather than the $100,000 cash surrender value. Furthermore, A could not
treat the $150,000 reserve as of the end of the fifth year as the fair market value,
because this amount is less than the amount a willing buyer would pay a willing seller
13
for such a contract, with neither party being under a compulsion to buy and sell and
both having reasonable knowledge of the relevant facts.
Proposed Effective Dates
The amendments to §1.402(a)-1 (a)(2) of the regulations are proposed to be
applicable to any distribution of a transferable retirement income, endowment, or other
life insurance contract occurring on or after February 13, 2004. The amendment to
§1.79-1 is proposed to be applicable to permanent benefits provided on or after
February 13, 2004. The amendment to §1.83-3(e) is proposed to be applicable to any
transfer occurring on or after February 13, 2004. The amendments to §1.402(a)1(a)(1)(iii) of the regulations are proposed to be applicable to any transfer of property
by a plan to a plan participant or beneficiary for less than fair market value where the
transfer occurs on or after the date of publication in the Federal Register of the final
regulations adopting these amendments. Taxpayers may rely upon these proposed
regulations for guidance pending the issuance of final regulations.
Interim Guidance for Determining Fair Market Value
The IRS and the Treasury recognize that taxpayers could have difficulty
determining the fair market value of a life insurance contract after the clarification in this
preamble that Notice 89-25 should not be interpreted to provide that a contract's
reserves (including life insurance reserves (if any) computed under section 807(d),
together with any reserves for advance premiums, dividend accumulations, etc.) are
always an accurate representation of the contract's fair market value. Accordingly, in
connection with this guidance, the IRS has issued Rev. Proc 2004-16 (2004-10 IR.B.),
which provides interim rules under which the cash value (without reduction for surrender
14
charges) of a life insurance contract distributed from a qualified plan may be treated as
the fair market value of that contract. The interim rules in Rev. Proc. 2004-16, permit
the use of values that should be readily available from insurance companies, because
the cash value (without reduction for surrender charges) is an amount that, in the case
of a flexible insurance contract (including a variable contract), is generally reported in
policyholder annual statements, and in the case of traditional insurance contracts, is
fixed at issue and provided in the insurance contract.
Under those interim rules, a plan may treat the cash value (without reduction for
surrender charges) as the fair market value of a contract at the time of distribution
provided such cash value is at least as large as the aggregate of: (1) the premiums paid
from the date of issue through the date of distribution, plus (2) any amounts credited (or
otherwise made available) to the policyholder with respect to those premiums, including
interest, dividends, and similar income items (whether under the contract or otherwise),
minus (3) reasonable mortality charges and reasonable charges (other than mortality
charges), but only if those charges are actually charged on or before the date of
distribution and are expected to be paid.
In those cases where the contract is a variable contract (as defined in section
807(d)) a plan may treat the cash value (without reduction for surrender charges) as the
fair market value of the contract at the time of distribution provided such cash value is at
least as large as the aggregate of: (1) the premiums paid from the date of issue through
the date of distribution, plus (2) all adjustments made with respect to those premiums
during that period (whether under the contract or otherwise) that reflect investment
return and the current market value of segregated asset accounts, minus (3) reasonable
15
mortality charges and reasonable charges (other than mortality charges), but only if
those charges are actually charged on or before the date of distribution and are
expected to be paid.
Applying those interim rules to the example above, A could treat the cash value
(without reduction for surrender charges) of $450,000 as the fair market value of the
contract as of the end of the fifth year, because, in this example, that amount exceeds
the aggregate of the five $100,000 premiums ($500,000), plus the amounts credited to
A with respect to those premiums, minus the reasonable mortality and other charges
actually imposed and expected to be paid.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations,
and, because the regulations do not impose a collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the 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 (a signed original and eight (8) copies) or
electronic comments that are submitted timely to the IRS. The IRS and Treasury
16
Department specifically request comments on the clarity of the proposed regulations
and how they may be made easier to understand. In addition, the Treasury Department
and the IRS specifically request comments regarding the interim rules set forth in Rev.
Proc. 2004-16 and proposals for appropriate permanent methods for valuing life
insurance contracts when distributed from qualified retirement plans and for valuing
such contracts for purposes of sections 79 and 83, including appropriate discounts
which take into account the probability that contracts will be surrendered during the
period during which surrender charges apply. The IRS and the Treasury are also
reviewing other types of contracts, such as annuities, which have cash surrender value
but where that cash surrender value may not reflect the fair market value of the
contracts. Accordingly, the IRS and the Treasury also request comments regarding the
valuation of these other contracts. All comments will be available for public inspection
and copying.
A public hearing has been scheduled for Wednesday, June 9, 2004, at 10 a.m. in
the auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington,
DC. Due to building security procedures, visitors must use the main building entrance
on Constitution Avenue. In addition, all visitors must present photo identification to
enter the building. Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing starts. For more
information about having your name placed on the list to attend the hearing, see the
"FOR FURTHER INFORMATION CONTACT" section of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments at the hearing must submit written (signed original and eight (8)
17
copies) or electronic comments and an outline of the topics to be discussed and the
time to be devoted to each topic by Wednesday, M a y 19, 2004. A period of 10 minutes
will be allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for receiving outlines has
passed. Copies of the agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Robert M. Walsh, Employee Plans,
Tax Exempt and Government Entities Division, and Linda Marshall, Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the IRS and Treasury participated in the development of these
regulations.
List of Subjects in 26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed A m e n d m e n t s to the Regulations
Accordingly, 26 C F R part 1 is proposed to be amended as follows:
PART 1 - INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7 8 0 5 * * *
Par. 2 Section 1.79-1, paragraph (d)(3) is revised to read as follows:
§1.79-1 Group-term life insurance -- general rules.
* * * * *
(d) * * *
18
(3) Formula for determining deemed death benefit. The deemed death benefit
(DDB) at the end of any policy year for any particular employee is equal to:
R/Y
whereR is the net level premium reserve at the end of that policy year for all benefits
provided to the employee by the policy or, if greater, the fair market value of the policy
at the end of that policy year; and
Y is the net single premium for insurance (the premium for one dollar of paid-up,
whole life insurance) at the employee's age at the end of that policy year.
*****
Par. 3. In §1.83-3, paragraph (e), the last two sentences are revised to read as
follows:
§1.83-3 Meaning and use of certain terms.
*****
(e) * * * In the case of a transfer of a life insurance contract, retirement income
contract, endowment contract, or other contract providing life insurance protection, or
any undivided interest therein, the policy cash value and all other rights under such
contract (including any supplemental agreements thereto and whether or not
guaranteed), other than current life insurance protection, are treated as property for
purposes of this section. However, in the case of the transfer of a life insurance
contract, retirement income contract, endowment contract, or other contract providing
life insurance protection, which w a s part of a split-dollar arrangement (as defined in
§1.61-22(b)) entered into (as defined in §1.61-220) on or before September 17, 2003,
19
and which is not materially modified (as defined in §1.61-220(2)) after September 17,
2003, only the cash surrender value of the contract is considered to be property.
*****
Par. 4. Section 1.402(a)-1 is amended by:
1. Revising paragraph (a)(1)(iii).
2. Revising the last two sentences of paragraph (a)(2).
The revisions read as follows:
§1.402(a)-1 Taxability of beneficiary under a trust which meets the reguirements of
section 401(a).
(a)***(1) ***
(iii) Except as provided in paragraph (b) of this section, a distribution of property
by a trust described in section 401(a) and exempt under section 501(a) shall be taken
into account by the distributee at its fair market value. In the case of a distribution of a
life insurance contract, retirement income contract, endowment contract, or other
contract providing life insurance protection, or any interest therein, the policy cash value
and all other rights under such contract (including any supplemental agreements thereto
and whether or not guaranteed) are included in determining the fair market value of the
contract. In addition, where a trust described in section 401(a) and exempt under
section 501(a) transfers property to a plan participant or beneficiary in exchange for
consideration and where the fair market value of the property transferred exceeds the
amount received by the trust, then the excess of the fair market value of the property
transferred by the trust over the amount received by the trust is treated as a distribution
by the trust to the distributee.
20
* * * * *
(2)* * * If, however, the contract distributed by such exempt trust is a life
insurance contract, retirement income contract, endowment contract, or other contract
providing life insurance protection, the fair market value of such contract at the time of
distribution must be included in the distributee's income in accordance with the
provisions of section 402(a), except to the extent that, within 60 days after the
distribution of such contract, all or any portion of such value is irrevocably converted into
a contract under which no part of any proceeds payable on death at any time would be
excludable under section 101(a) (relating to life insurance proceeds). If the contract
distributed by such trust is a transferable annuity contract, a life insurance contract, a
retirement income contract, endowment contract, or other contract providing life
insurance protection (whether or not transferable), then notwithstanding the preceding
21
sentence, the fair market value of the contract is includible in the distributee's gross
income, unless within such 60 days such contract is also m a d e nontransferable.
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Parti
Section 404.-Deduction for Contributions of an Employer to an Employees' Trust or
Annuity Plan and Compensation Under a Deferred Payment Plan
(Also, §§401,412, 6011,6111, 6112; §§26 CFR 1.401-1, 1.412(i)-1, 1.6011-4,
301.6111-2,301.6112-1.)
Rev. Rul. 2004-20
ISSUES
Issue 1: Can a qualified pension plan be a plan described in § 412(i) of the Internal
Revenue Code if the plan holds life insurance contracts and annuity contracts for the be
of a participant that provide for benefits at normal retirement age in excess of the
participant's benefits at normal retirement age under the terms of the plan?
Issue 2: If a qualified pension plan holds life insurance contracts providing for life i
on a participant's life in excess of the participant's death benefit under the terms of
plan, are contributions for premiums for such excess life insurance coverage currently
deductible by the employer?
FACTS
Situation 1
Employer M maintains Plan A, a defined benefit plan that is funded solely by life
insurance contracts and annuities with level annual premiums for each participant
commencing with the date the individual becomes a participant in the plan (or, in the ca
of an increase in benefits, commencing at the time the increase becomes effective) and
ending with the individual's attainment of normal retirement age. Plan A is intended to
2
plan described in § 412(i). The amounts that will be accumulated under the insurance
contracts and annuity contracts for the benefit of a participant at normal retirement age,
assuming premiums are paid and determined by applying annuity purchase rates
guaranteed under the contracts, will provide for benefits in excess of the participant's
benefits at normal retirement age under the terms of the plan.
Situation 2
Employer N maintains Plan B. With respect to Participant P, Plan B provides a
death benefit that meets the definition of an incidental death benefit under § 1.4011(b)(1)(i) of the Income Tax Regulations. The assets of Plan B include life insurance
contracts on the life of Participant P with a face amount in excess of Participant P's death
benefit under Plan B. Premiums with respect to Participant P include an annual premium
for the waiver of the entire premium payment if Participant P becomes disabled. Upon the
death of a covered employee, the portion of the proceeds of the life insurance contract that
exceeds the death benefit payable to Participant P's beneficiary under the plan is applied
to the payment of premiums under the plan with respect to other participants.
LAW AND ANALYSIS
Section 412 sets forth minimum funding requirements for qualified pension plans.
Section 412(i) describes certain insurance contract plans that are exempt under
§ 412(h)(2) from the minimum funding requirements of § 412 (section 412(i) plans). Under
§ 411(b)(1)(F), a plan that is funded exclusively by the purchase of insurance contracts and
satisfies the requirements of § 412(i)(2) and (3) satisfies the accrual requirements of
§ 411 (b) if an employee's accrued benefit as of any applicable date is not less than the
3
cash surrender value his life insurance contracts would have on that applicable date if the
requirements of § 412(i)(4) through (6) were satisfied.
A section 412(i) plan must be funded by the purchase of individual or group
insurance contracts. Section 412(i)(2) requires contracts held by a section 412(i) plan to
provide for level annual premium payments to be paid commencing with the date the
individual became a participant in the plan (or, in the case of an increase in benefits,
commencing at the time the increase becomes effective) and extending not later than the
retirement age for each individual participating in the plan. Section 412(i)(3) requires
benefits provided under a section 412(i) plan to be equal to the benefits provided under
each contract at normal retirement age under the plan.
Under § 1.412(i)-1 (b)(2)(iii), the benefits for each participant provided under a
section 412(i) plan that holds individual insurance contracts must be equal to the benefits
provided under the participant's individual contracts at the participant's normal retirement
age under the plan. Furthermore, under § 1.412(i)-1(b)(2)(iv), the benefits provided by the
plan for each individual participant must be guaranteed by the life insurance company
issuing the individual contracts to the extent premiums have been paid.
Section 404(a)(1)(A)(i) provides that the amount necessary to satisfy the minimum
funding requirement under § 412 is deductible even if it is greater than the amount
determined under § 404(a)(1)(A)(ii) or (iii), whichever is applicable with respect to the plan.
The alternative limit determined under § 404(a)(1)(A)(ii) is the amount necessary to
provide the remaining unfunded cost of all participants' past and current service credits as
a level amount, or as a level percentage of compensation, over the remaining future service
4
of each participant. However, if the remaining unfunded cost with respect to any three
individuals is more than 50 percent of all remaining unfunded cost, the amount attributable
to those individuals is distributed over a period of at least five years.
The alternative limit determined under § 404(a)(1)(A)(iii) is the normal cost of the
plan plus, if past service or other supplementary pension or annuity credits are provided by
the plan, the amount necessary to amortize the unfunded costs attributable to those credits
in equal annual payments over 10 years.
Under § 1.404(a)-6(a)(2) of the Income Tax Regulations, the normal cost for any
year is defined as the amount actuarially determined which would be required as a
contribution by the employer in such year to maintain the plan if the plan had been in effect
from the beginning of service of each then included employee and if such costs for prior
years had been paid and all assumptions as to interest, mortality, time of payment, etc.,
had been fulfilled.
Section 1.404(a)-3(b) provides that in no event shall the limitations under
§ 404(a)(1) for pension or annuity plans exceed costs based on assumptions and methods
that are reasonable in view of the funding medium and reasonable expectations as to the
effects of mortality, interest, and other pertinent factors.
Section 1.404(a)-14 provides rules for determining the deductible limits under
§ 404(a)(1)(A)(i), (ii), and (iii). The regulations provide in general that the limit on
deductible amounts contributed for an employer's taxable year is based on the amounts
determined for purposes of § 412 for the applicable plan year or years.
5
Section 404(a)(1)(E) provides that an amount contributed to a plan that would
otherwise be deductible, but that exceeds the limitations of § 404(a)(1), is deductible in
future years to the extent of the difference between the amount contributed and the
maximum amount deductible for each succeeding year under § 404(a)(1).
Section 4972 generally imposes a 10-percent excise tax on nondeductible
contributions to a qualified plan, including nondeductible contributions carried over from
preceding years.
Rev. Rul. 94-75, 1994-2 C.B. 59, discusses the tax consequences of converting a
qualified defined benefit plan that is not a section 412(i) plan to a section 412(i) plan, and
holds that the deductible limit under § 404(a)(1)(A)(iii) applies to a section 412(i) plan.
Rev. Rul. 55-748, 1955-2 C.B. 234, discusses the deductibility of contributions to a
qualified plan that are used to pay life insurance premiums attributable to the life insurance
benefits of retirement income contracts purchased with respect to employees by the trust,
the proceeds of which, upon the death of an employee, are payable to the trustee and are
held by the trustee for application to payment of subsequent premiums on similar contracts
on behalf of other employees. Rev. Rul. 55-748 holds that the part of the employer's
contribution attributable to the purchase of life insurance benefits, which, when they
become payable, are applicable to the reduction of subsequent employer contributions to
the plan are not considered as a cost of the pension plan for the purpose of determining
the limitation on deductions under § 404(a)(1)(A), (B), and (C) of the Code (the
predecessor provisions to current §§ 404(a)(1)(A)(i), (ii), and (iii)) for the year in which such
contributions are paid, and cannot be deducted as such. Rev. Rul. 55-748 further provides
6
that contributions attributable to such insurance benefits, not otherwise determined, may be
determined by applying the rates provided in Rev. Rul. 55-747, 1955-2 C.B. 228, to the
amounts of insurance that would revert to the trust in the event of death of the insured
employee in the year for which the premiums are paid. In later years, if an employer for any
reason, such as the receipt by the trustee of life insurance proceeds under a retirement
income contract because of the death of an employee, which proceeds were applied to the
payment of premiums on similar contracts for the benefit of other employees, contributes to
the trust a sum less than the maximum deduction permitted for that year under
§ 404(a)(1)(A), (B), or (C), Rev. Rul. 55-748 provides that the employer may deduct in that
year, in addition to this current contribution, the contributions made in prior years and not
then deductible because they were attributable to that part of the retirement income
contracts that would provide life insurance payable to the trustee, to the extent of the
difference between his current contribution and his maximum deduction permitted under
§404(a)(1)(A),(B),or(C).
Rev. Rul. 55-747 provided a table to be used in computing the premiums to be
included in the income of an employee on account of current life insurance protection
provided for the employee under a life or endowment insurance contract held by an
employees' trust qualified under § 401 (a).
Rev. Rul. 66-110, 1966-1 C.B. 12, provided that the current published premium
rates charged by an insurer for individual 1 -year term life insurance available to all standard
risks may be used for determining the cost of insurance in connection with individual
policies issued by the same insurer and held by an employees' trust qualified under
7
§ 401(a). In addition, Rev. Rul. 66-110 extended the table of premiums set forth in Rev.
Rul. 55-747 to cover additional ages.
Rev. Rul. 67-154, 1967-1 C.B. 11, amplified Rev. Rul. 66-110 and held that, where
an insurer published one-year term insurance rates lower than those set forth in Rev. Rul.
55-747, but those rates were applicable only under a dividend option whereby term
insurance may be purchased with dividends on existing policies and were lower than the
insurer's published rates for initial insurance available to all standard risks, those rates
could not be used in place of the rates set forth in Rev. Rul. 55-747 in determining the cost
of insurance under a trust described in § 401 (a).
Notice 2001-10, 2001-1 C.B. 459, revoked Rev. Rul. 55-747, and provided a new
table (Table 2001) to be used in valuing term life insurance coverage provided to an
employee. Under Notice 2001-10, taxpayers could continue to use the rates set forth in
Rev. Rul. 55-747 for purposes of determining the value of current life insurance protection
provided under a qualified retirement plan for taxable years ending on or before December
31, 2001. In addition, Notice 2001-10 provided generally that taxpayers could continue to
determine the value of current life insurance protection by using the insurer's lower
published rates available to standard risks as provided in Rev. Rul. 66-110. However, for
periods after December 31, 2003, Notice 2001-10 sets forth certain additional conditions
on the use of the insurer's published rates.
Notice 2002-8, 2002-1 C.B. 398, revokes Notice 2001-10. Under Notice 2002-8,
Rev. Rul. 55-747 remains revoked; however, taxpayers can use the rates set forth in Rev.
Rul. 55-747 for purposes of determining the value of current life insurance protection
8
provided under a qualified retirement plan for taxable years ending on or before December
31, 2001. Notice 2002-8 republishes Table 2001 and provides that Table 2001 can be
used to determine the value of current life insurance protection on a single life that is
provided under a qualified plan for arrangements entered into before the effective date of
future guidance. In addition, paragraph 3 of Section III of Notice 2002-8 placed conditions
on the use of the insurer's lower published rates under Rev. Rul. 66-110, as amplified by
Rev. Rul. 67-154, for periods after December 31, 2003, with respect to arrangements
entered into after January 28, 2002.
Rev. Rul. 2003-105, 2003-40 I.R.B. 696, obsoleted Rev. Rul. 66-110 for
arrangements entered into after September 17, 2003, except as provided in paragraph 3
of Section III of Notice 2002-8. Accordingly, Rev. Rul. 66-110, as amplified by Rev. Rul. 67154, remains in effect until future guidance is issued for life insurance provided under a
qualified retirement plan, subject to the conditions provided by Notice 2002-8 with respect
to arrangements entered into after January 28, 2002.
Section 1.401-1 (b)(1 )(i) provides that a pension plan within the meaning of § 401 (a)
is a plan established and maintained by an employer primarily to provide systematically for
the payment of definitely determinable benefits to employees over a period of years,
usually for life, after retirement. A pension plan may also provide for the payment of
incidental death benefits through insurance or otherwise.
Rev. Rul. 74-307, 1974-2 C.B. 126, holds that preretirement death benefits under a
qualified pension plan are considered incidental death benefits within the meaning of
§ 1.401-1 (b)(1 )(i) if less than 50 percent of the employer contribution credited to each
9
participant's account is used to purchase ordinary life insurance policies on the
participant's life, or if the total death benefit before normal retirement date does not exceed
the greater of (a) the proceeds of ordinary life insurance policies providing a death benefit
of 100 times the anticipated monthly normal retirement benefit, or (b) the sum of (i) the
reserve under the ordinary life insurance policies plus (ii) the participant's account in the
auxiliary fund. See also Rev. Rul. 68-453, 1968-2 C.B. 163.
Rev. Rul. 81-162, 1981-1 C.B. 169, holds that a plan established by an employer
that provides employees only such benefits as are afforded through the purchase of
ordinary life insurance contracts (other than retirement income contracts), which are
converted to life annuities at normal retirement age, does not constitute a pension plan
within the meaning of § 401(a). Rev. Rul. 81-162 provides that the primary purpose of such
a life insurance contract is to provide life insurance protection, and the reserve
accumulated thereon is a result of premium payments being made on a level basis. Rev.
Rul. 81-162 reasons that such reserve will provide a relatively small retirement annuity in
comparison with the annuity that a retirement income contract of the same face amount will
provide. Therefore, Rev. Rul. 81-162 concludes that a plan providing only for the purchase
of ordinary life insurance contracts (other than retirement income contracts) is not primarily
for the payment of benefits to employees over a period of years after retirement. This
analysis would not apply, however, if the death benefit payable to the beneficiary under the
plan were limited to an incidental death benefit, with the remaining benefit payable to the
plan.
10
In Situation 1, Plan A is not a plan described in § 412(i) because the participant's
benefit under Plan A payable at normal retirement age is not equal to the amount provided
at normal retirement age with respect to the contracts held on behalf of the participant, and
thus, Plan A fails to satisfy the requirements of § 412(i)(3). Accordingly, Plan A is subject
to the requirements of § 412, with charges and credits to the funding standard account
determined using the reasonable funding method selected for the plan under generally
applicable rules, and using reasonable actuarial assumptions. Such reasonable funding
method and such reasonable actuarial assumptions are also used to determine the
deductible amount of contributions under the generally applicable rules of § 404(a). In
addition, the exception from the accrual rules that applies to § 412(i) plans under
§ 411 (b)(1)(F) does not apply to Plan A.
In Situation 2, the fact that the life insurance contracts on the life of Participant P
provide for death benefits in excess of the death benefits under the plan would not cause
Plan B to fail to satisfy the requirements to be a plan described in § 412(i), if Plan B
otherwise met those requirements. Similarly, the fact that the life insurance contracts on
the life of Participant P provide for death benefits that would fail to satisfy the incidental
benefit rule of § 1.401-1 (b)(1 )(i) if payable to Participant P's beneficiary under the plan
does not cause Plan B to fail to satisfy the incidental death benefit rule of § 1.401-1 (b)(1)(i)
because those excess death benefits under the life insurance contracts are not payable to
Participant P's beneficiary under the plan. However, a portion of Employer N's
contributions under Plan B is attributable to the purchase of life insurance coverage held by
Plan B that is in excess of the incidental death benefit payable under Plan B. Under Rev.
11
Rul. 55-748, the portion of Employer N's contributions that is attributable to such excess life
insurance coverage does not constitute normal cost, and is not deductible as part of
normal cost for the taxable year in which contributed. Rather, that portion of Employer N's
contributions is used to provide a source of funds to pay future premiums (i.e., premiums
on other participants) that will come due after the death of Participant P. Accordingly, the
nondeductible portion of Employer N's contributions under Plan B that is paid for life
insurance protection for Participant P is carried over pursuant to the rules of § 404(a)(1 )(E)
to be treated as contributions under the rules of § 404(a)(1 )(E) in later years and deductible
when the employer contributions are less than the maximum deductible limit (e.g., in years
in which excess death benefits under Plan B are used to satisfy Employer N's obligation to
pay future premiums on other participants). Similarly, Employer N's contributions to pay
premiums for the disability waiver for Participant P do not constitute normal cost, and are
not deductible as part of normal cost for the taxable year in which contributed. Rather, that
portion of Employer N's contributions is used to provide a source of funds to pay future
premiums that will come due after Participant P becomes disabled. Accordingly, the
nondeductible portion of Employer N's contributions under Plan B that is paid for the
disability waiver for Participant P is carried over pursuant to the rules of § 404(a)(1)(E) to
be treated as contributions under the rules of § 404(a)(1)(E) in later years and deductible
when the employer contributions are less than the maximum deductible limit (e.g., if and
when Participant P becomes disabled).
In general, the premiums for excess life insurance coverage that are not currently
part of normal cost under § 404(a)(1)(A) are determined in a manner consistent with total
12
premiums under the contract (i.e., must be spread in a level manner over the premium
payment period). However, if the premiums for the life insurance contracts covering a
participant are level annual premiums payable beginning with the participant's participation
in the plan and ending at the participant's normal retirement age, this excess amount can
be determined by applying the appropriate term cost factors to the excess term coverage.
Nondeductible contributions are subject to the excise tax of § 4972 as provided
thereunder. In determining the amount of premiums for excess life insurance coverage,
Table 2001 is applicable for taxable years ending after December 31, 2001, and the table
set forth in Rev. Rul. 55-747 is used for earlier periods. In addition, the current published
premium rates charged by an insurer for individual 1 -year term life insurance available to al
standard risks as described in Rev. Rul. 66-110, as amplified by Rev. Rul. 67-154, can be
used for taxable years ending on or before December 31, 2003. For arrangements
entered into on or before January 28, 2002, such current published premium rates can
continue to be used for periods ending after December 31,2003. However, for
arrangements entered into after January 28, 2002, such current published premium rates
can continue to be used for periods ending after December 31, 2003 only if the additional
requirements of Notice 2002-8 are satisfied.
HOLDING
A qualified pension plan cannot be a section 412(i) plan if the plan holds life
insurance contracts and annuity contracts for the benefit of a participant that provide for
benefits at normal retirement age in excess of the participant's benefits at normal
retirement age under the terms of the plan.
13
Employer contributions under a qualified defined benefit plan that are used to
purchase life insurance coverage for a participant in excess of the participant's death
benefit provided under the plan are not fully deductible when contributed, but are carried
over to be treated as contributions in future years and deductible in future years when other
contributions to the plan that are taken into account for the taxable year are less than the
maximum amount deductible for the year pursuant to the limits of § 404.
LISTED TRANSACTIONS
Transactions that are the same as, or substantially similar to, the transaction
described in Situation 2 of this revenue ruling are identified as "listed transactions" for
purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and § 301.6111-2(b)(2) and
§ 301.6112-1 (b)(2) of the Procedure and Administration Regulations effective February
13, 2004, the date this revenue ruling was released to the public, provided that the
employer has deducted amounts used to pay premiums on a life insurance contract for a
participant with a death benefit under the contract that exceeds the participant's death
benefit under the plan by more than $100,000.
It should be noted that, independent of any classification as "listed transactions" for
purposes of §§ 1.6011 -4(b)(2), 301.6111 -2(b)(2), and 301.6112-1 (b)(2) of the regulations,
arrangements that are the same as, or substantially similar to, the arrangements described
in this notice may already be subject to the disclosure requirements of § 6011 of the Code,
the tax shelter registration requirements of § 6111, or the list maintenance requirements of
§6112 (§§ 1.6011-4, 301.6111-1T, 301.6111-2, and 301.6112-1).
14
Persons who are required to satisfy the registration requirement of §§6111 of the
Code with respect to the arrangements described in this notice and who fail to do so may
be subject to the penalty under § 6707(a). Persons who are required to satisfy the listkeeping requirement of § 6112 with respect to the arrangements and who fail to do so may
be subject to the penalty under § 6708(a). In addition, the Service may impose penalties
on participants in these arrangements or substantially similar arrangements, including the
accuracy-related penalty under § 6662.
EFFECT ON OTHER RULINGS
Rev. Rul. 55-748 is modified and superseded.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Larry Isaacs of the Employee Plans,
Tax Exempt and Government Entities Division, and Linda Marshall of the Office of the
Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities. For
further information regarding this revenue procedure, please contact the Employee Plans'
taxpayer assistance telephone service at 1 -877-829-5500 (a toll-free number) between the
hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. Mr. Isaacs may be
reached at (202) 283-9888, and Ms. Marshall may be reached at (202) 622-6090 (not tollfree numbers).
Parti
Section 401 .-Qualified pension, profit-sharing, and stock bonus plans
26 CFR 1.401 (a)(4)-4: Nondiscriminatory availability of benefits, rights, and features
Rev. Rul. 2004-21
ISSUE
Does a plan that is funded, in whole or in part, with life insurance contracts satisfy
the requirements of § 401(a)(4) of the Internal Revenue Code prohibiting discrimination in
favor of highly compensated employees where: (1) highly compensated employees are
permitted, prior to distribution of retirement benefits, to purchase life insurance contracts
from the plan at cash surrender value; and (2) any rights under the plan for nonhighly
compensated employees to purchase life insurance contracts from the plan prior to
distribution of retirement benefits are not of inherently equal or greater value than the
purchase rights of highly compensated employees?
FACTS
Employer M maintains Plan A, a retirement plan that is intended to be a qualified
plan under § 401 (a). Plan A provides an incidental death benefit within the meaning of
§ 1.401-1 (b)(1 )(i) of the Income Tax Regulations for each participant, and holds a life
insurance contract on the life of each participant to fund that incidental death benefit.
Before distributions to a participant under Plan A commence, each participant is offered
the opportunity to purchase the life insurance contract under which the participant is insured
from Plan A for its cash surrender value. It is assumed for purposes of this revenue ruling
2
that Prohibited Transaction Exemption 92-6, 57 FR 5189 (February 12, 1992) applies to
the purchase of a life insurance contract from Plan A and, thus, a participant's purchase of
a life insurance contract from Plan A is not a prohibited transaction under § 4975.
Employer M has nonhighly compensated employees that are not excludable employees
within the meaning of § 1.410(b)-6, and the features of the life insurance contracts covering
the lives of highly compensated employees are different than the features of the life
insurance contracts covering the lives of nonhighly compensated employees. In addition,
because of these differences in the features of the contracts, the rights that the nonhighly
compensated employees have to purchase the life insurance contracts under which they
are insured from Plan A are not of inherently equal or greater value than the rights that
highly compensated employees have to purchase the life insurance contracts under which
they are insured.
LAW AND ANALYSIS
Section 401(a)(4) provides that, under a qualified retirement plan, contributions or
benefits provided under the plan must not discriminate in favor of highly compensated
employees. Section 410(b) provides minimum coverage requirements that are designed
to ensure that a qualified plan provides sufficient benefits to a large enough proportion of
participants who are nonhighly compensated employees.
Section 1.401 (a)(4)-1 (b)(3) provides that a plan satisfies the requirements of
§ 401(a)(4) only if all benefits, rights and features provided under the plan are made
available under the plan in a nondiscriminatory manner. Under § 1.401 (a)(4)-4(a), benefits,
rights and features (i.e., optional forms of benefit, ancillary benefits, and other rights or
3
features) are made available under the plan in a nondiscriminatory manner only if each
benefit, right or feature satisfies the current availability requirement of § 1.401 (a)(4)-4(b)
and the effective availability requirement of § 1.401 (a)(4)-4(c). In general, a benefit, right or
feature satisfies the current availability requirement of § 1.401 (a)(4)-4(b) for a plan year if
the group of employees to whom the benefit, right or feature is currently available during the
plan year satisfies § 410(b) (without regard to the average benefit percentage test of
§1.410(b)-5).
An other right or feature is any right or feature applicable to employees under the
plan (other than a benefit formula, an optional form of benefit, or an ancillary benefit) that
can be expected to have meaningful value. Under § 1.401 (a)(4)-4(e)(3)(i), a distinct other
right or feature exists if a right or feature is not available on substantially the same terms as
another right or feature. Under § 1.401 (a)(4)-4(e)(3)(iii)(C), the right to a particular form of
investment, including, for example, a particular class or type of employer securities (taking
into account, in determining whether different forms of investment exist, any differences in
conversion, dividend, voting, liquidation preference, or other rights conferred under the
security) is a distinct other right or feature. Similarly, differences in insurance contracts
(e.g., differences in cash value growth terms or different exchange features) that may be
purchased from a plan can create distinct other rights or features even if the terms under
which the contracts are purchased from the plan are the same.
Under § 1.401 (a)(4)-4(d)(4), an optional form of benefit, ancillary benefit, or other
right or feature is permitted to be aggregated with another optional form of benefit, ancillary
benefit, or other right or feature if one of the two is, in all cases, of inherently equal or
4
greater value than the other, and the optional form of benefit, ancillary benefit, or other right
or feature that is of inherently equal or greater value separately satisfies the current
availability requirement of § 1.401 (a)(4)-4(b) and the effective availability requirement of
§ 1.401 (a)(4)-4(c). For this purpose, one benefit, right, or feature is of inherently equal or
greater value than another benefit, right, or feature only if, at any time and under any
conditions, it is impossible for any employee to receive a smaller amount or a less valuable
right under the first benefit, right, or feature than under the second benefit, right, or feature.
To the extent the purchase from Plan A of a life insurance contract by a highly
compensated employee is a distribution alternative with respect to benefits described in
§ 411(d)(6)(A), such a purchase right is an optional form of benefit under Plan A. Even in
situations in which this purchase right is not an optional form of benefit, this purchase right
is an other right or feature. The purchase rights for the highly compensated employees are
distinct optional forms of benefit or other rights or features from the purchase rights for
nonhighly compensated employees because of differences in the life insurance contracts
(analogous to a conversion right applicable to a security). This purchase right for highly
compensated employees does not satisfy the current availability requirement of
§ 1.401 (a)(4)-4(b) because the right to purchase the contracts of a type available to the
highly compensated employees is not available to any nonhighly compensated employees,
and therefore is not available to a group that satisfies the requirements of § 410(b).
Moreover, under the facts presented, this purchase right of highly compensated employees
cannot satisfy the requirements of § 1.401 (a)(4)-4 through aggregation with any other
optional form of benefit, ancillary benefit, or other right or feature (such as the purchase
5
right for nonhighly compensated employees) because no other optional form of benefit,
ancillary benefit, or other right or feature under the plan that would enable the aggregated
benefits to be available to a group that satisfies the requirements of § 410(b) is of
inherently equal or greater value. Thus, Plan A fails to satisfy the nondiscrimination
requirements of § 401 (a)(4).
HOLDING
A plan that is funded, in whole or in part, with life insurance contracts does not
satisfy the requirements of § 401 (a)(4) prohibiting discrimination in favor of highly
compensated employees where: (1) the plan permits highly compensated employees, prior
to distribution of retirement benefits, to purchase those life insurance contracts prior to
distribution; and (2) any rights under the plan for nonhighly compensated employees to
purchase life insurance contracts from the plan prior to distribution of retirement benefits
are not of inherently equal or greater value than the purchase rights of highly compensated
employees.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Larry Isaacs of Employee Plans, Tax
Exempt and Government Entities Division, and Linda Marshall of the Office of the Division
Counsel/Associate Chief Counsel, Tax Exempt and Government Entities. For further
information regarding this revenue ruling, contact the Employee Plans taxpayer assistance
telephone service between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday
through Friday, by calling (877) 829-5500 (a toll-free number). Mr. Isaacs may be reached
6
at (202) 283-9710, and Ms. Marshall may be reached at (202) 622-6090 (not toll-free
numbers).
Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also, Part I, §402; §1.402(a)-1.)
Rev. Proc. 2004-16
SECTION 1. PURPOSE
This revenue procedure is issued in connection with the issuance of proposed
regulations under § 402(a) of the Internal Revenue C o d e regarding the valuation of life
insurance contracts upon distribution from a qualified retirement plan and proposed
regulations under §§ 79 and 83 regarding the valuation of life insurance contracts
under those sections (REG-126967-03). The preamble to the proposed regulations
states that it is not appropriate in s o m e cases to use either the net surrender value of a
distributed life insurance contract (i.e., the contract's cash value after reduction for any
surrender charges) or the contract's reserves as the contract's fair market value upon
distribution of an insurance contract from a qualified plan but the preamble provides
limited guidance as to what value m a y be used instead. Similarly, the proposed
regulations under §§ 79 and 83 clarify that the amount includible in income under those
sections is based upon the fair market value of the insurance contract rather than its
cash value but these proposed regulations do not provide any guidance as what
constitutes fair market value. The regulations are generally proposed to apply
beginning on the date the proposed regulations are filed in the Federal Register. The
preamble to the proposed regulations also requests public comments regarding
appropriate methods for valuing life insurance contracts w h e n distributed from qualified
retirement plans and for purposes of §§ 79 and 83. Until further guidance is issued, this
revenue procedure provides interim rules under which the cash value (without reduction
for surrender charges) of a life insurance contract m a y be treated as the contract's fair
market value w h e n the contract is distributed from a qualified plan under § 402 and for
purposes of §§ 79 and 83.
2
S E C T I O N 2. B A C K G R O U N D
.01 Section 402(a) provides generally that any amount actually distributed to any
distributee by any employees' trust described in § 401 (a) which is exempt from tax
under § 501 (a) shall be taxable to the distributee, in the taxable year of the distributee in
which distributed, under § 72.
.02 Section 1.402(a)-1 (a)(7)(iii) of the current regulations provides, in general,
that a distribution of property by a § 401(a) plan shall be taken into account by the
distributee at its "fair market value." Section 1.402(a)-1 (a)(2) of the current regulations
provides, in general, that upon distribution of an annuity or life insurance contract, the
"entire cash value" must be included in the distributee's income. The current
regulations do not define "fair market value" or "entire cash value" and questions have
arisen regarding the interaction between these two provisions.
.03 The proposed regulations would clarify that the requirement that a distribution
of property must be included in the distributee's income at fair market value is
controlling in those situations where the existing regulations provide for the inclusion of
the entire cash value. Thus, the proposed regulations provide that, in those cases
where a qualified plan distributes a life insurance contract, retirement income contract,
endowment contract, or other contract providing life insurance protection, the fair market
value of such a contract is generally included in the distributee's income rather than the
entire cash value of the contract. For this purpose, the policy cash value and all other
rights under the contract (including any supplemental agreements thereto and whether
or not guaranteed) are included in determining the fair market value of such a contract.
The proposed regulations provide a similar rule for purposes of the valuation of such
contracts under §§ 79 and 83.
.04 In Rev. Rul. 59-195, 1959-1 C.B. 18, the Service ruled that in situations
similar to those where an employer purchases and pays the premiums on an insurance
policy on the life of one of its employees and subsequently sells such policy, on which
further premiums must be paid, the value of such policy, for computing taxable gain in
the year of purchase, should be determined under the method of valuation prescribed in
§25.2512-6 of the Gift Tax Regulations. Under this method, the value of such a policy is
3
not its cash surrender value but the interpolated terminal reserve at the date of sale plus
the proportionate part of any premium paid by the employer prior to the date of the sale
which is applicable to a period subsequent to the date of the sale. Section 25.2512-6
also provides that if "because of the unusual nature of the contract such approximation
is not reasonably close to the full value, this method m a y not be used." Thus, this
method m a y not be used to determine the fair market value of an insurance policy
where the reserve does not reflect the value of all of the relevant features of the policy.
.05 In Q & A - 1 0 of Notice 89-25, 1989-1 C.B. 662, the IRS addressed the question
of what amount is i ncludible in income under § 402(a) w h e n a participant receives a
distribution from a qualified plan that includes a life insurance policy with a value
substantially higher than the cash surrender value stated in the policy. The notice noted
the practice of using cash surrender value as fair market value for these purposes and
concluded that this practice is not appropriate where the total policy reserves, including
life insurance reserves (if any) computed under § 807(d), together with any reserves for
advance premiums, dividend accumulations, etc., represent a m u c h more accurate
approximation of the policy's fair market value.
.06 Since Notice 89-25 w a s issued, life insurance contracts have been marketed
that are structured in a manner which results in a temporary period during which neither
a contract's reserves nor its cash surrender value represent the fair market value of the
contract. For example, s o m e life insurance contracts m a y provide for large surrender
charges and other charges that are not expected to be paid because they are expected
to be eliminated or reversed in the future (under the contract or under another contract
for which the first contract is exchanged), but this future elimination or reversal is not
always reflected in the calculation of the contract's reserve. If such a contract is
distributed prior to the elimination or reversal of those charges, both the cash surrender
value and the reserve under the contract could significantly understate the fair market
value of the contract. Thus, the preamble to the proposed regulations states that, in
some cases, it would not be appropriate to use either the net surrender value (i.e. the
contract's cash value after reduction for any surrender charges) or, because of the
unusual nature of the contract, the contract's reserves to determine the fair market
value of the contract. Accordingly, Q & A - 1 0 of Notice 89-25 should not be interpreted to
4
provide that a contract's reserves (including life insurance reserves (if any) computed
under § 807(d), together with any reserves for advance premiums, dividend
accumulations, etc.) are always an accurate representation of the contract's fair market
value.
.07 A s stated in the preamble to the proposed regulations, the amount of any
distribution determined under § 402 also applies for purposes of determining the
qualified status of any plan. For example, the fair market value of a distributed life
insurance contract, determined in accordance with the proposed regulations and this
revenue procedure, must be considered in determining whether the insured participant
has received benefits in excess of the limits imposed by § 415.
.08 Section 79 generally requires that the cost of group-term life insurance
coverage on the life of an employee that is in excess of $50,000 of coverage be
included in the income of the employee. Pursuant to § 1.79-1 (b) of the Income Tax
Regulations, under specified circumstances group-term life insurance m a y be combined
with other benefits, referred to as permanent benefits.
.09 Permanent benefits provided to an employee are subject to taxation under
rules described in § 1.79-1 (d). Under those rules, the cost of the permanent benefits,
reduced by the amount paid for those benefits by the employee, is included in the
employee's income. The cost of the benefits can be no less than an amount
determined under a formula provided in the regulations. The formula is based in part on
the increase in the employee's d e e m e d death benefit during the year. O n e of the
factors used for determining the deemed death benefit is "the net level premium reserve
at the end of that policy year for all benefits provided to the employee by the policy or, if
greater, the cash value of the policy at the end of that policy year."
.10 The proposed regulations would amend § 1.79-1(d) to delete the term cash
value from the formula for determining the cost of permanent benefits and substitute the
term fair market value. The purpose of the change is to clarify that, unless specifically
excepted from the definition of permanent benefits, the value of all features of a life
insurance policy providing an economic benefit to an employee (including, for example,
the value of a springing cash value feature) must be included in the employee's income.
5
.11 Section 83(a) provides that w h e n property is transferred to any person in
connection with the performance of services, the service provider must include in gross
income (as compensation income) the excess of the fair market value of the property,
determined without regard to lapse restrictions (such as life insurance contract
surrender charges), and determined at the first time that the transferee's rights in the
property are either transferable or not subject to a substantial risk of forfeiture (i.e.,
when those rights b e c o m e "substantially vested"), over the amount (if any) paid for the
property. Section 1.83-3(e) provides that i n the case of a transfer of a life insurance
contract, retirement income contract, endowment contract, or other contract providing
life insurance protection, only the cash surrender value of the contract is considered to
be property. The proposed regulations generally would amend § 1.83-3(e) to provide
that in the case of a transfer of an insurance contract, retirement income contract,
endowment contract, or other contract providing life insurance protection, the policy
cash value and all other rights under the contract (including any supplemental
agreements, whether or not guaranteed), other than current insurance protection, are
treated as property for purposes of this section. However, in the case of the transfer of
a life insurance contract, retirement income contract, endowment contract, or other
contract providing life insurance protection, which w a s part of a split-dollar arrangement
(as defined in § 1.61-22(j)) entered into on or before September 17, 2003, and which is
not materially modified (as defined in § 1.61-220(2)) after September 17, 2003, only the
cash surrender value of the contract is considered to be property.
SECTION 3. INTERIM GUIDANCE FOR DETERMINING FAR MARKET VALUE
.01 The Service and the Treasury recognize that m a n y taxpayers could have
difficulty determining the fair market value of an insurance contract after the issuance of
the proposed regulations under §§ 79 and 83 and the clarification in the preamble to the
proposed regulations under § 402 that Notice 89-25 should not be interpreted to provide
that a contract's reserves (including life insurance reserves (if any) computed under
§ 807(d), together with any reserves for advance premiums, dividend accumulations,
etc.) are always an accurate representation of the contract's fair market value.
Accordingly, in connection with the proposed regulations, this revenue procedure
6
provides interim rules under which the cash value (without reduction for surrender
charges) of a life insurance contract distributed from a qualified plan m a y be treated as
the fair market value of that contract. These interim rules also apply for purposes of
determining the value of insurance contracts under §§ 79 and 83.
.02 Cash value (without reduction for surrender charges) m a y be treated as the
fair market value of a contract as of a determination date provided such cash value is at
least as large as the aggregate of: (1) the premiums paid from the date of issue through
the date of determination, plus (2) any amounts credited (or otherwise m a d e available)
to the policyholder with respect to those premiums, including interest, dividends, and
similar income items (whether under the contract or otherwise), minus (3) reasonable
mortality charges and reasonable charges (other than mortality charges), but only if
those charges are actually charged on or before the date of determination and are
expected to be paid.
.03 In those cases where the contract is a variable contract (as defined in
§ 817(d)) cash value (without reduction for surrender charges) m a y be treated as the
fair market value of the contract provided such cash value is at least as large as the
aggregate of: (1) the premiums paid from the date of issue through the date of
determination, plus (2) all adjustments m a d e with respect to those premiums during that
period (whether under the contract or otherwise) that reflect investment return and the
current market value of segregated asset accounts, minus (3) reasonable mortality
charges and reasonable charges (other than mortality charges), but only if those
charges are actually charged on or before the date of determination and are expected to
be paid.
.04 The date of determination in the case of a distribution of a contract from a
qualified plan is the date of that distribution. The date of determination in the case of
the provision of permanent benefits subject to § 79 is the date those benefits are
provided. The date of determination in the case of a transfer of an insurance contract
subject to § 83 is the date on which fair market value must be determined under the
rules of § 8 3 .
S E C T I O N 4. E F F E C T I V E D A T E
This revenue procedure is effective on February 13, 2004.
7
DRAFTING INFORMATION
The principal authors of this revenue procedure are Robert Walsh and Larry
Isaacs of the Employee Plans, Tax Exempt and Government Entities Division. For
further information regarding this revenue procedure as it pertains to § 402, please
contact the Employee Plans' taxpayer assistance telephone service at 1 -877-829-5500
(a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time,
Monday through Friday. For further information regarding this revenue procedure as it
pertains to § 79, please contact Betty Clary of the Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities) at (202) 622-6080 (not a toll-free
number). For further information regarding this revenue procedure as it pertains to
§ 83, please contact Robert Misner of the Office of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities) at (202) 622-6030 (not a toll-free
number). Mr. Walsh and Mr. Isaacs m a y be reached at (202) 283-9888 (not a toll-free
number).
1-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
Page 1 of 27
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 13, 2004
JS-1173
Department of the Treasury
Second Quarterly Update of the 2003 - 2004 Priority Guidance Plan
Joint Statement by:
Pamela F. Olson
Assistant Secretary (Tax Policy)
U.S. Department of the Treasury
Mark W. Everson
Commissioner
Internal Revenue Service
Emily A. Parker
Acting Chief Counsel
Internal Revenue Service
We are pleased to announce the second quarterly update of the 2003 - 2004
Priority Guidance Plan.
On July 24, 2003, we released the 2003 - 2004 Priority Guidance Plan listing 268
projects for the plan year beginning July 1, 2003 and ending June 30, 2004. In our
Joint Statement that accompanied the release of the 2003 2004 Priority Guidance
Plan, we emphasized our commitment to increased and more timely published
guidance. W e indicated that we would update the plan quarterly to reflect additional
guidance that we intend to publish during the plan year. Updating the plan also
provides flexibility to respond to developments arising during the year.
The attached update sets forth the guidance on the original 2003 - 2004 Priority
Guidance Plan that we have published. Although the update may indicate that a
particular item on the plan has been completed, it is possible that one or more
additional projects may be completed in the plan year relating to that item. The
update also includes 34 items of additional guidance, some of which have already
been published.
We continue to invite the public to provide us with comments and suggestions as
we identify and write guidance throughout the plan year.
The updated 2003 -2004 Priority Guidance Plan will be republished on the IRS
website on the Internet (www.irs.gov) under Tax Professionals, IRS Resources,
Administrative Information and Resources, 2003 2004 Priority Guidance Plan.
Copies can also be obtained by calling Treasury's Office of Public Affairs at (202)
622-2960.
OFFICE OF TAX POLICY
AND
INTERNAL REVENUE SERVICE
2003-2004 PRIORITY GUIDANCE PLAN
FEBRUARY 13, 2004 UPDATE
-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
CONSOLIDATED RETURNS
Original PGP Projects:
1. Guidance under section 1502 regarding transactions involving obligations of
consolidated group members.
2. Guidance under section 1502 regarding rate or discount subsidy payments.
3. Final regulations under section 1502 regarding certain group structure
changes.
4. Guidance under section 1502 regarding treatment of member stock.
Additional PGP Projects:
5. Guidance under section 1504(a)(5)(C) and (D) regarding affiliation.
6. Guidance under section 1502 regarding application of section 108 to members
of a consolidated group.
• P U B L I S H E D 9/4/2003 in F R as T E M P 9089
• P U B L I S H E D 12/11/2003 in F R as T E M P 9098
CORPORATIONS AND THEIR SHAREHOLDERS
Original PGP Projects:
1. Final regulations regarding the effect of reorganizations on attribute reduction
in respect of cancellation of indebtedness.
2. Guidance regarding redemptions of corporate stock.
3. Guidance regarding transactions involving the transfer or receipt of no net
equity value.
4. Final regulations regarding taxable asset acquisitions and dispositions of
insurance companies.
5. Guidance regarding the acquisition of businesses having certain nonqualified
settlement funds.
6. Guidance regarding the effect of pre-closing changes of acquiror stock value
on continuity of interest.
7. Guidance regarding the business purpose requirement under section 355.
• P U B L I S H E D 11/17/2003 in IRB 2003-46 as R E V . R U L . 2003-110
(released 10/23/2003)
8. Guidance regarding the active trade or business requirement under section
355(b).
9. Guidance regarding predecessors and successors under section 355(e).
10. Guidance regarding the assumption of liabilities in certain transfers of
property.
11. Guidance regarding transfers of assets after putative reorganizations.
12. Guidance regarding certain cross-chain transactions.
Page 2 of 27
-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
13. Guidance under section 368(a)(1 )(F).
14. Guidance under section 382.
• P U B L I S H E D 10/6/2003 in IRB 2003-40 as N O T I C E 2003-65
(released 9/12/2003)
15. Guidance under section 1374 regarding liquidations of C corporations.
EMPLOYEE BENEFITS
A. Retirement Benefits
Original PGP Projects:
1. Guidance on phased retirement arrangements.
2. Guidance on distribution rules for rollover contributions.
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as R E V RUL. 2004-12
(released 1/29/2004)
3. Guidance updating Rev. Rul. 81-100.
4. Proposed regulations under section 401 (a)(4) for cash balance plans.
5. Regulations under section 401 (a)(9) on required minimum distributions.
6. Guidance on whether employees of a section 501 (c)(3) organization who are
eligible to participate in a section 403(b) plan are excludable employees for section
401 (k) and (m) plans.
7. Guidance relating to annuity plans under section 403(b).
8. Final regulations under section 408(q).
9. Guidance under section 409(p) on S corporation ESOPs.
• P U B L I S H E D 2/9/2004 in IRB 2004-6 as REV. RUL. 2004-4
(released 1/23/2004)
10. Revenue ruling under section 410(b)(6)(c).
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as REV. RUL. 2004-11
(released 1/29/2004)
11. Guidance under section 411(a).
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as REV. RUL. 2004-10
(released 1/29/2004)
12. Guidance under sections 411 (b)(1)(H) and 411 (b)(2).
13. Guidance under section 411 (d)(6).
14. Guidance on mortality tables.
• P U B L I S H E D 9/22/2003 in IRB 2003-38 as N O T I C E 2003-62
(released 9/3/2003)
15. Guidance on section 412(i) plans.
• WILL B E P U B L I S H E D 2/17/2004 in F R as N P R M REG-126967-03
16. Additional transitional rules when a PEO retirement plan is converted to a
multiple employer plan.
Page 3 of 27
-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
• P U B L I S H E D 12/15/2003 in IRB 2003-50 as REV. P R O C . 2003-86
(released 11/25/2003)
17. Regulations under section 415.
18. Guidance on section 416(g)(4)(H) for safe harbor 401 (k) plans.
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as REV. RUL. 200413 (released 1/29/2004)
19. Guidance on use of electronic technologies for various retirement plan
transactions.
• P U B L I S H E D 2/9/2004 in IRB 2004-6 as N O T I C E 2004-10
(released 1/20/2004)
20. Final regulations under section 417(a).
• P U B L I S H E D 12/17/2003 in FR as T D 9099
21. Guidance under section 417(e).
22. Guidance under section 420.
23. Guidance under section 457
24. Revenue Procedure on model provisions for section 457(b) plans.
25. Guidance under section 3405 on actions by a duly authorized agent.
Additional PGP Projects:
26. Notice on abusive Roth IRA transactions.
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as N O T I C E 2004-8
(released 12/31/2003)
27. Revenue procedure on funding waivers under section 412(d).
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as R E V P R O C . 2004-15
(released 1/29/2004)
28. Revenue ruling on nondiscrimination requirements for qualified plans selling
life insurance to participants.
• WILL B E P U B L I S H E D 3/8/2004 in IRB 2004-10 as REV. RUL. 2004-21
(released 2/13/2004)
29. Revenue ruling on deduction limits for qualified plans holding life insurance.
• WILL B E P U B L I S H E D 3/8/2004 in IRB 2004-10 as REV. RUL. 2004-20
(released 2/13/2004)
30. Revenue procedure on determining fair market value of life insurance
distributed from qualified plans or taxable under section 79 or section 83.
• WILL B E P U B L I S H E D 3/8/2004 in IRB 2004-10 as R E V P R O C . 2004-16
(released 2/13/2004)
B. Executive Compensation, Health Care and Other Benefits, and Employment
Taxes
Original PGP Projects:
1. Guidance under section 35 on credit for health care insurance costs of eligible
individuals.
• WILL B E P U B L I S H E D 3/1/2004 in IRB 2004-9 as REV. P R O C . 2004-12
(released 2/12/2004)
Page 4 of 27
• 1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
2.
Guidance on election between taxable and nontaxable benefits.
3. Guidance under section 62(c) on payments to couriers.
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as REV. RUL. 2004-1
(released 1/15/2004)
4. Revenue ruling on electronic receipts and accountable plans.
• P U B L I S H E D 11/3/2003 in IRB 2003-44 as REV. RUL. 2003-106
(released 10/20/2003)
5. Guidance under section 83.
6. Guidance on disability payments.
7. Guidance on HRAs.
8. Revenue ruling under section 105 on nonprescription drugs.
• P U B L I S H E D 9/22/2003 in IRB 2003-38 as REV. RUL. 2003-102
(released 9/3/2003)
9. Guidance on debit cards.
10. Revenue ruling on the application of section 280G to various bankruptcy
situations.
11. Guidance on health care provider incentive payments.
12. Final regulations on Incentive Stock Options.
13. Guidance on the employment taxation and reporting requirements applicable
to interest in nonstatutory stock options and deferred compensation transferred to a
former spouse incident to divorce.
14. Guidance under section 3121 regarding the definition of salary reduction
agreement.
15. Guidance on the employment tax treatment of bonuses paid to employees on
the signing of a collectively bargained agreement.
16. Guidance on FICA and FUTA tax with respect to incentive stock options under
section 422 and employee stock purchase plans under section 423.
17 Notice on issues with respect to the treatment of choreworkers.
• P U B L I S H E D 10/27/2003 in IRB 2003-43 as N O T I C E 2003-70
(released 10/3/2003)
18. Guidance on the reporting procedures for successor organizations following
Rev. Proc. 96-60.
19. Guidance under section 3504.
20. Revenue ruling under section 4980B on Medicare entitlement as a second
qualifying event.
• WILL B E P U B L I S H E D 3/8/2004 in IRB 2004-10 as REV. RUL. 2004-22
(released 2/13/2004)
21. Guidance on tips paid to restaurant employees.
22. Guidance on the deposit requirements for employment tax in connection with
Page 5 of 27
1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
the exercise of nonstatutory options.
Additional PGP Projects:
23. Notice on health savings accounts.
• P U B L I S H E D 1/12/2004 in IRB 2004-2 as N O T I C E 2004-2
(released 12/22/2003)
24. Guidance on the tax treatment of payments under the Smallpox Emergency
Personnel Protection Act.
25. Additional guidance on health savings accounts.
EXCISE TAXES
Original PGP Projects:
1. Final regulations under section 4051 regarding the definition of highway
vehicle in sections 145.4051 and 48.4061 (a)-1.
2. Guidance regarding the definition of highway tractors subject to the heavy
truck tax under section 4051.
3. Guidance under section 4051 (a)(2) and (3) regarding suitability for use.
4. Guidance under section 4081 regarding the entry into the United States of
taxable fuel.
5. Final regulations under section 4252 regarding toll telephone services.
6. Guidance under section 4261 regarding resellers of air transportation.
7. Guidance under section 4291 regarding the duties of the collector of collected
excise taxes.
8. Proposed regulations under section 6416(a)(4) regarding claims for gasoline
tax.
EXEMPT ORGANIZATIONS
Original PGP Projects:
1. Guidance on joint ventures between exempt organizations and for-profit
companies.
2. Guidance on low-income housing partnerships and 501(c)(3) participation.
3. Guidance on downpayment assistance organizations.
4. Guidance on section 501 (c)(4) organizations.
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as R E V . R U L . 2004-6
(released 12/23/2003)
5. Guidance concerning the internet and unrelated business income tax.
6. Regulations under section 529 regarding qualified tuition programs.
7. Guidance on reporting requirements applicable to Coverdell education savings
Page 6 of 27
-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
accounts.
• P U B L I S H E D 8/18/2003 in IRB 2003-33 as N O T I C E 2003-53
(released 7/31/2003)
8. Guidance on split interest trusts.
Additional PGP Projects:
9. Announcement on suspension of tax exempt status.
• P U B L I S H E D 12/1/2003 in IRB 2003-48 as A N N . 2003-74
(released 11/14/2003)
FINANCIAL INSTITUTIONS AND PRODUCTS
Original PGP Projects:
1. Proposed regulations regarding accruals on sales of REMIC regular interests
between payment dates.
2. Guidance on system upgrade payments made to utilities.
3. Final regulations under section 263(g).
4. Guidance under section 265(a)(2).
5. Proposed regulations on notional principal contracts.
6. Revenue ruling under section 446 concerning the timing rules of hedging
transactions not identified under section 1.1221-2(f).
• P U B L I S H E D 12/29/2003 in IRB 2003-52 as REV. RUL. 2003-127
7. Final regulations addressing the treatment of inducement fees for REMIC
residual interests.
8. Proposed regulations addressing valuation under section 475.
9. Final regulations under section 475(e) and (f).
10. Guidance under section 851 on the treatment of certain obligations backed by
Treasury securities for RIC diversification purposes.
11. Revenue ruling under section 856 on customary services performed by REITs.
• WILL B E P U B L I S H E D 3/8/2004 in IRB 2004-10 as REV. RUL. 2004-24
12. Advance notice of proposed rulemaking on interest-only REMIC regular
interests.
13. Final regulations on REMIC residual interests.
14. Guidance on credit card transactions.
15. Guidance under section 7872.
Additional PGP Projects:
16. Proposed regulations clarifying the application of the TEFRA audit procedures
to R E M I C s .
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17. Guidance regarding the application of section 1 (h) to capital gain dividends of
RICs and REITs.
18. Revenue ruling under sections 1233 and 1259 regarding the transfer of a short
sale position from one broker to another.
• WILL B E P U B L I S H E D 2/23/2004 in IRB 2004-8 as REV. RUL. 2004-15
(released 1/28/2004)
19. Guidance on tax avoidance transactions using offsetting forward currency
option contracts.
• P U B L I S H E D 12/22/2003 in IRB 2003-51 as N O T I C E 2003-81
20. Guidance under section 853 regarding foreign tax credit reporting by regulated
investment companies.
GENERAL TAX ISSUES
Original PGP Projects:
1. Proposed regulations under section 21 regarding the credit for household and
dependent care expenses.
2. Final revenue procedure under section 23 regarding the credit for adoption
expenses.
3. Guidance under section 32.
4. Guidance under section 41 regarding the research credit.
• P U B L I S H E D 1/2/2004 in F R as T D 9104
• P U B L I S H E D 1/2/2004 in F R as A N P R M REG-153656-03
5. Final regulations under section 41 regarding the computation of the research
credit in a controlled group.
6. Guidance under section 42.
• P U B L I S H E D 11/24/2004 in IRB 2003-47 as REV. P R O C . 2003-82
7. Final regulations under sections 1.42-6 and 1.42-14 to conform to statutory
changes.
• P U B L I S H E D 1/6/2004 in F R as T D 9110
8. Guidance under section 45D regarding the new markets tax credit.
• P U B L I S H E D 8/25/2003 in IRB 2003-34 as N O T I C E 2003-56
(released 7/22/2003)
• P U B L I S H E D 9/29/2003 in IRB 2003-39 as N O T I C E 2003-64
(released 9/5/2003)
• P U B L I S H E D 10/14/2003 in IRB 2003-41 as N O T I C E 2003-68
(released 9/23/2003)
9. Final regulations under sections 46 and 167 relating to normalization.
10. Guidance under sections 51 and 51A on qualified IV-A recipient.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as REV. RUL. 2003-112
(released 10/17/2003)
11. Guidance regarding the section 59(e) election.
12. Revenue ruling regarding disaster relief payments to businesses.
13. Revenue ruling under sections 61 and 162 on the proper treatment of
Medicaid rebates paid by pharmaceutical companies.
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14. Guidance regarding the treatment of employee relocation costs.
15. Final regulations under section 121(c) regarding the reduced maximum
exclusion for gain on the sale of a principal residence.
16. Revenue ruling under sections 121 and 1031 regarding like-kind exchange of
a principal residence.
17. Guidance under section 152 regarding the release of a claim for exemption for
a child of divorced or separated parents.
18. Guidance under section 165 regarding the deduction for worthless stock of
subsidiaries for which an election under the check-the-box regulations has been
made.
• P U B L I S H E D 12/24/2003 in IRB 2003-52 as R E V . RUL. 2003-125
19. Final regulations under section 167 regarding the income forecast method.
20. Proposed and temporary regulations under section 168 relating to like-kind
exchanges.
21. Final regulations under section 168 regarding depreciation of property for
which the use changes.
22. Proposed and temporary regulations under sections 168 and 1400L regarding
special depreciation allowance.
• P U B L I S H E D 9/8/2003 in F R as T E M P 9091
23. Guidance under section 168 regarding changes in classification of property.
• P U B L I S H E D 1/2/2004 in F R as T E M P 9105
24. Guidance under section 168 on asset classes and activity classes under
Rev.
Proc. 87-56.
25. Guidance under section 172 regarding specified liability losses.
26. Guidance under section 174 regarding the treatment of inventory property.
27. Guidance under section 179 on elections.
28. Final regulations under section 221 regarding interest on education loans.
29. Revenue procedure under section 274 regarding the use of statistical
sampling.
30. Final regulations under section 280F regarding vans and light trucks.
31. Final regulations under section 465 regarding interest other than as a creditor.
32. Guidance under section 1031 regarding reverse like-kind exchanges of
property.
33. Revenue ruling under section 1241 on cancellation of lease or distributor
agreements.
34. Guidance on corporations chartered under Indian tribal law.
Additional PGP Projects:
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35. Revenue ruling under sections 61, 104, 130, and 139 regarding payments
made
to claimants of the September 11th Victim Compensation Fund of 2001.
• P U B L I S H E D 11/17/2003 in IRB 2003-46 as REV. RUL. 2003-115
36. Notice regarding charitable contributions of patents and other intellectual
property.
• P U B L I S H E D 1/20/2004 in IRB 2004-3 as N O T I C E 2004-7
37. Guidance under section 1031 regarding the use of SIC codes in like kind
exchanges of depreciable tangible property.
38. Notice under section 29 regarding chemical change.
• P U B L I S H E D 11/17/2003 in IRB 2003-46 as N O T I C E 2003-70
(released 10/29/2003)
39. Final regulations under section 42 removing a barrier to the electronic filing of
Form 8609 relating to the low-income housing credit.
• P U B L I S H E D 1/27/2004 in F R as T D 9112
40. Revenue procedure under section 446 regarding improper to proper
depreciation changes.
• P U B L I S H E D 1/20/2004 in IRB 2004-3 as REV. P R O C . 2004-11
(released 12/30/2003)
GIFTS, ESTATES AND TRUSTS
Original PGP Projects:
1. Guidance under section 642(c) regarding the contribution of a qualified
conservation easement.
• P U B L I S H E D 12/15/2003 in IRB 2003-50 as R E V RUL. 2003-123
2. Final regulations under section 643 regarding state law definition of income for
trust purposes.
• P U B L I S H E D 1/2/2004 in FR as T D 9102
3. Update revenue procedures under section 664 containing sample charitable
remainder unitrust provisions.
4. Guidance under section 664 regarding dividends and capital gains for
charitable remainder trusts.
• P U B L I S H E D 11/20/2003 in F R as N P R M REG-110896-98
5. Final regulations under section 671 regarding reporting requirements for
widely-held fixed investment trusts.
6. Guidance under sections 671 and 2036 regarding tax reimbursement
provisions in grantor trusts.
7. Guidance under section 2032 regarding section 301.9100 relief.
• P U B L I S H E D 12/24/2003 in F R as N P R M REG-139845-02
8. Guidance under section 2053 regarding post-death events.
9. Guidance under section 2632 regarding the election out of the deemed
allocation of the generation-skipping transfer tax exemption.
10. Guidance under section 2642 regarding issues related to the generationskipping transfer tax exemption.
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11. Guidance under section 2642 regarding qualified severance.
12. Guidance under section 2651 regarding the predeceased parent rule.
13. Guidance under section 2704 regarding the liquidation of an interest.
Additional PGP Projects:
14. Guidance under section 2702 regarding qualified interests.
• P U B L I S H E D 11/3/2003 in IRB 2003-44 as N O T I C E 2003-72
(released 10/15/2003)
15. Revenue ruling under section 642(c) regarding governing instrument
requirements.
• P U B L I S H E D 1/20/2004 in IRB 2004-3 as REV. RUL. 2004-5
INSURANCE COMPANIES AND PRODUCTS
Original PGP Projects:
1. Revenue ruling concerning reserves used to calculate required interest under
section 812.
• P U B L I S H E D 12/1/2003 in IRB 2003-48 as REV. RUL. 2003-120
2. Guidance regarding substantially equal periodic payments under section 72(q).
• WILL B E P U B L I S H E D 3/1/2004 in IRB 2004-9 as N O T I C E 2004-15
3. Guidance regarding the 2001 CSO mortality tables.
4. Guidance regarding split-dollar life insurance.
• P U B L I S H E D 9/17/2003 in FR as T D 9092
Additional PGP Projects:
5. Revenue ruling describing prior guidance on split-dollar life insurance that, due
to subsequent guidance, is obsolete.
• P U B L I S H E D 10/6/2003 in IRB 2003-40 as REV. RUL. 2003-105
6. Final regulations under section 817
INTERNATIONAL ISSUES
A. Subpart F/Deferral
Original PGP Projects:
1. Regulations on the allocation of subpart F income.
2. Regulations under section 959 on previously taxed earnings and profits.
3. Guidance on the PFIC provisions.
B. Inbound Transactions
Original PGP Projects:
1. Guidance on cross-border pension distributions.
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2. Guidance under section 1441.
3. Guidance on securities lending.
4. Guidance on the treatment of certain financial products for withholding
purposes.
5. Regulations under section 1446.
6. Regulations relating to the reporting of bank deposit interest.
C. Outbound Transactions
Original PGP Projects:
1. Guidance on international restructurings.
2. Guidance follow-up to Notice 2003-46.
• P U B L I S H E D 10/22/2003 in F R as T D 9093 and N P R M REG-110385-99
D. Foreign Tax Credits
Original PGP Projects:
1. Regulations on the allocation of foreign taxes under section 901.
2. Regulations under sections 902 and 904.
3. Regulations on look-through treatment for 10/50 company dividends (see
Notice 2003-5).
4. Regulations on the change of taxable year and foreign tax credits.
E. Transfer Pricing
Original PGP Projects:
1. Regulations on the treatment of cross-border services.
2. Regulations on cost sharing under section 482.
3. Guidance on the APA process (Rev. Proc. 96-53).
4. Regulations on global dealing.
F. Sourcing and Expense Allocation
Original PGP Projects:
1. Guidance on interest expense apportionment.
2. Regulations on the allocation and apportionment of charitable contributions.
3. Regulations relating to the treatment of fringe benefits.
4. Guidance on the source of payments for cross-border use of property.
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5.
Regulations under sections 863(d) and (e).
G. Treaties
Original P G P Projects:
1. Treaty guidance on the determination of residence for dual resident
companies.
2. Treaty guidance under the independent services article for nonresident
partners.
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as REV. RUL. 2004-3
(released 1/29/2004)
3. Guidance on the procedures for claiming treaty waiver of insurance excise tax.
• PUBLISHED 11/10/2003 in IRB 2003-45 as REV. PROC. 2003-78
(released 10/10/2003)
4. Guidance on reporting for Canadian RRSPs and other plans.
• P U B L I S H E D 8/25/2003 in IRB 2003-34 as N O T I C E 2003-57
(released 8/1/2003)
• P U B L I S H E D 12/8/2003 in IRB 2003-49 as N O T I C E 2003-75
(released 11/26/2003)
H. Other
Original P G P Projects:
1. Guidance on the definition of "qualified foreign corporation" for purposes of
taxation of dividends received by individuals.
• P U B L I S H E D 10/20/2003 in IRB 2003-42 as N O T I C E 2003-69
(released 9/30/2003)
• P U B L I S H E D 10/27/2003 in IRB 2003-43 as N O T I C E 2003-71
(released 10/3/2003)
• P U B L I S H E D 12/15/2003 in IRB 2003-50 as N O T I C E 2003-79
(released 11/26/2003)
2. Regulations under section 269B.
3. Guidance on cross-border insurance issues.
4.
Guidance on possessions issues.
5. Regulations concerning the treatment of currency gain or loss.
6. Regulations under section 1503(d).
Additional PGP Projects:
7 Revenue ruling relating to convention benefits under section 274(h).
• P U B L I S H E D 10/20/2003 in IRB 2003-42 as REV. RUL. 2003-109
(released 9/30/2003)
8. Announcement of agreement relating to the limitation on benefits article in
the
U.S. Swiss Income Tax Convention.
• P U B L I S H E D 10/6/2003 in IRB 2003-40 as A N N . 2003-59
9. Announcement of agreement relating to deferred compensation under the
U.S.- Austrian Income Tax Convention.
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• P U B L I S H E D 10/6/2003 in IRB 2003-40 as A N N . 2003-58
10. Announcement of agreement implementing the mutual agreement procedures
of the U.S.-Dutch Income Tax Convention.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as A N N . 2003-63
11. Notice regarding information reporting with respect to foreign disregarded
entities.
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as N O T I C E 2004-4
(released 12/29/2003)
12. Regulations regarding electronic filing of duplicate forms 5472.
• P U B L I S H E D 2/9/2004 in F R as T E M P 9113 and N P R M REG-167217-03
PARTNERSHIPS
Original PGP Projects:
1. Guidance regarding partnership transactions under section 337(d).
2. Final regulations under section 460 regarding partnership transactions for
long-term contracts.
3. Final regulations under section 704(b) regarding capital account book-up.
4. Guidance under section 704(b) regarding the allocation of foreign tax credits.
5. Guidance under section 704(c).
• P U B L I S H E D 11/24/2003 in F R as N P R M REG-160330-02
6. Guidance under section 707 regarding disguised sales.
7. Proposed regulations under section 721 regarding partnership interests issued
for services and the treatment of compensatory partnership options.
8. Update of the section 751 regulations.
9. Final regulations under section 752 regarding the assumption of partner
liabilities.
10. Guidance under section 752 where a general partner is a disregarded entity.
11. Guidance on the application of section 1045 to certain partnership
transactions.
12. Guidance under section 6031 on the reporting requirements of tax-exempt
bond partnerships.
• P U B L I S H E D 11/10/2003 in F R as T E M P 9094
• P U B L I S H E D 12/1/2003 in IRB 2003-48 as REV. P R O C . 2003-84
(released 11/6/2003)
13. Guidance under section 7701 regarding Delaware Statutory Trusts.
14. Guidance under section 7701 regarding disregarded entities and collection
issues.
Additional PGP Projects:
15. Notice under section 772 regarding dividends as a separately stated item.
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• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as N O T I C E 2004-5
(released 1/27/2004)
SUBCHAPTER S
Original PGP Projects:
1. Revenue ruling under section 1361 regarding QSub elections.
2. Guidance on the treatment of LIFO recapture under section 1363(d).
3. Guidance under section 7701 on deemed corporation entity elections for
electing S corporations.
Additional PGP Projects:
4. Revenue procedure under section 1362 regarding S corporation rollover to
IRA.
• WILL B E P U B L I S H E D 2/17/2004 in IRB 2004-7 as REV. P R O C . 2004-14
TAX ACCOUNTING
Original PGP Projects:
1. Final regulations under sections 162 and 263 regarding the deduction and
capitalization of expenditures for intangible assets.
• P U B L I S H E D 1/5/2004 in F R as T D 9107
2. Regulations under sections 162 and 263 regarding the deduction and
capitalization of expenditures for tangible assets.
• P U B L I S H E D 1/20/2004 in IRB 2004-3 as N O T I C E 2004-6
3. Guidance under sections 162 and 263 regarding the deduction and
capitalization of costs incurred to fertilize established timber stands.
4. Revenue ruling regarding the deduction and capitalization of costs incurred by
utilities to maintain assets used to generate power.
5. Guidance under sections 165 regarding the treatment of preproduction costs
of creative property.
6. Regulations under section 263A regarding the simplified service cost and
simplified production methods.
7. Guidance under section 263A regarding "negative" additional section 263A
costs.
8. Final regulations under sections 263A and 448 regarding adjustments under
section 481(a) for certain changes in accounting method.
9. Regulations under section 381 regarding changes in method of accounting.
10. Guidance under section 442 regarding the period for taking into account
adjustments resulting from certain changes in annual accounting period by passthrough entities.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as REV. P R O C . 2003-79
11. Revenue procedure under section 446 regarding changes in method of
accounting for rotable spare parts.
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12. Regulations under section 446 regarding methods of accounting.
13. Temporary regulations under section 448 regarding the nonaccrual experience
method.
• P U B L I S H E D 9/4/2003 in F R as T E M P 9090
14. Final revenue procedure under section 451 regarding the treatment of
advance payments.
15. Revenue ruling under section 461 regarding the proper year for the deduction
of payroll taxes on deferred compensation by accrual method taxpayers.
16. Regulations under section 468B regarding certain escrow funds.
17. Guidance on the tax treatment of vendor allowances involving buildouts and
image upgrades.
18. Revenue ruling under section 1341 regarding the claim of right.
• WILL B E P U B L I S H E D 2/23/2004 in IRB 2004-8 as REV. RUL. 2004-17
(released 2/6/2004)
Additional PGP Projects:
19. Notice under section 263A regarding the simplified service cost and simplified
production methods.
• P U B L I S H E D 9/2/2003 in IRB 2003-35 as N O T I C E 2003-59
20. Revenue ruling under section 263A regarding the treatment of environmental
remediation expenses.
• WILL B E P U B L I S H E D 2/23/2004 in IRB 2004-8 as REV. RUL. 2004-18
(released 2/6/2004)
21. Final, temporary and proposed regulations under section 461 (f) regarding
transfers to satisfy contested liabilities.
• P U B L I S H E D 11/21/2003 in F R as T D 9095 and N P R M REG-136890-02
22. Notice under section 461 (f) identifying certain transfers to trusts for contested
liabilities as listed transactions.
• P U B L I S H E D 12/8/2003 in IRB 2003-49 as N O T I C E 2003-77
(released 11/19/2003)
23. Guidance providing procedures under which taxpayers may obtain automatic
consent to change a method of accounting to comply with sections 1.263(a)-4 and
1.263(a)-5.
24. Guidance regarding the treatment of capitalized costs in certain transactions
involving the acquisition of a trade or business or a change in the capital structure
of a business entity.
TAX ADMINISTRATION
Original PGP Projects:
1. Update Rev. Proc. 85-35 regarding claims for relief by victims of terrorism.
2. Final regulations under section 5891 regarding structured settlement factoring
transactions.
3. Annual compilation of Tax Shelter Listed Transactions under section 6011.
• P U B L I S H E D 12/8/2003 in IRB 2003-49 as N O T I C E 2003-76
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(released 11/7/2003)
4. Final regulations regarding electronic payee statements.
5. Proposed regulations regarding what constitutes a return under
section
6020(b) for purposes of applying the failure to pay penalty.
6. Guidance regarding information reporting under section 6041 for commissions
paid to insurance agents.
7. Revenue ruling regarding information reporting for royalty payments under
sections 6041 and 6050N.
8. Final regulations regarding information reporting and backup withholding for
purchasing card transactions.
9. Revenue procedure regarding Qualified Payment Card Agents.
10. Guidance regarding information reporting with respect to payments in lieu of
dividends m a d e to individuals.
• P U B L I S H E D 10/6/2003 in IRB 2003-40 as N O T I C E 2003-67
(released 9/16/2003)
• P U B L I S H E D 12/29/2003 in F R as T D 9103
11. Final regulations under section 6045(f) regarding the reporting of gross
proceeds to attorneys.
12. Final regulations under section 6050P regarding information reporting for
cancellation of indebtedness.
13. Final regulations under section 6091 regarding hand carrying returns.
14. Proposed regulations under section 6103 regarding the disclosure of unrelated
third party tax information in tax proceedings.
15. Final regulations under section 6103 regarding the definition of "agent"
• P U B L I S H E D 1/6/2004 in F R as T D 9111
16. Revenue procedure under section 6103 regarding fees charged for furnishing
certain returns and return information.
• P U B L I S H E D 10/27/2003 in IRB 2003-43 as R E V P R O C . 2003-74
17. Final regulations regarding the ability of a return preparer to furnish a
completed copy of an income tax return to the taxpayer using a medium other than
paper.
18. Withdrawal of regulations under former section 6152 relating to the election by
a decedent's estate to pay income tax in installments.
• P U B L I S H E D 12/3/2003 in F R as T D 9096
19. Update Rev. Ruls. 75-365, 366, and 367 regarding interests in real estate held
by a decedent.
20. Guidance regarding the use of summary assessment procedures with respect
to claimed Black Reparations and similar credits.
21. Guidance under section 6213 regarding math error assessments based on a
Form W - 2 .
22. Revenue ruling regarding the classification of items and the statute of
limitations under the T E F R A partnership provisions.
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23. Revenue ruling under section 6231 regarding the application of certain T E F R A
partnership provisions to disregarded entities.
24. Final regulations under section 6302 regarding the minimum threshold for
depositing F U T A taxes.
25. Proposed regulations under sections 6320 and 6330 regarding collection due
process.
26. Notice regarding collection issues relating to property held as a tenancy by
the
entirety arising from the Supreme Court's opinion in United States v.
Craft.
• P U B L I S H E D 9/29/2003 in IRB 2003-39 as N O T I C E 2003-60
(released 9/11/2003)
27. Revenue ruling regarding the limitations on setoff.
28. Revenue ruling regarding setoff with respect to a taxpayer in bankruptcy.
29. Proposed regulations under section 6655 regarding estimated tax payments
by corporations.
30. Final regulations under sections 6662 and 6664 regarding penalties relating to
tax shelters.
• P U B L I S H E D 12/30/2003 in F R as T D 9109
31. Revenue procedure regarding the submission and processing of offers-incompromise.
• P U B L I S H E D 9/8/2003 in IRB 2003-36 as REV. P R O C . 2003-71
(released 8/21/2003)
32. Final regulations imposing a user fee for offers-in-compromise.
• P U B L I S H E D 8/15/2003 in F R as T D 9086
33. Guidance necessary to facilitate electronic tax administration.
34. Final regulations under section 7430 regarding qualified offers.
• P U B L I S H E D 12/29/2003 in F R as T D 9106
35. Proposed regulations under section 7430 regarding miscellaneous changes
m a d e by T R A 97 and R R A 98.
36. Update Rev. Proc. 87-24 regarding docketed Tax Court cases.
37. Proposed regulations regarding third party and John Doe summonses.
38. Revenue procedure regarding the early examination of questionable
transactions.
39. Revisions to Circular 230 regarding practice before the IRS.
• P U B L I S H E D 12/30/2003 in F R as N P R M REG-122379-02
40. Revenue procedure expanding the prefiling agreement program.
Additional PGP Projects:
41. Announcement regarding a delay of the implementation of the new rolling
renewal schedule for enrolled agents to renew their enrollment under Circular 230.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as A N N . 2003-68
(released 10/27/2003)
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42. Revenue ruling under section 6323 regarding the effect of actual knowledge of
a tax lien for priority purposes.
• P U B L I S H E D 11/3/2003 in IRB 2003-44 as REV. R U L . 2003-108
43. Proposed regulations under section 6011 to remove impediments to electronic
filing of certain business returns.
• P U B L I S H E D 12/19/2003 in F R as N P R M REG-116664-01
44. Notice under section 6001 establishing a pilot program for entering into a
record keeping agreement relating to the research credit under section 41.
• P U B L I S H E D 2/9/2004 in IRB 2004-6 as N O T I C E 2004-11
45. Revenue ruling under section 6402 regarding post-petition credits in chapter
13 bankruptcy cases.
46. Temporary regulations under sections 6043 and 6045 regarding information
reporting relating to taxable stock transactions.
• P U B L I S H E D 12/30/2003 in F R as T E M P 9101
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as N O T I C E 2004-9
(released 12/30/2003)
47. Guidance under section 6041 regarding information reporting relating to debit
or credit card payments of health expenses.
• WILL B E P U B L I S H E D 3/1/2004 in IRB 2004-9 as N O T I C E 2004-16
48. Notice providing relief to health insurance providers from the section 6050T
information reporting requirements.
49. Notice regarding changes to the ITIN application process.
• P U B L I S H E D 1/12/2004 in IRB 2004-2 as N O T I C E 2004-1
(released 12/18/2003)
50. Revenue ruling under section 6402 regarding offset under the community
property laws of various states.
51. Revenue ruling regarding the liability of multi-members of a limited liability
company for employment taxes.
52. Notice regarding the use of signature stamps by practitioners.
53. Final regulations under section 6011 regarding confidential transactions.
• P U B L I S H E D 12/30/2003 in F R as T D 9108
TAX EXEMPT BONDS
Original PGP Projects:
1. Guidance under section 141 regarding naming rights.
2. Guidance on correction alternatives and voluntary compliance for tax exempt
bond provisions.
3. Final regulations under section 141 on refundings.
4. Proposed regulations under section 141 regarding allocation and accounting
provisions.
5. Regulations under section 142 regarding solid waste disposal facilities.
6. Guidance under section 143 regarding mortgage insurance fees.
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• P U B L I S H E D 11/5/2003 in F R as N P R M REG-146692-03
7 Guidance under section 143 regarding average area purchase price.
• WILL B E P U B L I S H E D 3/1/2004 in IRB 2004-9 as REV. P R O C . 2004-18
(released 2/10/2004)
8. Final regulations under section 148 regarding brokers' commissions and
similar fees.
• P U B L I S H E D 12/11/2003 in F R as T D 9097
9. Guidance on arbitrage.
10. Guidance under section 150 regarding change in use provisions.
11. Guidance under section 1397E regarding qualified zone academy bonds.
Additional PGP Projects:
12. Revenue ruling under section 147(e) regarding helicopters.
• 11/17/2003 in IRB 2003-46 as REV. RUL. 2003-116
(released 10/29/2003)
A P P E N D I X - Regularly Scheduled Publications
JULY 2003
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 7/7/2003 in IRB 2003-27 as REV. RUL. 2003-71
2. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in July
2003.
• P U B L I S H E D 7/28/2003 in IRB 2003-30 as N O T I C E 2003-48
(released 7/3/2003)
3. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 7/21//2003 in IRB 2003-29 as REV. RUL. 2003-87
AUGUST 2003
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 8/18/2003 in IRB 2003-33 as REV. RUL. 2003-94
2. Revenue procedure providing the amounts of unused housing credit carryover
allocated to qualified states under section 42(h)(3)(D) for the calendar year.
• P U B L I S H E D 8/25/2003 in IRB 2003-34 as REV. P R O C . 2003-67
3. Notice providing the inflation adjustment factor to be used in determining the
enhanced oil recovery credit under section 43 for tax years beginning in the
calendar year.
• P U B L I S H E D 7/14/2003 in IRB 2003-28 as N O T I C E 2003-43
4. Notice providing the applicable percentage to be used in determining
percentage depleting for marginal properties under section 613A for the calendar
vftar
Page 20 of 27
S-l 173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
• P U B L I S H E D 7/29/2003 in IRB 2003-30 as N O T I C E 2003-54
5. Revenue ruling setting forth the terminal charge and the standard industry fare
level (SIFL) cents-per-mile rates for the second half of 2003 for use in valuing
personal flights on employer-provided aircraft.
• P U B L I S H E D 9/15/2003 in IRB 2003-37 as REV. RUL. 2003-89
6. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in August
2003.
• P U B L I S H E D 9/2/2003 in IRB 2003-25 as N O T I C E 2003-58
(released 8/6/2003)
7. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 8/25/2003 in IRB 2003-34 as REV. RUL. 2003-100
SEPTEMBER 2003
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 9/8/2003 in IRB 2003-36 as REV. RUL. 2003-101
2. Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers w h o dispose of qualified low-income buildings or interests therein during
the period July through September, 2003.
• P U B L I S H E D 8/18/2003 in IRB 2003-33 as REV. RUL. 2003-93
3. Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period October through December
2003.
• P U B L I S H E D 9/29/2003 in IRB 2003-39 as REV. RUL. 2003-104
4. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in
September 2003.
• P U B L I S H E D 9/22/2003 in IRB 2003-38 as N O T I C E 2003-63
(released 9/4/2003)
5. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 9/22/2003 in IRB 2003-38 as REV. RUL. 2003-103
6. Revenue procedure under section 62 regarding the deduction and deemed
substantiation of federal standard mileage amounts.
• P U B L I S H E D 10/27/2003 in IRB 2003-43 as REV. P R O C . 2003-76
7. Revenue procedure under section 62 regarding the deduction and deemed
substantiation of federal travel per diem amounts.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as REV. P R O C . 2003-80
8. Update Notice 2002-62 to add approved applicants for designated private
delivery service status under section 7502(f). Will be published only if any new
applicants are approved.
• C L O S E D W I T H O U T PUBLICATION
OCTOBER 2003
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
Page 21 of 27
i-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
• P U B L I S H E D 10/14/2003 in IRB 2003-41 as REV. RUL. 2003-107
(released 9/17/2003)
2. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in October
2003.
• P U B L I S H E D 10/20/2003 in IRB 2003-42 as N O T I C E 2003-61
(released 10/6/2003)
3. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 11/3/2003 in IRB 2003-44 as R E V RUL. 2003-113
4. Revenue procedure under section 1 and other sections of the Code regarding
the inflation adjusted items for 2004.
• P U B L I S H E D 12/8/2003 in IRB 2003-49 as REV. P R O C . 2003-85
5. Revenue procedure providing the loss payment patterns and discount factors
for the 2003 accident year to be used for computing unpaid losses under section
846.
• P U B L I S H E D 1/12/2004 in IRB 2004-2 as R E V P R O C . 2004-9
(released 12/17/2003)
6. Revenue procedure providing the salvage discount factors for the 2003
accident year to be used for computing discounted estimated salvage recoverable
under section 832.
• P U B L I S H E D 1/12/2004 in IRB 2004-2 as REV. P R O C . 2004-10
(released 12/17/2003)
7. Update of Rev. Proc. 2002-71 listing the tax deadlines that may be extended
by the Commissioner under section 7508A in the event of a Presidentially-declared
disaster or terrorist attack.
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as REV. P R O C . 2004-13
NOVEMBER 2003
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as R E V RUL. 2003-114
(released 10/17/2003)
2. Revenue ruling providing the "base period T-Bill rate" as required by section
995(f)(4).
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as REV. RUL. 2003-111
3. Revenue ruling setting forth covered compensation tables for the 2004
calendar year for determining contributions to defined benefit plans and permitted
disparity.
• P U B L I S H E D 12/8/2003 in IRB 2003-49 as REV. RUL. 2003-124
(released 11/21/2003)
4. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in
November 2003.
• P U B L I S H E D 11/24/2003 in IRB 2003-47 as N O T I C E 2003-74
(released 11/7/2003)
5. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 12/1/2003 in IRB 2003-48 as R E V RUL. 2003-121
Page 22 of 27
JS-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
6. Update of Rev. Proc. 2002-66 regarding adequate disclosure for purposes of
the section 6662 substantial understatement penalty and the section 6694 preparer
penalty.
• P U B L I S H E D 11/3/2003 in IRB 2003-44 as REV. P R O C . 2003-77
7. News release setting forth cost-of living adjustments effective January 1, 2004,
applicable to the dollar limits on benefits under qualified defined benefit pension
plans and other provisions affecting certain plans of deferred compensation.
• P U B L I S H E D 11/10/2003 in IRB 2003-45 as N O T I C E 2003-73
(released 10/16/2003 as IR-2003-122)
DECEMBER 2003
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 12/8/2003 in IRB 2003-49 as REV. RUL. 2003-122
(released 11/18/2003)
2. Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers w h o dispose of qualified low-income buildings or interests therein during
the period October through December, 2003.
• P U B L I S H E D 11/17/2003 in IRB 2003-46 as REV. RUL. 2003-117
3. Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period January through March
2004.
• P U B L I S H E D 12/29/2003 in IRB 2003-52 as REV. RUL. 2003-126
4. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in
December 2003.
• P U B L I S H E D 12/22/2003 in IRB 2003-51 as N O T I C E 2003-80
5. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 12/29/2003 in IRB 2003-52 as REV. RUL. 2003-128
6. Revenue procedure setting forth, pursuant to section 1397E, the maximum
face amount of Qualified Zone Academy Bonds that m a y be issued for each state
during 2004.
7. Federal Register notice on Railroad Retirement Tier 2 tax rate.
• P U B L I S H E D 12/15/2003 in IRB 2003-50 as N O T I C E 2003-78
(released 11/25/2003) (also P U B L I S H E D 11/25/2003 in FR)
JANUARY 2004
1. Revenue procedure updating the procedures for issuing private letter rulings,
determination letters, and information letters on specific issues under the
jurisdiction of the Chief Counsel.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-1
2. Revenue procedure updating the procedures for furnishing technical advice to
certain IRS offices, in the areas under the jurisdiction of the Chief Counsel.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-2
3. Revenue procedure updating the previously published list of "no-rule" issues
under the jurisdiction of certain Associates Chief Counsel other than the Associate
Chief Counsel (International) on which advance letter rulings or determination
letters will not be issued.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-3
Page 23 of 27
JS-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
4. Revenue procedure updating the previously published list of "no-rule" issues
under the jurisdiction of the Associate Chief Counsel (International) on which
advance letter rulings or determination letters will not be issued.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-7
5. Revenue procedure updating procedures for furnishing letter rulings, general
information letters, etc. in employee plans and exempt organization matters relating
to sections of the Code under the jurisdiction of the Office of the Commissioner, Tax
Exempt and Government Entities Division.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-4
6. Revenue procedure updating procedures for furnishing technical advice in
employee plans and exempt organization matters under the jurisdiction of the
Commissioner, Tax Exempt and Government Entities Division.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-5
7. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 1/12/2004 in IRB 2004-2 as REV. RUL. 2004-2
(released 12/19/2003)
8. Revenue ruling setting forth the prevailing state assumed interest rates
provided for the determination of reserves under section 807 for contracts issued in
2003 and 2004.
• WILL B E P U B L I S H E D 2/23/2004 in IRB 2004-8 as REV. R U L . 2004-14
(released 1/28/2004)
9. Revenue ruling providing the dollar amounts, increased by the 2003 inflation
adjustment for section 1274A.
• P U B L I S H E D 11/24/2003 in IRB 2003-47 as REV. RUL. 2003-119
10. Revenue ruling setting forth the amount that section 7872 permits a taxpayer
to lend to a qualified continuing care facility without incurring imputed interest,
adjusted for inflation.
• P U B L I S H E D 11/24/2003 in IRB 2003-47 as REV. RUL. 2003-118
11. Revenue procedure providing procedures for limitations on depreciation
deductions for owners of passenger automobiles first placed in service during the
calendar year; amounts to be included in income by lessees of passenger
automobiles first leased during the calendar year; and the m a x i m u m allowable
value of employer-provided automobiles first m a d e available to employees for
personal use in the calendar year.
12. Revenue procedure providing the domestic asset/liability percentages and the
domestic investment yield percentages for taxable years beginning after December
31, 2002, for foreign companies conducting insurance business in the U.S.
13. Revenue procedure updating procedures for issuing determination letters on
the qualified status of employee plans under sections 401 (a), 403(a), 409, and
4975.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-6
14. Revenue procedure updating the user fee program as it pertains to requests
for letter rulings, determination letters, etc. in employee plans and exempt
organizations matters under the jurisdiction of the Office of the Commissioner, Tax
Exempt and Government Entities Division.
• P U B L I S H E D 1/5/2004 in IRB 2004-1 as REV. P R O C . 2004-8
15. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in January
2004.
Page 24 of 27
JS-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
• P U B L I S H E D 2/2/2004 in IRB 2004-5 as N O T I C E 2004-3
(released 1/8/2004)
16. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
• P U B L I S H E D 1/26/2004 in IRB 2004-4 as R E V . R U L . 2004-7
FEBRUARY 2004
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
• P U B L I S H E D 2/9/2004 in IRB 2004-6 as R E V . R U L . 2004-9
2. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
3. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in February
2004.
MARCH 2004
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
2. Notice providing resident population of the states for determining the calendar
year state housing credit ceiling under section 42(h), the private activity bond
volume cap under section 146, and the qualified public educational facility bond
volume cap under section 142(k).
3. Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers w h o dispose of qualified low-income buildings or interests therein during
the period January through March, 2004.
• WILL B E P U B L I S H E D 2/23/2004 in IRB 2004-8 as R E V . R U L . 2004-16
4. Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period April through June, 2004.
5. Revenue ruling setting forth the terminal charge and the standard industry fare
level (SIFL) cents-per-mile rates for the first half of 2004 for use in valuing personal
flights on employer-provided aircraft.
6. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in March
2004.
7. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
APRIL 2004
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
2. Revenue ruling providing the average annual effective interest rates charged
by each Farm Credit Bank District.
3. Notice providing the inflation adjustment factor, nonconventional fuel source
Page 25 of 27
5-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
credit, and reference price for the calendar year that determines the availability of
the credit for producing fuel from a nonconventional source under section 29.
4. Revenue procedure providing a current list of countries and the dates those
countries are subject to the section 911 (d)(4) waiver and guidance to individuals
w h o fail to meet the eligibility requirements of section 911 (d)(1) because of adverse
conditions in a foreign country.
5. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in April
2004.
6. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
MAY 2004
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
2. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in M a y
2004.
3. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
4. Revenue procedure providing guidance for use of the national and area
median gross income figures by issuers of qualified mortgage bonds and mortgage
credit certificates in determining the housing cost/income ratio under section 145.
JUNE 2004
1. Revenue ruling setting forth tables of the adjusted applicable federal rates for
the current month for purposes of sections 42, 382, 1274, 1288, and 7520.
2. Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers w h o dispose of qualified low-income buildings or interests therein during
the period April through June, 2004.
3. Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period July through September
2004.
4. Notice providing the calendar year inflation adjustment factor and reference
prices for the renewable electricity production credit under section 45.
5. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability for the purpose
of the full funding limitation of section 412(c)(7) for plan years beginning in June
2004.
6. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores m a y use in valuing inventories.
Page 26 of 27
5-1173: Treasury and IRS Release Second Quarterly Update of the 2003-2004 Priority Guidance Plan
Page 27 of 27
[S-l 174: Treasury International Capital Data For December
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Readet®).
February 17, 2004
JS-1174
Treasury International Capital Data For December
Treasury International Capital (TIC) data for December are released today and
posted on the U.S. Treasury web site (www.treas.gov/tic). The next release date,
which will report on data for January, is scheduled for March 15, 2004.
Domestic Securities
Gross purchases of domestic securities by foreigners were $1,198.8 billion in
December, exceeding gross sales of domestic securities by foreigners of $1,118.0
billion during the s a m e month.
Foreign purchases of domestic securities reached $80.8 billion on a net basis in
December, relative to $82.4 billion during the previous month. Purchases were
largely accounted for by private net flows of $64.4 billion in December. Net private
purchases of Corporate Bonds represented the largest inflow from private sources,
reaching $19.7 billion in December. Net private purchases of Treasury Bonds and
Notes increased to $18.4 billion during the month. Net private purchases of
Government Agency Bonds rose for the third consecutive month to $12.9 billion in
December. Net private purchases of Equities reached $13.4 billion.
Official net purchases of long-term U.S. securities were $16.4 billion in December,
relative to $20.9 billion in November. Official net purchases of Treasury Bonds and
Notes of $11.3 billion accounted for the bulk of official inflows in December, down
from $18.9 billion the previous month.
Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $310.1 billion
in December, relative to gross sales of foreign securities to U.S. residents of $315.2
billion during the s a m e month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $5.1
billion, highlighting a net U.S. acquisition of $0.1 billion in Foreign Bonds and $5.0
billion in Foreign Equities.
Net Long-Term Securities Flows
Net foreign purchases of long-term securities from U.S. residents were $75.7 billion
in December compared with $87.5 billion in November. Net foreign purchases of
long-term securities were $707.9 billion in the 12-months through December 2003
as compared to $574.6 million during the twelve months through December 2002.
The full December data set, including adjustments for repayments of principal on
asset-backed securities, as well as historical series, can be found on the TIC w e b
site, http://www.treas.gov/tic/.
Page 1 of 2
fS-1174: Treasury International Capital Data For December
Related Documents:
• Table 1. Foreigners' Transactions in Long-Term Securities with U.S.
Residents
Page 2 of 2
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
Treasury International Capital
Data Table For December
Table 1. Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2001
12 Months Through
Dec-02 Dec-03
Sep-03
Oct-03
Nov-03
Dec-03
10,261.8
1 Gross Purchases of Domestic Securities
9,740.9
2 Gross Sales of Domestic Securities
520.8
3 Domestic Securities Purchased, net (line 1 less line 2) /l
13,022.9 15,725.9
12,475.4 14,981.4
547.6
744.5
1,363.0
1,347.2
15.8
1,438.4
1,397.2
41.1
1,171.1
1,088.7
82.4
1,198.8
1,118.0
80.8
4.3
-2.5
-6.3
19.3
-6.2
18.3
-7.4
61.5
14.6
4
5
6
7
8
Private, net 11
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
494.2
15.0
146.6
218.2
114.4
508.3
112.8
166.6
176.7
52.2
605.0
163.7
138.0
265.5
37.8
9
10
11
12
13
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
26.7
39.3
3.5
7.1
17.4
28.6
139.5
109.3
24.9
3.8
2.0
5.6
5.5
8.1
3.0
0.5
-2.0
-0.2
2,557.8
14 Gross Purchases of Foreign Securities
2,577.4
Gross
Sales
of
Foreign
Securities
15
14
less
line
15)/3
-19.6
16 Foreign Securities Purchased, net (line
2,640.0
2,613.0
27.0
30.5
-50.1
501.2
17
18
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19 Net Long-Term Securities Flows (line 3plus line 16)
/l
12
/3
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
Source: U.S. Department of the Treasury
6.4
9.3
20.3
-1.0
28.7
8.9
64.4
18.4
12.9
19.7
13.4
22.9
19.5
20.9
18.9
16.4
11.3
3.0
0.7
1.3
0.9
4.4
0.7
-0.1
-0.2
-0.2
-0.1
3,535.9
3,572.5
-36.6
345.7
357.2
-11.5
369.2
382.5
-13.3
321.5
316.4
310.1
315.2
-5.1
28.5
-1.5
25.7
-62.3
-2.7
-8.9
-5.1
-8.2
-3.7
8.8
-0.1
-5.0
574.6
707.9
4.3
27.8
87.5
75.7
11.5
5.1
S-l 175: Treasury Under Secretary Taylor to travel to Middle East
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 15, 2004
JS-1175
John Taylor, Under Secretary of the Treasury for International Affairs, to
Travel to the Middle East
John Taylor, Under Secretary of the Treasury for International Affairs, will
travel to several countries in the greater Middle East region from February
14 to February 23, with stops in Afghanistan, Iraq, Israel and the West
Bank.
In Afghanistan, he will highlight private sector development, discuss improvements
in revenue collection, and talk with other donors on achieving
measurable results ahead of the Afghan elections in June. In Iraq, he will
review progress on strengthening the financial sector, focusing on monetary
policy and the banking sector.
In Israel, he will participate in a meeting of the Joint Economic Development Group
with Under Secretary of State Al Larson, and meet with economic policymakers,
including Minister Netanyahu and central bank governor Klein. In the West Bank,
he will participate in the first meeting of the Palestinian Economic Development
Group with Under Secretary of State Al Larson and meet with economic
policymakers, including Minister Fayyad.
-30-
Page 1 of
s-1176: Bush Economic Team Announces Trip to Washington, Oregon to Discuss the President's Effort... Page 1 of 2
PRLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 14, 2004
js-1176
Bush Economic Team Announces Trip to Washington, Oregon to Discuss the
President's Efforts to Strengthen the E c o n o m y and Create Jobs
Department of the Treasury
U.S. Department of C o m m e r c e
U.S Department of Labor
U.S. Small Business Administration
F O R I M M E D I A T E R E L E A S E : February 13, 2004
C O N T A C T : R o b Nichols 202-622-2920
Treasury Secretary John W. Snow, Commerce Secretary Don Evans, Labor
Secretary Elaine L. Chao, and Small Business Administration Administrator Hector
Barreto will travel to Washington and Oregon on Tuesday, February 17th and
Wednesday, February 18th to discuss the state of the economy and the jobs and
growth plan - as well as other efforts by President Bush to create jobs, strengthen
the economic recovery and increase workers' standards of living.
During the "Jobs and Growth Tour" Secretaries Snow, Evans and Chao and
Administrator Barreto will participate in town hall-style meetings, roundtables, and
tours in the two states, and will meet with families, workers, manufacturers, local
business leaders, economic officials, small business owners, and individual
investors.
Secretaries Snow, Evans and Chao conducted a similar tour of Wisconsin and
Minnesota in July 2003.
President Bush has said many times, one worker out of work is too many and he
wants everyone w h o wants to work be able to find a job. The President's Jobs and
Growth tax relief package helped fuel the strong improvement in the economy
during the past two quarters. It raised the level of economic activity, which
increases incomes , created hundreds of thousands of new jobs and living
standards for American workers , yet there is more to be done.
President Bush during the State of the Union announced new initiatives to
strengthen economic growth, further reform education and job training, and address
the rising cost of health care. During the two days, the four officials will focus on
these new initiatives and specifically what w e can do to make sure people are
prepared for the jobs for the 21st century.
More than two million taxpayers in Washington, and more than one million
taxpayers in Oregon, will have lower income tax bills in 2004 as a result of
President Bush's Jobs and Growth Act.
During the two days, the officials will participate in events in Spokane, Richland and
Yakima, Washington and Portland and Eugene, Oregon.
s-1176: Bush Economic Team Announces Trip to Washington, Oregon to Discuss the President's Effort... Page 2 of 2
A detailed schedule will be released on Monday, February 16, 2004 on
www.treas.gov.
Interview requests should be directed to Ginny Ward at 202-482-1008.
-30-
S-1177: Treasury and IRS issue Guidance on Abusive Foreign Tax Credit Transactions
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Readet®).
February 17, 2004
JS-1177
Treasury and IRS issue Guidance on
Abusive Foreign Tax Credit Transactions
Today, the Treasury Department and the IRS issued two notices concerning
transactions intended to generate foreign tax credits for U.S. taxpayers. Notice
2004-19 describes the administrative and regulatory approaches the Treasury and
IRS are using to address foreign tax credit transactions that create results
inconsistent with the purpose of the foreign tax credit rules. Notice 2004-19 also
discusses the legislation proposed in the President's F Y 2005 Budget. The
legislation would provide additional statutory rules disallowing foreign tax credits in
appropriate circumstances and would grant Treasury regulatory authority to ensure
that the mechanical foreign tax credit rules cannot be used to achieve results that
do not reflect the economic effect of the transactions.
Notice 2004-19 reflects careful consideration of Notice 98-5. Notice 98-5 described
an approach for disallowing foreign tax credits based on a comparison of economic
profit to the claimed tax benefits and stated that this approach would be
implemented through regulations. Treasury and the IRS have decided not to issue
regulations as described in Notice 98-5. This decision was influenced by recent
court cases involving foreign tax credit transactions that clearly produced results
inconsistent with the purpose of the foreign tax credit rules. The courts held that
the approach taken in Notice 98-5 did not support the IRS's proposed disallowance
of foreign tax credits in those cases. Treasury and the IRS disagree strongly with
the result in those cases, but have concluded that the approach described in Notice
98-5 is unlikely to be an effective tool for addressing transactions that abuse the
foreign tax credit rules. Accordingly, Notice 2004-19 withdraws Notice 98-5, and
describes the approaches Treasury and the IRS are using to address transactions
and arrangements structured to give rise to inappropriate foreign tax credit results.
Notice 2004-20 halts a specific transaction designed to generate credits for foreign
taxes paid on gain that is not subject to tax in the United States. The claimed result
of the transaction is a foreign tax credit but no corresponding income and U.S. tax
for the U.S. taxpayer.
The transaction involves a purported acquisition of stock of a foreign target
corporation by a domestic corporation, an accompanying election under section
338, and a prearranged plan to sell the target corporation's assets in a transaction
that gives rise to foreign tax without corresponding income for U.S. tax purposes.
This transaction does not produce the foreign tax credit benefits claimed to be
generated. Under Notice 2004-20, this transaction, and any transaction that is
substantially similar, are identified as "listed transactions" that are subject to
disclosure, list-keeping, and registration requirements.
"The foreign tax credit serves the important purpose of eliminating potential double
taxation. It w a s never intended to eliminate tax altogether,'' stated Treasury
Assistant Secretary for Tax Policy P a m Olson. "Transactions structured so the
taxpayer incurs foreign taxes without any corresponding U.S. tax liability because
the underlying income is not recognized for U.S. tax purposes do not give rise to
the double taxation that is the economic basis for the foreign tax credit. These
5-1177: Treasury and IRS issue Guidance on Abusive Foreign Tax Credit Transactions
types of transactions should not generate foreign tax credits."
"We are addressing abusive foreign tax credit transactions through proposed
legislation and our ongoing administrative and regulatory actions. The guidance
issued today reflects our determination to ensure that the foreign tax credit rules
serve their intended purpose. These notices are an important part of our
comprehensive efforts to address tax shelter transactions," continued Assistant
Secretary Olson.
"The Treasury Department and the IRS will continue to use all of the tools available
to stem abusive foreign tax credit transactions. In addition, w e urge Congress to
pass the legislation proposed in the President's Budget to ensure the government
has additional tools to prevent abuse in this area," concluded Assistant Secretary
Olson.
Related D o c u m e n t s :
• Notice 2004-19
• Notice 2004-20
Page 2 of 2
RESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 19, 2004
2004-3-1-11-11-2-20848
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 $86,014 million as of the end of that week, compared to $85,368 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 30, 2003
February 6, 2004
85,368
86,014
TOTAL
1. Foreign Currency Reserves x
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
8,386
14,862
23,248
8,570
14,900
23,469
Of which, issuer headquartered in the U.S.
0
0
). Total deposits with:
u. Other central banks and BIS
13,606
2,986
16,592
13,876
2,993
16,869
.ii. Banks headquartered in the U.S.
0
0
.ii. Of which, banks located abroad
0
0
iii. Banks headquartered outside the U.S.
0
0
iii. Of which, banks located in the U.S.
0
0
IMF Reserve Position"
21,887
21,981
Special Drawing Rights (SDRs) 2
12,598
12.652
Gold Stock3
11,043
11,043
0
0
Dther Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 30, 2003
Euro
'eign currency loans and securities
Yen
February 6, 2004
TOTAL
Euro
"
]regate 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
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 30, 2003
Euro
1. Contingent liabilities in foreign currency
Yen
February 6, 2004
TOTAL
Euro
Yen
TOTAL
0
0
2. Foreign currency securities with embedded
options
0
0
3. Undrawn, unconditional credit lines
0
0
0
0
l.a. Collateral guarantees on debt due within 1
year
Lb. Other contingent liabilities
la. With other central banks
lb. With banks and otherfinancialinstitutions
feadquartered in the US.
.c. With banks and otherfinancialinstitutions
r
eadquartered outside the U.S.
Aggregate short and long positions of
)tions in foreign
irrencies vis-a-vis the U.S. dollar
i Short positions
.1. Bought puts
2. Written calls
Long positions
1. Bought calls
2. Written puts
Notes:
des holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
•), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values,
)osits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior w e e k 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 w e e k reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
}f_SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 19, 2004
2004-2-19-17-10-2-26860
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 $85,909 million as of the end of that week, compared to $86,096 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
February 6, 2003
February 13,2004
86,096
85,909
TOTAL
I. Foreign Currency Reserves]
Euro
Yen
TOTAL
Euro
Yen
TOTAL
i. Securities
8,386
14,862
23,248
8,617
14,896
23,513
If which, issuer headquartered in the U.S.
0
0
. Total deposits with:
/. Other central banks and BIS
13,606
2,986
16,592
13,944
2,293
16,237
ii. Banks headquartered in the U.S.
0
0
ii. Of which, banks located abroad
0
0
'ii. Banks headquartered outside the U.S.
0
0
ii. Of which, banks located in the U.S.
0
0
!MF Reserve Position
22,561
22,288
Special Drawing Rights (SDRs) 2
12,652
12,829
Sold Stock3
11,043
11,043
0
0
'ther Reserve Assets
H. Predetermined Short-Term Drains on Foreign Currency Assets
January 6, 2003
Euro
-ign currency loans and securities
Yen
February 13, 2004
TOTAL
Euro
0
'egate 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
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 6, 2003
Euro
Yen
February 13, 2004
TOTAL
Euro
Yen
TOTAL
0
0
2. Foreign currency securities with embedded
options
0
0
3. Undrawn, unconditional credit lines
0
0
0
0
1. Contingent liabilities in foreign currency
l.a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
la. With other central banks
\b. With banks and otherfinancialinstitutions
[eadquartered in the U.S.
c. With banks and otherfinancialinstitutions
eadquartered outside the U.S.
Aggregate short and long positions of
>tions in foreign
irrencies vis-a-vis the U.S. dollar
'. Short positions
. 1. Bought puts
2. Written calls
Long positions
1. Bought calls
I. Written puts
Notes:
des holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
5 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 IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
S-1178: Bush Economic Team Visits Workers, Business Owners, Families in Washington
*
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 17, 2004
JS-1178
Bush Economic Team Visits Workers, Business Owners, Families in
Washington
President's Efforts to Strengthen the Economy and Create Jobs Discussed
FOR IMMEDIATE RELEASE: February 17, 2004
CONTACT:
R o b Nichols at 202-622-2920
Treasury Secretary John W. Snow, Commerce Secretary Don Evans, Labor
Secretary Elaine L. Chao, and Small Business Administrator Hector Barreto
traveled through Washington on a bus today, making stops to discuss the state of
the economy and the President's jobs and growth plan as well as other efforts by
President Bush to create jobs, strengthen the economic recovery and increase
workers' standards of living.
"There is no better way to get a feel for how the economy is doing, and what people
really need from their government, than to get out here and visit with folks," S n o w
said. "We're hearing that tax cuts have worked well so far for businesses and
families in Washington - and that taxes shouldn't be increased now, just when
progress is being made. W e intend to bring that message back to Capitol Hill," he
added.
More than two million taxpayers in Washington will have lower income tax bills in
2004 as a result of President Bush's Jobs and Growth Act.
"This administration will not be satisfied until everyone who wants to work can find a
job. There are tremendous resources available to help workers transitioning
between jobs and w e want workers in Washington and Oregon to know about them
- there is something for everyone." said Secretary of Labor Elaine L.
Chao."
Secretaries Snow, Evans and Chao and Administrator Barreto visited the Spokane
Intercollegiate Research and Technology Institute foundation this morning, talked
with w o m e n business owners in Richland this afternoon, and met with families at a
Mexican restaurant in Yakima at the end of the day. At each stop, participants were
encouraged to give a report on how the economy is doing in their community, and
make suggestions for ways to increase growth and job creation.
The bus tour will continue in Oregon tomorrow. Secretaries Snow, Evans and Chao
conducted a similar tour of Wisconsin and Minnesota in July 2003.
-30-
Page 1 of 1
JS-1179: Photo: G 7 Governors
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 8, 2004
JS-1179
Photo: G 7 Governors
Media Contact
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://www.treas.gov/press/releases/js 1179.htm
S-1180: Treasury Issues Notice Concerning Treatment of Certain Capitalized Transaction Costs
PRESS R O O M
^5fc
FROM THE OFFICE OF PUBLIC AFFAIRS
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February 19, 2004
JS-1180
Treasury Issues Notice Concerning Treatment of Certain Capitalized
Transaction Costs
The Treasury Department and IRS issued a notice today announcing their intention
to propose regulations regarding the treatment of amounts that facilitate certain taxfree and taxable transactions and other restructurings, and that are required to be
capitalized under section 263. The notice requests comments regarding the
appropriate treatment of certain transaction costs that are required to be
capitalized, including whether such costs should be treated as giving rise to a new
asset the basis of which is amortizable.
"The proper treatment of amounts incurred to facilitate certain transactions has
been the subject of disputes between taxpayers and the IRS in recent years,"
stated Acting Treasury Assistant Secretary for Tax Policy Greg Jenner. "This notice
is the first step toward providing clear and administrable rules."
Related Documents:
• Notice 2004-18
Page 1 of 1
Part III -Administrative, Procedural, and Miscellaneous
Request for C o m m e n t s Concerning the Treatment of Amounts Required to B e
Capitalized in Certain Transactions to which § 1.263(a)-5 Applies
Notice 2004-18
On December 22, 2003, the Treasury Department and Internal Revenue Service
issued final regulations (T.D. 9107; 69 F R 436) under § 263(a) of the Internal Revenue
C o d e requiring capitalization of certain amounts that facilitate the creation or acquisition
of an intangible asset and under § 167 providing a 15-year safe harbor amortization
period for certain intangible assets described in § 263(a). The final regulations under §
263(a) also provide guidance on the treatment of amounts required to be capitalized
under § 263(a) in certain acquisitions of a trade or business. For example, § 1.263(a)5(g)(2) provides that amounts required to be capitalized by an acquirer in an acquisition,
merger, or consolidation that is not described in § 368 are added to the basis of the
acquired assets (in the case of a transaction that is treated as an acquisition of the
assets of the target for federal income tax purposes) or the acquired stock (in the case
of a transaction that is treated as an acquisition of the stock of the target for federal
income tax purposes).
The final regulations under § 263(a) do not address the treatment of amounts
required to be capitalized in certain other transactions to which the regulations apply (for
example, amounts required to be capitalized in tax-free transactions, costs of a target in
a taxable stock acquisition, and stock issuance costs). The preamble to the final
regulations states that the Service and Treasury Department intend to issue separate
guidance to address the treatment of these amounts and will consider at that time
whether such amounts should be eligible for the 15-year safe harbor amortization period
described in § 1.167(a)-3(b).
The Service and Treasury Department are aware that there is continuing
controversy as to the proper treatment of certain costs that facilitate certain tax-free and
taxable transactions and other restructurings and that are required to be capitalized
under § 263(a) and § 1.263(a)-5. The Service and Treasury Department also are aware
that under current law, capitalized costs that facilitate tax-free and taxable transactions
that are similar m a y be treated differently. For example, § 1.263(a)-5(g)(2) provides that
the acquirer's capitalized transaction costs that facilitate a taxable asset acquisition
increase the basis of the acquired assets. S o m e commentators, however, have
expressed differing views as to h o w an acquirer's capitalized transaction costs that
facilitate a tax-free asset acquisition are treated. In addition, the Service and Treasury
Department are aware that, under current law, similar costs m a y be treated differently
depending on which party incurs the costs. Commentators have suggested that
capitalized transaction costs incurred by an acquirer and target to facilitate a tax-free
stock acquisition m a y be treated differently.
2
To reduce the prospect of future controversy, the Service and Treasury
Department intend to propose regulations to address the treatment of amounts that
facilitate certain tax-free and taxable transactions and other restructurings and that are
required to be capitalized under § 263(a) and § 1.263(a)-5. The Service and Treasury
Department intend to develop a set of rules that are clear and administrable.
The Service and Treasury Department are considering the treatment of
capitalized costs that facilitate the following transactions:
(1) Tax-free asset acquisitions and dispositions (for example, reorganizations
under § 368(a)(1)(A), (C), (D), (G));
(2) Taxable asset acquisitions and dispositions (see § 1.263(a)-5(g) for the
treatment of certain transaction costs in taxable asset acquisitions);
(3) Tax-free stock acquisitions and dispositions (for example, reorganizations
under § 368(a)(1)(B));
(4) Taxable stock acquisitions and dispositions (see § 1.263(a)-5(g) for the
treatment of certain transaction costs in taxable stock acquisitions);
(5) Tax-free distributions of stock (for example, distributions of stock to which
§ 305(a) or § 355(a) applies);
(6) Tax-free distributions of property (for example, distributions to which §§ 332
and 337 apply);
(7) Taxable distributions of property (for example, distributions to which §§ 331
and 336 apply and distributions of stock to which § 311 applies);
(8) Organizations of corporations, partnerships, and entities that are disregarded
as separate from their owner (for example, transfers described in § 351 or § 721);
(9) Corporate recapitalizations (for example, reorganizations under §
368(a)(1)(E));
(10) Reincorporations of corporations in a different state (for example, in a
reorganization under § 368(a)(1)(F)); and
(11) Issuances of stock.
There are specific issues raised by each of these types of transactions. The Service
and Treasury Department previously have requested comments more generally on the
treatment of capitalized costs that facilitate certain of these transactions. In this Notice,
3
the Service and Treasury Department request additional comments, including
comments focusing on the following issues.
ISSUES ON WHICH COMMENTS ARE REQUESTED
(1) Treatment of capitalized costs. Section 263(a) and the regulations thereunder
require that certain amounts that facilitate the transactions listed above be capitalized.
The Service and Treasury Department request comments regarding whether the
particular capitalized costs that facilitate transactions for which the Service and
Treasury Department are considering guidance should (a) increase the basis of a
particular asset or assets (and, if the basis of multiple assets should be increased, the
methodology for allocating the costs among the assets), (b) be treated as giving rise to
a n e w asset the basis of which m a y not be amortized, (c) be treated as giving rise to a
n e w asset the basis of which m a y be amortizable, (d) reduce an amount realized, or (e)
be treated as an adjustment to equity. To the extent that capitalized costs should be
treated as giving rise to a n e w asset the basis of which m a y be amortizable, the Service
and Treasury Department request comments regarding the appropriate amortizable
useful life. For example, an appropriate amortizable useful life might be 15 years, a
useful life consistent with that afforded to certain intangibles under § 1.167(a)-3(b) and §
197. Additionally, if such costs are treated as giving rise to a new, amortizable asset,
the Service and Treasury Department also request comments as to the treatment of
such costs if a specific event (e.g., a liquidation) occurs prior to the expiration of the
amortization period.
(2) Consistent treatment of capitalized costs that facilitate similar taxable and taxfree transactions. The regulations promulgated under § 263(a) provide rules regarding
the treatment of amounts that facilitate a taxable acquisition of stock and assets and a
taxable disposition of assets. The Service and Treasury Department request comments
regarding whether, as a policy matter, capitalized costs that facilitate a tax-free
transaction should be treated in the s a m e manner as the capitalized costs that facilitate
a similar taxable transaction.
(3) Consistent treatment of all capitalized costs that facilitate a transaction. The
Service and Treasury Department request comments regarding whether, as a policy
matter, capitalized costs that facilitate a transaction, regardless of the type of cost and
the party to the transaction that incurs such cost, should be treated similarly.
DATES: Written and electronic comments must be submitted by April 19, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (Notice 2004-18), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D C
20044. Submissions m a y be hand delivered Monday through Friday between the hours
of 8 a.m. and 4 p.m. to: CC:LPD:PR (Notice 2004-18), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue N.W., Washington, D C . Alternatively, taxpayers
m a y send submissions electronically directly to the Service at:
4
Notice.comments@irscounsel.treas.gov All materials submitted will be available for
public inspection and copying.
FOR FURTHER INFORMATION CONTACT: Concerning submissions, Guy Traynor
(202) 622-7180; concerning this notice, Andrew J. Keyso, (202) 622-4800 (not toll-free
numbers).
5-1181: Treasury takes action against F A R C / A U C Narco-Terrorist Leaders <BR>in continued effort to ... Page 1 of 2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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February 19, 2004
js-1181
Treasury takes action against FARC/AUC Narco-Terrorist Leaders
in continued effort to Halt Narcotics Trafficking
In another important effort in the battle against narcotics trafficking, the Treasury
Department took action today against leaders and key figures of the Colombian
narco-terrorist organizations, the Revolutionary Armed Forces of Colombia
(Fuerzas Armadas Revolucionarias de Colombia, "FARC") and the United SelfDefense Forces of Colombia (Autodefensas Unidas de Colombia, "AUC").
The Treasury's Office of Foreign Assets Control (OFAC) has added the names of
F A R C leaders, including Pedro Antonio Marin and Jorge Briceno Suarez, key A U C
figures, including Carlos Castano Gil and Salvatore Mancuso G o m e z and A U C front
companies to the list of "Tier II" persons designated under the Foreign Narcotics
Kingpin Designation Act (Kingpin Act). The 40 Colombian n a m e s added to the
Kingpin Act list include 19 F A R C individuals, 18 individuals associated with the
A U C and three front companies connected to the A U C . These 40 persons are
subject to the economic sanctions imposed against foreign drug cartels under the
Kingpin Act.
The OFAC action prohibits U.S. individuals and companies from doing business
with the 40 designated persons and blocks their assets found in U.S. jurisdiction.
Today's designations comprise the first actions by Treasury against the operatives
and fronts of the F A R C and the A U C ; and they are part of Treasury's plan to further
identify, expose, isolate and incapacitate these Colombian narco-terrorists and their
support networks.
These Kingpin Act designations reinforce the reality that the FARC and the AUC
are not simply terrorist/guerrilla organizations fighting within Colombia to achieve
political agendas. They are part and parcel of the narcotics production and export
threat to the United States, as well as Europe and other countries of Latin America.
The FARC and the AUC organizations were designated by President Bush as
Significant Foreign Narcotics Traffickers on M a y 29, 2003. A s the White House
announced at that time, "This action underscores the President's determination to
pursue narco-terrorists. This action also underscores the President's determination
to do everything possible to fight drug traffickers, undermine their operations and
end the suffering that trade in illicit drugs inflicts on Americans and other people
around the world."
Under President Bush's Executive Order 13224, both the FARC and the AUC were
n a m e d as Specially Designated Global Terrorists in October 2001. Previously, the
F A R C , in October 1997, and the A U C , in September 2001, had been identified as
Foreign Terrorist Organizations under the Antiterrorism and Effective Death Penalty
Act.
The list of Tier II individuals includes the supreme leader of the FARC, Pedro
Antonio Marin, the leaders of the F A R C Secretariat, its governing body, certain key
F A R C commanders, an international representative of the F A R C , and key F A R C
m e m b e r s engaged in narcotics trafficking or the murder of U.S. citizens. The list of
Tier II individuals also includes a number of A U C key figures, A U C financial
managers and key A U C m e m b e r s connected with narcotics trafficking. Three
;-1181: Treasury takes action against F A R C / A U C Narco-Terrorist Leaders <BR>in continued effort to ... Page 2 of 2
businesses that are run on behalf of the A U C are also being designated.
This action is part of the ongoing interagency effort to carry out the mandate of the
Kingpin Act, which applies economic sanctions against foreign narcotics trafficking
kingpins worldwide. It reflects the increasing cooperation, coordination and
integration a m o n g these agencies in the battle against international narcotics
trafficking and narco-terrorism.
A total of 104 organizations, individuals and businesses in 12 foreign countries are
n o w designated under the Kingpin Act. In addition to the prohibitions on
transactions and blocking of assets subject to U.S. jurisdiction, penalties under the
Kingpin Act range from civil penalties of up to $1,075,000 per violation to more
severe criminal penalties. Criminal penalties for corporate officers are up to 30
years in prison and fines up to $5,000,000. Criminal fines for corporations are up to
$10,000,000. Other individuals face up to ten years in prison for criminal violations
of the Kingpin Act.
This and other Tier II actions under the Kingpin Act are coordinated by the
Department of Treasury with the Department of State, the Department of Justice,
the Department of Defense, the Department of Homeland Security, the Central
Intelligence Agency, the Drug Enforcement Administration and the Federal Bureau
of Investigation.
The list of individuals named by OFAC as Tier II designations today is attached and
available at www.treas.gov/ofac, as is the entire list of Kingpin Act designations.
Today's list will be published in the Federal Register at a later date.
30-
REPORTS
• FARC - Foreign Narcotics Kingpin Designation Act - Tier II
• A U C - Foreign Narcotics Kingpin Designation Act - Tier II
Department of the Treasury
Office of Foreign Assets Control
Foreign Narcotics Kingpin Designation Act - Tier II
Revolutionary Armed Forces of Colombia (FARC)
February 2004
(19 Individuals)
^FARC-EP
FARC Designated by the President as a
Significant Foreign Narcotics Trafficker on May 29, 2003
Pedro Antonio Marin
"Manuel Marulanda"
"Tirofijo"
FARC Supreme Leader
m
Indicted In Colombia
FARC SECRETARIAT
£3
f*
if?
Juvenal Ovidio Ricardo Palmera Pineda
"Simon Trinidad"
FARC Commander
Captured in Ecuador - January 2004
In Colombian Custody
>
Milton de Jesus Toncel Redondo
"Joaquin Gomez"
Secretariat Member
FARC Commander
Rodrigo Londono Echeverry
"Timoleon Jimenez"
Secretariat Member
FARC Commander
Noel Mata Mata
"Efrain Guzman"
Secretariat Member
FARC Commander
Indicted in Colombia
Indicted in Colombia
>
>
Indicted in Colombia
Luciano Marin Arango
"Ivan Marquez"
Secretariat Member
FARC Commander
Guillermo Leon Saenz Vargas
"Alfonso Cano"
Secretariat Member
FARC Commander
Luis Edgar Devia Silva
"Raul Reyes"
Secretariat Member
Indicted in Colombia
Indicted In Colombia
>
>
Indicted In Colombia
Indicted In Colombia
Jorge Briceno Suarez
"Mono Jojoy"
Secretariat Member
Senior FARC Military Commander
>
German Briceno Suarez
"Granobles"
FARC Commander
>
U.S. Indictment (Narcotics & Kidnapping)
Indicted in Colombia
U.S. Indictment (Murder)
Indicted in Colombia
>|£'
Luis Alberto Alban Burbano
F A R C International Representative
Henry Castellanos Garzon
"Romafia"
F A R C Front C o m m a n d e r
Indicted In Colombia
U.S. Indictment (Kidnapping)
Indicted in Colombia
A
Jose Benito Cabrera Cuevas
"Fabian Ramirez"
FARC Commander
T o m a s Molina Caracas
"Negro Acacio"
16th Front C o m m a n d e r
Indicted in Colombia
U.S. Indictment (Narcotics & Kidnapping)
Indicted in Colombia
Jorge Torres Victoria
"Pablo Catatumbo"
FARC Central General Staff member
FARC Commander
>
>
Indicted in Colombia
Ties to Brazilian narcotics traffickers
Luis Fernando Da Costa and Leonardo
Dias Mendonca, previously designated
by the President as Tier 1 Kingpins
Eugenlo Vargas P e r d o m o
"Carlos Bolas"
FARC Member
Captured in Suriname - June 2002
In U.S. Custody
U.S. Indictment (Narcotics)
Nelson Vargas Rueda
FARC member
Captured in Colombia
In U.S. Custody
Oscar Caracas Viveros
FARC Member
U.S. Indictment (Narcotics)
U.S. Indictment (Murder)
Gustavo Bocota Aguablanca
FARC Member
>
U.S. Indictment (Murder)
Foreign Narcotics Kingpin Designation Act - Tier II
Department of the Treasury
Office of Foreign Assets Control
United Self-Defense Forces of Colombia (AUC)
February 2004
(18 Individuals & 3 entities)
/•*JO w; 5 5 ? ^ *l | T«DE TENSAS
A U C Designated by the President as a
Significant Foreign Narcotics Trafficker on M a y 29, 2003
A U C KEY FIGURES
Carlos Castano Gil
DOB 05/15/65
C.C.70564150
U.S. INDICTMENT
Salvatore Mancuso Gomez
D O B 08/17/64
C.C.6892624
Juan Carlos Sierra Ramirez
D O B 04/15/66
C.C. 71680143
/*
>
Hernan Giraldo Serna
D O B 10/16/48
C.C.12531356
U.S. INDICTMENT
U.S. INDICTMENT
Ivan Roberto Duque Gaviria
(a.k.a. "Ernesto Baez")
D O B 05/09/55
C.C.10241940
Hector German Buitrago Parada
(a.k.a. "Martin Llanos")
D O B 01/21/68
C.C.79436816
Luis Eduardo Cifuentes Galindo
(a.k.a. "El Aguila")
D O B 03/16/60
C.C. 3254362
Guillermo Perez Alzate
(a.k.a. "Pablo Sevillano")
C.C. 71646827
Ramon Maria Isaza Arango
D O B 09/30/40
C.C.5812993
Jose Vicente Castano Gil
D O B 07/02/57
C.C.3370637
Hector Castano Gil
D O B 03/24/1959
C.C. 03371328
Diego Fernando Murillo Bejarano
(a.k.a. "Adolfo Paz")
(a.k.a. "Don Berna")
D O B 02/23/61
C.C.16357144
Other A U C m e m b e r s
A U C Financial Managers
FRONT COMPANIES
0
SOCIEDAD DE COMERCIALIZACION INTERNACIONAL POSEIDON S.A.
(a.k.a. C.I. POSEIDON S.A.)
(f.k.a. C.I. COMERCIALIZADORA INTERNACIONAL POSEIDON S.A.)
NIT 800173090-7
Calle 79 Sur No. 48B-56, Sabaneta, Antioquia, Colombia
Edgar Fernando Blanco Puerta
D O B 06/19/46
C.C.13224238
Captured in Costa Rica - 2002
Awaiting extradition to U.S.
PS
&
U.S. Indictment
a
LOS G N O M O S LTDA.
NIT 800165614-2
Calle 5 No. 61-82, apto. 412B, Cali, Valle, Colombia
B
Carlos AH Romero Varela
D O B 03/19/1959
C.C.13447909
In U.S. Custody
Rafael Dario Atencia Pitalua
D O B 02/04/63
C.C. 06889653
o
Sor Teresa G o m e z Alvarez
D O B 06/27/56
C.C. 21446537
U.S. Indictment
FRONT COMPANY
2M
Luis Manuel Sanchez Varilla
D O B 02/01/1964
C.C. 08174649
In Colombian Custody
Elkln Alberto Arroyave Ruiz
D O B 09/03/68
C.C.04652820
Captured in Costa Rica - 2002
In U.S. Custody
U.S.Indictment
U.S. Indictment
CL
FUNPA2COR
(a.k.a. Fundacion para la Paz de Cordoba)
(a.k.a. F U N D A Z C O R )
(a.k.a. Fundacion por la Pas de Cordoba)
NIT 830054536-9
Carrera 6 No. 29-12, Monteria, Cordoba, Colombia
S-1182: Zarate, Treasury Officials to Brief on Designation of F A R C / A U C NARCO-Terrorist Leaders
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 19, 2004
JS-1182
MEDIA ADVISORY:
Zarate, Treasury Officials to Brief on Designation of
F A R C / A U C NARCO-Terrorist Leaders
The Treasury Department today will hold a briefing with reporters to discuss the
action taken against leaders and key figures of the Colombian narco-terrorist
organizations, the Revolutionary Armed Forces of Colombia (Fuerzas Armadas
Revolucionarias de Colombia, "FARC") and the United Self-Defense Forces of
Colombia (Autodefensas Unidas de Colombia, "AUC").
WHO: Juan C. Zarate, Deputy Assistant Secretary, Executive Office for
Terrorist Financing and Financial Crimes Richard Newcomb, Director, Office of
Foreign Assets Control (OFAC) Richard Speier, Internal Revenue Service, Deputy
Chief of Criminal Investigation
WHAT: Pen and Pad Briefing - no cameras will be admitted
WHEN: 2:00 pm EST
WHERE: Department of Treasury - Media Room (4121)
Media without Treasury press credentials, including media with White House
credentials, planning to attend should contact Frances Anderson in Treasury's
Office of Public Affairs at (202) 528-9086. Please be prepared to provide her with
the following information: name, social security number and date of birth by noon
EST.
Page 1 of 1
3-1201: Treasury Releases N e w Data O n The Benefits O f The Jobs And Growth Tax Relief Reconciliat... Page 1 of 2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 19, 2004
JS-1201
Treasury Releases New Data On The Benefits Of The Jobs And Growth Tax
Relief Reconciliation Act
(Revised)
The Department of the Treasury today released new figures demonstrating that
because of the President's tax relief package enacted last May, an additional $50
billion dollars will remain in the hands of American taxpayers through higher refunds
and lower tax payments this spring. The total refunds Americans will receive this
spring will increase to about $195 billion.
• As a result of the tax cuts in 2003, Treasury expects that a record
number of individuals will receive refunds this year.
• Treasury expects that the average refund will be $300 higher than
had the Jobs & Growth Tax Relief Act had not been enacted.
• T h e President's 2003 tax relief is expected to increase refunds
received by Americans by about $37 billion more than if the Jobs &
Growth Tax Relief Act had not been enacted, from approximately
$158 billion to $195 billion.
• T h e tax relief is expected to decrease the amount that Americans
w h o must m a k e tax payments w h e n filing their tax returns this spring
by approximately $13 billion, from $85 billion to $72.5 billion.
• Taken together the higher tax refunds and lower tax payments are
expected to put an additional $50 billion in the hands of American
taxpayers this spring.
In addition, Treasury's data shows that American families will see a significant
reduction in their tax burden because of the tax relief packages that the President
has signed since taking office. The President's 2001 and 2003 tax cuts m e a n that in
2004:
• Americans will receive a total of $232 billion in tax relief in 2004.
• $176 billion in tax relief will stay in the hands of American families
and small businesses to help then save and invest.
• Every American w h o would have paid income taxes before the tax
relief w a s enacted in 2001 will receive a tax cut in 2004.
The President's Tax Cuts Mean Significant Tax Relief for Working American
Families Expanding the 1 0 % bracket and doubling the child tax credit will benefit
low income Americans
• Nearly 5 million taxpayers, including 4 million taxpayers with
children, will have their income tax liability completely eliminated in
2004.
• Low-income families will also benefit from provisions that m a k e the
child credit refundable for more families and reduce marriage
penalties caused by the EITC. 111 million individuals and families
will receive an average tax cut of $1,586 in 2004 because of the tax
cutesof2001 and 2003.
• 49 million married couples will have an average tax cut of $2,602.
3-1201: Treasury Releases N e w Data O n The Benefits O f The Jobs And Growth Tax Relief Reconciliat... Page 2 of 2
• 43 million families with children will receive an average tax cut of
$2,090.
• 14 million elderly individuals will see their taxes fall, on average, by
$1,883.
• 25 million small business owners will receive an average tax cut of
$3,001.
If Congress Does Not Act, Americans Will Pay Higher Taxes in 2005
If the tax cuts that expire after 2004 are not extended for 2005, taxes will increase
for taxpayers w h o otherwise would benefit from these provisions.
• Lower income taxpayers will not receive $5.7 billion in relief from
the expanded 10 percent rate.
• Taxpayers will not receive $8.9 billion in marriage penalty tax relief
• Families with children will not receive $13.2 billion in relief from the
child tax credit. In 2005, the increased child credit, additional
marriage penalty relief, and expanded 10 percent bracket will
sunset, increasing the tax burden on a family of four earning
$40,000 by $915.
93 million taxpayers would pay, on average, a tax increase of $565.
• 70 million women would see their taxes increase, on average, by
$697
• 46 million married couples would pay, on average, an additional
$960 in taxes
• 37 million families with children would incur an average tax
increase of $954
• 8 million single w o m e n with children would see their taxes
increase, on average, by $357
• 11 million elderly taxpayers would pay, on average, an additional
$398 in taxes
• 23 million small business owners would incur tax increases
averaging $831
• Nearly 2 million individuals and families w h o currently have no
income tax liability would b e c o m e subject to the income tax.
• President Bush's budget extends A M T relief through 2005. Without
these changes, these taxpayers would pay an additional $23.2
billion in tax as a result of the A M T .
S-1183: Treasury Announces Actions Against AL-Haramain
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 19, 2004
JS-1183
Treasury Announces Actions Against AL-Haramain
The United States Attorney's Office for the District of Oregon announced a federal
search warrant was executed yesterday against property purchased on behalf of
the Al Haramain Islamic Foundation, Inc. in Ashland, Oregon.
The search was led by agents of the Internal Revenue Service-CI as part of a joint
Federal Bureau of Investigation (FBI) and Department of Homeland Security
(DHSyimmigration and Customs Enforcement investigation.
This search was conducted pursuant to a criminal investigation into possible
violations of the Internal Revenue Code, the Money Laundering Control Act and the
Bank Secrecy Act. The suspected crimes relate to possible violations of the
currency reporting and tax return laws by two officers of the Ashland Oregon office
of Al Haramain Foundation, Inc.
In a separate administrative action today, the Treasury's Office of Foreign Assets
Control (OFAC) has blocked pending investigation accounts of the Al Haramain
Foundation, Inc. to ensure the preservation of its assets pending further O F A C
investigation.
The parent of the Oregon Al Haramain Islamic Foundation is headquartered in
Saudi Arabia, and is one of that country's largest Non Governmental Organizations,
with worldwide reach.
In March 2002, the United States Treasury and the Kingdom of Saudi Arabia jointly
designated the Bosnian and Somalia Branches of Al Haramain as supporters of
terrorism. In December 2003, the reconstituted branch of Al Haramain in Bosnia,
Vazir, was also designated by both governments as a supporter of terrorism. In
January 2004, the Kingdom of Saudi Arabia and the U.S. Department of the
Treasury jointly designated four additional Al Haramain branches - Indonesia,
Tanzania, Kenya and Pakistan - as being supporters of terrorism. The United
Nations has adopted these Al Haramain designations and imposed an asset freeze,
travel ban and arms embargo pursuant to United Nations Security Council
Resolutions 1267/1390/1455.
Page 1 of 1
[S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 19, 2004
JS-1184
Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
The Bush Administration has taken aggressive action to address the abusive tax
shelter problem, more so than in any period in recent memory. Tax shelters are
being addressed effectively through increased disclosure by taxpayers and
promoters, timely response by the Treasury Department and the IRS to
transactions that are identified, and, where necessary, targeted legislative
changes to the substantive tax laws. The Administration's actions to carry out each
of these principles have been focused, significant, and effective:
The Administration is taking vigorous enforcement action against abusive
tax shelters.
• The Administration has increased the disclosure of abusive tax shelters.
• The Administration is using its regulatory authority to shut d o w n abusive
tax shelters.
• The Administration's legislative proposals will:
- Shut d o w n specific abusive tax shelters.
- Give the IRS important n e w tools and enhance its ability to combat abusive
tax shelters.
- Enhance the IRS' effectiveness without compromising taxpayer protections.
• The Administration is reining in international tax abuses.
So-called "technical tax shelters" proliferated in the 1990s because taxpayers and
promoters believed that taxpayers could enter into aggressive transactions with little
risk of detection and with little risk of owing anything more than the tax due and
interest even if caught. The Administration's approach to tax shelters is changing
completely the risk-reward calculus for taxpayers considering an abusive
transaction. The IRS' audits of the promoters of these tax shelters over the past
three years have been unprecedented. Taxpayers and promoters no longer will be
able to avoid detection. The Treasury Department and the IRS will take the steps
necessary to shut down tax shelters - including appropriate enforcement action
against taxpayers and promoters - as they are identified.
Beginning back in early 2002, the Administration proposed significant legislation to
end the "hide-and-seek'; tactics of promoters and taxpayers involved in these
abusive transactions. In addition, the Administration is committed to providing the
IRS with the resources and support needed to ensure that all taxpayers pay their
fair share. The Administration's F Y 2005 Budget includes an additional $300 million
for IRS efforts to ensure compliance with the tax laws, and increases the total IRS
budget by 4.8 percent - significantly above the average for non-defense, nonhomeland security discretionary spending. The budget continues a three year trend
of increasing resources for the IRS to improve taxpayer compliance and to target
abusive transactions, while maintaining customer service to taxpayers.
Shutting down abusive transactions is not amenable to an easy, "one size fits all"
solution. There simply is no "silver bullet" to the problem of tax shelters, and the
Administration's actions reflect the comprehensive steps needed to effectively
address this problem. Broad anti-abuse provisions, such as the proposed
codification of the economic substance doctrine, may appear to be simple and
attractive. They would do more, however, to burden careful taxpayers and
practitioners - and the IRS - than stop abusive transactions. Complex rules would
be needed to address the wide range of everyday business transactions that would
Page
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
be affected by a broad, anti-abuse rule. But those regulations, in fact, would m a k e
the law less clear and more complex, and complex rules are more difficult for the
IRS to administer fairly. At the s a m e time, it is impossible for statutory or regulatory
rules to cover every factual situation. A codified rule also would not stop those w h o
are inclined to find economic substance and business purpose in virtually any
transaction. It is far preferable to leave the economic substance doctrine to the
courts - where it w a s originally conceived in the 1930s - which are better suited to
applying the doctrine with flexibility. The judicial doctrine of economic substance
requires an intensely factual inquiry, and these types of inquiries should be done by
a court based on the actual facts of the case before it.
The specific steps taken by the Administration to address tax shelters are detailed
below.
The Administration Is Taking Vigorous Enforcement Action Against Abusive
Tax Shelters
Effective action against tax shelters requires effective tax administration. Over the
past three years, the Treasury Department and the IRS have been working closely
together to implement an effective strategy for dealing with abusive transactions.
Although the actions described below relate to so-called "technical" tax shelters, the
IRS also has an extensive program in place to address promoters of schemes and
scams marketed primarily to individuals and small businesses, as well as the
taxpayers w h o enter into those schemes and scams.
The IRS Is Implementing a Coordinated Strategy for Tax Shelters Commissioner Mark Everson is focused on organizing and maximizing the
effectiveness of the IRS' efforts to combat tax shelters. John Klotsche, a former
chairman of a major international law firm, has joined the IRS as a Senior Advisor to
the Commissioner and has responsibility over the coordination of the IRS' efforts to
combat tax shelters. The Commissioner and Senior Advisor Klotsche are working
to coordinate efforts within the agency, with the Treasury Department, and with the
Department of Justice.
The Treasury Department and the IRS Have Issued Proposed Ethical Rules
and Opinion Standards for Tax Practitioners - Many promoters claim that they
can provide taxpayers with opinions that will protect against penalties even if a tax
shelter is successfully challenged by the IRS. In December 2003, the Treasury
Department and the IRS issued new proposed regulations that set out best
practices for tax practitioners and provide minimum standards for tax opinions used
to support tax shelters. Finalizing these rules is a high priority for the Treasury
Department and the IRS.
• The IRS Has Established Coordinated, Transaction-Specific Task Forces to
Address Identified Tax Shelters - Beginning in 2002, the IRS began using
transaction-specific task forces to coordinate activities to shut down tax shelters.
These task forces consist of attorneys from the IRS Operating Divisions, the IRS
Office of Chief Counsel, the IRS' Office of Tax Shelter Analysis (OTSA), and the
Treasury Department. These task forces allow the IRS to quickly develop and
coordinate the legal response to a tax shelter.
• The IRS Has Expanded Its Partnership with States to Combat Tax Shelters In 2003, the IRS entered into a nationwide partnership agreement with tax
authorities in 40 states and the District of Columbia to share data and coordinate
examination efforts to combat tax shelters. This agreement recently w a s expanded
to n o w cover 45 states, the District of Columbia and N e w York City, and the IRS
has started sharing leads on more than 20,000 taxpayers.
The IRS Has Initiated Over 130 Promoter Audits - Since the beginning of
2001, the IRS has initiated over 130 promoter audits, including audits of accounting
firms, law firms, insurance companies, brokerage companies, banks, and other
boutique and mid-size promoters. These promoter audits will help ensure
compliance with the promoter disclosure rules and will examine whether promoter
penalties should be asserted against particular promoters.
Page 2 of 13
JS-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
• T h e IRS H a s Served Over 350 Administrative S u m m o n s e s on Tax Shelter
Promoters - Since the beginning of 2002, the IRS has served over 350
administrative s u m m o n s e s to tax shelter promoters and has referred over 120
s u m m o n s e s to the Department of Justice for enforcement. The Department of
Justice has c o m m e n c e d enforcement actions in court with respect to 67 of these
summonses. Administrative s u m m o n s e s have been, and will continue to be, an
important source of information for the IRS regarding promoter activities and
compliance.
The IRS Has Sought Court Permission to Serve John Doe Summonses in
Five Promoter Cases - Since the beginning of 2002, the IRS has sought, as
required by statute, court permission to serve "John Doe" s u m m o n s e s in 5 promoter
cases. John D o e s u m m o n s e s are an important tool for identifying taxpayers w h o
m a y have entered into potential tax shelters.
The IRS Has Encouraged Voluntary Disclosure - In December 2001, the IRS
began a disclosure initiative (Announcement 2002-2) to give taxpayers an incentive
to disclose questionable transactions and other items that m a y have resulted in an
underpayment of tax. In order to obtain penalty relief under the initiative, a taxpayer
w a s required to disclose all relevant information about the transaction, including the
identity of any promoter. The IRS has been using the information from the 1,689
disclosures received to identify n e w promoters and potential tax shelters for
investigation and appropriate enforcement action.
• The IRS Is Using a Mandatory IDR to Identify Listed Transactions for LMSB
Cases - Since April 2002, the IRS' Large and Midsize Business Division (LMSB)
has been using a uniform information document request (IDR) in all of its audits.
This mandatory IDR requests information regarding all "listed" transactions (i.e.,
specifically identified in published guidance as a tax avoidance transaction)
reported by the taxpayer on its returns. The mandatory IDR will ensure that all
L M S B taxpayers under audit disclose listed transactions.
• The IRS Has Developed Mandatory Penalty Guidelines for Listed
Transactions - The IRS issued penalty guidelines in December 2001 requiring the
development of accuracy-related penalties for listed transactions. These guidelines
will help ensure that appropriate penalties are applied with respect to listed
transactions.
• The IRS Has Conducted Three Settlement Initiatives - In November 2002, the
IRS announced three settlement initiatives to resolve, on a basis that is fair, cases
involving three widely-marketed tax shelters: the Section 302/318 "basis shift"
transaction, the Section 351 contingent liability transaction, and the highlyleveraged corporate-owned life insurance (COLI) transaction. These initiatives
have allowed the IRS to resolve a significant number of cases on a basis that is fair
to the government and taxpayers. These initiatives permit the IRS to focus its
resources on other tax shelters.
• The IRS Has Revised Its Tax Accrual Workpaper Policy to Request These
D o c u m e n t s From Taxpayers W h o Engage in Listed Transactions - Tax accrual
workpapers normally are prepared by taxpayers and their independent auditors to
evaluate the taxpayer's tax reserves for financial accounting purposes. Starting in
2002, the IRS changed its policy so that it n o w m a y request these workpapers from
taxpayers w h o have engaged in listed transactions. This change in policy is a
significant disincentive for taxpayers considering entering into a listed transaction.
• The IRS Has Entered into an Agreement with a Major Professional Firm to
Ensure Compliance with the Disclosure Rules - A s a result of the IRS' audits of
promoters of technical tax shelters, one large professional firm has agreed to work
with the IRS to ensure ongoing compliance with the registration and list
maintenance provisions of the Internal Revenue Code and regulations. The IRS'
agreement with this firm will ensure the highest standards of practice and future
compliance with the law and regulations. The IRS expects to use this agreement
as a model for agreements with other practitioners.
Page 3 ot13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
The Administration H a s Increased Disclosure Of Abusive Tax Shelters
Taxpayers will be far less willing to engage in tax shelters if they believe that their
transactions will be identified and that they will have to defend their transactions to
the IRS and in the courts. The early disclosure of tax shelters also will allow the
Treasury Department and the IRS to respond to abusive transactions before they
spread throughout the market. Over the past two years the Administration has
significantly overhauled rules requiring disclosure of abusive transactions by
taxpayers and promoters. In addition, the Administration has proposed statutory
changes that will further expand and strengthen the disclosure system. The
Treasury Department originally announced these proposed statutory changes in
March 2002, and the Administration remains committed to working with Congress to
ensure that these important proposals are enacted into law.
• Expanded and Simplified the Taxpayer Return Disclosure Regulations Temporary regulations issued in February 2000 required the disclosure of
potentially questionable transactions. These rules, however, were limited to
corporate taxpayers and were complex and subjective. The Treasury Department
and the IRS finalized n e w disclosure regulations in February 2003 to increase
disclosure and m a k e the regulations easier to apply and administer. These n e w
regulations contain straightforward, objective rules with no subjective exceptions.
They apply to all taxpayers, including individuals, trusts, and partnerships.
Expanded and Simplified the Promoter List-Maintenance Regulations Temporary regulations issued in February 2000 required promoters to maintain lists
of taxpayers w h o participated in potentially questionable transactions. These rules
were complex and subjective. The Treasury Department and the IRS finalized n e w
list-maintenance regulations in February 2003 to broaden the list-maintenance
requirements. These n e w regulations contain straightforward, objective rules that
work with the n e w disclosure regulations to give the IRS multiple sources of
information on a potential tax shelter. Coordinated rules for taxpayers and
promoters will end the "conspiracy of silence" that m a d e it more difficult for the IRS
to identify and take action against tax shelters.
Issued Final Regulations for Promoter Registration of Certain Tax Shelters Temporary regulations issued in February 2000 required promoters to register
certain tax shelters with the IRS. The Treasury Department and the IRS finalized
the registration regulations in February 2003. W h e n the Administration's proposal
to a m e n d the underlying statute is enacted into law, the Treasury Department and
the IRS will issue n e w registration regulations to fully coordinate the three sets of
disclosure rules: taxpayer return disclosure, promoter registration, and promoter
list-maintenance.
Issued Final Penalty Regulations to Address Taxpayers Who Fail to
Disclose Potential Tax Shelters - In the absence of a specific penalty for the
failure to disclosure a transaction on a return, s o m e taxpayers were choosing to not
disclose the transaction and to rely on an opinion to avoid any penalties if the
transaction is successfully challenged by the IRS. In December 2003, the Treasury
Department and the IRS issued final penalty regulations limiting the penalty
defenses for taxpayers w h o fail to disclose potential tax shelters or positions based
on advice that a regulation is invalid.
Proposed a New Schedule M-3 to Prioritize Book-Tax Differences - The
Schedule M-1 that is part of the corporate income tax return requires taxpayers to
identify differences between their taxable income and their financial, or book,
income. The rules for disclosing these book-tax differences are unclear. The
Treasury Department and the IRS recently proposed a n e w corporate income tax
form to m a k e book-tax differences more transparent. The n e w Schedule M-3 will
allow the IRS to more quickly identify differences that m a y have resulted from an
aggressive tax position or a potential tax shelter. Better disclosure of book-tax
differences will allow the IRS to focus its resources more efficiently on potentially
significant, emerging issues.
Proposed Legislation to Fully Coordinate the Disclosure Rules - Disclosure
works best w h e n the IRS has multiple sources of information about a tax shelter
Page 4 of 13
5-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
that form a complete w e b of disclosure. Existing statutes do not permit uniform and
consistent rules. The Administration's F Y 2005 Budget again proposes to change
the promoter registration and list-maintenance statutes to permit uniform and
consistent taxpayer and promoter disclosure rules.
• Proposed Legislation to Impose Meaningful Penalties on Taxpayers who Fail
to Disclose - A taxpayer currently faces no penalty for the failure to disclose a
potentially abusive transaction on a return. Only Congress m a y provide for a
nondisclosure penalty. The Administration's F Y 2005 Budget again proposes
penalties of up to $200,000 for taxpayers w h o fail to disclose potential tax shelters.
In addition, public companies would be required to disclose in their S E C filings any
penalties for failing to disclose a transaction that the Treasury Department and the
IRS have identified as a "tax avoidance" (or "listed") transaction.
• Proposed Legislation to Increase Penalties on Promoters who Fail to
Register a Transaction - The Administration's F Y 2005 Budget again proposes to
increase the existing penalties for a promoter's failure to register a transaction with
the IRS. Along with the Administration's proposal to broaden the reach of the
promoter registration statute, this proposal will impose meaningful penalties on
promoters w h o fail to register a potential tax shelter.
Proposed Legislation to Increase Penalties on Promoters who Fail to
Maintain Lists of Taxpayers w h o Have Engaged in Potential Tax Shelters Existing penalties on promoters w h o fail to maintain lists of participating taxpayers
are insufficient. The Administration's F Y 2005 Budget again proposes significant
penalties of $10,000 per day on promoters for the failure to provide the IRS with
lists of taxpayers w h o have engaged in potential tax shelters.
The Administration Is Using Its Regulatory Authority To Shut Down Abusive
Tax Shelters
The Treasury Department and the IRS have used the authority under section 6011
to identify in published guidance (or "list") specific "tax avoidance" transactions.
The recently revised disclosure and list-maintenance rules impose stringent
disclosure requirements on taxpayers and promoters for listed transactions. These
listing notices also m a k e clear to taxpayers and promoters that the Treasury
Department and the IRS are aware of these abusive transactions and that the IRS
is committed to taking appropriate enforcement action against participating
taxpayers and promoters. Listing notices have been one of the most effective
actions taken over the past three years to stop tax shelters. Over the past three
years, the Administration has listed the following transactions:
• Abusive Foreign Tax Credit Transactions - These transactions involve a
domestic corporation's transitory ownership of a foreign target corporation when,
pursuant to a prearranged plan, the domestic corporation acquires the stock of the
target corporation and then all or substantially all of the target corporation's assets
are sold in a transaction that gives rise to foreign tax without a corresponding
inclusion of income for U.S. tax purposes. The Treasury Department and the IRS
issued Notice 2004-20 to shut down these transactions. The Treasury Department
and the IRS at the s a m e time also issued Notice 2004-19, which details the
legislative and regulatory approaches that the Treasury Department and the IRS
are using to address other abusive foreign tax credit transactions.
• Abusive Excess Life Insurance in Defined Benefit Pension Plans - These
arrangements involve specially designed life insurance policies intended primarily to
benefit highly-compensated employees through a retirement plan. The Treasury
Department and the IRS issued Rev. Rul. 2004-20 to shut down abusive excess life
insurance arrangements.
• Abusive S Corporation ESOP Arrangements - These arrangements are
intended to assist companies in avoiding tax rules designed to protect rank-and file
participants in employee stock ownership plans ("ESOPs"). The Treasury
Department and the IRS issued Rev. Rul. 2003-6 and Rev. Rul. 2004-4 to stop
these abuses and protect rank-and-file participants in S corporation E S O P s .
Page 5 of 13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
• Abusive Roth IRA Transactions - These arrangements involve the contribution
of property to an IRA through a transaction that disguises the value of the
contribution to circumvent Roth IRA contribution limits. The Treasury Department
and the IRS issued Notice 2004-8 to stop abusive structures designed to avoid the
contribution limits that apply to Roth IRAs.
• Abusive Offsetting Foreign Currency Option Contract Transactions - These
transactions involve two pairs of offsetting foreign currency options. T w o of the
offsetting options are assigned to a charity, and the taxpayer claims an immediate
loss on one option without recognizing the offsetting gain on the other. The
Treasury Department and the IRS issued Notice 2003-81 to shut down these
transactions.
• Abusive Contested Liability Transactions - These transactions involve the
purported establishment of trusts to accelerate deductions for liabilities that a
taxpayer is contesting under section 461(f). The trusts, however, do not comply
with the requirements of that section because the taxpayer either retains control
over the trust assets or transferred its own stock or the stock or note of a related
party. The Treasury Department and the IRS issued Notice 2003-77 to prevent the
use of trusts to accelerate deductions.
• Abusive Stripping Transactions - These transactions improperly separate
income from related deductions. S o m e of these transactions, for example, are
structured to have a tax-indifferent party realize the taxable income while the
taxpayer claims deductions related to that income, such as depreciation or rental
expenses. The Treasury Department and the IRS issued Notice 2003-55 to shut
down these transactions.
Abusive Option Sales to Family Limited Partnerships - These arrangements
involve the purported sale of compensatory stock options to a limited partnership
owned by the taxpayer's family members to avoid income and employment taxes
on the exercise of the options. The Treasury Department and the IRS issued
Notice 2003-47 to shut down these transactions.
• Abusive Welfare Benefit Funds - These transactions are designed to avoid the
applicable deduction limits on contributions to welfare benefit funds. Taxpayers
claim that the benefits are being provided under a collective bargaining agreement.
The Treasury Department and the IRS issued Notice 2003-24 stop these abuses
and further addressed these transactions in final regulations issued July 2003.
• Abusive Offshore Deferred Compensation Arrangements - These
transactions are designed to avoid income and employment taxes by utilizing a
purported lease of the right to a taxpayer's services in the United States through a
foreign leasing company. The proceeds of the leasing arrangement are transferred
to an offshore trust maintained on behalf of the taxpayer. The Treasury Department
and the IRS issued Notice 2003-22 to shut down these abusive offshore employee
leasing arrangements.
• Abusive Producer Owned Reinsurance Company ("PORC") Arrangements These insurance arrangements involve a foreign corporation established to reinsure
the policies sold by a taxpayer in connection with the sale of products or services.
The taxpayers utilize various exemptions of income for insurance companies to
divert portions of the premiums paid to the P O R C and pay little or no tax on the
diverted funds. The Treasury Department and the IRS issued Notice 2002-70 to
shut down these arrangements.
Abusive Lease-In/Lease-Out ("LILO") Transactions - LILOs involve a lease of
property from a tax-indifferent party (e.g., a foreign party or a tax-exempt party),
and a simultaneous lease of the s a m e property back to the tax-indifferent party to
generate substantial deductions of the lease payments. The Treasury Department
and IRS issued Rev. Rul. 2002-69 to supersede earlier guidance issued to shut
down these transactions.
Abusive Partnership Straddle Tax ("Eliminator") Transactions - These
Page 6 of 13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
transactions involve the use of a straddle, a tiered partnership structure, a transitory
partner, and the partnership allocation rules to generate purported permanent noneconomic tax losses for the taxpayer. The Treasury Department and the IRS issued
Notice 2002-50 to shut down these transactions.
Abusive Passthrough Entity Straddle Transactions - These transactions
involve the use of a straddle, one or more transitory S corporation shareholders,
and the rules of subchapter S to allow a taxpayer to claim an immediate loss while
deferring an offsetting gain. The Treasury Department and the IRS issued Notice
2002-65 to shut down these transactions.
Abusive Common Trust Fund Straddle Transactions - These transactions
involve the use of a c o m m o n trust fund that invests in economically offsetting gain
and loss positions in foreign currencies and allocates the gain to one or more taxindifferent parties and the losses to the taxpayer. The Treasury Department and
the IRS issued Notice 2003-54 to shut down these transactions.
Abusive 401 (k) Accelerated Deductions - These transactions involve claims by
employers of accelerated deductions for contributions to retirement plans on
compensation expected to be earned by participants in future years. The Treasury
Department and the IRS issued Rev. Rul. 2002-46 to expand earlier guidance
identifying these listed transactions.
• Abusive Notional Principal Contracts or Contingent Swaps - These
transactions involve the use of a notional principal contract to claim current
deductions for periodic payments m a d e by a taxpayer while disregarding the
accrual of a right to receive offsetting payments in the future. The Treasury
Department and the IRS issued Notice 2002-35 to stop these abuses.
• Abusive Inflated Basis ("CARDS") Transactions - These transactions involve
the use of a loan assumption agreement to claim an inflated basis in assets. The
assets are sold for fair market value and the taxpayer claims a significant loss,
arguing that the entire principal amount of the loan is included in taxpayer's basis.
The Treasury Department and the IRS issued Notice 2002-21 to shut down these
transactions.
Abusive Section 302/318 "Basis Shift" Transactions - These transactions
involve an abuse of the attribution rules to increase the basis of the stock held by
the taxpayer through a redemption of stock held by a tax-indifferent party (typically,
a foreign entity). The taxpayer claims a loss on the sale of its stock based on its
position that the basis of the redeemed stock is added to the basis of stock the
taxpayer sold. The Treasury Department and the IRS issued Notice 2001-45 to
shut down these transactions.
Promoters of tax shelters often attempt to take advantage of highly technical tax
rules to obtain tax benefits not intended by Congress. The Administration is using
its regulatory authority whenever appropriate to stop abusive transactions and
eliminate potential opportunities for abuse. Administrative actions taken over the
past three years include:
• Issued Final Regulations to Stop Abusive Split-Dollar Life Insurance
Arrangements - "Split-dollar life insurance arrangements" have been used to
provide s o m e corporate executives with tax-free compensation and to m a k e taxfree gifts a m o n g family members. In September 2003, the Treasury Department
and the IRS issued final regulations that shut down the use of these arrangements.
• Issued Notice to Stop Abusive "Reverse Split-Dollar Life Insurance
Arrangements" - "Reverse split-dollar life insurance arrangements" were being
marketed as a m e a n s to avoid gift and estate taxes on wealth transfers to family
members. The Treasury Department and the IRS issued Notice 2002-59 to shut
d o w n these arrangements.
• Issued Final Regulations to Stop Abusive Hedged Deferred Compensation
Page 7 of 13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
Liability Arrangements - These transactions were being used to claim favorable
hedging income tax treatment with regard to certain deferred compensation
arrangements. In March 2002, the Treasury Department and the IRS issued final
regulations to prevent these claimed tax benefits.
• Issued Revenue Rulings to Stop "Double-dip" Health Benefit Deduction
S c h e m e s - Promoters had been marketing schemes that purport to exclude health
insurance premiums from an employee's income twice - i.e., once w h e n paid by a
reduction in salary and a second time when the amount of the salary reduction w a s
reimbursed. The Treasury Department and the IRS issued Rev. Rul. 2002-3 and
Rev. Rul. 2002-80 to shut down these arrangements, which often were not
disclosed to the employees.
Issued Final Regulations to Stop Abusive Deferred Compensation Schemes
for Nonprofit Executives - S o m e nonprofit organizations offered steeply
discounted "options" to executives to purchase mutual funds. These arrangements
effectively gave the executives cash compensation that could be claimed at any
time, even though the compensation w a s purported to be not taxable until claimed.
In July 2003, the Treasury and IRS issued final regulations that m a d e these options
and similar arrangements currently taxable.
• Issued Revenue Ruling to Stop Potential Abuses Involving Donations of
Patents - S o m e taxpayers had claimed deductions for contributions of patents that
far exceed the actual value of the patent to the recipient public charity. The
Treasury Department and the IRS issued Rev. Rul. 2003-28 to clarify that certain
transfers of rights in a patent do not give rise to a charitable contribution deduction.
The Administration's F Y 2005 Budget also proposes to limit further a taxpayer's
ability to claim a deduction for the contribution of a patent or other intellectual
property.
• Issued Revenue Ruling on Purported Insurance Companies Used to Reduce
Tax on Investment Income - S o m e taxpayers had created purported insurance
companies in foreign jurisdictions to shield investment income from U.S. tax. The
Treasury Department and the IRS issued Rev. Rul. 2003-34 to notify taxpayers that
the IRS will challenge certain off-shore insurance company arrangements used to
reduce tax on investment income. The Administration's F Y 2005 Budget proposes
to curtail the abuse of these insurance company arrangements.
• Issued Temporary Regulations to Stop "Son of BOSS" Transactions - Notice
2000-44 identified the so-called "Son of B O S S " transaction as a listed transaction.
S o m e promoters continued to market this tax shelter, and s o m e taxpayers were still
entering into these transactions. In June 2003, the Treasury Department and the
IRS issued temporary regulations under section 358(h) to stop these "Son of
B O S S " transactions.
• Issued Revenue Ruling to Stop Tax Shelters Involving Variable Life
Insurance and Annuity Contracts - S o m e taxpayers had entered into variable life
insurance or annuity contract arrangements to avoid current tax on income and gain
from the underlying assets even though the taxpayers retained effective ownership
over these assets. The Treasury Department and the IRS issued Rev. Rul. 200392 to stop these arrangements.
• Issued Notice to Stop the Use of Stapled Stock Structures to Artificially
Increase Foreign Tax Credits - Congress enacted section 269B in 1984 to
address the potential for tax avoidance in certain structured transactions involving
stock of two corporations (one foreign and one domestic) that cannot be transferred
separately due to contractual restrictions. Since then, however, taxpayers had
sought to use the rules of section 269B to their advantage by creating stapled stock
structures to artificially increase their foreign tax credits by manipulating the
allocation and apportionment of expenses such as interest. The Treasury
Department and the IRS issued Notice 2003-50 to halt these transactions by
announcing an immediately effective, targeted change to the rules of section 269B,
and by reminding taxpayers of the potential applicability of existing principles of law,
such as the substance-over-form doctrine, to these transactions.
Page 8 of 13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
• Proposed N e w Information Reporting Requirements on U.S. Persons that
O w n Certain Foreign Entities - The Treasury Department and the IRS issued
Announcement 2004-4 to propose n e w Form 8858. This form will require
information reporting by U.S. persons that o w n foreign disregarded entities. This
information reporting requirement will provide a m e a n s for the IRS to identify
potential compliance issues efficiently in an area in which there currently is
inadequate information reporting and will allow the IRS to better focus its audit
resources.
• Issued Temporary Regulations to Require Information Reporting to
Shareholders on Corporate Inversion Transactions - Corporate inversion
transactions generally result in the shareholders of the inverting company
recognizing gain on their stock as a result of the transaction. The Treasury
Department and the IRS issued regulations in 2002 that require inverting
corporations to provide information reporting on these transactions to ensure that
the shareholders accurately report the gain recognized as a result of an inversion.
• Issued Final Regulations to Eliminate Inappropriate Benefits from Domestic
Reverse Hybrids - The Treasury Department and the IRS issued final regulations
in 2002 to eliminate the benefits of a structure involving a hybrid entity established
in the United States that makes payments to a parent company established in a
country with w h o m the U.S. has a tax treaty that w a s designed to give rise to a
deduction in the United States and exemption from tax in both the United States
and the treaty country.
Issued Regulations to Clarify the Treatment of Stock-Based Compensation
in Cost Sharing Arrangements - The Treasury Department and the IRS issued
regulations in 2003 on the tax treatment of stock-based compensation under the
related party transfer pricing rules governing qualified cost sharing arrangements.
These regulations are aimed at ensuring that the rules governing qualified cost
sharing arrangements for the joint development of intangible assets cannot be used
to facilitate the migration of intangibles outside the United States for less than arm's
length compensation.
The Administration's Legislative Proposals Will Shut Down Specific Abusive
Tax Shelters
The Administration's FY 2005 Budget builds on earlier Administration legislative
proposals to strengthen the disclosure rules and on the information gathered
through IRS compliance programs. The n e w legislative proposals close loopholes
and target identified tax shelters and abusive practices. A s other abusive
transactions are identified, the IRS will challenge the transactions in audits, and the
Treasury Department and the IRS will work with Congress to enact any legislation
necessary to address the transactions.
• Proposed Legislation to Stop Abusive Leasing Transactions with TaxIndifferent Parties - Taxpayers increasingly have used purported leasing
transactions, often referred to as SILO transactions, to "acquire" significant tax
benefits from a tax-indifferent party, such as a municipal transit authority or foreign
government, in exchange for a modest fee. These transactions do not involve any
useful economic activity, such as the acquisition or financing of business assets.
The Administration's F Y 2005 Budget proposes to sharply limit the tax benefits that
a taxpayer can claim in these transactions.
• Proposed Legislation to Eliminate Abusive Transactions Involving Foreign
Tax Credits - Current law provides taxpayers with a credit for certain foreign taxes
in order to eliminate the double taxation of foreign income (i.e., taxation by both the
United States and the country where the income is earned). Taxpayers have
structured transactions in an attempt to use foreign tax credits not to eliminate
double taxation, but inappropriately to reduce their U.S. tax liability on unrelated
foreign income. The Administration's F Y 2005 Budget proposes to deny foreign tax
credits for foreign withholding taxes imposed on income if the underlying property
generating the income w a s not held for a specified minimum period of time. In
addition, the Administration's proposals would provide the Treasury Department
with regulatory authority to prevent transactions that inappropriately separate
Page 9 of 13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
foreign taxes from the related foreign income to take advantage of the foreign tax
credit rules where there is no real risk of double taxation.
Proposed Legislation to Stop Abusive Income-Separation Transactions S o m e taxpayers continue to engage in transactions that separate the periodic
income steam from an underlying income-producing asset in order to generate an
immediate tax loss for one taxpayer and the conversion of current taxable income
into deferred capital gain for another. Although the Tax C o d e prohibits these
transactions for bonds and preferred stock, taxpayers have been engaging in
essentially identical transactions using similar assets, such as shares in a moneymarket mutual fund. The Administration's F Y 2005 Budget again proposes to treat
an income-separation transaction as a secured borrowing, not a separation of
ownership. Debt characterization will ensure that the tax treatment of the
transaction clearly reflects income.
Proposed Legislation to Prevent the Misuse of Tax-Exempt Casualty
Insurance C o m p a n i e s - Certain small casualty insurance companies are not
subject to federal income tax. S o m e taxpayers are abusing this rule by creating
insurance companies, claiming tax-exempt status, and improperly accumulating
investment income tax-free. The Administration's F Y 2005 Budget proposes to
prevent taxpayers from using this targeted exemption to inappropriately avoid tax
on investment income.
• Proposed Legislation to Tighten the Deduction Limitation for Interest Paid to
Related Parties - Current law denies a deduction for certain interest paid by a
corporation to a related party to the extent the corporation's net interest expenses
exceed 50 percent of its taxable income (computed with certain adjustments). This
limitation only applies if the corporation's debt-equity ratio exceeds 1.5 to 1.0. In
order to address the opportunities available under current law to inappropriately
reduce taxes on U.S. operations through the use of foreign related party debt, the
Administration's F Y 2005 Budget proposes to tighten the limitation for related party
interest expense.
Proposed Legislation to Prevent Avoidance of U.S. Tax on Foreign Earnings
Invested in U.S. Property - Under current law, U.S. shareholders of a controlled
foreign corporation must include in income their pro rata share of earnings of the
corporation that are invested in certain U.S. property. Deposits with banks are
excluded from the definition of U.S. property subject to this rule, however, so that
taxpayers operating through foreign subsidiaries are not discouraged from using the
U.S. banking system. This exception has been interpreted in a manner inconsistent
with the underlying policy. For example, certificates of deposit have been issued by
a U.S. affiliate in a transaction structured to take advantage of the bank exception.
Under the proposal contained in the Administration's F Y 2005 Budget, the
exception for deposits with persons carrying on the banking business would be
modified to eliminate this potential for abuse.
Proposed Legislation to Modify Tax Rules for Individuals Who Give Up U.S.
Citizenship or Green Card Status - If an individual gives up U.S. citizenship, or
terminates long-term U.S. residency, with a principal purpose of avoiding U.S. tax,
the individual is subject to an alternative tax regime for 10 years. The
Administration's F Y 2005 Budget proposes changes designed to improve
compliance with the expatriation rules.
Proposed Legislation to Stop Abuses by Requiring Charitable Deductions
to Reflect Accurately the Value of the Donation - S o m e taxpayers are abusing
the laws designed to support charities by claiming deductions for contributions of
certain property (e.g., patents, intellectual property, and motor vehicles) that far
exceed the value of the property donated. The Administration's F Y 2005 Budget
proposes to impose additional appraisal requirements and, in the case of patents
and certain other intellectual property, limit the amount that can be deducted to
match the value of the donation.
• Proposed Legislation to Stop Abuses of Section 529 College Savings Plans
- Section 529 college savings plans involve a number of issues that are not clearly
answered by current law. A s a result, these savings plans could be abused to
Page 10 of 13
3-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
avoid transfer taxes. The Administration's F Y 2005 Budget proposes to clarify the
rules to prevent abuse and to m a k e the applicable rules more equitable. The
Administration's proposal would further encourage savings for college expenses
through these increasingly popular plans.
The Administration's Legislative Proposals Will Give the IRS Important Tools
and E n h a n c e Its Ability T o C o m b a t Abusive Tax Shelters
The Administration's FY 2005 Budget contains a number of important legislative
proposals that will allow the IRS to deal more effectively with abusive tax shelters.
M a n y of these proposals are designed to end practices used by s o m e taxpayers
and promoters to impede or delay examination. Taxpayers w h o are willing to enter
into abusive transactions and promoters w h o are willing to recommend abusive
transactions should be willing to disclose these transactions and subject them to
IRS scrutiny.
Proposed Legislation to Permit Injunction Actions against Promoters S o m e promoters repeatedly disregard their legal obligations, including the
registration and list-maintenance requirements. The Administration's F Y 2005
Budget again proposes to confirm the Government's authority to enjoin the most
egregious promoters of tax shelters, as it is doing currently with promoters of tax
scams directed primarily at individuals and small businesses.
• Proposed Legislation to Impose a New Penalty for the Failure to Report an
Interest in a Foreign Financial Account - Individual taxpayers are required to
disclose on their tax returns interests in a foreign financial account, such as a bank
account. The Administration's F Y 2005 Budget again proposes a n e w civil penalty
for the failure to disclose foreign financial accounts, which often are used in tax
avoidance transactions.
• Proposed Legislation to Stop Taxpayers and Promoters from Using the
Federal Practitioner Privilege to Delay Disclosing Potential Tax Shelters S o m e practitioners and non-corporate taxpayers are claiming the statutory
practitioner-client privilege in order to delay the IRS' efforts to identify and examine
potential tax shelters. The Administration's F Y 2005 Budget again proposes to
eliminate the privilege with respect to tax shelters and proposes to confirm that the
identity of any person that a promoter is required to identify to the IRS is not
privileged.
Proposed Legislation to Eliminate the Incentive for Taxpayers and
Promoters to Delay Disclosing Potential Tax Shelters - S o m e taxpayers and
practitioners are delaying the IRS' efforts to identify and examine potential tax
shelters in order to run out the statute of limitations. The Administration's F Y 2005
Budget proposes to extend the statute of limitations for potential tax shelters that a
taxpayer fails to disclose until the transaction is disclosed to the IRS by either the
taxpayer or the promoter. The IRS, with the assistance of the Department of
Justice, is challenging inappropriate claims of privilege in the courts where
necessary.
• Proposed Legislation to Increase the Penalties for False or Fraudulent
Statements M a d e to Promote Abusive Tax Avoidance Transactions - Existing
penalties are insufficient to deter s o m e promoters from making false or fraudulent
statements regarding the claimed benefits of a potential tax shelters. The
Administration's F Y 2005 Budget proposes to increase significantly the penalty for
making false or fraudulent statements to up to 50 percent of the fees earned.
The Administration's Legislative Proposals Will Enhance The IRS'
Effectiveness Without Compromising Taxpayer Protections
The Administration is committed to exploring ways in which the IRS can work more
effectively without compromising taxpayer protections. By working more effectively,
the IRS can devote more resources to a range of priorities, including abusive
transactions. Americans must be confident that the IRS is taking all appropriate
actions to ensure that all taxpayers are paying their fair share.
Page 11 of 13
S-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
• Proposed Legislation to Expand the Use of Electronic Filing - The IRS has
taken a number of steps to expand the availability and increase the use of
electronic filing, which reduces costs and speeds processing for both taxpayers and
the Government. The Administration's F Y 2005 Budget again proposes to extend
the April 15 filing date to April 30 for returns that are filed electronically, provided
that any tax due also is paid electronically. This proposal would encourage more
taxpayers to file electronically and allow the IRS to process more returns and
payments efficiently.
• Proposed Legislation to Permit Private Collection Agencies to Support the
IRS' Collection Efforts - The IRS' resource and collection priorities do not permit
the IRS to continually pursue all outstanding tax liabilities. M a n y taxpayers are
aware of their outstanding tax liabilities but have failed to pay them, and the IRS
cannot continuously pursue each taxpayer with an outstanding liability. The
Administration's F Y 2005 Budget again proposes to allow private collection
agencies, or P C A s , to support the IRS' collection efforts in specific, limited ways.
The proposal would enable the government to reach these taxpayers to obtain
payment while allowing the IRS to focus its own enforcement resources on more
complex cases and issues. P C A s would not have any enforcement power and
would be carefully monitored to ensure that taxpayer rights are carefully protected.
• Proposed Legislation to Curb Frivolous Returns and Submissions - Some
taxpayers are abusing taxpayer protections, such as the collection due process
procedures, by making frivolous arguments to in order to delay or impede tax
administration. The Administration's F Y 2005 Budget again proposes to increase
the penalty for frivolous returns and allow the penalty to be applied to frivolous
submissions that are not withdrawn after IRS request. The IRS would be permitted
to disregard non-return frivolous submissions that are not withdrawn.
• Proposed Legislation to Terminate Installment Agreements if Taxpayers Fail
to File Returns or M a k e Tax Deposits - The IRS cannot terminate an installment
agreement even if a taxpayer fails to file required returns or fails to m a k e required
federal tax deposits. The Administration's F Y 2005 Budget again proposes to
permit the IRS to terminate an installment agreement in these situations.
• Proposed Legislation to Streamline the Handling of Collection Due Process
Cases - The rules regarding the proper court to review a collection due process
case are unnecessarily complicated and have been used by s o m e taxpayers to
delay tax administration. The Administration's F Y 2005 Budget again proposes to
consolidate jurisdiction over collection due process cases in the Tax Court.
• Proposed Legislation to Improve Procedures for Taxpayers Seeking to
Resolve Their Tax Liabilities - The IRS must be able to work quickly with
taxpayers w h o are seeking to resolve their tax liabilities in good faith. The
Administration's F Y 2005 Budget again proposes to permit the IRS to enter into
installment agreements that do not guarantee full payment of a liability over the life
of the agreement. This will permit the IRS to work with a broader range of taxpayers
w h o desire to resolve their tax liabilities. The Administration's F Y 2005 Budget also
again proposes to expedite the review process for accepted offers-in-compromise.
The Administration Is Reining In International Tax Abuses
International tax abuses are particularly difficult to address, and the Administration
is using all available tools to curtail abusive transactions and practices in this area.
• Significantly Expanded Network of Bilateral Tax Information Exchange
Relationships - In the last two years, the United States has negotiated and
concluded important n e w tax information exchange agreements with nine significant
offshore financial centers, including The Bahamas, the British Virgin Islands, and
the C a y m a n Islands. Each of these agreements reflects the international standards
for tax information exchange that the United States has been a leader in
establishing, and in each case the agreement is the first such agreement entered
into by the offshore financial center with any country.
Page 12 of 13
JS-1184: Bush Administration's Aggressive Actions to Combat Abusive Tax Shelters
• Prevented Tax Avoidance on L u m p S u m Pension Distributions - The n e w
2003 income tax treaty with the United Kingdom eliminated an abuse under which a
person would establish transitory residence in the United Kingdom prior to receiving
from a U.S. pension fund a lump s u m distribution that otherwise would be taxable in
the United States in order to claim tax exemption on the distribution in both the
United States and the United Kingdom.
Page 13 of 13
[S-1185: President Bush Urges Congress to Make Tax Cuts Permanent
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 20, 2004
JS-1185
President Bush Urges Congress to Make Tax Cuts Permanent
Today's Presidential Action
«
President Bush today called on Congress to make his tax cuts permanent and
discussed with taxpayers his plan to create jobs in America and to continue to grow
and strengthen the economy.
« New figures released today by the Treasury Department demonstrate the
real benefits of the Presidents tax relief for all Americans.
• Last July and August when tax relief checks went out, families with
children received up to $400 per child jV in all, 24 million families received
tax relief totaling $14 billion.
•
The 2003 tax relief will also be felt this spring, as the Treasury
Department estimates that Americans will receive an extra $50 billion in
higher refunds and lower tax payments for the 2003 tax year when they file
their taxes on April 15th.
•
For the 2004 tax year, 111 million families will save an average of
$1,586 because of the tax relief, a total of $176 billion in additional tax relief.
The Presidents Tax Relief is Working
« Americans economy is strong and getting stronger. More Americans than
ever own their homes. More businesses are investing. Indicators of manufacturing
activity are the highest in the last two decades, and economic growth in the second
half of 2003 was the highest in almost 20 years. Stock market wealth has
increased by more than $4 trillion over the past 12 months, and more than 365,000
jobs have been added in the last five months. Because of the continuing effects of
President Bushj|s tax relief, workers will continue to keep more of what they earn in
the future, and small businesses will be better able to invest and grow. The
President]|s policies are helping to put the economy on a path to sustained growth
and job creation, but w e cannot rest until every American w h o wants to work can
find a job.
« Over the past three years, President Bush has proposed and signed into
law three separate tax relief measures, resulting in significant tax relief for
millions of American families and businesses. Failure to extend the
President! ]s tax cuts permanently would dramatically increase the burden on
American taxpayers in future years. For example:
• In 2005, the increased child credit, additional marriage penalty relief,
and expanded 10-percent bracket will shrink, increasing the tax burden on a
family of four earning $40,000 by $915;
•
In 2006, allowable small business expensing will shrink from $100,000
to just $25,000, increasing the cost of capital investments for Americans
small businesses;
•
In 2009, the top tax rate on dividends will increase from 15 to 35
percent, while the tax on capital gains will climb from 15 to 20 percent,
raising the tax burden on retirees and families investing for their future; and
Page 1 of 2
S-1185: President Bush Urges Congress to Make Tax Cuts Permanent
• In 2011, the tax rate relief, new 10-percent tax bracket, death tax repeal,
marriage penalty relief, and all the remaining tax relief enacted over the past
three years will sunset, resulting in tax increases for every American m a n or
w o m a n w h o pays income taxes.
« The cumulative effect of tax relief on the economy has been strong,
laying the groundwork for increased economic growth and job creation.
According to the Treasury Department, by the last quarter of 2003, the tax
relief signed by President Bush had:
• Reduced the unemployment rate by nearly 1 percentage point below where
it would have been otherwise;
• Increased the jobs available to Americans by as many as 2 million; and
• Increased real G D P by as much as 3 percent.
Page 2 of 2
S-1186: Treasury Promotes Financial Education in Miami
PHLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 20, 2004
JS-1186
U.S. Treasury Official Visits Miami to Promote Financial Education and
Launch Spanish Language Financial Education Resource Guide
The Department of the Treasury today announced that Kristin Smith, Director of the
Office of Financial Education (OFE), is visiting Miami to promote financial education
within the Hispanic community.
While in Miami, Smith will present an honorary certificate of recognition to the
Greater Miami Prosperity Campaign for its successes in providing financial
education to the community. In addition, Smith will launch the Spanish language
version of the OFE's online Federal Financial Education Resource Directory,
Directorio Federal de Educacion Financiera, during the " W o m e n & Money" Hispanic
Financial Literacy Conference sponsored by the Women's Bureau of the
Department of Labor at Miami Dade College.
"Treasury's Office of Financial Education helps Americans access financial
education programs to obtain the knowledge and skills they need to make informed
financial choices throughout their lives." said Office of Financial Education Director
Kristin H. Smith. "To enhance financial literacy in America, w e highlight effective
financial education programs across the country to increase the program's visibility
within the community and try to make it easier for individuals to utilize existing
resources."
The Greater Miami Prosperity Campaign's goals are to increase the number of
workers in Miami-Dade County claiming the refundable federal Earned Income Tax
Credit in the upcoming tax season, to promote financial education, and to enhance
these workers' ability to build assets by linking them to financial institutions and
asset development programs.
The Directorio Federal de Educacion Financiera will provide an estimated 29 million
U.S. residents w h o speak Spanish at home with access to the many financial
education resources available within the federal government. The guide includes
information on fifteen separate resources and programs available in Spanish,
catalogued by subject area, program name, and sponsoring organization. This
information can also be used to assist organizations that implement financial
education initiatives within the Hispanic community.
The Spanish-language directory is available through the OFE's website at
www.treasury.gov/financialeducation.
The Department of the Treasury's Office of Financial Education was established in
M a y 2002. The O F E is responsible for focusing the Department's financial
education policymaking, and for ensuring coordination on financial education within
the Department and all of its bureaus. The O F E serves to provide the Department
of the Treasury with expertise on the many complex and interdisciplinary issues
involved in financial education, and is able to tap into the Department's wide base
of expertise on finance. The O F E also supports the efforts of the Financial Literacy
and Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies, and
commissions, which works to improve financial literacy and education for people
throughout the United States.
Page 1 of 2
[S-1186: Treasury Promotes Financial Education in Miami
Page 2 of 2
S-1188: Treasury Secretary John Snow Credit Union National Association ( C U N A ) Government Affair... Page 1 of 4
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 23, 2004
JS-1188
Treasury Secretary John W. Snow
Credit Union National Association (CUNA)
Government Affairs Conference
Washington, D C
Thank you, Dan, and thank you all for having m e here today.
It's always a pleasure to see Dan Mica... he is in a lot of the meetings I have with
members of the financial community, and I want you to know that he does a very
fine job representing you, the C U N A membership.
I enjoy having Dan in those meetings for a lot of the same reasons that I enjoyed
coming to this meeting last year, and again today - and that has to do with the
heart of the credit union community.
You are an extremely powerful group - in terms of dollars and influence - but you
also have a lot of heart. You're in the financial world to do good as well as to do
business... your motto of "not for charity, not for profit, but for service" rings true,
throughout your ranks. And it makes you a pleasure to work with.
When I came to this meeting last year, I was very new to my job. The President was
promoting his Jobs and Growth Tax Cut plan, and I was eager to help him out.
Because I know that tax cuts work, and I knew that our recovering economy needed
that kind of stimulus.
The President had inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
I'm pleased to report to you, this year, that those tax cuts that the President and I
agreed were necessary - and which the Congress thankfully passed - did work,
indeed.
Homeownership is up, unemployment is heading down, and GDP growth has been
strong.
The President's tax cuts provided the stimulus that was necessary to turn our
economic ship around... and they are now encouraging and allowing for the
economic growth that is continuing into the future.
• Economic growth in the second half of 2003 was the fastest since 1984;
• N e w h o m e construction was the highest in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Over 360,000 jobs have been created in the past five months;
• Unemployment claims - both initial claims and continuing claims - are well off
their peaks of last year, indicating improvement in the labor market;
S-1188: Treasury Secretary John Snow Credit Union National Association ( C U N A ) Government Affair... Page 2 of 4
• In the middle of this month, the D o w closed at a 32-month-high. This translates
into more than three trillion dollars of growth in value in the markets.
These economic indicators all point to the same conclusion: economic growth is
robust and will be sustained.
However, there is more to do. We are not, by any means, satisfied.
There are still Americans who want to find work and cannot... and this
Administration will not rest until that most critical need is met and until every
American looking for work can find a job.
The President's proposed budget, which we sent up to the hill a few weeks ago,
addresses that need by continuing to focus on improving our economy... by making
those tax cuts permanent, encouraging small business growth and investment. And
by holding the line on spending. This combined effort is designed to cut our deficit
in half in five years.
This issue of continuing to grow the economy is so essential... and I know that you
understand that.
I see credit unions as playing an important role in economic growth.
Your dedication to small-business lending is one of the major reasons why I say
that.
Small business is at the foundation of this great economy, and credit unions have
been there for entrepreneurs when they needed you the most.
As of last year, credit unions were welcomed into the SBA lending programs, and I
hope that has helped out both you and America's entrepreneurs as m u c h as this
Administration hoped it would.
You know as well as I do: small business is where the jobs come from. We estimate
that between two-thirds and three-quarters of recent net n e w jobs are coming from
that sector.
That's why we want to make small business tax cuts permanent, and that's why I
want to c o m m e n d the credit union community for financing America's hard-working
small-business owners!
There is something that is especially true when we talk about your lending activity
to the entrepreneurial community... and that is the fact that, as a group, you really
understand the value of relationships, and of working together... it m a k e s you
unique.
This quality makes you valuable to your customers, and over the last couple of
years has m a d e you valuable to your country... because you're working so well with
the Treasury Department... we're partners, working together to fight the war on
terror.
Out of the horror of September 11th, 2001, came a tremendous resolve in the
financial community to cut off the terrorists' lifeblood: their money.
Institutions large and small have committed themselves to the task.
America's credit unions have done everything that the Treasury Department has
asked of you during this fight, and I want to personally thank you for your efforts. In
a very real sense, together w e have forged a partnership in this fight.
S-1188: Treasury Secretary John Snow Credit Union National Association ( C U N A ) Government Affair... Page 3 of 4
For example, your compliance with the information sharing provisions of Section
314 of the Patriot Act has been exemplary.
Under our 314 process, law enforcement provides the names of suspected
terrorists or significant m o n e y launderers to Treasury's Financial Crimes
Enforcement Network (FinCEN), which scrubs the n a m e s and, if appropriate, sends
them on to you. We've asked that you then search your recent account and
transaction records for potential matches, and report them back to FinCEN.
You've done it, and our country is safer because of it.
We understand that the 314 process is an extraordinary tool... it is one that
provides law enforcement with valuable leads to follow the m o n e y trail. And without .
your help it would be useless.
We've also asked you to establish risk-based procedures to verify the identity of
your customers w h o open accounts, pursuant to section 326 of the Patriot Act.
While w e insist that you form a reasonable belief as to the customer's identity, w e
have also worked hard to ensure that the regulation give you the flexibility to decide
which forms of identification you will accept to verify customer identity. This reflects
our judgment that you are in the best position to m a k e such decisions. W e believe
this flexibility enhances the effectiveness of this regulation.
And we're always looking for ways to provide you with more and better guidance
concerning FinCEN's regulations. This is our part of the bargain, our half of the
partnership. S o let's keep up the dialog... let us know w h e n we're not clear, or
w h e n w e can do better - because the better our regulations are understood by you,
the more successful our critical enforcement efforts will be.
So please know that we appreciate our working relationship on the war on terror,
and that w e view you as a partner in other critical ways, as well.
You're a partner in economic growth, as I mentioned before.
You're also a partner in the effort to increase financial literacy in this country.
You are closer to your customers than a lot of financial institutions are. You
therefore have an opportunity to contribute in a unique w a y to financial literacy
efforts.
I'm pleased to say that a multitude of individuals and organizations like yoursacross the m a n y agencies of government, a m o n g m e m b e r s of Congress, and
throughout the private sector - are dedicating major resources to improve financial
literacy in America.
In other words, there is a serious movement afoot, and it is a good one.
President Bush is dedicated to this cause, which is why the Treasury Department
created the Office of Financial Education in M a y of 2002.
Its work was then recognized by Congress in Title Five of the Fair and Accurate
Credit Transactions Act, which the President signed this past December.
Treasury's Financial Education Office now serves as the supporting office for a new
Financial Literacy Commission, w h o s e work is to complement, encourage and
sometimes coordinate the work of the m a n y individuals and institutions that are
committed to greater financial literacy in America.
I would also like to see the Commission identify some areas that need the most
help, the quickest... and credit unions can help us do that.
S-1188: Treasury Secretary John Snow Credit Union National Association ( C U N A ) Government Affair... Page 4 of 4
For example: I think w e have a tremendous opportunity to start fresh with a n e w
generation... to ensure that tomorrow's young adults understand h o w important it is
to save, and h o w to protect themselves from identity theft, in the s a m e w a y that
they understand the basics of physical health or road safety.
There is a tremendous interest on the part of high school students to learn the
financial facts of life: h o w to m a n a g e a credit card, h o w to save and invest, h o w
important it is to save for retirement at the beginning of a career, not at the end.
When you consider the fact that the financial tragedy of bankruptcy is growing
fastest a m o n g young adults in their early 20s, it becomes clear that w e must work
to satisfy the natural desire of young people to learn n o w and therefore reduce this
problem for the next generation.
Another group that has an immediate need is our population of new immigrants to
this country.
Many new immigrants come to America from places where consumer financial
services are not c o m m o n , where checking accounts and credit cards and mortgage
loans are virtually unknown, and where a bank is not seen as a safe place to put
your money. They do not know h o w to get involved in the financial mainstream
here, and so they remain outside of the mainstream, prey to the loan sharks and
the financial predators.
You and your staff are uniquely positioned to reach out to these groups and others
in need of financial education to help bring them into the financial mainstream,
where they can safely build up their assets, invest and save for their futures and
their children's futures.
A s with so m a n y other things, w e accomplish the most w h e n w e work together.
Whether it's fighting terrorists, or teaching teenagers about financial responsibility,
or helping entrepreneurs pursue their American Dreams.
I'm glad to work with the nation's credit unions on all these efforts.
I thank you for the work you do, and the chance to speak to you today.
Have a great conference.
[S-1189: Treasury and IRS Issue Proposed Rules on Student Exception to FICA Employment Tax
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 24, 2004
JS-1189
Treasury and IRS Issue Proposed Rules on Student Exception
to FICA Employment Tax
Today, Treasury and the IRS issued proposed regulations concerning the exception
from FICA employment tax for students employed by the school, college or
university where the student is pursuing a course of study. The proposed
regulations expand upon existing regulations and guidance, including clarifying that
whether an organization is a school, college or university is determined based on
the primary function of the organization. The proposed regulations also clarify that
determination of whether employees are students for purposes of the exclusion is
m a d e by examining the individual's employment relationship with the employer to
determine if employment or education is predominant in the relationship.
The regulations make conforming changes for purposes of Federal unemployment
taxes, for which there is an identical exception. These rules have particular
relevance in determining whether a medical resident providing services to a hospital
is considered a student for employment tax purposes.
In addition, the IRS released a notice suspending Revenue Procedure 98-16, which
provided that students enrolled at least half-time at certain institutions of higher
education qualify for the student FICA exception. The notice proposes a n e w
revenue procedure that is consistent with the proposed regulations and provides
interim reliance. Colleges and universities that have been relying on the safe
harbor provided in Rev. Proc. 98-16 will generally be unaffected by this guidance.
Related Documents:
• The text of Notice 2004-12
Page 1 of 1
Part III - Administrative, Procedural, and Miscellaneous
Proposed Revenue Procedure Regarding Services that Qualify For the Student F I C A Exception
Notice 2004-12
I. Overview and Purpose
This notice contains a proposed revenue procedure providing a safe harbor that certain
institutions of higher education, and certain affiliated organizations can use in applying the exception for
services performed by a student provided under § 3121(b)(10) of the Internal Revenue Code (student
F I C A exception). A previous version of this safe harbor was issued in Rev. Proc. 98-16, 1998-1 C.B.
403. However, the Service has recently proposed amendments to the Employment Tax Regulations
interpreting § 3121 (b)( 10) in order to clarify specific issues that have arisen with taxpayers and in
litigation (see proposed regulations § 31.3121 (b)( 10)- 2(c), (d), and (e) published in the Federal
Register on February 25, 2004 ( X X Fed. Reg. X X X X ) ) . In order to provide guidance that is
consistent with the proposed regulations in all respects, the Service is suspending Rev. Proc. 98-16 and
proposing to replace it with the revenue procedure contained in this notice.
The proposed revenue procedure updates the safe harbor of Rev. Proc. 98-16 in several
respects that align it with the proposed regulations. First, the proposed revenue procedure adds a
primary function requirement to the definition of an institution of higher education. Section 3121 (b)( 10)
applies only to services performed in the employ of a school, college or university, or an affiliated §
509(a)(3) organization. Under the proposed regulations and the n e w safe harbor, an organization can
be a school, college or university only if its primary function is to conduct educational activities. Thus, in
order to take advantage of the safe harbor in the revenue procedure, an institution must satisfy not only
the Department of Education's regulations at 34 C.F.R. § 600.4 and satisfy the accreditation
requirements of 34 C.F.R. § 600.2, as was required in Rev. Proc. 98-16, but also must have education
and instruction as its primary function The primary function requirement m a y m a k e the exception under
§ 3121(b)(10) unavailable to certain institutions of higher education that are embedded within a larger
organization like a hospital or museum.
Second, the proposed revenue procedure does not permit an institution to apply the student
F I C A exception to services performed by an employee w h o regularly works 40 or more hours per
week. Under the existing regulations, services fall within the student F I C A exception only if they are
performed incident to and for the purpose of pursuing a course of study. The proposed regulations
clarify that an individual w h o regularly works forty or more hours per week has the status of a career
employee, and, accordingly, is not performing services incident to and for the purpose of pursuing a
course of study. The proposed revenue procedure follows the proposed regulations. The student
F I C A exception generally, and the safe harbor provided by the proposed revenue procedure
specifically, are still available for services performed by an employee w h o on occasion works 40 or
more hours per week and otherwise meets the requirements of the safe harbor.
Third, the proposed revenue procedure provides that an individual has career employee status if
the individual is a "professional employee." The proposed regulations provide that a professional
employee for purposes of the student F I C A exception is an employee whose primary duty consists of
the performance of services requiring knowledge of an advanced type in a field of science or learning,
whose work requires the consistent exercise of discretion and judgment in its performance, and whose
work is predominantly intellectual and varied in character. The proposed revenue procedure follows the
proposed regulations.
Fourth, the proposed revenue procedure expands the terms of employment that result in status
as a career employee. Rev. Proc. 98-16 provided that an individual was to be considered a career
employee if the employee was eligible to participate in one of several types of retirement plans, eligible
for reduced tuition (with certain exceptions), or otherwise classified by the institution of higher education
as a career employee. The proposed regulations adopt the same criteria for identifying individuals w h o
have the status of a career employee and adds to the list eligibility for a number of other benefits. The
proposed revenue procedure follows the proposed regulations, adding the additional criteria that cause
an individual to have career employee status and fall outside the scope of the safe harbor. Employees
considered as having the status of a career employee per se cannot have the status of a student for
purposes of the student F I C A exception.
Fifth, and finally, the proposed revenue procedure provides that an employee has career
employee status if the individual is required to be licensed under state or local law in order to perform
the services the individual provides to the school, college or university. The proposed revenue
procedure follows the proposed regulation.
II.
Request for C o m m e n t s
2
Comments are requested on the proposed revenue procedure. Comments m a y be submitted
on or before M a y 25, 2004, to Internal Revenue Service, P O B o x 7604, Washington, D C 20044,
Attn: CC:PA:LPD:PR (Notice 2004-12), R o o m 5203. Submissions m a y also be hand-delivered
Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier=s Desk at 1111
Constitution Avenue, N W , Washington, D C 20224, Attn: CC:PA:LPD:PR (Notice 2004-12), R o o m
5203. Submissions m a y also be sent electronically via the internet to the following email address:
Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2004-12) in the subject
line.
III. Effect on Other Documents
Rev. Proc. 98-16 is suspended effective February 25, 2004.
IV. Effective Date
The Service intends to issue a final revenue procedure at the same time that the proposed
regulations under § 3121(b)(10) are finalized. Until a final version of the proposed revenue procedure
is issued, taxpayers m a y rely on the proposed revenue procedure with respect to services performed on
or after February 25, 2004 (the date prop. Reg. § 31.3121(b)(10)-2(c) - (f) ( X X F R X X X X ) was
published in the Federal Register).
V. Proposed Revenue Procedure
SECTION 1. PURPOSE
This revenue procedure sets forth generally applicable standards for determining whether
service in the employ of certain public or private nonprofit schools, colleges, universities, or affiliated
organizations described in § 509(a)(3) of the Internal Revenue Code (the Code) performed by a
student qualifies for the exception from Federal Insurance Contributions Act (FICA) tax provided under
§ 3121(b)(10) of the Code (Student F I C A exception). These standards are intended to provide
objective and administrable guidelines for determining employment tax liability.
SECTION 2. SCOPE
.01 Institutions of higher education typically distinguish between career employees and student
employees. Sections 5 and 6 of this revenue procedure contain generally applicable standards for
determining whether or not services performed by employees of certain institutions of higher education
are eligible for the Student F I C A exception.
.02 The standards contained in this revenue procedure do not apply to employees w h o are postdoctoral
3
students, postdoctoral fellows, medical residents, or medical interns because the services performed by
these employees cannot be assumed to be incident to and for the purpose of pursuing a course of study.
The employment activities of these individuals overlaps with the activities comprising the course of
study, and thus it is not appropriate to apply the standards of this revenue procedure to these
individuals.
.03 The standards contained in this revenue procedure may not constitute the exclusive method for
determining whether the Student F I C A exception applies. If the standard for qualifying for the exclusion
described in section 6 of this revenue procedure (providing generally that an employee enrolled at least
half-time at an institution of higher education has the status of student) is not met, whether or not service
in the employ of a school, college, university, or affiliated organization described in § 509(a)(3) of the
Code will qualify for the Student F I C A exception will depend on consideration of all the facts and
circumstances.
SECTION 3. BACKGROUND
.01 Sections 3101 and 3111 of the Code impose social security and Medicare taxes (FICA taxes) on
employees and employers, respectively, equal to a percentage of the wages received by an individual
with respect to employment.
.02 Section 3121(a) of the Code defines "wages" for purposes of FICA taxes as all remuneration for
employment, with certain exceptions. Section 3121(b) of the Code defines "employment" as services
performed by an employee for an employer, with certain exceptions.
.03 Section 3121 (b)( 10) of the Code excepts from the definition of employment services performed in
the employ of a school, college, or university (whether or not that organization is exempt from income
tax), or an affiliated organization described in § 509(a)(3) of the Code, if the services are performed by
a student w h o is enrolled and regularly attending classes at that school, college or university.
Remuneration for services excluded from the definition of employment under § 3121(b)(10) of the
Code is not subject to F I C A taxes.
.04 Section 31.3121 (b)(10)-2 of the Employment Tax Regulations provides that whether an employee
has the status of a student is determined on the basis of the employee's relationship with the school,
college, or university for which the services are being performed. A n employee w h o performs services
in the employ of a school, college, or university as an incident to and for the purpose of pursuing a
course of study at the school, college, or university has the status of a student in the performance of
those services. Services that are not incident to and for the purpose of pursuing a course of study
do not qualify for the exception. If the employee performs services as an incident to and for the
purpose of pursuing a course of study and, therefore, has the status of a student, the amount of
4
remuneration for services performed by the employee, the type of services performed by the employee,
and the place where the services are performed are immaterial for purposes of the Student F I C A
exception.
.05 Section 218 of the Social Security Act (the Act), 42 U.S.C. section 418, allows states to provide
Social Security coverage for services performed by students for the public school the student is
attending under agreements established with the Social Security Administration. If a state has exercised
its option under § 218 of the Act to provide for coverage of student services, § 3121(b)(10) of the
Code provides that those services will not qualify for the Student F I C A exception.
SECTION 4. CERTAIN INSTITUTIONS OF HIGHER EDUCATION
.01 The standards contained in this revenue procedure apply to "institutions of higher education"
meeting the requirements of § 31.3121 (b)( 10)- 2(c) of the proposed Employment Tax Regulations. For
purposes of this revenue procedure, the term "institution of higher education" includes any public or
private nonprofit school, college, university within the meaning of prop. Reg. § 31.3121(b)(10)-2(c), or
affiliated organization described in § 509(a)(3) of the Code, that meets the requirements set forth in
Department of Education regulations at 34 C.F.R. § 600.4, as amended from time to time, and that is
accredited or preaccredited by a nationally recognized accrediting agency as defined in the Department
of Education regulations at 34 C.F.R § 600.2.
.02 Services for other institutions may also be eligible for the Student FICA exception. Thus, for
example, services performed by a student for a secondary school m a y be eligible for the Student F I C A
exception. Whether or not services for other institutions, such as secondary schools, qualify for the
Student F I C A exception is determined based on the facts and circumstances of each case.
SECTION 5. STUDENT FICA EXCEPTION NOT AVAILABLE FOR EMPLOYEES
WITH CAREER EMPLOYEE STATUS
.01 Services performed by individuals with career employee status are not eligible for the Student FICA
exception under the standard in section 6 of this revenue procedure because their services are not
incident to and for the purpose of pursuing a course of study. See prop. Reg. §31.3121 (b)( 10)2(d)(3)(ii).
.02 Career employee status. Services of an employee with career employee status are not incident to
and for the purpose of pursuing a course of study. A n employee m a y be considered to have career
employee status based on the employee's hours worked, whether the employee is a "professional
employee," the employee's terms of employment, or whether the employee is licensed under state or
local law to work in the field in which the employee performs services. These standards are set forth in
5
prop. Reg. § 31.3121 (b)( 10)-2(d)(3)(ii). A n employee has career employee status if the employee is
described in paragraph (1), (2), (3), or (4) of this section.
(1) Hours worked. An employee has the status of a career employee if the employee regularly
performs services 40 hours or more per week.
(2) Professional employee. An employee has the status of a career employee if the employee is a
professional employee. A professional employee is an employee—
(a) Whose primary duty consists of the performance of work requiring knowledge of an advanced type
in a field of science or learning customarily acquired by a prolonged course of specialized intellectual
instruction and study, as distinguished from a general academic education, from an apprenticeship, and
from training in the performance of routine mental, manual, or physical processes.
(b) Whose work requires the consistent exercise of discretion and judgment in its performance; and
(c) Whose work is predominantly intellectual and varied in character (as opposed to routine mental,
manual, mechanical, or physical work) and is of such character that the output produced or the result
accomplished cannot be standardized in relation to a given period of time.
(3) Terms of employment. An employee's terms of employment may indicate that the employee has
career employee status. A n employee with career employee status includes any employee w h o is-(a) Eligible to receive vacation, sick leave, or paid holiday benefits;
(b) Eligible to participate in any retirement plan described in § 401(a) of the Code that is
established or maintained by the employer; or would be eligible to participate if age and service
requirements were met;
(c) Eligible to participate in an arrangement described in § 403(b) of the Code, or would be eligible to
participate if age and service requirements were met;
(d) Eligible to participate in a plan described under § 457(a), or would be eligible to participate if age
and service requirements were met;
(e) Eligible for reduced tuition (other than qualified tuition reduction under § 117(d)(5) of the Code
provided to a teaching or research assistant w h o is a graduate student) because of the individual's
employment relationship with the institution;
(1) Eligible to receive employee benefits described under § 79 (life insurance), 127 (qualified
6
educational assistance), 129 (dependent care assistance programs), or 137 (adoption assistance); or
(g) Classified by the employer as a career employee.
(4) Licensure. An employee is a career employee if the employee is required to be licensed under state
or local law to work in thefieldin which the employee performs services.
.03 If an individual performs services in multiple job positions, the individual will be deemed to have
career employee status with respect to all of the positions if the individual has career employee status in
any one or more of the job positions.
SECTION 6. STANDARDS APPLICABLE TO UNDERGRADUATE AND GRADUATE
STUDENTS
.01 An individual who is a half-time undergraduate student or a half-time graduate or professional
student and w h o does not have the status of a career employee will qualify for the Student F I C A
exception under this revenue procedure with respect to services performed at or for an institution of
higher education described in section 4 of this revenue procedure in which they are enrolled or at
affiliated organizations described in § 509(a)(3) of the Code. Services performed by a student for any
other employer are not covered by the standards of this revenue procedure.
.02 An individual is deemed to be a half-time undergraduate or half-time graduate or professional
student if the individual does not have the status of a career employee status and is an undergraduate or
graduate student w h o is in the last semester, trimester, or quarter of a course of study requiring at least
two semesters, trimesters, or quarters to complete and is enrolled in the number of credit or unit hours
needed to complete the requirements for obtaining a degree, certificate, or other recognized educational
credential offered by that institution of higher education even if enrolled in less than half the number
required of full-time students.
.03 The determination of student status should be made at the end of the drop-add period and may be
adjusted thereafter at the institution of higher education's option. The determination of student status for
payroll periods ending before the end of the drop-add period m a y be based on the number of semester,
trimester, or quarter hours being taken at the end of the registration period for that semester, trimester,
or quarter.
.04 If an individual is described in section 6.01 or 6.02 of this revenue procedure, services performed
by the individual are eligible for the Student F I C A exception with respect to all services performed
during all payroll periods of a month or less that fall wholly or partially within the academic term.
7
.05 The Student F I C A exception does not apply to services performed by an individual w h o is not
enrolled in classes during school breaks of more thanfiveweeks (including summer breaks of more than
five weeks), other than services described in section 6.04. See Rev. Rul. 72-142, 1972-1 C.B. 317,
and Rev. Rul. 74-109, 1974-1 C.B. 288. However, the Student F I C A exception applies to
employment which continues during normal school breaks of 5 weeks or less during which the individual
is not eligible for the Student F I C A exception pursuant to section 6.01 of this revenue procedure
provided that the individual qualifies for the Student F I C A exception pursuant to section 6.01 of this
revenue procedure on the last day of classes or examinations preceding the break and is eligible to
enroll in classes for thefirstacademic period following the break.
.06 If the standards of this revenue procedure are met (and section 8 does not apply), the amount of
remuneration for services performed by the employee, the type of services performed by the employee,
and the place where the services are performed are immaterial. If the services performed by a student
otherwise described in section 6.01 or 6.02 are covered under an agreement pursuant to section 218 of
the Act, the Student F I C A exception does not apply.
.07 For provisions relating to domestic service performed by a student in a local college club, or local
chapter of a collegefraternityor sorority, see § 31.3121(b)(2)-1.
SECTION 7. DEFINITIONS
For purposes of the standard contained in section 6 of this revenue procedure, the following definitions
must be used. For purposes of the following definitions, the term "institution of higher education" means
an institution of higher education as defined in section 4 of this revenue procedure.
.01 Undergraduate student. The term "undergraduate student" has the meaning attributed to that term in
the Department of Education regulations at 34 C.F.R. section 674.2.
.02 Half-time undergraduate student. The term ,fhalf-time undergraduate student" has the meaning
attributed to that term in the Department of Education regulations at 34 C.F.R. section 674.2.
.03 Graduate or professional student. The term "graduate or professional student" means a student
who-(1) is enrolled at an institution of higher education for the purpose of obtaining a degree, certificate, or
other recognized educational credential above the baccalaureate level or is enrolled in a program leading
to a professional degree;
(2) has completed the equivalent of at least three years of full-time study at an institution of higher
8
education, either prior to entrance into the program or as part of the program itself; and
(3) is not a postdoctoral student, postdoctoral fellow, medical resident, or medical intern.
.04 Half-time graduate or professional student. The term "half-time graduate or professional student"
means an enrolled graduate or professional student, as defined in section 7.03 of this revenue
procedure, w h o is carrying at least a half-time academic workload at an institution of higher education
as determined by that institution according to its own standards and practices.
SECTION 8. ANTI-ABUSE RULE
The standards in this revenue procedure must be applied in a reasonable manner, consistent with the
purpose of excluding from employment only services that are performed as an incident to and for the
purpose of pursuing a course of study at an institution of higher education as defined in section 4 of this
revenue procedure. If the standards are inappropriately applied in a manner that conflicts with this
underlying purpose so as to manipulate or mischaracterize the nature of the relationship between an
employee and an institution of higher education, resulting in the improper avoidance of payment of FICA
taxes, then whether the Student FICA exception applies will be determined on the basis of all the facts
and circumstances, rather than on the basis of the specific standards set forth in section 6 of this revenue
procedure. For example, the standards would be inappropriately applied through the manipulation of
the relationship between employees and the institution of higher education if a university claimed that the
Student F I C A exception applied to research laboratory workers, w h o had been career employees, but
were converted to non-career status and required to enroll in a certificate program granting six credit
hours per semester for work experience in the laboratory. A s another example, if an individual w h o
was not a student worked for a university on a full-time basis for many years, in a job generally
performed by non-students (but nonetheless failed to meet the literal definition of career employee), and
then enrolled at the university for six credit hours of course work per semester while continuing the fulltime work in the same job, it m a y not be appropriate to apply the standards of this revenue procedure
to conclude that the individual's work has become incident to and for the purpose of pursuing a course
of study solely because the individual enrolled for this course work. In both of these examples, whether
the work is performed incident to and for the purpose of pursuing a course of study must be determined
on the basis of all the relevant facts and circumstances.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for services performed on or after February 25, 2004 (the date
prop. Reg. §31.3121 (b)( 10)-2(c) - (f) ( X X F R X X X X ) was published in the Federal Register).
The principal author of this notice is Stephen D. Suetterlein of the Office of Associate Chief
9
Counsel (Tax Exempt & Government Entities). However, other personnel from the Service and
Treasury Department participated in the development of this notice. For further information regarding
this notice contact Mr. Suetterlein at (202) 622-6040 (not a toll-free call).
10
S-1190: United States Designates bin Laden Loyalist
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 24, 2004
JS-1190
United States Designates bin Laden Loyalist
The Treasury Department today announced that Shaykh Abd-al-Majid AL-ZINDANI,
a loyalist to Usama bin Laden and supporter of al-Qaeda, has been designated by
the United States as a Specially Designated Global Terrorist under the authority of
Executive Order 13224 and the International Emergency Economic Powers Act.
His n a m e will be submitted to the U N Security Council's 1267 Committee's
consolidated list because of his support to bin Laden and al-Qaeda.
"With this action, the international community's drumbeat against terrorist financiers
continues to grow louder and the financial noose around al-Qaeda continues to
grow tighter," said Juan Zarate, Deputy Assistant Secretary for Terrorist Financing
and Financial Crime.
The U.S. has credible evidence that AL-ZINDANI, a Yemeni national, supports
designated terrorists and terrorist organizations.
AL-ZINDANI has a long history of working with bin Laden, notably serving as one of
his spiritual leaders. In this leadership capacity, he has been able to influence and
support many terrorist causes, including actively recruiting for al-Qaeda training
camps. Most recently, he played a key role in the purchase of weapons on behalf
of al-Qaeda and other terrorists.
AL-ZINDANI also served as a contact for Ansar al-lslam (Al), a Kurdish-based
terrorist organization linked to al-Qaeda, which is included in the U N 1267 sanctions
Committee list.
AL-ZINDANI is the founder and leader of the Al Iman University in Sanaa, Yemen,
which has over 5,000 enrollees. Al Iman students are suspected of being
responsible, and were arrested, for recent terrorist attacks, including the
assassination of three American missionaries and the assassination of the number
two leader for the Yemeni Socialist party, Jarallah Omar. Notably, John Walker
Lindh was also a student at Al Iman University before he joined the Taliban.
AL-ZINDANI, born circa 1950, has used the aliases Abdelmajid Al-Zindani and
Shaykh Abd Al-Majid Al-Zindani. H e holds a Y e m e n passport, no. A005487, which
was issued on August 13, 1995.
Executive Order 13224 provides means to disrupt the support network that funds
terrorism. Under this order, the United States government m a y block the assets of
individuals and entities providing support, financial or otherwise, to designated
terrorists and terrorist organizations. Blocking actions are critical to combating the
financing of terrorism.
When a blocking action is put into place, any assets that exist in the formal financial
system at the time of the orders are frozen. Blocking actions serve additional
functions as well, e.g., they act as a deterrence for non-designated parties w h o
might otherwise be willing to finance terrorist activity; expose terrorist financing
"money trails" that m a y generate leads to previously unknown terrorist cells and
financiers; disrupt terrorist financing networks by encouraging designated terrorist
supporters to disassociate themselves from terrorist activity and renounce their
affiliation with terrorist groups; terminate terrorist cash flows by shutting down the
Page 1 of 2
5-1190: United States Designates bin Laden Loyalist
pipelines used to m o v e terrorist- related assets; force terrorist to use alternative,
more costly, and higher-risk m e a n s of financing their activities; and engender
international cooperation and compliance with obligations under U N Security
Council Resolutions.
Designation under the UN Security Council's 1267 Committee's consolidated list
will trigger international obligations on all m e m b e r countries, requiring them to take
steps to prevent designated individuals and entities from continuing to fund or
otherwise support terrorism. It is also a critical action to publicly identify these
supporters of terrorism, providing warning to other entities that they are prohibited
from doing business with them.
The Treasury Department is committed to stopping terrorism by taking action
against those w h o fund it. With this designation, 351 individuals and entities will
have been designated under President Bush's Executive Order aimed at freezing
the assets of terrorists and their supporters - Executive Order 13224. At least $139
million in assets has been kept out of the control of terrorists as a result of efforts by
the United States and its allies.
Page 2 of 2
-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
Page 1 of
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 25, 2004
JS-1191
Testimony of
Barbara M. Angus, International Tax Counsel,
United States Department of the Treasury
before the Senate Committee on Foreign Relations
on Pending Income Tax Agreements
F E B R U A R Y 25, 2004
Mr. Chairman and distinguished Members of the Committee, I appreciate the
opportunity to appear today at this hearing to recommend, on behalf of the
Administration, favorable action on two income tax treaties that are pending before
this Committee. W e appreciate the Committee's interest in these agreements as
demonstrated by the scheduling of this hearing.
This Administration is dedicated to eliminating unnecessary barriers to cross-border
trade and investment. The primary means for eliminating tax barriers to trade and
investment are bilateral tax treaties. Tax treaties eliminate barriers by providing
greater certainty to taxpayers regarding their potential liability to tax in the foreign
jurisdiction; by allocating taxing rights between the two jurisdictions so that the
taxpayer is not subject to double taxation; by reducing the risk of excessive taxation
that m a y arise because of high gross-basis withholding taxes; and by ensuring that
taxpayers will not be subject to discriminatory taxation in the foreign jurisdiction.
The international network of over 2000 bilateral tax treaties has established a stable
framework that allows international trade and investment to flourish. The success
of this framework is evidenced by the fact that countless cross-border transactions,
from investments in a few shares of a foreign company by an individual to multibillion dollar purchases of operating companies in a foreign country, take place
each year, with only a relatively few disputes regarding the allocation of tax
revenues between governments.
The Administration believes that these agreements with Japan and Sri Lanka would
provide significant benefits to the United States and to our treaty partners, as well
as our respective business communities. The tax treaty with Japan is a critically
important modernization of the economic relationship between the world's two
largest economies. The agreement with Sri Lanka represents the first tax treaty
between our two countries, and reflects our continuing commitment to extending
our treaty network to emerging economies. W e urge the Committee and the
Senate to take prompt and favorable action on both agreements.
Purposes and Benefits of Tax Treaties
Tax treaties provide benefits to both taxpayers and governments by setting out
clear ground rules that will govern tax matters relating to trade and investment
between the two countries. A tax treaty is intended to mesh the tax systems of the
two countries in such a way that there is little potential for dispute regarding the
amount of tax that should be paid to each country. The goal is to ensure that
taxpayers do not end up caught in the middle between two governments, each of
which claims taxing jurisdiction over the same income. A treaty with clear rules
addressing the most likely areas of disagreement minimizes the time the two
governments (and taxpayers) spend in resolving individual disputes.
5-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
O n e of the primary functions of tax treaties is to provide certainty to taxpayers
regarding the threshold question with respect to international taxation: whether the
taxpayer's cross-border activities will subject it to taxation by two or more
countries. Treaties answer this question by establishing the minimum level of
economic activity that must be engaged in within a country by a resident of the
other country before the first country m a y tax any resulting business profits. In
general terms, tax treaties provide that if the branch operations in a foreign country
have sufficient substance and continuity, the country where those activities occur
will have primary (but not exclusive) jurisdiction to tax. In other cases, where the
operations in the foreign country are relatively minor, the h o m e country retains the
sole jurisdiction to tax its residents. In the absence of a tax treaty, a U.S. c o m p a n y
operating a branch or division or providing services in another country might be
subject to income tax in both the United States and the other country on the income
generated by such operations. Although the United States generally provides a
credit against U.S. tax liability for foreign taxes paid, there remains potential for
resulting double taxation that could m a k e an otherwise attractive investment
opportunity unprofitable, depriving both countries of the benefits of increased crossborder investment.
Tax treaties protect taxpayers from potential double taxation through the allocation
of taxing rights between the two countries. This allocation takes several forms.
First, the treaty has a mechanism for resolving the issue of residence in the case of
a taxpayer that otherwise would be considered to be a resident of both countries.
Second, with respect to each category of income, the treaty assigns the "primary"
right to tax to one country, usually (but not always) the country in which the income
arises (the "source" country), and the "residual" right to tax to the other country,
usually (but not always) the country of residence of the taxpayer. Third, the treaty
provides rules for determining which country will be treated as the source country
for each category of income. Finally, the treaty provides rules limiting the amount of
tax that the source country can impose on each category of income and establishes
the obligation of the residence country to eliminate double taxation that otherwise
would arise from the exercise of concurrent taxing jurisdiction by the two countries.
As a complement to these substantive rules regarding allocation of taxing rights, tax
treaties provide a mechanism for dealing with disputes or questions of application
that arise after the treaty enters into force. In such cases, designated tax
authorities of the two governments - known as the "competent authorities" in tax
treaty parlance - are to consult and reach an agreement under which the taxpayer's
income is allocated between the two taxing jurisdictions on a consistent basis,
thereby preventing the double taxation that might otherwise result.
The U.S. competent authority under our tax treaties is the Secretary of the
Treasury. That function has been delegated to the Director, International ( L M S B ) of
the Internal R e v e n u e Service.
In addition to reducing potential double taxation, treaties also reduce "excessive"
taxation by reducing withholding taxes that are imposed at source. Under U.S.
domestic law, payments to non-U.S. persons of dividends and royalties as well as
certain payments of interest are subject to withholding tax equal to 30 percent of the
gross amount paid. Most of our trading partners impose similar levels of
withholding tax on these types of income. This tax is imposed on a gross, rather
than net, amount. Because the withholding tax does not take into account
expenses incurred in generating the income, the taxpayer frequently will be subject
to an effective rate of tax that is significantly higher than the tax rate that would be
applicable to net income in either the source or residence country. T h e taxpayer
m a y be viewed, therefore, as having suffered "excessive" taxation. Tax treaties
alleviate this burden by setting m a x i m u m levels for the withholding tax that the
treaty partners m a y impose on these types of income or by providing for exclusive
residence-country taxation of such income through the elimination of sourcecountry withholding tax. Because of the excessive taxation that withholding taxes
can represent, the United States seeks to include in tax treaties provisions that
substantially reduce or eliminate source-country withholding taxes.
Our tax treaties also include provisions intended to ensure that cross-border
investors do not suffer discrimination in the application of the tax laws of the other
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S-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
country. This is similar to a basic investor protection provided in other types of
agreements, but the non-discrimination provisions of tax treaties are specifically
tailored to tax matters and therefore are the most effective m e a n s of addressing
potential discrimination in the tax context. The relevant tax treaty provisions
provide guidance about what "national treatment" m e a n s in the tax context by
explicitly prohibiting types of discriminatory measures that once were c o m m o n in
s o m e tax systems. At the s a m e time, tax treaties clarify the manner in which
possible discrimination is to be tested in the tax context. Particular rules are
needed here, for example, to reflect the fact that foreign persons that are subject to
tax in the host country only on certain income m a y not be in the s a m e position as
domestic taxpayers that m a y be subject to tax in such country on all their income.
Tax treaties also include provisions dealing with more specialized situations, such
as rules coordinating the pension rules of the tax systems of the two countries or
addressing the treatment of employee stock options, Social Security benefits, and
alimony and child support in the cross-border context. These provisions are
becoming increasingly important as the number of individuals w h o m o v e between
countries or otherwise are engaged in cross-border activities increases. While
these subjects m a y not involve substantial tax revenue from the perspective of the
two governments, rules providing clear and appropriate treatment can be very
important to each of the individual taxpayers w h o are affected.
In addition, tax treaties include provisions related to tax administration. A key
element of U.S. tax treaties is the provision addressing the exchange of information
between the tax authorities. Under tax treaties, the competent authority of one
country m a y request from the other competent authority such information as m a y
be necessary for the proper administration of the country's tax laws; the requested
information will be provided subject to strict protections on the confidentiality of
taxpayer information. Because access to information from other countries is
critically important to the full and fair enforcement of the U.S. tax laws, information
exchange is a priority for the United States in its tax treaty program. If a country
has bank secrecy rules that would operate to prevent or seriously inhibit the
appropriate exchange of information under a tax treaty, w e will not conclude a
treaty with that country. In fact, information exchange is a matter w e raise with the
other country before c o m m e n c e m e n t of formal negotiations because it is one of a
very few matters that w e consider non-negotiable.
Tax Treaty Negotiating Priorities and Process
The United States has a network of 56 bilateral income tax treaties covering 64
countries. This network includes all 29 of our fellow m e m b e r s of the O E C D and
covers the vast majority of foreign trade and investment of U.S. businesses. It is,
however, appreciably smaller than the tax treaty networks of s o m e other countries.
There are a number of reasons for this.
The primary constraint on the size of our tax treaty network may be the complexity
of the negotiations themselves. The various functions performed by tax treaties,
and particularly the goal of meshing two different tax systems, m a k e the negotiation
process exacting and time-consuming.
A country's tax policy, as reflected in its domestic tax legislation as well as its tax
treaty positions, reflects the sovereign choices m a d e by that country. Numerous
features of the treaty partner's particular tax legislation and its interaction with U.S.
domestic tax rules must be considered in negotiating an appropriate treaty.
Examples include whether the country eliminates double taxation through an
exemption system or a credit system, the country's treatment of partnerships and
other transparent entities, and h o w the country taxes contributions to pension
funds, the funds themselves, and distributions from the funds. A treaty negotiation
must take into account all of these and m a n y other aspects of the treaty partner's
tax system in order to arrive at an agreement that accomplishes the United States'
tax treaty objectives.
In any tax treaty negotiation, the two countries may come to the table with very
different views of what a final treaty should provide. Each country will have its o w n
list of positions that it considers non-negotiable. The United States, which insists
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5-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
on effective anti treaty-shopping and exchange of information provisions, and which
must accommodate the uniquely complex U.S. tax laws, probably has more nonnegotiable positions than most countries. For example, the United States insists on
inclusion of a special provision - the "saving clause" - which permits the United
States to tax its citizens and residents as if the treaty had not c o m e into effect, as
well as special provisions that allow the United States to apply domestic tax rules
covering former citizens and long-term residents.
Other U.S. tax law provisions that can complicate negotiations include the branch
profits tax and the branch level interest tax, rules regarding our specialized
investment vehicles, such as real estate mortgage investment conduits, real estate
investment trusts and regulated investment companies, and the Foreign Investors
in Real Property Tax Act rules. A s our international tax rules b e c o m e more and
more complicated, the number of special tax treaty rules that are required increases
as well.
Obtaining the agreement of our treaty partners on provisions of importance to the
United States sometimes requires other concessions on our part. Similarly, other
countries sometimes must m a k e concessions to obtain our agreement on matters
that are critical to them. In most cases, the process of give-and-take produces a
document that is the best tax treaty that is possible with that other country. In other
cases, w e m a y reach a point where it is clear that it will not be possible to reach an
acceptable agreement. In those cases, w e simply stop negotiating with the
understanding that negotiations might restart if circumstances change. Each treaty
that w e present to the Senate represents not only the best deal that w e believe w e
can achieve with the particular country, but also constitutes an agreement that w e
believe is in the best interests of the United States.
In establishing our negotiating priorities, our primary objective is the conclusion of
tax treaties or protocols that will provide the greatest economic benefit to the United
States and to U.S. taxpayers. W e communicate regularly with the U.S. business
community, seeking input regarding the areas in which treaty network expansion
and improvement efforts should be focused and information regarding practical
problems encountered by U.S. businesses with respect to the application of
particular treaties and the application of the tax regimes of particular countries.
The U.S. commitment to including comprehensive provisions designed to prevent
"treaty shopping" in all of our tax treaties is one of the keys to improving our overall
treaty network. Our tax treaties are intended to provide benefits to residents of the
United States and residents of the particular treaty partner on a reciprocal basis.
The reductions in source-country taxes agreed to in a particular treaty m e a n that
U.S. persons pay less tax to that country on income from their investments there
and residents of that country pay less U.S. tax on income from their investments in
the United States. Those reductions and benefits are not intended to flow to
residents of a third country. If third-country residents can exploit one of our treaties
to secure reductions in U.S. tax, the benefits would flow only in one direction. Such
use of treaties is not consistent with the balance of the deal negotiated. Moreover,
preventing this exploitation of our treaties is critical to ensuring that the third country
will sit d o w n at the table with us to negotiate on a reciprocal basis, so that w e can
secure for U.S. persons the benefits of reductions in source-country tax on their
investments in that country.
Despite the protections provided by the limitation on benefits provisions, there may
be countries with which a tax treaty is not appropriate because of the possibility of
abuse. With other countries there simply m a y not be the type of cross-border tax
issues that are best resolved by treaty.
For example, we generally do not conclude tax treaties with jurisdictions that do not
impose significant income taxes, because there is little possibility of the double
taxation of income in the cross-border context that tax treaties are designed to
address; with such jurisdictions, an agreement focused on the exchange of tax
information can be very valuable in furthering the goal of reducing U.S. tax
evasion.
The situation is more complex when a country adopts a special preferential regime
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5-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
for certain parts of the e c o n o m y that is different from the rules generally applicable
to the country's residents. In those cases, the residents benefiting from the
preferential regime do not face potential double taxation and so should not be
entitled to the reductions in U.S. withholding taxes accorded by a tax treaty, while a
treaty relationship might be useful and appropriate in order to avoid double taxation
in the case of the residents w h o do not receive the benefit of the preferential
regime. Accordingly, in s o m e cases w e have tax treaty relationships that carve out
certain categories of residents and activities from the benefits of the treaty. In other
cases, w e have determined that economic relations with the relevant country were
such that the potential gains from a tax treaty were not sufficient to outweigh the
risk of abuse, and have therefore decided against entering into a tax treaty
relationship (or have terminated an existing relationship).
Prospective treaty partners must evidence a clear understanding of what their
obligations would be under the treaty, including those with respect to information
exchange, and must demonstrate that they would be able to fulfill those
obligations. Sometimes a potential treaty partner is unable to do so. In other cases
w e m a y feel that a tax treaty is inappropriate because the potential treaty partner is
not willing to agree to particular treaty provisions that are needed in order to
address real tax problems that have been identified by U.S. businesses operating
there.
Lesser developed and newly emerging economies, for which capital and trade flows
with the United States are often disproportionate or virtually one way, m a y be
reluctant to agree to the reductions in source-country withholding taxes preferred by
the United States because of concerns about the short-term effects on their tax
revenues. These countries have two somewhat conflicting, objectives. They need
to reduce barriers to investment, which is the engine of development and growth,
and reducing source-country withholding taxes reduces a significant barrier to
inward investment. O n the other hand, reductions in source-country withholding
taxes m a y reduce tax revenues in the short-term. Because this necessarily
involves the other country's judgment regarding the level of withholding taxes that
will best balance these two objectives, our tax treaties with developing countries
often provide for higher m a x i m u m rates of source-country tax than is the U.S.
preferred position. Such a treaty nevertheless provides benefits to taxpayers by
establishing a stable framework for taxation. Moreover, having an agreement in
place m a k e s it easier to agree to further reductions in source-country withholding
taxes in the future. It is important to recognize that even where the current capital
and trade flows between two treaty countries are disproportionate, conclusion of a
tax treaty is not a zero-sum exercise. T h e goal of the tax treaty is to increase the
amount and efficiency of economic activity, so that the situation of each party is
improved.
For a country like the United States that has significant amounts of both inbound
and outbound investment, treaty reductions in source-country withholding taxes do
not have the s a m e one-directional impact on tax revenues, even looking just at the
short-term effects. Reductions in withholding tax imposed by the source country on
payments m a d e to foreign investors represent a short-term static reduction in
source-country tax revenues. However, reductions in foreign withholding taxes
borne by residents on payments received with respect to foreign investments
represent an increase in tax revenues because of the corresponding reduction in
the foreign tax credits that otherwise would offset the residents' domestic tax
liabilities. Thus, the reciprocal reductions in source-country withholding taxes
accomplished by treaty will have offsetting effects on tax revenues even in the short
term.
More importantly, looking beyond any net short-term effect on tax liabilities, an
income tax treaty is a negotiated agreement under which both countries expect to
be better off in the long run. These long-term economic benefits far outweigh any
net short-term static effects on tax liabilities. Securing the reduction or elimination
of foreign withholding taxes imposed on U.S. investors abroad can reduce their
costs and improve their competitiveness in connection with international business
opportunities. Reduction or elimination of the U.S. withholding tax imposed on
foreign investors in the United States m a y encourage inbound investment, and
increased investment in the United States translates to more jobs, greater
productivity and higher w a g e rates. T h e tax treaty as a whole creates greater
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S-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
certainty and provides a more stable environment for foreign investment. T h e
agreed allocation of taxing rights between the two countries reduces cross-border
impediments to the bilateral flow of capital, thereby allowing companies and
individuals to more effectively locate their operations in such a w a y that their
investments are as productive as possible. This increased productivity will benefit
both countries' economies. The administrative provisions of the tax treaty provide
for cooperation between the two countries, which will help reduce the costs of tax
administration and improve tax compliance.
Discussion of Proposed New Treaties and Protocols
I now would like to discuss the two agreements that have been transmitted for the
Senate's consideration. W e have submitted Technical Explanations of each
agreement that contain detailed discussions of the provisions of each treaty and
protocol. These Technical Explanations serve as an official guide to each
agreement.
Japan
The proposed Convention and Protocol with Japan was signed in Washington on
November 6, 2003. The Convention and Protocol are accompanied by an
exchange of diplomatic notes, also dated November 6, 2003. The Convention,
Protocol and notes replace the existing U.S.-Japan tax treaty, which w a s signed in
1971.
Because the existing treaty dates back to 1971, it does not reflect the changes in
economic relations between the two countries that have taken place over the last
thirty years. Today, the trade and investment relationship between the United
States and Japan, the world's two largest economies, is critical to creating
economic growth throughout the world.
The proposed n e w treaty significantly reduces existing tax-related barriers to trade
and investment between Japan and the United States. Reducing these barriers will
help to foster still-closer economic ties between the two countries, enhancing the
competitiveness of both countries' businesses and creating n e w opportunities for
trade and investment.
The existing treaty also is inconsistent in many respects with U.S. tax treaty policy.
The proposed n e w treaty brings the treaty relationship into m u c h closer conformity
with U.S. policy and generally modernizes the agreement in a manner consistent
with other recent treaties. At the s a m e time, several key provisions of the n e w
treaty represent "firsts" for Japan. The evolution embodied in this agreement m a y
very well provide important precedents for m a n y countries in the region that look to
Japan for guidance and leadership in this regard.
Perhaps the most dramatic advances in the proposed new treaty are reflected in
the reciprocal reductions in source-country withholding taxes on income from crossborder investments. The existing treaty sets m a x i m u m rates for withholding taxes
on cross-border interest, royalty and dividend payments that are m u c h higher than
the rates reflected in the U.S. model tax treaty and provided in most U.S. tax
treaties with developed countries. The n e w treaty substantially lowers these
m a x i m u m withholding tax rates, bringing the limits in line with U.S. preferred tax
treaty provisions. The m a x i m u m rates of source-country withholding tax provided in
the n e w treaty are as low as, and in m a n y cases significantly lower than, the rates
provided for in any other tax treaty entered into by Japan. These important
reductions in source-country withholding tax agreed in this n e w treaty reflect the
commitment of both governments to facilitating cross-border investment.
In today's knowledge-driven economy, intangible property developed in the United
States, such as trademarks, industrial processes or know-how, is used around the
world. Given the importance of the cross-border use of intangibles between the
United States and Japan, a primary objective from the U.S. perspective in
negotiating a n e w tax treaty with Japan w a s to overhaul the existing rules for the
treatment of cross-border income from intangible property. This goal is achieved in
the proposed n e w treaty through the complete elimination of source-country
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withholding taxes on royalties. This is the first treaty in which Japan has agreed to
eliminate source-country withholding taxes on royalties.
The proposed new treaty is a major change from the existing treaty, which allows
the source country to impose a 10 percent withholding tax on cross-border
royalties. T h e gross-basis taxation provided for under the existing treaty is
particularly likely to lead to excessive taxation in the case of royalties because the
developer of the licensed intangible w h o receives the royalty payments typically
incurs substantial expenses, through research and development or marketing. T h e
existing treaty's 10-percent withholding tax imposed on gross royalties can
represent a very high effective rate of source-country tax on net income w h e n the
expenses associated with such income are considered. In addition, because
withholding taxes can be imposed on cross-border payments where the taxpayer
has no presence in the source country, the existing treaty's allowance of such taxes
on royalties created a significant disparity in treatment between royalty income and
services and other income. This has been particularly problematic as the line
between the types of income is not always clear.
With the elimination of source-country royalty withholding taxes provided for in the
proposed n e w treaty, royalties will be taxed exclusively by the country of residence
on a net basis in the s a m e manner as other business profits. This eliminates the
excessive taxation that can occur under the existing treaty. Moreover, treating
royalties in the s a m e manner as business profits removes the disparity in treatment
between royalty income and services and other income and therefore eliminates
what has been a significant source of dispute and potential double taxation for U.S.
taxpayers under the existing treaty. A s a final note, this change in the U.S.-Japan
treaty relationship m a y well have positive effects for other U.S. treaty negotiations.
Japan's historic policy of retaining its right to impose withholding tax on royalties in
its tax treaties has encouraged other countries to do the same. T h e change in this
policy reflected in the n e w treaty m a y serve as an impetus to other countries to
consider agreeing by treaty to greater reductions in source-country withholding
taxes on royalties.
The proposed new treaty also reflects significant improvements in the rules
regarding cross-border interest payments. T h e existing treaty provides for a
m a x i m u m withholding tax rate of 10 percent for all interest payments other than a
narrow class of interest paid to certain government entities. T h e n e w treaty
includes provisions eliminating source-country withholding taxes for significant
categories of interest. T h e most important of these is the elimination of sourcecountry withholding tax for interest earned by financial institutions. D u e to the
highly-leveraged nature of financial institutions, imposition of a withholding tax on
interest received by such enterprises could result in taxation that actually exceeds
the net income from the transaction. T h e n e w treaty will eliminate this potential for
excessive taxation, with cross-border interest earned by financial institutions taxed
exclusively by the residence country on a net basis. T h e n e w treaty also provides
for the elimination of source-country withholding taxes in the case of interest
received by the two governments, interest received in connection with sales on
credit, and interest earned by pension funds. This elimination of source-country
withholding taxes on income earned by tax-exempt pension funds ensures that the
assets expected to accumulate tax-free to fund retirement benefits are not reduced
by foreign taxes; a withholding tax in this situation would be particularly
burdensome because there is no practical mechanism for providing individual
pension beneficiaries with a foreign tax credit for withholding taxes that were
imposed on investment income years before the retiree receives pension
distributions. These exemptions from source-country withholding tax for interest
provided in the n e w treaty are broader than in any other Japanese tax treaty.
In addition, the proposed new treaty significantly reduces source-country
withholding taxes with respect to all types of cross-border dividends. Under the
existing treaty, direct investment dividends (that is, dividends paid to companies
that o w n at least 10 percent of the stock of the paying company) generally m a y be
taxed by the source country at a m a x i m u m rate of 10 percent and portfolio
dividends m a y be taxed at a m a x i m u m rate of 15 percent. T h e n e w treaty reduces
the m a x i m u m rates of source-country withholding tax to 5 percent for direct
investment dividends and 10 percent for portfolio dividends. T h e n e w treaty also
provides for the elimination of source-country withholding taxes on certain
Page 7 of 12
5-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
intercompany dividends where the dividend is received by a c o m p a n y that o w n s
more than fifty percent of the voting stock of the c o m p a n y paying the dividend. This
provision is similar to provisions included in the U.S. treaties with the United
Kingdom, Australia, and Mexico.
The elimination of withholding taxes on this category of intercompany dividends is
substantially narrower than provisions in other Japanese treaties. In addition, the
n e w treaty includes a provision that eliminates source-country withholding taxes on
dividends paid to pension funds, which parallels the treatment of interest paid to
pension funds.
Treasury believes that this provision eliminating source-country withholding taxes
on certain intercompany dividends is appropriate in light of our overall treaty policy
of reducing tax barriers to cross-border investment and in the context of this
important treaty relationship. A s I have testified previously, the elimination of
source-country taxation of dividends is something that is to be considered only on a
case-by-case basis. It is not the U.S. model position because w e do not believe
that it is appropriate to agree to such an exemption in every treaty. Consideration
of such a provision in a treaty is appropriate only if the treaty contains anti-treatyshopping rules that meet the highest standards and the information exchange
provision of the treaty is sufficient to allow us to confirm that the requirements for
entitlement to this benefit are satisfied. Strict protections against treaty shopping
are particularly important w h e n the elimination of withholding taxes on
intercompany dividends is included in relatively few U.S. treaties. In addition to
these prerequisites, the overall balance of the treaty must be considered.
These conditions and considerations all are met in the case of the proposed new
treaty with Japan. T h e n e w treaty includes the comprehensive anti-treaty-shopping
provisions sought by the United States, provisions that are not contained in the
existing treaty. T h e n e w treaty includes exchange of information provisions
comparable to those in the U.S. model treaty. In this regard, Japan recently
enacted domestic legislation to ensure that it can obtain and exchange information
pursuant to a tax treaty even in cases where it does not need the particular
information for its o w n tax purposes.
The United States and U.S. taxpayers benefit significantly both from this provision
in the n e w agreement and from the treaty overall. T h e elimination of source-country
withholding taxes on intercompany dividends provides reciprocal benefits because
Japan and the United States both have dividend withholding taxes and there are
substantial dividend flows going in both directions. U.S. companies that are in an
excess foreign tax credit position will be able to keep every extra dollar they receive
if the dividends they repatriate to the United States are free of Japanese
withholding tax. T h e treaty as a whole reflects dramatic reductions in sourcecountry withholding taxes relative to the existing treaty. T h e elimination of
withholding taxes on royalties and certain interest w a s a key objective for the United
States; while these provisions secured in this n e w treaty are consistent with U.S.
tax treaty policy, they are an unprecedented departure from historic Japanese tax
treaty policy.
Another important change reflected in the proposed new treaty is the addition of an
article providing for the elimination of source-country withholding taxes on "other
income", which include types of financial services income that under the existing
treaty could have been subject to gross-basis tax by the source country. In
particular, the Protocol confirms that securities lending fees, guarantee fees, and
commitment fees generally will not be subject to source-country withholding tax and
rather will be taxable in the s a m e manner as other business profits.
The proposed new treaty provides that the United States generally will not impose
the excise tax on insurance policies issued by foreign insurers if the premiums on
such policies are derived by a Japanese enterprise. This provision, however, is
subject to the anti-abuse rule that denies the exemption if the Japanese insurance
c o m p a n y were to enter into reinsurance arrangements with a foreign insurance
c o m p a n y that is not itself eligible for such an exemption.
Another significant modernization reflected in the proposed new treaty is the
Page 8 of 12
5-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
inclusion of specific rules regarding the application of treaty provisions in the case
of investments in one country m a d e by residents of the other country through
partnerships and other flow-through entities. These rules coordinate the domestic
law rules of Japan and the United States in this area in order to provide for certainty
in results for cross-border businesses operated in partnership form.
In the case of shipping income, the proposed new treaty provides for exclusive
residence-country taxation of profits from the operation in international traffic of
ships or aircraft. This elimination of source-country tax covers profits from the
rental of ships and aircraft on a full basis; it also covers profits from rentals on a
bareboat basis if the rental income is incidental to profits from the operation of ships
or aircraft in international traffic. In addition, the n e w treaty provides an exemption
from source-country tax for all income from the use, maintenance or rental of
containers used in international traffic.
The proposed new treaty generally provides for exclusive residence-country
taxation of gains with narrow exceptions, which is generally consistent with U.S. tax
treaty preferences but is a departure from the source-country taxation of gains that
is provided for in recent Japanese treaties. The n e w treaty provides for sourcecountry taxation of share gains in two circumstances. First, the n e w treaty includes
a rule similar to that in U.S. domestic law under which gains from the sale of shares
or other interests in an entity investing in real estate m a y be taxed by the country in
which the real estate is located. Second, it contains a narrow rule dealing with
gains on stock in restructured financial institutions that w a s included at the request
of Japan. Under this rule, the source country m a y tax gains on stock of a financial
institution if the financial institution had received substantial financial assistance
from the government under rules relating to distressed financial institutions, the
stock w a s purchased from the government, and the stock is sold within five years of
such assistance. Under a very broad grandfather rule, this provision does not apply
to any stock held by an investor w h o m a d e an investment in such a financial
institution prior to the entry into force of the n e w treaty including any additional
stock in the financial institution that the investor acquires subsequently.
Like the existing treaty, the proposed new treaty provides that pensions and social
security benefits m a y be taxed only by the residence country. The n e w treaty also
provides rules regarding the allocation of taxing rights with respect to compensation
earned in the form of employee stock options.
The proposed new treaty provides rules governing income earned by entertainers
and sportsmen, corporate directors, government employees, and students that are
consistent with the rules of the U.S. model treaty. The n e w treaty continues and
improves a host-country exemption for income earned by teachers that is found in
the existing treaty, although not in the U.S. model.
The proposed new treaty contains a comprehensive limitation on benefits article,
which provides detailed rules designed to deny "treaty shoppers" the benefits of the
treaty. These rules, which were not contained in the existing treaty and which have
not been included in this form in other Japanese tax treaties, are comparable to the
rules contained in recent U.S. treaties.
At the request of Japan, the proposed new treaty includes an additional limit on the
availability of treaty benefits obtained in connection with certain back-to-back
transactions involving dividends, interest, royalties or other income. This provision
is substantially narrower than the "conduit arrangement" language found in the
2003 treaty with the United Kingdom. It is intended to address abusive transactions
involving income that flows to a third-country resident. Japanese domestic law
does not provide sufficient protection against these abusive transactions. T h e
stricter protections against this type of abuse that are provided under U.S. domestic
law will continue to apply.
The proposed new treaty provides relief from double taxation in a manner
consistent with the U.S. model. T h e n e w treaty also includes a re-sourcing rule to
ensure that a U.S. resident can obtain a U.S. foreign tax credit for Japanese taxes
paid w h e n the treaty assigns to Japan primary taxing rights over an item of gross
income. A comparable rule applies for purposes of the Japanese foreign tax credit.
Page 9 of 12
[S-1191: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
The proposed n e w treaty provides for non-discriminatory treatment (i.e., national
treatment) by one country to residents and nationals of the other. Also included in
the n e w treaty are rules necessary for administering the treaty, including rules for
the resolution of disputes under the treaty. The information exchange provisions of
the n e w treaty generally follow the U.S. model and m a k e clear that Japan will
provide U.S. tax officials such information as is relevant to carry out the provisions
of the treaty and the domestic tax laws of the United States. Inclusion of this U.S.
model provision w a s m a d e possible by a recent change in Japanese law.
Sri Lanka
The United States does not currently have an income tax treaty with Sri Lanka. The
proposed income tax Convention with Sri Lanka w a s signed in Colombo on March
14, 1985 but w a s not acted on by the Senate at that time because changes m a d e to
U.S. international tax rules by the Tax Reform Act of 1986 necessitated s o m e
modifications to the agreement. The proposed Protocol, which w a s signed on
September 20, 2002, a m e n d s the 1985 Convention to reflect changes in domestic
law since 1985 as well as developments in U.S. tax treaty policy and includes
modifications that better reflect U.S. tax treaty preferences. W e are requesting the
Committee to report favorably on both the 1985 Convention and the 2002 Protocol.
The proposed new treaty generally follows the pattern of the U.S. model treaty,
while incorporating s o m e provisions found in other U.S. treaties with developing
countries. T h e m a x i m u m rates of source-country withholding taxes on investment
income provided in the proposed treaty are generally equal to or lower than the
m a x i m u m rates provided in other U.S. treaties with developing countries (and s o m e
developed countries).
The proposed treaty generally provides a maximum source-country withholding tax
rate on dividends of 15 percent. Special rules consistent with those in the U.S.
model treaty apply to certain dividends paid by a U.S. real estate investment trust.
The proposed treaty provides a m a x i m u m source-country withholding tax rate on
interest of 10 percent. This source-country tax is eliminated in the case of interest
paid by one of the two governments or received by one of the two governments or
one of the central banks.
Under the proposed treaty, royalties may be subject to source-country withholding
taxes at a m a x i m u m rate of 10 percent. A s in m a n y treaties with developing
countries, the royalties article also covers rents with respect to tangible personal
property; in the case of such rents, however, the m a x i m u m withholding tax rate is 5
percent. These rules in the proposed treaty do not apply to rental income with
respect to the lease of containers, ships or aircraft, which is instead covered by the
specific rules in the shipping article.
The rules in the proposed treaty relating to income from shipping and air transport
are complicated in terms of drafting, but produce results that in most cases are
consistent with m a n y recent U.S. tax treaties. First and simplest, under the
proposed treaty income derived from the rental of containers used in international
traffic is taxable only in the country of residence and not in the source country.
Exclusive residence-country taxation of such income is the preferred U.S. position
reflected in the U.S. model treaty. Second, the proposed treaty provides that
income derived from the international operation of aircraft also is taxable only in the
country of residence. This rule eliminating source-country tax covers income
derived from aircraft leases on a full basis as well as profits from the rental of
aircraft on a bareboat basis if the aircraft are operated in international traffic by the
lessee or if the lease is incidental to other profits from the operation of aircraft.
Third, the rules in the treaty provide for s o m e source-country taxation of income
from the operation and rental of ships, but not to exceed the source-country tax that
m a y be imposed under any of Sri Lanka's other treaties. Sri Lanka has entered into
two treaties that eliminate source-country tax on income from the operation of ships
and has confirmed through diplomatic note that this exemption from source-country
tax will apply in the case of the United States as well.
The proposed treaty provides the basic tax treaty rule that business profits of a
resident of one of the treaty countries generally m a y be taxed in the other country
Page 10 of 12
S-11 y l: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
only w h e n such profits are attributable to a permanent establishment located in that
other country. T h e rules in the proposed treaty permit broader host-country
taxation than is provided for in the U.S. model treaty. In this regard, the definition of
permanent establishment in the proposed treaty is somewhat broader than the
definition in the U.S. model, which lowers the threshold level of activity required for
imposition of host-country tax. This permanent establishment definition is
consistent with other U.S. treaties with developing countries. In addition, the
proposed treaty provides that certain profits that are not attributable to the
permanent establishment m a y be taxed in the host state if they arise from business
activities carried on in the host state that are similar to those carried on through the
permanent establishment. These rules are quite similar to rules found in our tax
treaties with other developing countries.
The proposed treaty's rules for taxation of income from personal services similarly
are consistent with our recent treaties with developing countries. Under the
proposed treaty, income earned through independent personal services m a y be
taxed in the host country if they are performed through a fixed base or if the
individual performing the services w a s in the host country for more than 183 days in
any 12-month period. The proposed treaty provides rules governing income earned
by entertainers and sportsmen, corporate directors and government employees that
are broadly consistent with the rules of the U.S. model treaty. The proposed treaty
also includes a limited exemption from source country taxation of students.
The proposed treaty contains a comprehensive limitation on benefits article, which
provides detailed rules designed to deny "treaty shoppers" the benefits of the
treaty. These rules are comparable to the rules contained in the U.S. model and
recent U.S. treaties.
The proposed treaty also sets out the manner in which each country will relieve
double taxation. Both the United States and Sri Lanka will provide such relief
through the foreign tax credit mechanism, including a d e e m e d paid credit for
indirect taxes paid by subsidiary companies.
The proposed treaty provides for non-discriminatory treatment (i.e., national
treatment) by one country to residents and nationals of the other. Also included in
the proposed treaty are rules necessary for administering the treaty, including rules
for the resolution of disputes under the treaty.
The proposed treaty includes an exchange of information provision that generally
follows the U.S. model. Under these provisions, Sri Lanka will provide U.S. tax
officials such information as is relevant to carry out the provisions of the treaty and
the domestic tax laws of the United States. Sri Lanka has confirmed through
diplomatic note its ability to obtain and exchange key information relevant for tax
purposes. T h e information that m a y be exchanged includes information held by
financial institutions, nominees or persons acting in an agency or fiduciary capacity.
Treaty Program Priorities
We continue to maintain a very active calendar of tax treaty negotiations. We
currently are in ongoing negotiations with Bangladesh, Canada, Chile, Hungary,
Iceland and Korea. W e also have substantially completed work with the
Netherlands, France and Barbados and look forward to the conclusion of these n e w
agreements.
With respect to future negotiations, we expect to begin discussions soon with
G e r m a n y and Norway. Another key priority is updating the few remaining treaties
that provide for low withholding tax rates but do not include the limitation on benefits
provisions needed to protect against the possibility of treaty shopping. Also a
priority is entering into n e w treaties with the former Soviet republics that are still
covered by the old U.S.S.R. treaty (which does not include an adequate exchange
of information provision). W e also are focused on continuing to expand our treaty
network by entering into n e w tax treaty relationships with countries that have the
potential to be important trading partners in the future.
Page 11 or i z
S-11 y 1: Angus Testimony on Japan Tax Treaty and Sri Lanka Protocol
Significant resources have been devoted in recent years to the negotiation of new
tax treaties with Japan and the United Kingdom, two major trade and investment
partners for the United States and two of our oldest tax treaties. With the
completion of these important negotiations, w e believe that it would be appropriate
to update the U.S. model treaty to reflect our negotiating experiences since 1996
A n e w model will help facilitate the negotiations w e expect to begin in the near
future. W e look forward to working with the staffs of the Senate Foreign Relations
Committee and Joint Committee on Taxation on this project.
Conclusion
Let me conclude by again thanking the Committee for its continuing interest in the
ax treaty program, and the Members and staff for devoting the time and attention to
the review of these n e w agreements. W e appreciate the assistance and
cooperation of the staffs of this Committee and of the Joint Committee on Taxation
in the tax treaty process.
We urge the Committee to take prompt and favorable action on the agreements
before you today. Such action will help to reduce barriers to cross-border trade and
investment by further strengthening our economic relations with a country that has
been a significant economic and political partner for m a n y years and by expanding
our economic relations with an important trading partner in the developing world
Related Documents:
• Technical Explanation: Japan Treaty
• Technical Explanation: Sri Lanka Protocol
Page 12 of 12
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE
CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF
AMERICA AND THE GOVERNMENT OF JAPAN FOR THE AVOIDANCE OF DOUBLE
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO
TAXES ON INCOME AND ON CAPITAL GAINS, SIGNED AT WASHINGTON
ON NOVEMBER 6, 2003
This is a technical explanation of the Convention between the Government of the United
States of America and the Government of Japan for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income, signed at Washington on
November 6, 2003 (the "Convention"), and the Protocol also signed at Washington on November
6, 2003, which forms an integral part thereto (the "Protocol"). In connection with the negotiation
of the Convention, the delegations of the United States and Japan developed and agreed upon an
exchange of Diplomatic Notes (the "Notes"). The Notes constitute an agreement between the
two governments that shall enter into force at the same time as the entry into force of the
Convention. The Notes are intended to give guidance both to the taxpayers and to the tax
authorities of the Contracting States in interpreting the Convention. The Notes and Protocol are
discussed below in connection with relevant provisions of the Convention.
References are made to the Convention between the Government of the United States of
America and the Government of Japan for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with respect to Taxes on Income, signed at Tokyo on March 8, 1971 (the "prior
Convention"). The Convention and Protocol replace the prior Convention.
Negotiations took into account the U.S. Treasury Department's current tax treaty policy
and the Treasury Department's Model Income Tax Convention, published on September 20,
1996 (the "U.S. Model"). Negotiations also took into account the Model Tax Convention on
Income and on Capital, published by the Organization for Economic Cooperation and
Development, as updated in January 2003 (the " O E C D Model"), and recent tax treaties
concluded by both countries.
The Technical Explanation is an official guide to the Convention. It reflects the policies
behind particular Convention provisions, as well as understandings reached with respect to the
application and interpretation of the Convention. While the Convention does not include subject
matter headings or titles for the Articles, such headings are included in the Technical
Explanation for ease of use. The headings included generally correspond to headings of
analogous articles of the U.S. Model where possible, and it is not intended that any legal effect
be given to the headings or to the fact of their inclusion in the Technical Explanation.
References in the Technical Explanation to "he" or "his" should be read to mean "he or she" or
"his or her."
hfiisHf*
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE
CONVENTION BETWEEN THE G O V E R N M E N T OF THE UNITED STATES OF
AMERICA A N D THE G O V E R N M E N T OF THE DEMOCRATIC SOCIALIST
REPUBLIC OF SRI L A N K A FOR THE AVOIDANCE OF DOUBLE TAXATION
A N D THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES O N
INCOME SIGNED A T C O L O M B O M A R C H 14, 1985, AS A M E N D E D B Y
A PROTOCOL SIGNED AT WASHINGTON O N SEPTEMBER 20, 2002
This is a Technical Explanation of the Convention between the Government of
the United States of America and the Government of the Democratic Socialist Republic
of Sri Lanka for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income Signed at Colombo March 14, 1985 (the
"Convention"). The Convention was amended by a Protocol signed on September 20,
2002 (the "Protocol"), which was accompanied by an explanatory Exchange of Notes
(the "Notes").
Negotiations with respect to the Protocol took into account the U.S. Treasury
Department's current tax treaty policy and the U.S. Treasury Department's Model Income
Tax Convention published September 20, 1996 (the "U.S. Model"). Negotiations also
took into account the Model Income Tax Convention on Income and on Capital,
published by the Organization for Economic Cooperation and Development (the " O E C D
Model"), the United Nations Model Double Taxation Convention Between Developed
and Developing Countries (the " U N Model"), and recent tax treaties concluded by both
countries.
The Technical Explanation is an official guide to the Convention. It reflects the
policies behind particular Convention provisions, as well as understandings reached with
respect to the application and interpretation of the Convention.
References in the Technical Explanation to "he" or "his" should be read to mean
"he or she" and "his or her."
Article 1 (Personal Scope)
Paragraph 1
Paragraph 1 of Article 1 provides that the Convention applies to residents of the
United States or Sri Lanka, except where the terms of the Convention provide otherwise.
Under Article 4 (Resident) a person is generally treated as a resident of a Contracting
State if that person is, under the laws of that State, liable to tax therein by reason of his
domicile or other similar criteria. If, however, a person is considered a resident of both
Contracting States, a single state of residence (or no state of residence) is assigned under
Article 4. This determination generally governs for purposes of the Convention.
YfdSteborr/Al
5-1192: Treasury and IRS Issue Guidance on "Swaps"
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 25, 2004
JS-1192
Treasury and IRS Issue Guidance on "Swaps"
Today the Treasury Department and the Internal Revenue Service issued
proposed regulations regarding the taxation of contingent nonperiodic payments
with respect to notional principal contracts (NPCs). These contracts consist mainly
of those transactions referred to in the financial marketplace as "swaps."
Existing final regulations state that the income or deduction for a nonperiodic
payment must be recognized by a party to the N P C in an economic manner over
the full term of the N P C . The existing regulations implement this principle for fixed
nonperiodic payments, but do not contain any explicit rules or examples for
significant contingent nonperiodic payments, which are included in some NPCs.
S o m e taxpayers have taken the position that, regardless of economic expectations,
a party to a N P C need not recognize any income with respect to a contingent
nonperiodic payment before the amount of the payment is finally fixed (a "wait and
see" approach). Such a wait-and-see approach generally postpones the
recognition of taxable income and may let a taxpayer choose to enjoy winning
positions as sources of capital gain but to garner ordinary deductions from any
losers.
The proposed regulations set forth a pair of more economic methods of accounting
for significant contingent nonperiodic payments. First, a generally applicable
method requires a taxpayer to estimate the amount of any contingent future
payment and, on the basis of that estimate, to recognize an appropriate portion in
the each taxable year. Additional estimations must take place every year, and the
taxpayer must include or deduct a "true-up" adjustment each year to the extent that
the more up-to-date estimate indicates that prior accruals were wrong.
Second, for most NPCs, the taxpayer may instead elect to mark the NPCs to
market. That is, the taxpayer may choose to recognize income or deduction at the
end of each year, based on the extent to which the N P C s changed in value during
the year. Because many taxpayers are already required to mark their derivative
positions to market for financial statement purposes, taxpayers should find this
method particularly easy to use.
Related Documents:
• The text of the proposed regulations
Page 1 of 1
>RESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 25, 2004
2004-3-2-17-28-54-11523
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 $85,437 million as of the end of that week, compared to $86,609 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
February 13,2003
!003
February 20, 2004
86,609
85,437
TOTAL
1. Foreign Currency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
8,617
14.896
23.513
8,669
14,453
23.123
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
13.944
2.993
16,937
13.566
2,904
16,470
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position ~
22,288
22,088
3. Special Drawing Rights (SDRs)"
12,829
12,713
4. Gold Stock3
11,043
11.043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
February 13, 2003
Euro
1. Foreign currency loans and securities
Yen
February 20, 2004
TOTAL
^
Euro
Yen
TOTAL
u
2. a. Short positions
2.b. Long positions
3. Other
0
0
0
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
February 13. 2003
Euro
1. Contingent liabilities in foreign currency
Yen
TOTAL
February 20. 2004
Euro
Yen
TOTAL
0
0
2. Foreign currency securities with embedded
options
0
0
3. Undrawn, unconditional credit lines
0
0
0
0
La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
3.a. With other central banks
S.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
f
.a. Short positions
•a.l. Bought puts
•a.2. Written calls
b. Long positions
b.l. Bought calls
b.2. Written puts
Notes:
dudes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
wA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
Reserves for the prior w e e k 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 w e e k reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
5-1193: Treasury and IRS Shut D o w n Aggressive Executive Stock Transaction
Page 1 of 1
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®.
February 25, 2004
JS-1193
Treasury and IRS Shut Down
Aggressive Executive Stock Transaction
Today, the Treasury Department and the IRS issued a revenue ruling that would
shut down an aggressive transaction involving the exercise of stock options by
corporate insiders using debt financing provided by the corporation.
In these transactions, typically the corporate insider will exercise options he or she
holds by giving the company a promissory note. If the value of the stock later falls
below the face amount of the note, the company may agree to reduce the insider's
debt. Certain individuals have claimed that this debt reduction does not result in
taxable income.
Revenue Ruling 2004-37 provides that reduction of debt in these circumstances
does result in taxable income to the insider. By forgiving part of the purchase price,
the company has increased the amount of stock that the insider has received
without paying for the stock. If the stock was not paid for by the insider, the insider
will be treated as receiving compensation.
Acting Assistant Secretary for Tax Policy Greg Jenner stated, "Once again, we
have m a d e it clear that everyone has to play by the same rules. A corporate insider
whose compensation is increased because the company reduces the purchase
price on stock the insider has already purchased must pay tax on that increased
compensation."
The ruling also provides that a reduction in the interest rate under the note, or a
change in the note so that the executive no longer has personal liability, also would
result in compensation income.
Related Documents:
• The text of Revenue Ruling 2004-37
Parti
Section 83.--Property Transferred in Connection with Performance of Services
26 C.F.R. 1.83-4: Special rules.
(Also §§ 108, 3121, 3306, 3401,1.1001-3)
Rev. Rul. 2004-37
ISSUE
If an employee issued a recourse note to his or her employer in satisfaction of
the exercise price of an option to acquire the employer's stock and the employer and
employee subsequently agree to reduce the stated principal amount of the note, does
the employee recognize compensation income under § 83 of the Internal Revenue
Code?
FACTS
In Year 1, Employer, a corporation, grants a nontransferable, nonstatutory option
to its Employee to purchase 1,000 shares of Employer c o m m o n stock at an exercise
price of $75 per share, the fair market value of a share of Employer stock at the time the
option is granted. Employee m a y exercise the option only during employment with
Employer or within 90 days after cessation of employment.
O n January 1 of Year 2, when the fair market value of 1,000 shares of Employer
stock is $100,000, Employee exercises the option and purchases 1,000 shares of
Employer stock in exchange for a nontransferable recourse note ("Note") secured by
the stock Employee receives on the exercise of the option. The Note has a stated
principal amount of $75,000, which is payable at maturity on December 31 of Year 11.
2
The Note also provides for payments of interest on December 31 of each year the Note
is outstanding. The interest rate is one-year LIBOR (determined as of January 1 of
each year the Note is outstanding) plus 25 basis points. The interest rate on the Note is
not less than the appropriate applicable Federal rate (AFR) on the date the Note is
issued. The stock is not subject to a substantial risk of forfeiture within the meaning of
§ 83(c).
In Year 2, Employee includes $25,000 as compensation income under § 83(a).
Employer reports $25,000 of compensation income on the Form W - 2 issued to
Employee for Year 2 and claims a corresponding deduction in Year 2 under § 83(h).
In Years 2 and 3, Employee makes the required interest payments under the
Note. O n January 1 of Year 4, the fair market value of the Employer stock has declined
to $50,000 and Employer and Employee agree to reduce the stated principal amount of
the Note from $75,000 to $50,000. The interest rate on the Note is not less than the
appropriate A F R on the date the Note is modified.
LAW
Section 83(a) provides that if, in connection with the performance of services,
property is transferred to any person other than the person for w h o m such services are
performed, the excess of the fair market value of the property at the first time that the
rights to the property are either transferable or not subject to a substantial risk of
forfeiture ("substantially vested"), whichever occurs earlier, over the amount paid for the
property is included in the gross income of the service provider in the first taxable year
in which the rights to the property are substantially vested.
Section 83(e)(3) provides that § 83 does not apply to the transfer of an option
without a readily ascertainable fair market value.
Section 83(h) provides that, in the case of a transfer of property to which § 83
applies, the person for w h o m were performed the services in connection with which the
property w a s transferred is allowed a deduction in an amount equal to the amount
3
included under § 83(a), (b), or (d)(2) in the gross income of the person w h o performed
the services. Such deduction is allowed for the taxable year of such person in which or
with which ends the taxable year in which such amount is included in the gross income
of the person w h o performed such services.
Section 1.83-3(a)(1) of the Income Tax Regulations provides that a "transfer" of
property occurs w h e n a person acquires a beneficial ownership interest in the property.
A person acquires a beneficial ownership interest in property w h e n he or she has been
transferred both the right to share in an increase in the value of the property and the
obligation to share in the risk of loss in its value. Whether a transfer has in fact
occurred is based on all the facts and circumstances.
Section 1.83-3(g) provides that the term "amount paid" refers to the value of any
money or property paid for the transfer of property to which § 83 applies. For this
purpose, value does not include any stated or unstated interest.
Section 1.83-4(c) provides that, if an indebtedness that has been treated as an
"amount paid" for purposes of § 83 is subsequently cancelled, forgiven, or satisfied for
an amount less than the amount of such indebtedness, the amount that is not, in fact,
paid is includible in the gross income of the service provider for the taxable year in
which such cancellation, forgiveness, or satisfaction occurs.
Section 1.83-7(a) provides that the grant of a nonqualified stock option is taxable
to the extent that the option has a readily ascertainable fair market value, determined in
accordance with § 1.83-7(b). Under § 1.83-7(b), an option that is not traded on an
established market does not have a readily ascertainable value at the time of grant
unless certain specific conditions are all satisfied (including the option being
transferable, the option not being subject to a condition that has a significant effect on
the fair market value of the option, and the fair market value of the option privilege being
readily ascertainable). Under § 1.83-7(a), if the option does not have a readily
ascertainable value at the time of grant, §§ 83(a) and 83(b) apply at such time as the
4
option is exercised or otherwise disposed of, even though the fair market value of such
option m a y have become readily ascertainable before such time.
Section 61(a)(12) provides that, in general, gross income includes income from
the discharge of indebtedness.
Section 108(a)(1)(B) provides an exclusion from gross income for any amount
that would be includible in gross income by reason of the discharge of indebtedness of
the taxpayer if the discharge occurs when the taxpayer is insolvent.
Under § 108(e)(5), for solvent and non-bankrupt taxpayers, if debt owed by a
purchaser to a seller is reduced, the reduction is a purchase price adjustment and not
income from discharge of indebtedness. Under § 108(e)(5)(C), § 108(e)(5) only applies
to reductions that, but for the application of § 108(e)(5), would be treated as income to
the purchaser from the discharge of indebtedness.
Not every indebtedness that is cancelled results in the debtor realizing gross
income by reason of discharge of indebtedness within the meaning of §§ 61(a)(12) and
108(a). "Debt discharge that is only a medium for s o m e other form of payment, such as
a gift or salary, is treated as that form of payment, rather than under the debt discharge
rules." S. Rep. No. 1035, 96th Cong., 2d Sess. 8 n.6 (1980), 1980-2 C.B. 620, 624 n.6.
Section 1.1001-3 provides rules to determine whether a modification of the terms
of a debt instrument results in an exchange of the original debt instrument for a modified
instrument that differs materially either in kind or in extent. If the modification results in
an exchange, the adequacy of the interest rate on the modified debt instrument
generally is retested under the applicable Code section, such as § 483.
Under § 1.1001-3(b), a modification of a debt instrument results in an exchange
for purposes of § 1.1001 -1 (a) if the modification is significant. Under §1.1001 -3(c), a
modification m e a n s any alteration, including any deletion or addition, in whole or in part,
of a legal right or obligation of the issuer or a holder of a debt instrument, whether the
alteration is evidenced by an express agreement (oral or written), conduct of the parties,
5
or otherwise.
Section 1.1001-3(e) provides rules for determining whether a modification is
"significant." Under § 1.1001-3(e)(2), a change in the yield of a debt instrument is a
significant modification if the yield computed under § 1.1001-3(e)(2)(iii) varies from the
annual yield on the unmodified debt instrument (determined as of the date of the
modification) by more than the greater of 1/4 of one percent (25 basis points) or 5
percent of the annual yield of the unmodified debt instrument (.05 x annual yield).
Sections 3101 and 3111 impose Federal Insurance Contributions Act (FICA)
taxes on "wages," as that term is defined in § 3121(a). FICA taxes consist of the OldAge, Survivors and Disability Insurance tax (social security tax) and the Hospital
Insurance tax (Medicare tax). These taxes are imposed both on the employer under
§3111 (a) and (b) and on the employee under § 3101 (a) and (b). Section 3102(a)
provides that the employee portion of FICA tax must be collected by the employer of the
taxpayer by deducting the amount of the tax from the wages as and when paid. Section
31.3102(a)-1 (a) of the Employment Tax Regulations provides that the employer is
required to collect the tax, notwithstanding that wages are paid in something other than
money. The term "wages" is defined in § 3121(a) for FICA purposes as all
remuneration for employment including the cash value of all remuneration (including
benefits) paid in any medium other than cash, with certain specific exceptions. Section
3121(b) defines "employment" for FICA purposes as any service, of whatever nature,
performed by an employee for the person employing him, with certain specific
exceptions.
Rules similar to the FICA rules apply with respect to Federal Unemployment Tax
Act (FUTA) tax under §§ 3301, 3306(b), and 3306(c).
Section 3402(a), relating to income tax withholding, generally requires every
employer making a payment of wages to deduct and withhold upon these wages a tax
determined in accordance with prescribed tables or computational procedures. Section
6
3401(a) provides that "wages" for income tax withholding purposes m e a n s all
remuneration for services performed by an employee for his employer, including the
cash value of all remuneration (including benefits) paid in any medium other than cash,
with certain specific exceptions. Under § 31.3402(a)-1 (c), an employer is required to
deduct and withhold income tax notwithstanding that the wages are paid in something
other than money (for example, wages paid in stock or bonds) and to pay over the tax in
money. If the wages are paid in property other than money, the employer should make
necessary arrangements to insure that the amount of the tax required to be withheld is
available for payment in money.
Sections 31.3121 (a)-1 (e), 31.3306(b)-1 (e), and 31.3401 (a)-1 (a)(4) provide that in
general the medium in which the remuneration is paid is immaterial. It m a y be paid in
cash or other than in cash. Remuneration paid in any medium other than cash is
computed on the basis of the fair market value of such items at the time of payment.
Sections 31.3121 (a)-1(i), 31.3306(b)-1(i), and 31.3401 (a)-1 (a)(5) provide that, unless
specifically excepted, remuneration for employment constitutes wages even though at
the time paid the relationship of employer and employee no longer exists between the
person in whose employ the services were performed and the individual w h o performed
the services.
In Rev. Rul. 79-305, 1979-2 C.B. 350, a corporation transferred c o m m o n stock to
an employee subject to a substantial risk of forfeiture. The ruling holds that, under § 83,
the fair market value of the stock at the time the risk lapses is includible in the
employee's gross income for the year in which risk lapses. The ruling also holds that
the fair market value of the stock at the time the risk lapses is wages for purposes of
§§ 3121(a), 3306(b), and 3401(a).
ANALYSIS
Under § 1.83-7(b), the option granted to Employee did not have a readily
ascertainable fair market value at the time of grant. Therefore, § 83 applies when the
7
option is exercised and stock is transferred to Employee.
Employee acquired beneficial ownership of the shares of Employer stock in Year
2 because, at that time, Employee acquired both the right to enjoy any increase in the
value of the shares and the risk of a decline in the value of the shares. Accordingly, for
purposes of § 83, the shares were transferred to Employee in Year 2. Employee's
Note, with an issue price of $75,000, constituted the amount paid by Employee for the
shares under § 1.83-3(g) in Year 2. Employee included $25,000 in gross income under
§ 83(a) in Year 2, the excess of the fair market value of Employer stock at the time of
transfer over the amount paid.
Under § 1.83-4(c), if an indebtedness that has been treated as an "amount paid"
for purposes of § 83 is subsequently cancelled, forgiven, or satisfied for an amount less
than the amount of such indebtedness, the amount that is not, in fact, paid is includible
in the gross income of the service provider for the taxable year in which such
cancellation, forgiveness, or satisfaction occurs. Thus, if the reduction of the stated
principal amount of the Note is a cancellation, forgiveness, or satisfaction of the
indebtedness for an amount less than the amount of such indebtedness, the reduction
of the stated principal amount is a medium for payment of compensation by Employer to
Employee, and any income resulting from the reduction is not income to Employee from
the discharge of indebtedness subject to the provisions of section 108. Accordingly, the
tax consequences of the reduction are governed by § 83 and § 1.83-4(c), and not
by§ 108(a)(1)(B) or § 108(e)(5).
Whether the reduction of the stated principal amount of the Note is a
cancellation, forgiveness, or satisfaction for an amount less than the amount of the
Note, and, thus, whether an amount is includible in income under § 1.83-4(c), is
determined in accordance with § 1.1001-3. Under § 1.1001-3(e)(2), if a modification to
the stated principal amount of a note produces a significant change in the note's yield,
the modification is significant. A significant modification results in an exchange of the
8
unmodified note for the modified note, which, depending on the issue price of the
modified note and the adjusted issue price of the unmodified note, m a y have tax
consequences for both the issuer and holder of the note.
In this case, the reduction in the stated principal amount of the Note is a
significant modification under § 1.1001-3(e)(2). As a result, there is an exchange of the
unmodified Note for the modified Note between Employee and Employer and a
satisfaction of the original indebtedness. Under § 1.83-4(c), the amount that is not, in
fact, paid, and thus the amount includible as compensation by Employee, is the excess
of the adjusted issue price of the unmodified Note over the issue price of the modified
Note.
The modified Note has adequate stated interest under § 483. Under
§ 1273(b)(4), the modified Note has an issue price of $50,000. The adjusted issue price
of the unmodified Note is $75,000. See § 1.1275-1 (b). As a result, under § 1.83-4(c),
Employee recognizes compensation income of $25,000 (the excess of the adjusted
issue price of the unmodified Note ($75,000) over the issue price of the modified Note
($50,000)). This amount is recognized in Year 4, the taxable year in which the
modification occurred.
HOLDING
If an employee issued a recourse note to his or her employer in satisfaction of
the exercise price of an option to acquire the employer's stock and the employer and
employee subsequently agree to reduce the stated principal amount of the note, the
employee generally recognizes compensation income under § 83 at the time of the
reduction. Thus, under the facts described above, Employee recognizes $25,000 of
compensation income on January 1 of Year 4 under § 1.83-4(c). If Employer and
Employee instead were, for example, to reduce the interest rate on the Note or change
the Note from recourse to nonrecourse, that modification also generally would result in
9
compensation income for Employee.
In addition, the compensation is wages for purposes of FICA, FUTA, and income
tax withholding.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Jean M. Casey of the Office of
the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities)
and Rebecca Asta of the Associate Chief Counsel (Financial Institutions and Products).
For further information regarding § 83, contact Ms. Casey at (202) 622-6030 and for
further information regarding § 1.1001-3, contact Ms. Asta at (202) 622-3940 (not tollfree calls).
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NEWS
FEDERAL FINANCING BANK
2004 PRESS RELEASE
February 2004
Brian Jackson, Chief Financial Officer, Federal Financing Bank (FFB)
announced the following activity for the month of February 2004.
FFB holdings of obligations issued, sold or guaranteed by other
Federal agencies totaled $30.9 billion on February 29, 2004, posting a
decrease of $407.2 million from the level on January 31, 2004. This net
change w a s the result of a decrease in holdings of agency debt (U.S. Postal
Service) of $470.9 million and an increase in net holdings of governmentguaranteed loans of $63.7 million. The FFB m a d e 71 disbursements and
received 6 prepayments during the month of February.
Below are tables presenting FFB February loan activity and FFB
holdings as of February 29, 2004.
FEDERAL FINANCING BANK
February 2004 ACTIVITY
Borrower
<f$ my
Date
Amount of
Final
Maturity
Interest Annually
Rate
or
1
Advance
SemiAnnually
A G E N C Y DEBT
U.S. POSTAL SERVICE
U.S. Postal Service
2/05
$900,000,000.00
2/6/2004
1.051%
U.S. Postal Service
2/05
$139,200,000.00
2/6/2004
1.010%
U.S. Postal Service
2/06
$800,000,000.00
2/9/2004
1.030%
U.S. Postal Service
2/06
$8,100,000.00
2/9/2004
1.010%
U.S. Postal Service
2/09
$600,000,000.00 2/10/2004
1.010%
U.S. Postal Service
2/10
$312,200,000.00 2/11/2004
1.030%
U.S. Postal Service
2/11
$149,700,000.00 2/12/2004
1.010%
U.S. Postal Service
2/13
$1,000,000,000.00 2/17/2004
1.010%
U.S. Postal Service
2/13
$69,300,000.00 2/17/2004
1.020%
U.S. Postal Service
2/17
$1,100,000,000.00 2/23/2004
1.020%
U.S. Postal Service
2/17
$471,600,000.00 2/19/1904
1.020%
U.S. Postal Service
2/16
$189,300,000.00 2/19/1904
1.051%
U.S. Postal Service
2/19
$22,100,000.00 2/20/2004
1.051%
U.S. Postal Service
2/23
$850,000,000.00 2/24/2004
1.051%
U.S. Postal Service
2/23
$81,000,000.00 2/24/2004
1.071%
U.S. Postal Service
2/24
$650,000,000.00 2/25/2004
1.051%
U.S. Postal Service
2/24
$39,700,000.00 2/25/2004
1.092%
U.S. Postal Service
2/25
$400,000,000.00 2/26/2004
1.071%
U.S. Postal Service
2/25
$120,000,000.00 2/26/2004
1.081%
U.S. Postal Service
2/26
$304,900,000.00 2/27/2004
1.092%
U.S. Postal Service
2/27
$2,000,000,000.00
3/1/2004
1.081%
U.S. Postal Service
2/27
$61,400,000.00
3/1/2004
1.071%
GOVT-GUARANTEED LOANS
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
G E N E R A L SERVICES ADMINISTRATION
San Francisco O B
2/05
$132,507.93
8/1/2005
1.658%
San Francisco Bldg
Lease
2/11
$18,463.06
8/1/2005
1.664%
San Francisco O B
2/23
$74,852.77
8/1/2005
1.607%
San Francisco O B
2/26
$132,507.94
8/1/2005
1.538%
San Francisco O B
2/26
$106;001.33
8/1/2005
1.538%
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
D E P A R T M E N T OF EDUCATION
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
SemiAnnually
Virginia Union Univ.
2/04
$158,695.23
1/2/2032
4.772%
Livingstone College
2/23
$105,305.68
7/1/2031
4.732%
Livingstone College
2/23
$10,653.96
7/1/2031
4.732%
Livingstone College
2/23
$14,847.33
7/1/2031
4.732%
Tuskegee Univ.
2/26
$8,792,842.20 11/2/2026
4.496%
Tuskegee Univ.
2/26
$2,000,000.00 11/1/2004
1.096%
$6,440,000.00 12/31/2036
4.856%
Quarterly
RURAL UTILITIES SERVICE
Deep East Texas
Electric #872
Washington Electric
#655
Brown County Elec.
#687
Douglas Electric #725
McLeod Coop. Power
#554
South Slope
Cooperative #741
East Kentucky Power
#753
McLennan County
Elec. #784
New Horizon Elec.
#791
North Star Elec. #2098
Three River Electric
Coop #846
Delaware County Elec.
#682
San Patricio Elec. #676
2/02
2/02
$425,000.00
1/2/2035
4.823%
Quarterly
2/03
$450,000.00 6/30/2004
0.992%
Quarterly
2/03
$80,000.00 12/31/2035
4.859%
Quarterly
2/03
$1,000,000.00 6/30/2004
0.992%
Quarterly
2/03
$1,763,000.00
1/2/2018
3.972%
Quarterly
2/05
$6,500,000.00 12/31/2030
4.729%
Quarterly
2/05
$2,500,000.00 12/31/2035
4.685%
Quarterly
2/05
$1,500,000.00 6/30/2004
0.972%
Quarterly
2/05
$1,500,000.00 12/31/2037
4.870%
Quarterly
2/05
$1,500,000.00 12/31/2036
4.852%
Quarterly
2/06
$750,000.00
1/2/2035
4.845%
Quarterly
2/06
$944,000.00
1/2/2035
4.845%
Quarterly
Vernon Electric Coop.
#2008
2/06
B A R C Electric #663
2/09
Blue Ridge Elec. #659
2/09
T R A N S C O #883
$1,527,000.00 12/31/2036
4.878%
Quarterly
4.777%
Quarterly
$8,850,000.00 12/31/2029
4.657%
Quarterly
2/09
$6,343,000.00 12/31/2020
4.348%
Quarterly
Aiken Elec. #896
2/11
$3,698,000.00 12/31/2036
4.824%
Quarterly
Flint Elec. #2016
2/11
$2,956,000.00 3/31/2034
4.776%
Quarterly
West Florida Electric
#2047
2/11
$4,397,000.00 12/31/2037
4.841%
Quarterly
Carroll Elec. #618
2/12
4.711%
Quarterly
French Broad Elec.
#809
Central Iowa Power
Coop. #2092
Central Iowa Power
Coop. #2094
$525,000.00
$400,000.00
1/2/2035
1/3/2034
2/13
$3,000,000.00 12/31/2035
4.792%
Quarterly
2/17
$11,000,000.00 12/31/2013
3.371%
Quarterly
2/17
$3,000,000.00 12/31/2031
4.541%
Quarterly
2/17
$4,619,000.00 6/30/2004
0.941%
Quarterly
2/17
$1,000,000.00 6/30/2004
0.941%
Quarterly
2/17
$54,000.00 12/31/2036
4.782%
Quarterly
2/19
$3,896,000.00 12/31/2037
4.793%
Quarterly
2/19
$82,590.00 6/30/2004
1.082%
Quarterly
West River Elec. #751
2/19
$4,000,000.00 6/30/2011
3.528%
Quarterly
Bartlett Elec. #535
2/20
$400,000.00
4.782%
Quarterly
2/20
$500,000.00 12/31/2036
4.764%
Quarterly
2/20
$600,000.00 12/31/2036
4.764%
Quarterly
United Elec. #858
2/20
$1,045,000.00 12/31/2036
4.764%
Quarterly
Ravalli #641
2/24
$900,000.00 12/31/2029
4.614%
Quarterly
2/26
$3,000,000.00 6/30/2004
0.974%
Quarterly
2/26
$500,000.00 3/31/2011
3.448%
Quarterly
2/27
$217,739.00 12/31/2018
3.928%
Quarterly
East River Power #793
Farmer's Rural Elec.
#2046
Swan's Island Electric
#2037
Forked Deer Electric
#2069
Upsala Coop. Tele.
#429
Dunn Electric Coop.
#861
Sac Osage Electric
Coop. #815
Red River Valley Elec.
#2095
Sangre D e Cristo Elec.
#732
Piedmont Tel. #566
|
1/3/2034
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FEDERAL FINANCING BANK HOLDINGS
February 2004
(in millions of dollars)
Feb. 29, 2004
Program
Jan. 31, 2004
Fiscal Year
Monthly Net
Net Change
Change
2/1/04- 2/29/0410/1/03-2/29/04
Agency Debt:
U.S. Postal Service
$20,061.4
$2,532.3
($470.9)
($5.2)
$2,061.4
$2,532.3
($470.9)
(S5,212.0)
FmHA-RDIF
$680.0
$680.0
$0.0
($125.0)
FmHA-RHIF
$1,830.0
$1,830.0
$0.0
$0.0
Rural Utilities Service-CBO
$4,270.2
$4,270.2
$0.0
$0.0
$6,780.2
$6,780.2
$0.0
($125.0)
$1,589.1
$1,622.7
($33.7)
($99.4)
$126.1
$115.0
$11.1
$46.8
$1.0
$1.0
$0.0
($1.2)
$1,054.8
$1,054.8
$0.0
($78.5)
$2,139.4
$2,143.6
($4.3)
($7.8)
$8.2
$8.2
$0.0
($1.4)
$597.3
$597.3
$0.0
($10.2)
$16,426.5
$16,334.6
$91.9
$808.2
$68.4
$69.8
($1.3)
($8.9)
$3.0
$3.0
$0.0
$0.0
Subtotal*
$22,013.8
$21,950.1
$63.7
$647.8
Grand total*
$30,855.4
$31,262.6
($4,072.0)
($4,689.2)
Subtotal*
Agency Assets:
Subtotal*
Govt-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block
3rant
)HUD-Public Housing Notes
aeneral Services Administration+
Ol-Virgin Islands
ON-Ship Lease Financing
ural Utilities Service
BA-State/Local Devel. Cos.
)T-Section511
*figures may not total due to rounding; +does not include capitalized interest
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2004 Press Releases
Return tn All PRESS RELEASES
Last Updated on 3/25/04
195: Ladner Testimony Before the House Committee on Government Reform
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 26, 2004
js-1195
Testimony of
Drew Ladner, Chief Information Officer
United States Department of Treasury
Before the House Committee on Government Reform
February 26, 2004
Mr. Chairman and Members of the Committee, thank you for the opportunity to
appear to discuss the General Services Administration's (GSA) government-wide
telecommunications program, Networx. The Secretary of the Treasury welcomes
this invitation for reasons relating to both the Department's mission and fiscal
responsibility. The continued leadership of the Chairman and the Members of the
Committee is vital if w e are to steward taxpayer dollars wisely not only at the
Treasury Department but across the federal government.
I serve as the Chief Information Officer (CIO) of the Treasury Department. As CIO
provide oversight, management, budgetary approval, and policy direction for all
information technology programs within the Treasury Department and its bureaus.
have operational responsibility for shared services across all Treasury bureaus,
including for the Treasury Communications System (TCS), one of the largest
secure networks in the civilian government.
The Committee has requested the Treasury view on the Networx Request for
Information. Let m e start by suggesting a list of principles that the Treasury
Department seeks to have inform its acquisition of telecommunications services.
Reflected throughout m y remarks below, they include but are not limited to:
1. Identifying and adopting innovation
2. Listening to the market laws of supply and demand
3. Relying on marketplace innovation
4. Avoiding the creation or promotion of proprietary standards
5. Simplifying business structures, processes, and systems
6. Embracing data, internet protocol, and managed services
7. Compensating based on performance and results
8. Affording maximum flexibility while keeping costs low
9. Supporting execution of Treasury shared service philosophy
10. Expecting technological obsolescence and not owning assets.
The Treasury Department seeks innovation in the acquisition of
telecommunications services for two primary reasons. First, acquiring the most
advanced telecommunications offerings provides the highest performance at the
Page 1 of 3
1195: Ladner Testimony Before the House Committee on Government Reform
lowest cost; because of the Department's large telecommunications program, the
Office of the C I O is firmly committed to acquiring faster, cheaper, and better
telecommunications services in order to exercise fiscal responsibility. Second, and
equally if not more important, Treasury Department operations depend on the
availability of high-performing telecommunications services in order to achieve
mission-critical objectives.
The Treasury Department is committed to acquiring from the private sector the
latest in telecommunications innovations, whether in product, process, or otherwise.
N e w telecommunication services already have transformed traditional circuit-based
voice communications into the digital world of IP-based communications. Because
the private sector has the incentive to invest in research and development, the
expectation is that the private sector consistently will provide the most attractive
offerings in terms of cost and performance.
Today's question is: how does Networx fare in all of this? Early signs are that
Networx will constitute a significant improvement over F T S 2001. It appears that
Networx will be m u c h more market-driven, in contrast to its more technology-driven
predecessor, F T S 2001 (which w a s a follow on to F T S 2000). A s a general rule, the
government should rely on performance-based, results-oriented specifications
rather than trying to dictate solutions through "how to" design technology
specifications. Moreover, this underscores an essential philosophical approach to
acquiring network services, whether the customer is in the public sector or private:
government agencies should strive to ensure that the customer is provided with the
most cost-effective service available.
Permit an illustrative example. Suppose a company has a need to transport
products. There are two major options: (1) purchase parts from m a n y suppliers,
assemble trucks, use the trucks to transport products, and keep enough spare parts
on hand to support a maintenance program; or (2) purchase fleet services from a
trucking company. Option 1 will cost the company more and distract it from its core
business. Option 2 reflects h o w telecommunications services should be acquired
wherever possible, yielding the best price for performance.
Consequently, a properly configured Networx can provide a comprehensive set of
m a n a g e m e n t services that enables government agencies to acquire the
telecommunications services required. A contract resembling F T S 2001 would be
more circuit-centric, forcing agencies to fulfill the rest of its services by building and
maintaining program m a n a g e m e n t offices, unnecessarily decentralizing s o m e
telecommunications functions, and incurring more costs across the enterprise. For
the Treasury Department, this would m e a n that each one of our dozen bureaus
might have a relatively large telecommunications cost center. At the s a m e time that
administrative decisions are integrated enterprise-wide, it is important that other
decision-making be as decentralized as possible.
This raises a larger point: as CIO I seek to manage the supply chain, both
downstream from our shared service platform into Treasury bureaus as well as
upstream into Treasury's suppliers. Treasury currently depends exclusively on no
one carrier and m a n a g e s risk by being carrier-neutral. Avoiding sole sourcing and
preserving flexibility to use multiple companies across a large telecommunications
contract are critical for several reasons. First, it is financially advantageous and
ensures that competitive forces provide incentive for contractors to price at market
levels. Second, in the event of technological change or obsolescence, a customer
can m a k e necessary adjustments quickly and cost-effectively. Third, if
underperformance provides operational rationale to switch vendors, a government
agency is in a better position to do so.
Managing the supply chain "upstream" is predicated on knowing what business
problems require solutions and h o w to execute. Facilitating the implementation of
n e w technologies is a crucial area where Networx can help federal agencies solve
operational problems. For example, the Treasury Department is reviewing
innovative solutions to improve billing processes and to reduce expenditures. With
an F T S 2001-like contract it is difficult for an agency to initiate and to integrate the
introduction, piloting, and deployment of n e w solutions and technologies. Key to a
successful Networx contract will be to consolidate purchasing power in a flexible,
Page 2 of 3
1195: Ladner Testimony Before the House Committee on Government Reform
performance-based contract that nimbly accommodates innovation w h e n superior
price for performance can be achieved.
Shorter-term, performance-based contracts in which suppliers are driven by
incentive m a k e such an approach possible. Consequently, it allows the
m a n a g e m e n t of telecommunications relationships both at the business and
technical levels. Because it is inadequate to have lengthy service level agreements
(SLAs) that do not effectively address higher level business issues, the Treasury
Department includes in its IT vision the integration of operating m a n a g e m e n t into
portfolio management. Telecommunications operations are no exception:
customers or users with access to portfolio management tools can more clearly see
and understand whether telecommunications services are meeting commitments
and take managerial action as appropriate - also making the supply chain more
efficient.
There is one final point on Networx that would boost IT security significantly:
applying IT security solutions with equal rigor to backhaul networks. Traditional
telecommunication carriers have increasing capabilities to monitor their core
networks with intrusion detection, intrusion prevention, and other security
technologies. While historically technical limitations have precluded fully using
these security services to combat worms, spam, and other network vulnerabilities
on high bandwidth, longer-haul portions of networks, innovation has m a d e this
possible in recent years. Networx'should seek to ensure that its security services
receive comparable treatment as large customers in the private sector. While
diversified and localized monitoring is still required, integrated monitoring on a
m u c h larger scale can eliminate or reduce the risk of the most c o m m o n
vulnerabilities and prevent the further and wider spread of threats. T h e result of
mandatory, centrally monitored, carrier-based intrusion detection system/intrusion
prevention system would be bandwidth savings and a safer, more secure backbone
for Networx and its customers.
Innovation is not just about our telecommunications programs; it is essential to
national security. Economically, it enables us to do more with less. Politically, it
promotes a leadership position on the global stage. Technologically, the application
of n e w products and processes leads to even more advances - thanks to the
vibrant entrepreneurial spirit of our country. And it is the lifeblood of the small- and
medium-size businesses that drive 80 percent of our economy, the stability and
prosperity of which is the mission of the Treasury Department.
Again, I am grateful to the Committee for demonstrating leadership in exploring the
best w a y s to acquire telecommunications services and for driving reform across the
federal government. Mr. Chairman, thank you for the opportunity to appear before
you today. This concludes m y formal remarks, and I would be pleased to respond to
any questions.
-30-
Page 3 of 3
1196: Photo: Deputy Secretary Bodman Speaks at Treasury's Black History Month Celebration Event
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 26, 2004
JS-1196
Photo: Deputy Secretary Samuel Bodman at the Treasury Department's Black
History Month Celebration Event
Media Contact
Deputy Secretary Samuel Bodman spoke at the Treasury Department's Black
History Month Celebration event. 2004 marks the 50th anniversary of the Supreme
Court's landmark decision on Brown vs. Board of Education.
High Resolution Image
Page 1 of 1
1197: U.S. Lifts Travel Ban on Libya
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 26, 2004
js-1197
U.S. Lifts Travel Ban on Libya
The United States today announced it will lift the travel ban on Libya. Today's action
is a response to Libya's progress in joining the international community's efforts to
combat terrorism and halt the spread of weapons of m a s s destruction and the
missiles capable of delivering them.
The Libyan Sanctions Regulations were promulgated in January 1986 after Libya's
participation in the terrorist attacks against the R o m e and Vienna airports the month
before. Authorized under the International Emergency Economic Powers Act and
the International Security and Development Cooperation Act of 1985, the sanctions
were a response to Libya's repeated use and support of terrorism against the
United States, as well as other countries and innocent persons.
Among other things, the sanctions have prohibited U.S. citizens from engaging in
travel and transportation-related activities with Libya. While the ban on travel by
U.S. persons is being lifted today, the prohibitions on transportation-related
activities, such as flights to Libya by U.S. air carriers, will remain in place at this
time.
Lifting the travel ban will permit U.S. persons to engage in transactions related to
travel to Libya and maintenance within Libya. Travel-related services, such as U.S.
travel agents' booking of travel and accommodations within Libya for U.S. persons
will also be permitted. Certain restrictions on payments, however, will continue to
apply to these transactions.
The travel ban always exempted journalists regularly employed in such capacity by
a newsgathering organization. U.S. citizens other than journalists were able to
travel to Libya only under the following conditions:
• Travel by close family members of Libyan nationals when the U.S. citizen or
resident registered with Treasury's Office of Foreign Assets Control or with
the E m b a s s y of Belgium in Tripoli;
• Travel for the sole purpose of engaging in licensed sales of agricultural
commodities, medicine and medical devices; or
• Travel related to the installation or servicing of medical equipment exported
pursuant to license could be authorized by specific license.
In addition, a limited number of specific licenses were issued for travel by U.S.
companies with pre-sanctions holdings.
-30-
i-1198: Treasury to Brief on the Annual Financial Report
Page 1 of 1
-,_ ..;.
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 26, 2004
JS-1198
MEDIA ADVISORY:Treasury to Hold Briefing on the 2003 Annual Financial
Report of the United States Government
The Department of the Treasury will hold a briefing on Friday, February 27, 2004,
to answer questions related to the 2003 Annual Financial Report of the United State
Government.
WHO: Don Hammond, Fiscal Assistant Secretary Robert Reid, Deputy Assistant
Secretary for Accounting Operations
WHAT: Pen and Pad Briefing - no cameras will be admitted
WHEN: 2:00 pm EST
WHERE: Room 2224
Media without Treasury press credentials planning to attend tomorrow's briefing
should contact the Treasury Public Affairs office at 202/622-2960 by 9:30am, Friday
morning. Media should be prepared to provide the following information: name,
social security number and date of birth. Media with White House press credentials
must call to be cleared in to the Treasury Building.
-1199: Warshawsky on 2003 G D P Report
F R O M T H E OFFICE O F PUBLIC AFFAIRS
February 27, 2004
JS-1199
Statement of Acting Assistant Secretary for Economic Policy
Mark Warshawsky on 2003 Fourth Quarter Gross Domestic Product Report
The economy continues to strengthen. A report this week on durable goods
suggests continued rapid growth in business capital investment. This shows that
the incentives contained in the President's Jobs and Growth plan are working.
Last year ended with a strong growth rate of 4.1 percent in the fourth quarter. The
last half of 2003 saw the fastest rate of G D P growth in nearly 20 years and the
economy looks to continue growing at levels above historical rates. We're
encouraged by the continuing positive momentum we're seeing in the economy, but
there remains more to be done. This Administration is committed to strengthening
the environment for job creation and seeks to ensure that jobs are available for all
those looking for work.
Page 1 of 1
-1200: Senior Treasury Department Official Recognizes Local Financial Education Program
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 26, 2004
JS-1200
Senior Treasury Department Official in Sacramento, CA, on Thursday
Recognizes Local Financial Education Program
Treasury Assistant Secretary for Financial Institutions Wayne Abernathy today
presented the Sacramento Mutual Housing Association, Sacramento, CA, with an
honorary certificate of recognition for its efforts in teaching financial education to
individuals in mutual housing communities throughout Sacramento, including nonEnglish speaking residents.
"This financial education program, which offers classes in languages such as
Hmong, Russian, and Spanish, is an excellent example of how partnerships
between community-based organizations, foundations, and financial institutions can
m a k e the financial mainstream more accessible to all people in the United States,
whether they have lived here their entire lives or only recently arrived in this
country," said Assistant Secretary Abernathy. "It is rewarding to hear how the
graduates of this program have used what they have learned to go on to purchase
a first home, pursue higher education, or start a small business."
The Financial Education Workshop Series began in the spring of 2001 and is free to
all participants. "At Sacramento Mutual Housing Association w e believe that
financial education and individual development accounts are crucial components to
building assets for low-income families and communities," said Rachel Iskow,
Executive Director. "We are honored that Secretary Abernathy is recognizing the
innovativeness of this program and the hardworking families that are using these
tools to break free from poverty."
The Sacramento Mutual Housing Association is a non-profit corporation that
develops, owns, and operates affordable multi-family housing to serve the
community interest. Its mission is to develop and operate permanently affordable
housing that builds strong and stable communities through resident participation
and leadership development. The Financial Education Workshop Series is a
collaborative effort of the Sacramento Mutual Housing Association, Mercy Housing
California, and the Sacramento Valley Organizing Community, supported by the
American Express Foundation, the Allstate Foundation, and the Neighborhood
Reinvestment Corporation. The Workshop consists of six two-hour classes covering
topics such as budgeting, basic banking, credit improvement and maintenance,
money management, being a smart consumer, and building assets.
The Treasury Department's Office of Financial Education has been designated by
Congress to lend its expertise and provide primary support to the Commission to
assist it in fulfilling its functions and duties. The Office of Financial Education (OFE)
was established in M a y 2002, as part of the Treasury Department's long-term
commitment to ensure that all Americans have access to financial education
programs that will help them make informed financial decisions throughout their
lives.
More information about the OFE can be found at:
www.treasury.gov/financialeducation
Page 1 of 1
-1201: Treasury Releases N e w Data O n The Benefits O f The Jobs And Growth Tax Relief Reconciliat... Page 1 of 2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 19, 2004
JS-1201
Treasury Releases New Data On The Benefits Of The Jobs And Growth Tax
Relief Reconciliation Act
(Revised)
The Department of the Treasury today released new figures demonstrating that
because of the President's tax relief package enacted last May, an additional $50
billion dollars will remain in the hands of American taxpayers through higher refunds
and lower tax payments this spring. The total refunds Americans will receive this
spring will increase to about $195 billion.
• As a result of the tax cuts in 2003, Treasury expects that a record
number of individuals will receive refunds this year.
• Treasury expects that the average refund will be $300 higher than
had the Jobs & Growth Tax Relief Act had not been enacted.
• The President's 2003 tax relief is expected to increase refunds
received by Americans by about $37 billion more than if the Jobs &
Growth Tax Relief Act had not been enacted, from approximately
$158 billion to $195 billion.
• The tax relief is expected to decrease the amount that Americans
w h o must m a k e tax payments when filing their tax returns this spring
by approximately $13 billion, from $85 billion to $72.5 billion.
• Taken together the higher tax refunds and lower tax payments are
expected to put an additional $50 billion in the hands of American
taxpayers this spring.
In addition, Treasury's data shows that American families will see a significant
reduction in their tax burden because of the tax relief packages that the President
has signed since taking office: The President's 2001 and 2003 tax cuts m e a n that in
2004:
• Americans will receive a total of $232 billion in tax relief in 2004.
• $176 billion in tax relief will stay in the hands of American families
and small businesses to help then save and invest.
• Every American w h o would have paid income taxes before the tax
relief w a s enacted in 2001 will receive a tax cut in 2004.
The President's Tax Cuts Mean Significant Tax Relief for Working American
Families Expanding the 1 0 % bracket and doubling the child tax credit will benefit
low income Americans
• Nearly 5 million taxpayers, including 4 million taxpayers with
children, will have their income tax liability completely eliminated in
2004. '
, AU
• Low-income families will also benefit from provisions that m a k e the
child credit refundable for more families and reduce marriage
penalties caused by the EITC. 111 million individuals and families
will receive an average tax cut of $1,586 in 2004 because of the tax
cutesof2001 and 2003.
. AQ million married couoles will have an average tax cut of $2,602.
1201: Treasury Releases N e w Data O n The Benefits Of The Jobs And Growth Tax Relief Reconciliat... Page 2 of 2
• 43 million families with children will receive an average tax cut of
$2,090.
• 14 million elderly individuals will see their taxes fall, on average, by
$1,883.
• 25 million small business owners will receive an average tax cut of
$3,001.
If Congress Does Not Act, Americans Will Pay Higher Taxes in 2005
If the tax cuts that expire after 2004 are not extended for 2005, taxes will increase
for taxpayers w h o otherwise would benefit from these provisions.
• Lower income taxpayers will not receive $5.7 billion in relief from
the expanded 10 percent rate.
• Taxpayers will not receive $8.9 billion in marriage penalty tax relief
• Families with children will not receive $13.2 billion in relief from the
child tax credit. In 2005, the increased child credit, additional
marriage penalty relief, and expanded 10 percent bracket will
sunset, increasing the tax burden on a family of four earning
$40,000 by $915.
93 million taxpayers would pay, on average, a tax increase of $565.
• 70 million women would see their taxes increase, on average, by
$697
• 46 million married couples would pay, on average, an additional
$960 in taxes
• 37 million families with children would incur an average tax
increase of $954
• 8 million single w o m e n with children would see their taxes
increase, on average, by $357
• 11 million elderly taxpayers would pay, on average, an additional
$398 in taxes
• 23 million small business owners would incur tax increases
averaging $831
• Nearly 2 million individuals and families w h o currently have no
income tax liability would b e c o m e subject to the income tax.
• President Bush's budget extends A M T relief through 2005. Without
these changes, these taxpayers would pay an additional $23.2
billion in tax as a result of the A M T .
S-1202: Treasury Secretary John S n o w Center for Strategic and International Studies
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 27, 2004
JS-1202
U.S. Treasury Secretary John S n o w Center for Strategic and International
Studies
Washington, D C February 27, 2004
Good afternoon I am very pleased to join this esteemed group and to talk with you
V
about the outlook for the global economy.
The global economic recovery has accelerated in the last six months. Economic
n ^ ' h ^ J f - f ^ ' m p ^ v , n 9 ' a n d risks h ^ e diminished. Consensus forecasts put G-7
growth at 3.3% for this year, more than double the 2002 rate.
In the United States the recovery is strengthening. The President's tax cuts have
worked. They provided the stimulus that was necessary to turn the economy
around, and they are now encouraging and allowing for the economic growth that is
continuing into the future.
• Economic growth in the second half of 2003 was the fastest since 1984• N e w h o m e construction in 2003 was the highest in 25 years• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;'
• Jobs are coming back;
• The unemployment rate is falling;
• There is more than three trillion dollars of growth in value in the markets last
year.
These economic indicators all point to the same conclusion: We are on a path to
sustained economic growth. However, there is more to do. W e are not, by any
means, satisfied. W e will keep working until every American who wants work can
find a job.
Beyond the United States, we are also seeing promising signs. Japanese
performance provided a positive surprise in the fourth quarter, with growth hitting an
annual rate of 7 percent. Recent Japanese recoveries, including this one, have
been heavily dependent on export demand. It is important for domestic demand to
play a greater role to bring about sustained growth in the Japanese economy.
In continental Europe, where growth is still lagging, the indicators are positive.
German growth finally turned around in the second half of last year. Industrial
production w a s up sharply in the fourth quarter of 2003, and business surveys look
good. Nonetheless, overall growth in the Euro Area remained modest last year,
especially in the biggest countries. It is important that the positive signs become
growth achievements this year.
Many emerging market countries are also experiencing higher economic growth
rates, along with reduced interest rate spreads and improved equity markets. This
follows concerted efforts to reform the international financial system through steps
such as inclusion of collective action clauses in emerging market debt, limits on
exceptional access to IMF lending, measuring and accounting for results, and the
use of grants to avoid heavy debt burdens.
Page 1 of 4
1202: Treasury Secretary John S n o w Center for Strategic and International Studies
Looking ahead, prospects also look positive. There is evidence that the momentum
for growth continues to build. Financial markets have strengthened - in the U.S.
and elsewhere. Inventories are low-suggesting the need to increase production to
meet demand. And more investment is underway. More broadly, there is a more
positive outlook, as geopolitical uncertainties have eased and forecasters see fewer
downside risks.
Yet this is not enough. Stronger growth is in everyone's interest. More work is
needed to ensure growth that is broad-based and sustainable - and less reliant on
a single engine. It is not in anyone's interest that the United States consistently
stand out as the fastest growing major economy.
Indeed, the need for stronger global growth was at the top of the agenda when I
hosted m y G-7 colleagues in Boca Raton earlier this month. W e all place top priority
on growth. And w e agreed that structural reforms are vital to our long-term
performance - even if they involve short term costs.
This is why I felt it was so important to move ahead with what we are calling the
Agenda for Growth initiative, which w a s launched by the G-7 last September. This
initiative focuses on supply-side reforms to boost productivity, raise growth and
employment, and thereby increase living standards. In other words, while strong
macroeconomic policies are vital, it is also essential that w e update microeconomic
frameworks in the major economies to enhance the potential for sustained and
healthy growth.
We are now seeing progress as each G-7 country is taking concrete actions to
advance these goals. For example:
• Canada has fully implemented a five-year, $100 billion tax reduction plan.
• France is undertaking pension reforms that will significantly strengthen its
public finances.
• G e r m a n y has enacted key elements of its reform initiative - entitled Agenda
2010 - that includes measures to improve work incentives as well as to
reduce taxes.
• Italy has seen its unemployment rate fall as labor market reforms entered
fully into force in October.
• T h e United Kingdom announced n e w measures to help small business
access capital and to improve access to tax credits for research and design.
In Boca Raton, we all committed to future steps that demonstrate the widespread
commitment to going further to increase labor and product market flexibility, boost
productivity and raise employment.
• The United Kingdom is establishing a long-term strategy for funding
innovation and scientific research, extending skills training programs and is
proposing a collaborative initiative on regulatory reform across the EU.
• Japan will work on further fiscal expenditure and revenue reforms, including
in social security, and will continue to address financial sector reforms.
• Italy plans to advance pension and corporate tax reform, including tax
exemptions on dividends and capital gains.
• Germany's priorities include pension and tax code reform.
• France will continue its work to reduce labor market constraints, while also
pursuing health care reform.
• C a n a d a will provide tax incentives and explore other funding alternatives for
infrastructure investment by municipalities.
As for the United States, our contributions will be through the President's
commitments to maximize growth and job creation. This includes: spurr.ngl savmg
through changes to the tax system; making health care more affordable, work.ng to
prevent frivolous lawsuits from diverting m o n e y from job creatran; streamlining
regulations; preparing American workers for the d e m a n d s of the 21 st cen ury job
market; and working to m a k e tax relief permanent, so that families and businesses
alike can plan for the future.
Page 2 of 4
-1202: Treasury Secretary John Snow Center for Strategic and International Studies
The Agenda for Growth marks a fundamental change in the G-7 approach. I a m
optimistic that the steps that each country is pursuing will m a k e a real difference to
our future prospects and those of the world economy as a whole. Combined with
strong macroeconomic policies, including sound fiscal policies over the mediumterm, this initiative is also an important step to addressing global current account
imbalances.
Let me turn to trade. Opening markets and reducing barriers to trade is an
important engine for domestic and global economic growth; trade leads to more
jobs, higher w a g e s and increased productivity, which in turn leads to greater
prosperity. It is through free trade that all nations can benefit from each other's
prosperity. Free trade m e a n s n e w markets for exporters.
Multilateral trade liberalization is a global tax cut for all consumers and exporters
and an engine for growth, in association with sound macroeconomic and structural
policies. The IMF and World Bank estimate that the static global welfare gains from
eliminating barriers to merchandise trade alone are broadly in the range of $250
billion to $550 billion per year. Another study estimates the gains from removing all
trade barriers at $1.9 trillion.
The Cancun outcome represented a missed opportunity, but there are hopeful signs
that w e can get the Doha Development Agenda back on track again so that 2004 is
not a lost year. The focus of the W T O negotiations should be the market access
agenda - agriculture, industrial and consumer goods, and services. These areas
have the greatest potential to promote economic growth. For developing countries
to realize the benefits of trade, they too need to reduce their o w n trade barriers
substantially. Developing countries collect most of their tariffs on trade with other
developing countries. In particular, efficiency gains from trade liberalization in the
financial services sector could be beneficial for m a n y emerging markets.
But even as we ponder the next steps in the WTO, the United States continues to
press an aggressive trade agenda to open markets regionally and bilaterally with
willing partners. For example, w e have recently concluded free trade agreements
with Central America ( C A F T A ) and Australia, and are negotiating additional free
trade agreements in Africa, Asia, Latin America, and the Middle East. By moving
forward on multiple fronts, w e can exert leverage for openness and create a new
competition for trade liberalization.
Before closing, I want to mention briefly some of the other important initiatives we
are pursuing as part of the drive for global growth. With the chairmanship of the G-7
this year, w e have the opportunity to help lead change and bring results that
facilitate growth.
In Boca Raton, we focused in particular on:
• Supporting the economic revival underway in Afghanistan and Iraq - as well
as the importance of strengthening economic growth and raising living
standards in the greater Middle East.
• Continuing the fight against terrorist financing - notably strengthening asset
freezing regimes and combating abuse of the informal financial sector and
non-profit organizations.
• Creating an environment that allows private businesses to flourish in the
poorest countries.
• Reducing the roadblocks for people sending m o n e y back to their families by identifying and removing the barriers that slow the flow of remittances,
m a k e transactions expensive or encourage m o n e y to flow through informal
channels.
Looking to the Summit, I expect us to continue our work in these areas, as well as
to explore w a y s to consolidate and build on reforms to the international financial
system so that it is as modern and effective as possible.
Thank you so much for having me here today - I hope you have a wonderful
meeting.
Page 3 of4
JS-1202: Treasury Secretary John S n o w Center for Strategic and International Studies
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Page 4 of 4
-1203: Treasury and IRS Issue Depreciation Regulations
Page 1 of
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
February 27, 2004
JS-1203
Treasury and IRS Issue Depreciation Regulations
Today, the Treasury Department and Internal Revenue Service issued proposed
and temporary regulations that provide guidance for computing depreciation
deductions under the Modified Accelerated Cost Recovery System ( M A C R S ) in
section 168 of the Internal Revenue Code when property is acquired in a like-kind
exchange or as a result of an involuntary conversion.
"Previously, the depreciation rules for MACRS property acquired in a like-kind
exchange or involuntary conversion transaction were unclear. These regulations
provide clear rules to taxpayers depreciating property acquired and relinquished in
these transactions," stated Acting Treasury Assistant Secretary for Tax Policy Greg
Jenner.
The regulations also provide guidance on the annual depreciation allowances for
automobiles that are both acquired in a like-kind exchange or involuntary
conversion transaction and subject to the special automobile depreciation
limitations in section 280F.
The regulations generally apply to like-kind exchange and involuntary conversion
transactions after February 27, 2004. Taxpayers generally may rely on these
regulations, or any prior guidance issued by the Internal Revenue Service, for
M A C R S property acquired in a like-kind exchange or involuntary conversion
transaction before the effective date of the regulations.
Related Documents:
• TD 9115: Final and temporary regulations
• REG-106590-00: Notice of proposed rulemaking
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 C F R Part 1
[TD9115]
RIN 1545-BC27
Depreciation of M A C R S Property That is Acquired in a Like-kind Exchange or As a
Result of an Involuntary Conversion
A G E N C Y : Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
S U M M A R Y : This document contains regulations relating to the depreciation of property
subject to section 168 of the Internal Revenue Code ( M A C R S property). Specifically,
these temporary regulations provide guidance on how to depreciate M A C R S property
acquired in a like-kind exchange under section 1031 or as a result of an involuntary
conversion under section 1033 when both the acquired and relinquished property are
subject to M A C R S in the hands of the acquiring taxpayer. These temporary regulations
will affect taxpayers involved in a like-kind exchange under section 1031 or an
involuntary conversion under section 1033. 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 March 1, 2004.
///pp*
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106590-00, REG-138499-02]
RIN 1545-AX95; RIN 1545-BB05
Depreciation of MACRS Property That is Acquired in a Like-kind Exchange or As a
Result of an Involuntary Conversion
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking; notice of proposed rule making by crossreference to temporary regulations; notice of public hearing; and partial withdrawal of
proposed regulations.
SUMMARY: In the Rules and Regulations section of this issue of the Federal Register,
the IRS is issuing temporary regulations relating to the depreciation of property subject
to section 168 of the Internal Revenue Code (MACRS property). Specifically, the
temporary regulations provide guidance on how to depreciate MACRS property
acquired in a like-kind exchange under section 1031 or as a result of an involuntary
conversion under section 1033 when both the acquired and relinquished property are
subject to MACRS in the hands of the acquiring taxpayer. The text of those temporary
regulations also serves as the text of these proposed regulations. This document also
provides notice of a public hearing on these proposed regulations and a partial
withdrawal of proposed regulations [REG-139499-02] published July 21, 2003.
DATES: Written or electronic comments must be received by May 30, 2004. Outlines
of topics to be discussed at the public hearing scheduled for June 3, 2004, at 10 a.m.
must be received by May 13, 2004.
A D D R E S S E S : Send submissions to CC:PA:LPD:PR (REG-106590-00), room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D C
20044. Alternatively, submissions may be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-106590-00), Courier's
Desk, Internal Revenue Service, 1111 Constitution Ave., N W , Washington, D C , or sent
electronically, via the IRS Internet site at http://www.irs.gov/reqs. The public hearing will
be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington D C .
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 proposed regulations,
Charles J. Magee, (202) 622-3110; concerning submissions of comments, the hearing,
and/or to be placed on the building access list to attend the hearing, Robin Jones, (202)
622- 7180 (not toll-free numbers).
S U P P L E M E N T A R Y INFORMATION:
Background
Temporary regulations in the Rules and Regulations section of this issue of the
Federal Register amend 26 C F R part 1 relating to section 168 of the Internal Revenue
Code (Code). The temporary regulations provide guidance under section 168 on how to
depreciate M A C R S property acquired in a like-kind exchange under section 1031 or as
a result of an involuntary conversion under section 1033 when both the acquired and
relinquished property are subject to M A C R S in the hands of the acquiring taxpayer.
The text of those regulations also serves as the text of these proposed
2
regulations. The preamble to the temporary regulations explains the temporary
regulations and these proposed regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It 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
7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original and eight (8)
copies) or electronic comments that are submitted timely to the IRS. The IRS and
Treasury Department specifically request comments on the clarity of the proposed rules
and how they may be made easier to understand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for June 3, 2004, beginning at 10 a.m. in
the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security procedures, visitors must enter at the
3
Constitution Avenue entrance. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the hearing starts.
For information about having your name placed on the building access list to attend the
hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments at the hearing must submit an outline of the topics to be
discussed and the time to be devoted to each topic (signed original and eight (8) copies)
by May 13, 2004. A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Alan H. Cooper, Office of the Chief
Counsel (Small Business/Self Employed), and Charles J. Magee, Office of the
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.
Partial Withdrawal of Proposed Regulations
Under the authority of 26 U.S.C. 7805, §§1.168(a)-1 and 1.168(b)-1 of the notice
of proposed rulemaking (REG-138499-02) published in the Federal Register on July
21,2003, (68 FR 43047) are withdrawn.
4
Proposed A m e n d m e n t s to the Regulations
Accordingly, 26 C F R part 1 is proposed to be amended as follows:
PART 1-INCOME T A X E S
Paragraph 1. The authority citation for part 1 reads as follows:
Authority: 26 U.S.C. 7805 * * *
§1.168(i)-1 also issued under 26 U.S.C. 168(i)(4).
Par. 2. Sections 1.168(a)-1 and 1.168(b)-1 are added to read as follows:
S1.168(a)-1 Modified accelerated cost recovery system
[The text of this proposed section is the same as the text of §1.168(a)-1T(a) and
(b) published elsewhere in this issue of the Federal Register].
S1.168(b)-1 Definitions.
[The text of this proposed section is the same as the text of §1.168(b)-1T(a) and
(b)(1) published elsewhere in this issue of the Federal Register].
Par. 3. Section 1.168(d)-1 is amended to read as follows:
1. Revising paragraph (b)(3)(i) and (ii).
2. Adding paragraph (d)(3).
The revision and addition read as follows:
$1.168(d)-1 Applicable conventions—half-year and mid-quarter conventions.
* * * * *
(b) * * *
(3) * * *
5
(i) and (ii) [The text of the proposed amendment to §1.168(d)-1(b)(3)(i) and (ii) is
the same as the text of §1.168(d)-1T(b)(3)(i) and (ii) published elsewhere in this issue of
the Federal Register].
*****
(d) * * *
(3) [The text of the proposed amendment to §1.168(d)-1(d)(3) is the same as the
text of §1.168(d)-1T(d)(3) published elsewhere in this issue of the Federal Register.]
Par. 4. Section 1.168(i)-0 is amended by revising the entries for §1.168(i)-
1(d)(2), (e)(3)(i), (e)(3)(v) and (vi), (f)(1), (f)(2), (f)(2)(i), (i), 0), and (I) to read as follow
1
1.168(0-0 Table of contents for the general asset account rules.
*****
S1.168(0-1 General asset accounts.
*****
(d) * * *
(2) [The text of the proposed entry for §1.168(i)-1 (d)(2) is the s a m e as the entry for
§1.168(i)-1T(d)(2) published elsewhere in this issue of the Federal Register].
*****
(e) * * *
(3) * * *
(i) [The text of the proposed entry for §1.168(i)-1 (e)(3)(i) is the s a m e as the entry for
§1.168(i)-1T(e)(3)(i) published elsewhere in this issue of the Federal Register].
*****
(vi) [The text of the proposed entries for §1.168(i)-1(e)(3)(vi) is the s a m e as the entries
for §1.168(i)-1 T(e)(3)(vi) published elsewhere in this issue of the Federal Register].
* * * * *
/t\ * * *
(f)(1) through (f)(2)(i) [The text of the proposed entries for §1.168(i)-1 (f)(1) through
(f)(2)(i) is the s a m e as the text of the entries for §1.168(i)-1T(f)(1) through (f)(2)(i)
published elsewhere in this issue of the Federal Register].
*****
(i) and (j) [The text of the proposed entries for §1.168(i)-1(i) and (j) is the s a m e as the
entries for §1.168(i)-1T(i) and (j) published elsewhere in this issue of the Federal
Register].
*****
6
(I) [The text of the proposed entry for §1.168(i)-1(l) is the s a m e as the entry for
§1.168(i)-1 T(l) published elsewhere in this issue of the Federal Register].
Par. 5. Section 1.168(i)-1 is amended by revising paragraphs (c)(2)(ii)(E), (d)(2),
(e)(3)(i), (e)(3)(iii)(B)(4), (e)(3)(vi), (f)(1), (f)(2)(i), (i), 0), and (I) to read as follows:
$1.168(i)-1 General asset accounts.
* ** * *
(c) * * *
/o\ * * *
(ii) * * *
(E) [The text of the proposed amendment to §1.168(i)-1 (c)(2)(ii)(E) is the s a m e
as the text of §1.168(i)-1T(c)(2)(ii)(E) published elsewhere in this issue of the Federal
Register].
*****
(d) * * *
(2) [The text of the proposed amendment to §1.168(i)-1 (d)(2) is the s a m e as the
text of §1.168(i)-1T(d)(2) published elsewhere in this issue of the Federal Register].
*****
(e)
* * *
(3) * * *
(i) [The text of the proposed a m e n d m e n t to §1.168(i)-1(e)(3)(i) is the s a m e as the
text of §1.168(i)-1T(e)(3)(i) published elsewhere in this issue of the Federal Register].
*****
(iii) * * *
7
(B) * * *
(4) [The text of the proposed amendment to §1.168(i)-1(e)(3)(iii)(B)(4) is the
s a m e as the text of §1.168(i)-1T(e)(3)(iii)(B)(4) published elsewhere in this issue of the
Federal Register].
* * * * *
(e)(3)(vi) [The text of the proposed amendment to §1.168(i)-1(e)(3)(vi) is the
s a m e as the text of §1.168(i)-1T(e)(3)(vi) published elsewhere in this issue of the
Federal Register].
* * * * *
(f)(1) and (2) [The text of the proposed amendment to §1.168(i)-1 (f)(1) and (2) is
the s a m e as the text of §1.168(i)-1T(f)(1) and (2) published elsewhere in this issue of
the Federal Register].
* * * * *
(i) and (j) [The text of the proposed amendment to §1.168(i)-1(i) and Q) is the
same as the text of §1.168(i)-1T(i) and (j) published elsewhere in this issue of the
Federal Register].
* * * * *
(I) [The text of the proposed amendment to §1.168(i)-1(l) is the s a m e as the text
of §1.168(i)-1T(l)(1) through (l)(3)(i) published elsewhere in this issue of the Federal
Register].
Par. 6. Section 1.168(i)-5 is added to read as follows:
§1.168^-5 Table of contents.
8
[The text of this proposed section is the s a m e as the text of §1.168(i)-5T
published elsewhere in this issue of the Federal Register].
Par. 7. Section 1.168(i)-6 is added to read as follows:
§1.168(0-6 Like-kind exchanges and involuntary conversions.
[The text of this proposed section is the s a m e as the text of §1.168(i)-6T
published elsewhere in this issue of the Federal Register].
Par. 8. Section 1.168(k)-1 is added to read as follows:
§1.168(k)-1 Additional first year depreciation deduction.
(a) through (f)(5)(ii)(F)(1_) [Reserved]. For further guidance, see §1.168(k)-1T(a)
through (f)(5)(ii)(F)(i).
(2) [The text of the proposed a m e n d m e n t to §1.168(k)-1 (f)(5)(ii)(F)(2) is the s a m e
as the text of §1.168(k)-1 T(f)(5)(ii)(F)(2) published elsewhere in this issue of the
Federal Register].
(f)(5)(ii)(G) through (f)(5)(iv) [Reserved]. For further guidance, see §1.168(k)1T(f)(5)(ii)(G) through (f)(5)(iv).
(v) [The text of the proposed a m e n d m e n t to §1.168(k)-1(f)(5)(v) is the s a m e as
the text of §1.168(k)-1T(f)(5)(v) published elsewhere in this issue of the Federal
Register].
(f)(6) through (f)(9) [Reserved]. For further guidance, see §1.168(k)-1T (f)(6)
through (f)(9).
(g) Effective date. (1) [The text of the proposed a m e n d m e n t to §1.168(k)-1 (g)(1)
is the same as §1.168(g)-1T(g)(1)(i) published elsewhere in this issue of the Federal
Register].
(2) [Reserved]. For further guidance, see §1.168(k)-1T(g)(2).
(3)(i) and (ii) [The text of the proposed amendment to §1.168(k)-1(g)(3)(i) and (ii)
is the s a m e as the text of §1.168(k)-1T(g)(3)(i) and (ii) published elsewhere in this issue
of the Federal Register].
10
(g)(4) [Reserved]. For further guidance, see §1.168(k)-1T(g)(4).
Isl Mark E. Matthews
Deputy Commissioner for Services and Enforcement.
11
JS-1204: U.S. Government Releases F Y 2003 Financial Report
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
February 27, 2004
JS-1204
U.S. Government Releases F Y 2003 Financial Report
The Treasury Department and Office of Management and Budget today released
the fiscal year 2003 Financial Report of the United States Government, a
comprehensive look at the government's finances that complements the Budget of
the U.S. Government. The report provides financial information for all aspects of the
federal government.
"Just as we demand that public companies accurately report financial information to
their shareholders, the federal government has an obligation to present its financial
position in a complete and timely manner to America's taxpayers. W e will continue
to m a k e improvements in reporting processes throughout the federal government to
produce and report information that meets the highest standards," said Treasury
Secretary Snow.
As part of our efforts to provide timely and accurate reporting, this year's Financial
Report is being issued a month earlier than last year, a clear indication that the
government is making progress in accelerating its reporting. For F Y 2003, threefourths of the major government agencies had completed their audited financial
statements by the end of December. Even more important, eight agencies issued
their statements by mid-November, only 45 days after the end of the fiscal year and
one year ahead of 2004 reporting requirements. In addition, these eight agencies
received unqualified opinions.
This year's report reflects information from the Department of Homeland Security
with its transfer of 22 government agencies and offices and s o m e 180,000
employees. The creation of the Department of Homeland Security in 2003 w a s the
most significant transformation of the Federal Government since 1947 when the
various branches of the Armed Forces were merged into a n e w Department of
Defense.
An important reporting improvement this year was the adoption of a new accounting
standard that requires recording military equipment and its related depreciation as
an asset. T h e estimated total acquisition cost of this equipment w a s $1.2 trillion.
The 2003 financial results show an accrual-based net operating cost of $665 billion,
compared to the reported budget deficit of $374.8 billion. The main difference
between the two results is that the Financial Report includes post-employment
actuarial costs for veterans' benefits and civilian and military retirees' pensions and
health care T h e government's largest liability for F Y 2003 w a s debt held by the
public which w a s $3.9 trillion. The report's Management Discussion and Analysis
section addresses the full effects of all significant liabilities, stewardship responsibilities, and other commitments.
While much progress had been made in the Federal Government's financial
reporting this past year, s o m e challenges remain. The General Accounting Office
issued a disclaimer of opinion on the report and cited s o m e materia weaknesses in
data and processes. W e have been working to eliminate these problems; however,
making these improvements will require a concerted effort by a I 9 ° ^ ~
agencies and auditors, along with continued strong leadership from Treasury and
OMB.
Page 1 of 2
5-1204: U.S. Government Releases F Y 2003 Financial Report
The full report can be found at http://www.fms.treas.gov/fr/
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Pa
§e 2
ot
js-1205: F A T F Strengthens Campaign to Fight Money Laundering and Terrorist Financing
F R O M T H E OFFICE O F PUBLIC A F F A I R S
February 27, 2004
js-1205
F A T F Strengthens Campaign to Fight Money Laundering and Terrorist
Financing
At its Plenary meeting in Paris today, the Financial Action Task Force (FATF), the
international body leading the charge to safeguard the global financial system
against money laundering and terrorist financing, announced the removal of Egypt
and Ukraine from its list of Non-Cooperative Countries and Territories (NCCTs).
"The international community, through the FATF, continues to remain vigilant and
act against the threat of money laundering and terrorist financing. Today's
announcement is a clear indication that w e are making important progress in
building the international net to prevent and catch the flow of tainted money through
the financial system," said Juan Zarate, the U.S. Treasury Department's Deputy
Assistant Secretary for the Executive Office of Terrorist Financing and Financial
Crimes.
NCCTs are countries that have failed to adopt and implement adequate measures
to effectively fight money laundering. Countries on the N C C T list can be subjected
to a range of counter measures, including increased scrutiny when dealing with
banks abroad.
*
Seven countries still remain on list: Cook Islands, Guatemala, Indonesia, Myanmar,
Nauru, Nigeria and Philippines.
Also today, the FATF President expressed support for the continuation of the
successful collaboration between FATF and the IMF and World Bank. The three
institutions recently conducted a 12-month pilot program to ensure the consistent
application of anti-money laundering and anti-terrorist financing standards
worldwide. The IMF and World Bank used the FATF's 40 Recommendations on
Money Laundering and Eight Special Recommendations Against Terrorist
Financing to assess countries' financial systems during the program.
The FATF encouraged the IMF and World Bank to continue such assessments on a
comprehensive, uniform and permanent basis as a regular part of their Financial
Sector Assessment Program.
Before the start of the Plenary meeting earlier this week, the FATF held a seminar
on the international fight against the financial war on terrorism. Attended by 44
countries the seminar addressed the risks posed by alternative remittance
systems, cash couriers, non-profit organizations and the links between narcotics
trafficking and terrorist financing.
Attendees expressed the need for improved resources to better collect and share
information regarding terrorist financing throughout the global economy. The FATF,
a 31-member body, is committed to ensuring the implementation of practical steps
to help the international community achieve this goal.
"This is an important dialogue as the international community adapts to the
changing complexion of terrorist financing and the threat it poses to all of us,
Zarate continued.
Page 1 of 2
js-1205: F A T F Strengthens Campaign to Fight Money Laundering and Terrorist Financing
The seminar came after the Finance Ministers and Central Bank Governors of the
G-7 and invited countries m a d e a political commitment to combat terrorist financing
during the September 2003 meeting in Dubai.
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@FedFRASER