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Department of the Treasury
PRESS R E L E A S E S
The following numbers were not used:
JS-1493, 1562-1599, 1601-1660, 1684 and 1688
Some numbers in May and June 2004 were used twice.
Page 1 of 1
-1489: Treasury Announces Market Financing Estimates
PHLSS ROOM
^E
FROM THE OFFICE OF PUBLIC AFFAIRS
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May 3, 2004
JS-1489
Treasury Announces Market Financing Estimates
The Treasury Department announced today that it expects net borrowing of
marketable debt to total $38 billion in the April - June 2004 quarter. The projected
cash balance on June 30 is $45 billion. In the last quarterly announcement on
February 2, 2004, Treasury announced that it expected net borrowing to total $75
billion with an end-of-quarter cash balance of $45 billion. The decrease in
borrowing is due to higher receipts, both from lower refunds and higher payroll and
individual taxes, lower outlays, and higher State and Local Government Series net
issuances.
Treasury also announced that it expects net borrowing of marketable debt to total
$91 billion in the July - September 2004 quarter. The projected cash balance on
September 30 is $35 billion.
During the January - March 2004 quarter, Treasury's net marketable borrowing
totaled $146 billion and the cash balance on March 31 was $21 billion. On
February 2, Treasury announced that it expected net marketable borrowing to total
$177 billion with an end-of-quarter cash balance of $20 billion. The decrease in
borrowing is largely attributable to lower tax refunds and higher payroll taxes.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, May 5.
REPORTS
• Treasury Announces Market Financing Estimates
tD.7/www.treas.gov/nress/releases/isl489.htm
5/31/2005
TREASURY ANNOUNCES MARKET FINANCING ESTIMATES
Today, the Treasury Department announced net borrowing of marketable debt for the April June 2004 and July - September 2004 quarters.
Estimated
End-of-Quarter
Borrowing
Cash Balance
($ billion)
($ billion)
Apr-Jun 2004
$38
$45
Jul-Sep 2004
$91
$35
Quarter
Since 1997, the average forecast error in net market borrowing for the current quarter is $10
billion, of which $1 billion is attributable to differences in the end-of-quarter cash balance.
Similarly, the average forecast error for the following quarter is $45 billion, of which $10 billion
is attributable to differences in the end-of-quarter cash balance.
The following tables display and reconcile the variation between forecasted and actual net
marketable borrowing in the Jan - M a r 2004 quarter.
Quarter
Estimated
Borrowing
Actual
Borrowing
($ billions)
Estimated
End-of-Quarter
Cash Balance
($ billions)
Actual
End-of-Quarter
Cash Balance
($ billions)
$146
$20
$21
($ billions)
Jan - M a r
2004
$177
-more-
Chg from
Feb Estimate
Categories
+$30**
Receipts
+$4
Outlays
Non-Marketable
-$2
Activity
Change
in
Cash
-$1
Balance
** includes tax refunds
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, M a y 5.
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S-1490: Deputy Assistant Secretary for Federal Finance Timothy S. Bitsberger M a y 2004 Quarterly Ref... Page
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 5, 2004
JS-1490
Deputy Assistant Secretary for Federal Finance Timothy S. Bitsberger May
2004 Quarterly Refunding Statement
Treasury is announcing the following changes to the issuance calendar:
- A new 5-year TIPS with the first auction in October 2004;
- A new 20-year TIPS with the first auction in July 2004.
Treasury is also considering canceling the regular reopening of nominal 10-year
securities. W e will provide one quarter notice before any change.
Details of the May Refunding
We are offering $54.0 billion of notes to refund approximately $32.8 billion of
privately held securities and Government account holdings maturing or called on
May 15, raising approximately $21.2 billion. The securities are:
- A new 3-year note in the amount of $24 billion, maturing May 15, 2007;
- A new 5-year note in the amount of $15 billion, maturing May 15, 2009;
- Anew 10-year note in the amount of $15 billion, maturing May 15, 2014.
These securities will be auctioned on a yield basis at 1:00 PM Eastern time on
Tuesday, May 11, Wednesday, May 12, and Thursday, May 13, respectively. All of
these auctions will settle on Monday, May 17. The balance of our financing
requirements will be met with weekly bills, monthly 2-year and 5-year notes, the
June 10-year note reopening, and the July 10-year and 20-year TIPS. Treasury is
also likely to issue cash management bills in early June and July.
5-year TIPS and 20-year TIPS
Treasury is adding both a 5-year TIPS and a 20-year TIPS to its auction calendar.
Each security will be auctioned semiannually. The 5-year TIPS will be auctioned on
an April/October cycle and the 20-year TIPS will be on a January/July cycle. The
first issues of these securities in July and October of this year will have an initial
maturity a half year longer than usual and will be reopened twice. Accordingly, the
20-year TIPS issued in July 2004 will have an initial maturity of 201/2-years and will
be reopened in January 2005 and July 2005. Similarly, the 5-year TIPS issued in
October 2004 will have an initial maturity of 51/2-years and will be reopened in April
2005 and October 2005. Starting with the 20-year TIPS issued in January 2006
and the 5-year TIPS issued in April 2006, these securities will be reopened only
once six months after the original issue.
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TIPS Auction and Maturity Dates
The new 5-year TIPS and 20-year TIPS will be auctioned in the second half of the
month and settle on the last business day of the month. However, these TIPS
issues will continue to have mid-month maturity dates (i.e., April 15 th for the 5-year
TIPS and January 15 th for the 20-year TIPS). Investors w h o purchase these
securities at auction will be required to pay Treasury the interest accrued between
the 15 th of the month and the settlement date. The auction schedule for 10-year
TIPS is not changing; 10-year TIPS will continue to be auctioned in the first part of
the month and settle on the 15 th of the month.
Zero B o u n d on TIPS C o u p o n s
In the event that the high accepted yield in an auction of a new TIPS issue is
negative, the security will have a zero coupon, and Treasury will issue the security
at a premium above the par value. Investors will receive the inflation-adjusted par
amount at maturity.
Cessation of the Long Term Treasury Rate
In Treasury's February 2002 Quarterly Refunding statement, we announced that
publication of a 30-year Constant Maturity Treasury (CMT) Yield w a s being
discontinued and that a "long term yield" average based on the bid yields on all
Treasury bonds with 25 or more years remaining to maturity (LT>25 average) would
be published in place of the 30-year C M T . W e also announced the publication of
an "extrapolation factor" to allow users to calculate a proxy estimate for a 30-year
yield. Because there are currently only three (3) bonds outstanding with more than
25 years to maturity, w e are ceasing the publication of the LT>25 average. W e will
continue to publish an extrapolation factor, but as of June 1, 2004 that factor will be
based on an extrapolation from the 20-year yield curve point. For further details on
this, please see http://www.treas.gov/offices/domestic-finance/debtmanagement/interest-rate/index.html
Other Policy Issues under Consideration
Nominal 10-year Note Reopening Policy
The introduction of two new TIP securities accompanied with smaller than
anticipated borrowing needs for this year and forecasts for declining deficits going
forward has led Treasury to reconsider its nominal 10-year note reopening policy.
State and Local Government Securities (SLGS) Proposed Regulatory
Changes
This summer Treasury will announce proposed regulatory changes for dealing with
trading activities that w e view are against the spirit and purpose of the S L G S
program and are detrimental to efficient Treasury financing. The purpose of the
S L G S program is "to assist tax-exempt issuers with complying with applicable
provisions of the Internal Revenue System code that apply to tax exempt issuers".
It is not, nor w a s it ever, intended to be a trading vehicle for tax-exempt issuers to
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capitalize on the inherent inefficiencies and arbitrage opportunities that are artifacts
of the non-marketable S L G S program, and Treasury considers its use in such
manner to be inappropriate. Treasury will consider any and all comments from
market participants regarding the proposed rule, before publishing a final rule.
Six-Decimal Price Awards in Treasury Auctions
In the February 2004 Quarterly Refunding Statement, Treasury announced its
intentions to compute price awards in auctions to six decimal places per hundred.
This change is expected to take place in the second half of this year.
In an effort to make this transition as smooth as possible for those who purchase
Treasury securities, w e have m a d e the following 6-decimal pricing calculation
formulas available at http://www.publicdebt.treas.gov/of/ofcalc6decimal.htm .
Institutions are encouraged to use the formulas for internal testing to determine
whether or not changes to their back-office systems will be necessary. Any
questions regarding this testing should be directed to B P D Office of Financing at
(202)691-3550.
Changing Limits on Non-competitive Bill Awards
The limit on non-competitive awards is $1 million for bill auctions and $5 million for
coupon auctions. The non-competitive award limit on coupons auctions w a s raised
in 1991 in an effort to increase participation in Treasury auctions and reduce
ownership concentrations. Treasury is studying raising the limit of noncompetitive
awards in bill auctions from $1 million to $5 million. W e will announce a decision at
the August refunding.
The next quarterly refunding announcement will take place on Wednesday, August
4, 2004. Please send comments and suggestions on these subjects or others
relating to debt management to debt.management@do.treas.gov
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 5, 2004
JS-1491
Minutes Of The Meeting Of The
Treasury Borrowing Advisory Committee
Of The Bond Market Association
May 4, 2004
The Committee convened in closed session at the Hay-Adams Hotel at 9:35 a.m.
The following members of the Committee were not present: Richard Axilrod, James
Capra, Thomas Kalaris, Joseph Rosenberg, and Thomas Marsico. Deputy
Assistant Secretary for Federal Finance Timothy Bitsberger welcomed the
Committee and gave them the charge.
The Committee first addressed the question in the Committee charge (attached)
dealing with the introduction of 5- and 20-year TIPS securities and the impact on
portfolio composition, specifically the impact on 10-year nominal issuance. Before
the Committee discussed the issue, Mr. Bitsberger presented a series of eight
charts (attached) showing Treasury's current and projected debt distribution. The
charts indicated that net market borrowing needs are currently lower than earlier
projected, that the current issuance calendar is capable of handling projected
deficits, that introducing TIPS will require some reduction of nominal issuance but
that auction sizes will remain relatively reasonable, and that the resulting
distributions in outstanding debt, both current and projected, remain within historical
norms.
A discussion ensued between several members about the role of 10-year nominal
debt in the Treasury market. O n e member opined that given the deficit numbers
and the reasons Treasury previously stated for moving to reopened 10-year notes
in May 2003, that it made sense now to reduce nominal 10-year issuance, but that it
was difficult to characterize the impact on liquidity of eliminating the reopened 10year note. O n e member stated that 10-year notes were an important risk
transference vehicle and suggested that paring back 10-year note sizes would
reduce the ability to transfer risk and raise the possibility of squeezes. Other
members stated that issuing expensive longer-term debt just for liquidity reasons
was not sufficient justification for keeping the 10-year note at current sizes; that
Treasury's primary goal is and should be lowest cost of financing overtime.
Others, concerned about liquidity and citing the current and projected debt
distribution charts, suggested that Treasury scale back nominal 10-years slightly
and nominal 5-year notes more, to accommodate the new TIPS.
The discussion turned to Treasury's rollover risk. Some members noted that more
than half of Treasury's debt matures within 2 years and that 63 percent matures
within 3 years. This led some Committee members to suggest that while Treasury
may view substituting 5- and 20-year TIPS for 10-year nominal issuance as a
symmetric substitution, such a substitution actually changes the risk characteristics
of Treasury's portfolio. Specifically, TIPS have a floating-rate component (the
inflation component) that effectively makes them behave like a much shorter
instrument. Members argued that because of the floating-rate component issuing
more TIPS while cutting back long-term nominal issuance would effectively result in
even more debt rolling over sooner. Committee members questioned the wisdom
of this move to effectively shorten average maturity of the portfolio by substitution of
TIPS issuance for long-term nominal issuance at what may be perceived as the end
of a 20-year deflationary trend. Treasury officials pointed out that historical 40-year
interest cost modeling, using short-dated and long-dated financing assumptions,
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indicate that shorter-dated issuance saves interest costs over time. Additionally,
theoretical arguments concerning term-risk premiums on nominal securities argue
for more TIPS issuance at the expense of long-term nominal issuance. Finally,
Treasury benefits slightly from rising inflation because inflation impacts revenues
sooner than outlays; Treasury should monetize the inflation by being a net seller of
inflation.
The discussion next turned to initial auction sizes for new TIPS and the appropriate
place for the n e w TIPS issues in the current calendar. Several m e m b e r s discussed
the merits of offering 5-year TIPS, questioning the sources of demand for a 5-year
instrument, noting that 5-year TIPS were once offered and discontinued. Treasury
officials pointed out that in the past, the Committee w a s nearly evenly divided
between n e w issuance of short and long-dated TIPS. Treasury officials pointed out
that trading volume has picked up for shorter-dated TIPS in recent months and that
central banks and term-restricted accounts were likely sources of decent demand.
O n e m e m b e r observed that central bank demand could decline as the dollar
strengthened.
A few members pointed out that one reason trading volume on shorter-dated TIPS
has increased is due to the nature of the cash flows on short-dated TIPS; shortdated TIPS trade m u c h more like nominal 5-years notes, but allow investors to
speculate on inflation expectations; because the cash flows on 5-year TIPS are
similar to 5-year nominal they are not really a "new asset class". The trading
volume is largely coming from speculators that traditionally hold nominal
instruments, as opposed to typical buy-and-hold accounts that hold longer-dated
TIPS. M e m b e r s felt that introducing a 5-year TIPS would effectively be increasing
5-year nominal supply and 5-year nominal supply w a s already more than sufficient.
More importantly, Treasury would not be attracting a n e w type of investor by
offering a 5-year TIPS, where as the 20-year TIPS would attract n e w investors.
O n e m e m b e r pointed out that because 5-year TIPS trade like nominals, dealers
would be more inclined to underwrite them because they are easier to hedge.
The Committee generally felt that the market wanted a 20-year TIPS and that the
size should initially be about $16 to $20 billion per year, via an initial auction and a
smaller reopening. The auction cycle should be such that the n e w instrument's
cash flows are fungible with existing TIPS. The Committee's consensus w a s that
the Treasury should wait to see if a 5-year TIPS is really needed or wanted. In the
interim, seasoned 10-year TIPS could satisfy the market demand for shorter-dated
TIPS. If Treasury insisted on doing a 5-year TIPS, it should be in the $16 to $20
billion per year range.
The Committee next addressed the question in the charge dealing with fiscal
uncertainty and interest rate volatility. Mr. Bitsberger presented charts (attached)
that depicted the budget uncertainty related to technical factors associated with the
budget-modeling process. This w a s a continuation of sensitivity analysis presented
in two prior meetings where Treasury presented charts showing the budget
uncertainty associated with economic forecasts and legislation. The error terms
associated with technical factors were significant and further highlighted the need
for flexibility and the importance of the bill market for addressing this uncertainty.
Several Committee m e m b e r s noted that the bill market and the short-coupon
market could handle greater issuance volume with little or no concession. Others
suggested that if borrowing needs were substantial and surprising, that Treasury
should consider issuing at various liquid points on the curve and then swap that
debt in the swap market.
The Committee then focused on the appropriate level of Treasury tolerance for
interest rate volatility. O n e m e m b e r pointed out that before Treasury can attempt to
optimize a portfolio, Treasury needs to state its goal and that the Committee would
like more guidance in that regard. Another m e m b e r raised the issue that if there is
significant correlation between deficit volatility and interest-rate volatility, that
Treasury should be m u c h more concerned about rollover risk. This m e m b e r
pointed out that recently there has not been significant correlation between deficit
volatility and interest-rate volatility, but that this current phenomena might be
extreme i e. , out in the "statistical tail" of past experience. Interest-rate volatility is
extremely low'right n o w but market consensus suggests that w e are likely at the
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end of a secular deflationary trend and when cyclical themes begin to reassert
themselves, interest-rate volatility could become more of a concern for Treasury.
Another member suggested that a multi-factor asset-liability framework might be
needed to properly assess this question. It w a s difficult to m a k e any assertions
about interest-rate volatility absent knowledge of what is occurring to other Treasury
assets and liabilities. Members agreed that more time be devoted to the study of
this complex question, and that it be discussed further at future meetings.
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 in November. It w a s the
consensus of the Committee that the third option presented w a s the best. That
option has the 3-year note auction taking place on Monday, November 8; the 5-year
note auction on Tuesday, November 9; and the 10-year note auction on
Wednesday, November 10, after the F O M C meeting. The Committee felt that
auctioning on three consecutive days w a s important and that volatility around
auction time would be lower after the F O M C meeting. The Committee finalized its
recommendation for borrowing in this quarter and the July-September quarter.
Those charts are attached.
The meeting adjourned at 11:30 p.m.
The Committee reconvened at 3:30 p.m. to present the Treasury with observations
on the degree of accuracy U.S labor market data. David Greenlaw of Morgan
Stanley provided a presentation on the major indicators of the labor markets,
namely the monthly household survey and payroll survey. H e started off by
pointing out that the two indicators differ in many respects, and that adjustments are
necessary before the two numbers can be compared. For the time period from
1994 to 2004, the two adjusted series are close in levels but differ in changes,
especially month-to-month changes. H e then went on to account for the sources of
the differences in the two adjusted series. First, numbers from the household
surveys m a y be biased downward, especially lately, because of measurement
errors in population, most likely due to immigration. Second, numbers from the
household survey decelerate (accelerate) faster than numbers from the payroll
survey around cyclical turning-point. The reason is it takes time to obtain
responses from start-up and close down firms. H e pointed out that quarterly data
such as employment insurance taxes, census of employment and wages, withheld
income and payroll taxes could be used as a benchmark revision to the survey
data. Overall, in conjunction with other labor indicators such as productivity growth,
Greenlaw concluded that it is likely that the employment reports are a fair indicator
of employment conditions.
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: Richard Axilrod, James Capra,
T h o m a s Kalaris, Joseph Rosenberg and T h o m a s Marsico. The Chairman
presented the Committee report to the 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 5:50 p.m.
Jeff Huther
Director
Office of Debt Management
M a y 4, 2004
Certified by:
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Mark B. Werner, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
May 4, 2004
Treasury Borrowing Advisory Committee
Quarterly Meeting
Committee Charge - M a y 2004
Portfolio Composition
We are introducing both 5-year and 20-year TIPS. We will need to reduce nominal
issuance to m a k e room for additional TIPS issuance. In the absence of liquidity
concerns, w e would eliminate the reopenings of 10-year nominal securities to
accommodate the new securities. W e would like the Committee's views on
eliminating the 10-year reopening, simply reducing the sizes of 10-year auctions, or
spreading the reduction in issuance across both 5-year and 10-year issuance. In
discussing these options, w e would like the Committees views on the timing of
implementation of the Committee's preferred option. W e would also like the
Committee's view on initial auction sizes for these new TIPS offerings and the
appropriate position for these securities in the issuance calendar.
Fiscal[Uncertainty: and Interest-Rate Volatility
As a follow up to discussions regarding the uncertainty of the budget-modeling
process, w e will show the Committee s o m e charts illustrating the financing risk due
to technical errors in budget forecasting. W e will also show the Committee charts
illustrating the trade-offs between interest costs and expected volatility. W e would
like the Committee's views on Treasury's tolerance for interest rate volatility.
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 S32.8 billion of
privately held notes and bonds maturing or called on M a y 15.
• The composition of Treasury marketable financing for the remainder of the
April- June quarter, including cash management bills.
• The composition of Treasury marketable financing for the July - September
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?
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.:
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®.
May 5, 2004
JS-1492
Report To The Secretary Of The Treasury
From The
Treasury Borrowing Advisory Committee
Of The
Bond Market Association
May 4, 2004
Dear Mr. Secretary:
Since the Committee's last meeting in February, the economy has continued to
grow at a robust pace. G D P expanded at a 4.2% pace in Q1. Moreover, the latest
economic readings point to a continuation of strong growth going forward. The ISM
manufacturing report has continued to run at levels near the 20-year high reached
in January. The latest data indicate robust home sales in March. Consumer
spending grew almost 4 % in Q1 despite higher energy prices and lower-thanexpected tax refunds. The trend in payroll employment has strengthened, with job
gains averaging 171,000 per month in Q1. The stronger trend in payrolls is
consistent with the message from other employment indicators such as jobless
claims.
Core inflation moved up in Q1. The core CPI rose an annualized 1.8% and the core
P C E deflator was up 2.0%, bringing the year-over-year changes in March to 1.6%
and 1.4%, respectively.
After maintaining its range even as most economic data pointed to a robust
recovery, the Treasury market reacted sharply to news that payrolls are starting to
pick up. Over the quarter, 10-year yields have risen by almost 40bp and 2s/30s
curve has flattened about 15bp. Yields are currently 80bp higher than the lows
observed in mid-March and the yield curve is 30bp flatter than its steepest levels of
the quarter. The market is currently pricing in approximately 4 5 % probability that
the Fed will raise rates by 25bp at the June F O M C meeting and is pricing in almost
90bp of tightening by year end.
First quarter reported earnings have been strong: with 82% of the S&P 500
reporting, approximately 7 6 % have beaten expectations while only 1 3 % have failed
to meet expectations. Despite strong corporate earnings, however, equity markets
have declined over the past three months: the S & P 500 Index has fallen
approximately 1 % and the N A S D A Q composite has fallen approximately 6%.
Driven by continued strong economic news and increased expectations of Fed
tightening, the dollar has reversed its downward course over the quarter and
strengthened almost 5 % versus the Euro and approximately 4.5% versus the Yen.
Budget performance has been stronger than expected, with tax refunds only 8.6%
higher than last year compared to Treasury's prior expectations of close to a 2 0 %
increase. At this point in the filing season, approximately 9 5 % of non-withheld tax
payments have usually been received, and they are running about 5 % lower than
last year.
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Against this economic and financial backdrop, the members of the Committee
began consideration of debt management questions included in the Quarterly
Charge. Following their standard format, Treasury presented a chart package that
will be released as part of the Treasury refunding announcement.
In its Charge to the Committee, Treasury stated that it will introduce 5-year and 20year TIPS and that it will continue to increase TIPS issuance nominally and as a
percentage of total debt outstanding. Treasury asked the Committee's advice as to
where investor demand for TIPS would be greatest and in which sectors it would
recommend reducing issuance.
Members of the Committee were uniform in their support for a new 20-year TIP
Most members felt strong investor demand would be manifest in this sector.
Members had differing opinions as to investor preference for 5-year TIPS with most
expressing reservations about large-scale issuance. As to the question of which
nominal issues to reduce in order to facilitate increased TIPS issuance, most
members expressed reservations about canceling the reopening of 10-year note
auctions. In fact, many members were reluctant to reduce nominal 10-year note
issuance too dramatically. Members favored larger reductions in 5-year nominal
issuance as well as reducing 10-year nominal issuance and bills. Because TIPS
cash flows differ from those of nominals, replacement of like maturity nominals with
TIPS w a s not favored by most members. In particular, the variable nature of the
inflation component of TIPS' cash flows w a s a factor in most members'
recommendations to reduce issuance of nominals along the yield curve. Other
members voiced concerns that eliminating 10-year auctions m a y impede the risk
transference utility that Treasury securities provide to the market by substituting
less liquid securities for those that are more liquid.
The Committee then responded to Treasury's second question in the Charge by
considering a number of slides that demonstrated forecast volatility in the Federal
budget over prior cycles. Specifically, Treasury showed a slide depicting current
and future budget projections in comparison with the January 2001 C B O baseline
forecast. Treasury highlighted a number of contributors to the large forecasting
error namely revenues, debt service changes due to legislation, spending, technical
errors and economic factors. Treasury responded to past Committee guidance to
show measures of forecast confidence around the Federal budget in out years.
Treasury highlighted the fact that the changes in interest expense are largely due to
factors outside of the control of debt managers. Treasury then presented a slide
showing three financing strategies and expressed a preference for balanced
issuance along the yield curve and asked the Committee to opine as to Treasury's
tolerance for interest rate volatility given the difficulty inherent in forecasting
required debt issuance. Committee members expressed support for Treasury
furthering its ongoing efforts to implement analytical tools that illustrate borrowing
needs and expenses under a wide array of scenarios. Members felt that risk
analysis which illustrates interest rate expense and nominal borrowing requirements
during periods of fiscal deficit and high nominal interest rates, as well as fiscal
surplus and low nominal interest rates, would be a welcome addition to Treasury's
debt management process. Members also discussed adoption of a m e a n variance
framework to debt management and concluded further study w a s required before a
concise recommendation could be m a d e to Treasury.
Treasury then asked the Committee to offer advice as to the scheduling of the
November 2004 refunding. Three potential options were offered to the group for
consideration. The consensus view w a s that it w a s necessary to be sensitive to the
employment release and the F O M C meeting, while scheduling around the
Veteran's Day holiday. Additionally, preserving the identity of the three-day auction
schedule that draws focus and liquidity to the underwriting process would be
favorable for the Treasury. The Committee recommended November 8th, 9th and
10 th as the days following the November 3 rd announcement to underwrite 3-year
notes, 5-year notes and 10-year notes.
The Committee then addressed the question of the composition of Treasury notes
to refund approximately $32.03 billion of privately held notes and bonds maturing
on M a y 17 th as well as the composition of Treasury marketable financing for the
remainder of the April-June quarter, including cash management bills for the July-
: / / w w w rreas anv/nress/releases/iS1492.htm
5/31/2005
S-1492: Report T o The Secretary O f The Treasury<br>From The<br><br>Treasury Borrowing Advisor... Page 3
September quarter. To refund $32.03 billion of privately held notes and bonds
maturing May 17th, 2004, the Committee recommended a $24 billion 3-year note
due 5/15/07, a $14 billion 5-year note due 5/15/09, and a $15 billion 10-year note
due 5/15/14. For the remainder of the quarter, the Committee recommended a $26
billion 2-year note issued in May and a $26 billion 2-year note issued in June, a $14
billion 5-year note issued in June and $11 billion reopening of the 10-year note in
June. The Committee also recommended a $20 billion 11-day cash management
bill issued 6/4/04 and maturing 6/15/04. For the July-September quarter, the
Committee recommended financing as contained in the attached table. Relevant
features include three $26 billion monthly 2-year notes, a $24 billion 3-year note,
three $14 billion monthly 5-year notes, a $15 billion 10-year note issued in August
followed by a $10 billion reopening of that 10-year note in September. The
Committee further recommended a $10 billion 10-year TIPS for issuance in July as
well as a $10 billion 20-year TIPS for issuance in July.
Respectfully submitted,
Mark B. Werner
Chairman
Ian Banwell
Vice Chairman
REPORTS
• TBAC Recommended Financing Tables: Q2
• T B A C Recommended Financing Tables: Q 3
://www.treas.eov/oress/releases/i sl492.htm
5/31/2005
5-1494: Treasury Publishes Final PFIC Mark T o Market Regulations
Page 1 of 1
i
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 29, 2004
js-1494
Treasury Publishes Final PFIC Mark To Market Regulations
Today, the Treasury Department published final regulations providing guidance for
taxpayers that elect to mark to market stock of a passive foreign investment
company. Passive foreign investment companies, or PFICs, are foreign
corporations that predominantly earn, or hold assets that produce, passive or
investment-type income, such as foreign mutual funds. The final regulations
provide operating rules for making the mark to market election and for making
determinations with respect to the annual mark to market inclusions. The final
regulations also provide for the coordination of the mark to market regime with the
rules that apply to PFICs generally.
The final regulations generally follow the proposed regulations, which were
published in July of 2002, with s o m e modest modifications in response to
comments from taxpayers. The final regulations are effective for taxable years
beginning after December 31, 2004.
The text of the final regulations is attached and will be on file tomorrow at the
Federal Register.
-30-
REPORTS
• final regulations
L://WWW
treas anv/nress/re1eases/isl494Jliir
S/?7/2005
[4830-01-P]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 C F R Part 1
[TD9123]
RIN 1545-AY17
Electing Mark to Market for Marketable Stock
A G E N C Y : Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
S U M M A R Y : This document contains final regulations that provide procedures for
certain United States persons holding marketable stock in a passive foreign investment
company (PFIC) to elect mark to market treatment for that stock under section 1296 of
the Internal Revenue Code and related provisions of sections 1291 and 1295. These
final regulations affect United States persons owning marketable stock in a PFIC.
DATES: Effective Date: These regulations are effective May 3, 2004.
Applicability Date: For dates of applicability, see §§1.1291-1 (j), 1.1295-1 (k), and
1.1296-10).
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 : Alexandra K. Helou, (202) 622-3840 (not
a toll free number).
S U P P L E M E N T A R Y INFORMATION:
Background
O n July 31, 2002, the IRS published in the Federal Register a notice of
proposed rulemaking (REG-112306-00; 2002-44 I.R.B. 767) under section 1296 and
related provisions of the Internal Revenue Code (Code). T w o written comments were
received in response to the notice of proposed rulemaking. N o public hearing w a s
requested or held on the notice of proposed rulemaking. After consideration of the
comments, the proposed regulations are adopted as final regulations with the
modifications discussed below.
S u m m a r y of Public C o m m e n t s and Explanation of C h a n g e s
A. Deferral of Post-October PFIC Losses by Regulated Investment Companies (RICs)
Under section 852(b)(10)
O n e commentator recommended that the regulations provide guidance regarding
the determination of post-October "net reduction in value" of PFIC stock held by a RIC
under section 852(b)(10). Section 852(b)(10) provides that taxable income of a RIC
(other than a RIC to which an election under section 4982(e)(4) applies) shall be
computed without regard to any net reduction in value occurring after October 31 of the
taxable year of any stock of a PFIC with respect to which an election under section
1296(k) is in effect and that any such reduction shall be treated as occurring on the first
day of the following taxable year.
To address concerns relating to a R I C s post-October period, the commentator
provided three recommendations. First, that the regulations clarify whether the deferral
of post-October PFIC losses under section 852(b)(10) is elective or mandatory; second,
that RICs be permitted to defer their post-October losses under rules similar to those
that apply to foreign currency gains and losses under §1.852-11; and third, that RICs be
allowed to include actual post-October dispositions of PFIC stock when computing
losses eligible for deferral.
The IRS and Treasury have considered these recommendations and determined
that the issues raised with respect to section 852(b)(10) are issues under the RIC tax
provisions that are beyond the scope of this regulations project.
B. Situations Arising From Different Tax Years of RICs and the Foreign Corporations in
Which Thev Invest
O n e commentator requested guidance in instances where the RIC and a foreign
corporation in which it invests have different or "mismatching" taxable years. This
commentator noted that a RIC m a y experience uncertainties with respect to determining
its taxable income and minimum distribution amount in situations where, following the
end of its taxable year, the RIC learns that a foreign corporation in which it has invested
is a PFIC or that the foreign corporation no longer satisfies the income or asset tests of
section 1297(a) for the current taxable year. To address administrative concerns arising
in this situation, this commentator recommended that RICs be permitted to recognize a
change in a foreign corporation's PFIC status in the R I C s taxable year within which the
taxable year of the foreign corporation ends.
Issues arising from different taxable years are not specific to PFICs for which a
taxpayer has m a d e a section 1296 election. Accordingly, this issue is beyond the scope
of this regulations project. However, comments are requested for approaches that
address issues arising w h e n a taxpayer and a PFIC have different taxable years. Such
issues m a y be addressed in a future regulations project.
C. Situations W h e r e a RIC O w n s Stock in a Foreign Corporation That N o Longer
Satisfies the PFIC Definition in the Current Year
O n e commentator suggested that the regulations should address certain issues
that arise with respect to a shareholder that has m a d e a section 1296 election for its
PFIC stock and the foreign corporation does not satisfy the income or asset test in
section 1297(a) for the year. First, the commentator suggested that the regulations
clarify that the character of gains from the disposition of the stock of the foreign
corporation during the time that the corporation did not qualify as a PFIC should be
capital gain. The commentator also requested that the regulations provide that the
character of losses with respect to stock for which a section 1296 election w a s m a d e
but that is recognized in a taxable year during which the foreign corporation is not a
PFIC be treated as ordinary income to the extent of any unreversed inclusions at the
time of disposition.
After consideration of these comments, and in accordance with the statutory
provisions of section 1296, the IRS and Treasury have adopted the first comment, but
not the second comment. Accordingly, two examples were added to the regulations.
Example 2 in §1.1296-1 (c)(7) clarifies that any gain from the disposition of stock of a
foreign corporation that does not qualify as a PFIC for the year of disposition will be
capital gain because section 1296(c)(1)(A) no longer applies at such time. In the case
of losses with respect to stock for which a section 1296 election w a s m a d e but that is
recognized in a taxable year during which the foreign corporation is not a PFIC,
Example 4 in §1.1296-1 (c)(7) w a s added to clarify that any loss from the disposition of
such stock will be a capital loss because section 1296(c)(1)(B) no longer applies at such
time.
Second, the commentator recommended that the regulations provide automatic
consent for RICs to terminate a section 1296 election during a year that a foreign
corporation no longer satisfies the requirements for PFIC status. The IRS and Treasury
have not adopted this recommendation. The IRS and Treasury believe that it is
appropriate to require consent of the Commissioner to terminate a section 1296
election. Under §1.1296-1 (h)(3), a shareholder can request the consent of the
Commissioner to revoke a section 1296 election upon a finding of a substantial change
in circumstances, which may include a foreign corporation ceasing to be a PFIC.
P. Technical Coordination Issues Arising From Marking PFIC Stock to Market Under the
Former Proposed 51.1291-8 and Notice 92-53
A commentator suggested that the regulations should clarify how the former
proposed §1.1291-8 (see Notice 92-53 (1992-2 C.B. 384)) and the current statutory
PFIC mark to market rules under section 1296 interact. For example, the commentator
requested clarification concerning the RICs adjustments to the basis of its PFIC stock
to reflect gains previously included under the former proposed §1.1291-8.
The IRS and Treasury believe that no additional clarification is needed. To the
extent a taxpayer increased its basis or received a new holding period under the former
proposed §1.1291-8, those consequences will be respected even though the proposed
regulations were withdrawn without being finalized following the enactment of current
section 1296 (see 64 FR 5015 (February 2, 1999) withdrawing proposed §1.1291-8).
As a result, the suggestion was not adopted.
This same commentator also recommended that Example 2 of proposed
§1.1296-1 (i)(4) be clarified by specifically providing that the RIC had not made a mark to
market election under the former proposed §1.1291-8. The commentator suggested
this modification to eliminate potential ambiguities that may arise over the relationship
between an election under the former proposed §1.1291-8 and section 1296. This
suggestion was adopted, and the example has been revised accordingly.
E. The Regulations Should Allow Qualified Shareholders to Make Protective and
Retroactive Mark to Market Elections
One commentator recommended that the regulations should provide rules similar
to those contained in the qualified electing fund (QEF) regime for purposes of making a
retroactive QEF election. The IRS and Treasury have considered this comment and
continue to believe that the appropriate process for retroactive relief for late mark to
market elections is under the §301.9100 relief provisions, as set forth in §1.12961(h)(1)(iii). Accordingly, this suggestion was not adopted.
F. Termination of Existing Section 1296 Mark to Market Elections Without the Consent
of the Commissioner
One commentator suggested permitting a taxpayer with an existing section 1296
election to make a QEF election and terminate its existing 1296 election without the
consent of the Commissioner. The proposed regulations were structured to facilitate an
election for mark to market treatment by permitting a taxpayer with an existing QEF
election to make a section 1296 election and terminate the existing QEF election
without requiring the consent of the Commissioner. Conversely, a taxpayer with an
existing section 1296 election is permitted to make a QEF election only if the section
1296 election is terminated as provided by section 1296 and the regulations thereunder
(e.g., if the PFIC stock ceases to be marketable) or is revoked with consent of the
Commissioner. This approach reflects consideration of the relative administrative
burdens imposed under each set of rules, and the stated intent of Congress that one of
the purposes for enacting section 1296 w a s to provide another alternative to the interest
charge rules of section 1291 that would be available in instances where taxpayers
cannot obtain sufficient information to make a QEF election. See H.R. Rep. No. 10SMS, at 533 (1997); S. Rep. No. 105-33 at 94 (1997). After consideration of the
comment, the IRS and Treasury continue to believe the rules coordinating QEF
elections and mark to market elections under section 1296 are appropriate for the
reasons discussed above. Accordingly, this recommendation was not adopted.
G. Proposals to Enhance the Utility of QEF Elections for RICs
One commentator provided two suggestions focused on enhancing the utility of
QEF elections for RICs. Specifically, the commentator first suggested allowing RICs to
use U.S. Generally Accepted Accounting Principles (U.S. GAAP) or International
Financial Reporting Standards (IFRS) for purposes of computing QEF inclusions under
section 1295(a)(2). The commentator also suggested revising the retroactive QEF
election rules in cases where a RIC learns of the PFIC status of a foreign corporation
immediately prior to the deadline for making a QEF election. These comments, which
raise issues regarding the QEF rules, are beyond the scope of this regulation.
Accordingly, these comments were not adopted but will be considered in the context of
any guidance to be issued under the appropriate substantive provisions.
H. Additional Revisions
The final regulations also clarify that the regulations apply to taxable years
beginning on or after May 3, 2004. Additionally, the several examples in proposed
§1.1296-1 (c) have been grouped together in new §1.1296-1 (c)(7) in order to make the
regulation more readable.
Special Analysis
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It 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 entit
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to sect
7805(f) of the Code, the notice of proposed rulemaking preceding these regulations wa
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Alexandra K. Helou, Office of Associate
Chief Counsel (International). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes; Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an entry in
numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1296-1 also issued under 26 USC 1296(g) and 26 USC 1298(f). * * *
Par. 2. §1.1291-0 (table of contents) is amended by revising the introductory text
and by adding the entries for §1.1291-1 to read as follows:
51.1291-0 Treatment of shareholders of certain passive foreign investment companies;
table of contents.
This section contains a listing of the headings for §§1:1291-1,1.1291-9, and 1.129110.
51.1291-1 Taxation of U.S. persons that are shareholders of section 1291 funds.
(a) through (b) [Reserved].
(c) Coordination with other PFIC rules.
(1) and (2) [Reserved].
(3) Coordination with section 1296: distributions and dispositions.
(4) Coordination with mark to market rules under chapter 1 of the Internal
Revenue C o d e other than section 1296.
(i) In general.
(ii) Coordination rule.
(d) [Reserved].
(e) Exempt organization as shareholder.
(1) In general.
(2) Effective date.
(f) through (i) [Reserved].
(j) Effective date.
* * * * *
Par. 3. Section 1.1291-1 is amended by:
1. Revising paragraphs (a) through (d).
2. Adding paragraphs (f) through (j).
The revisions and additions read as follows:
'1.1291-1 Taxation of U.S. persons that are shareholders of section 1291 funds.
(a) and (b) [Reserved].
(c) Coordination with other PFIC rules.
(1)and (2) [Reserved].
(3) Coordination with section 1296: distributions and dispositions. If PFIC stock is
marked to market under section 1296 for any taxable year, then, except as provided in
'1.1296-1 (i), section 1291 and the regulations thereunder shall not apply to any distribution
with respect to section 1296 stock (as defined in '1.1296-1 (a)(2)), or to any disposition of
such stock, for such taxable year.
(4) Coordination with mark to market rules under chapter 1 of the Internal Revenue
Code other than section 1296--(i) In general. If PFIC stock is marked to market for any
taxable year under section 475 or any other provision of chapter 1 of the Internal Revenue
Code, other than section 1296, regardless of whether the application of such provision is
mandatory or results from an election by the taxpayer or another person, then, except as
provided in paragraph (c)(4)(ii) of this section, section 1291 and the regulations thereunder
shall not apply to any distribution with respect to such PFIC stock or to any disposition of
such PFIC stock for such taxable year. See • ' 1.1295-1 (i)(3) and 1.1296-1 (h)(3)(i) for rules
regarding the automatic termination of an existing election under section 1295 or section
1296 when a taxpayer marks to market PFIC stock under section 475 or any other
provision of chapter 1 of the Internal Revenue Code.
(ii) Coordination rule--(A) Notwithstanding any provision in this section to the
contrary, the rule of paragraph (c)(4)(ii)(B) of this section shall apply to the first taxable year
in which a United States person marks to market its PFIC stock under a provision of
chapter 1 of the Internal Revenue Code, other than section 1296, if such foreign
corporation w a s a PFIC for any taxable year, prior to such first taxable year, during the
United States person=s holding period (as defined in section 1291(a)(3)(A) and '1.12961 (f)) in such stock, and for which such corporation w a s not treated as a Q E F with respect to
such United States person.
(B) For the first taxable year of a United States person that marks to market its PFIC
stock under any provision of chapter 1 of the Internal Revenue Code, other than section
1296, such United States person shall, in lieu of the rules under which the United States
person marks to market, apply the rules of ' 1.1296-1 (i)(2) and (3) as if the United States
person had m a d e an election under section 1296 for such first taxable year.
(d) [Reserved].
*****
(f) through (i) [Reserved].
(j) Effective dates. This section applies for taxable years beginning on or after
M a y 3, 2004, except as otherwise provided in paragraph (e)(2) of this section.
Par. 4. §1.1295-0 (table of contents) is a m e n d e d by:
1. Revising the entries for §1.1295-1 (i)(3) and (i)(4) and adding paragraph (i)(5),
(i)(5)(i), and (i)(5)(ii).
2. Revising the entry for §1.1295-1 (k).
The revisions and addition read as follows:
51.1295-0 Table of contents. * * *
51.1295-1 Qualified electing funds.
* *** *
/:\ * * *
(3) Automatic termination.
(4) Effect of invalidation, termination or revocation.
(5) Election after invalidation, termination or revocation.
(i) In general.
(ii) Special rule.
*****
(k) Effective dates.
*****
51.1295-1 Qualified electing funds.
Par. 5. Section 1.1295-1 is a m e n d e d by:
1. Redesignating paragraphs (i)(3) and (i)(4) as paragraphs (i)(4) and (i)(5),
respectively.
2. Adding a n e w paragraph (i)(3).
3. Revising newly designated paragraph (i)(5).
4. Revising paragraph (k).
T h e revisions and addition read as follows:
'1.1295-1 Qualified electing funds
* ****
(i) * * *
(3) Automatic termination. If a United States person, or the United States
shareholder on behalf of a controlled foreign corporation, makes an election pursuant to
section 1296 and the regulations thereunder with respect to PFIC stock for which a QEF
election is in effect, or marks to market such stock under another provision of chapter 1 of
the Internal Revenue Code, the QEF election is automatically terminated with respect to
such stock that is marked to market under section 1296 or another provision of chapter 1 of
the Internal Revenue Code. Such termination shall be effective on the last day of the
shareholders taxable year preceding the first taxable year for which the section 1296
election is in effect or such stock is marked to market under another provision of chapter 1
of the Internal Revenue Code.
Example. Corp Y, a domestic corporation, owns directly 100 shares of
marketable stock in foreign corporation FX, a PFIC. Corp Y also o w n s a 50 percent
interest in FP, a foreign partnership that owns 200 shares of F X stock. Accordingly,
under section 1298(a)(3) and ' 1.1296-1 (e)(1), Corp Y is treated as indirectly owning
100 shares of F X stock. Corp Y also owns 100 percent of the stock of FZ, a foreign
corporation that is not a PFIC. F Z owns 100 shares of F X stock, and therefore under
section 1298(a)(2)(A), Corp Y is treated as owning the 100 shares of F X stock owned
by FZ. For taxable year 2005, Corp Y has a Q E F election in effect with respect to all
300 shares of F X stock that it owns directly or indirectly. See generally ' 1.1295-1 (c)(1).
For taxable year 2006, Corp Y makes a timely election pursuant to section 1296 and
the regulations thereunder. For purposes of section 1296, Corp Y is treated as owning
stock held indirectly through a partnership, but not through a foreign corporation.
Section 1296(g); »1.1296-1(e)(1). Accordingly, Corp Y = s section 1296 election covers
the 100 shares it o w n s directly and the 100 shares it owns indirectly through FP, but not
the 100 shares owned by FZ. With respect to the first 200 shares, Corp Y = s Q E F
election is automatically terminated effective December 31, 2005. With respect to the
100 shares Corp Y o w n s through foreign FZ, Corp Y = s Q E F election remains in effect
unless invalidated, terminated, or revoked pursuant to this paragraph (i).
*****
(5) Effect after invalidation, termination, or revocation-- (i) In general. Without the
Commissioners consent, a shareholder whose section 1295 election w a s invalidated,
terminated, or revoked under this paragraph (i) m a y not m a k e the section 1295 election
with respect to the PFIC before the sixth taxable year in which the invalidation, termination,
or revocation b e c a m e effective.
(ii) Special rule. Notwithstanding paragraph (i)(5)(i) of this section, a shareholder
whose section 1295 election w a s terminated pursuant to paragraph (i)(3) of this section,
and either w h o s e section 1296 election has subsequently been terminated because its
PFIC stock ceased to be marketable or w h o no longer marks to market such stock under
another provision of chapter 1 of the Internal Revenue Code, m a y m a k e a section 1295
election with respect to its PFIC stock before the sixth taxable year in which its prior section
1295 election w a s terminated.
*****
(k) Effective dates. Except as otherwise provided, paragraphs (b)(2)(iii), (b)(3),
(b)(4), and (c) through (j) of this section are applicable to taxable years of shareholders
beginning after December 31, 1997. However, taxpayers m a y apply the rules under
paragraphs (b)(4), (f) and (g) of this section to a taxable year beginning before January
1,1998, provided the statute of limitations on the assessment of tax has not expired as
of April 27, 1998, and, in the case of paragraph (b)(4) of this section, the taxpayers w h o
filed the joint return have consistently applied the rules of that section to all taxable
years following the year the election w a s made. Paragraph (b)(3)(v) of this section is
applicable as of February 7, 2000, however, a taxpayer m a y apply the rules to a taxable
year prior to the applicable date provided the statute of limitations on the assessment of
tax for that taxable year has not expired. Paragraphs (i)(3) and (i)(5)(ii) of this section
are applicable for taxable years beginning on or after M a y 3, 2004.
Par. 6. Section 1.1296-1 is added to read as follows:
' 1.1296-1 Mark to market election for marketable stock.
(a) Definitions--(1) Eligible RIC. A n eligible RIC is a regulated investment company
that offers for sale, or has outstanding, any stock of which it is the issuer and which is
redeemable at net asset value, or that publishes net asset valuations at least annually.
(2) Section 1296 stock. The term section 1296 stock m e a n s marketable stock in a
passive foreign investment company (PFIC), including any PFIC stock owned directly or
indirectly by an eligible RIC, for which there is a valid section 1296 election. Section 1296
stock does not include stock of a foreign corporation that previously had been a PFIC, and
for which a section 1296 election remains in effect.
(3) Unreversed inclusions--(i) General rule. The term unreversed inclusions m e a n s
with respect to any section 1296 stock, the excess, if any, of~
(A) The amount of mark to market gain included in gross income of the United
States person under paragraph (c)(1) of this section with respect to such stock for prior
taxable years; over
(B) The amount allowed as a deduction to the United States person under paragraph
(c)(3) of this section with respect to such stock for prior taxable years.
(ii) Section 1291 adjustment. The amount referred to in paragraph (a)(3)(i)(A) of this
section shall include any amount subject to section 1291 under the coordination rule of
paragraph (i)(2)(ii) of this section.
(iii) Example. A n example of the computation of unreversed inclusions is as follows:
Example. A, a United States person, acquired stock in Corp X, a foreign
corporation, on January 1, 2005 for $150. At such time and at all times thereafter, Corp X
w a s a PFIC and A = s stock in Corp X w a s marketable. For taxable years 2005 and 2006,
Corp X w a s a nonqualified fund subject to taxation under section 1291. A m a d e a timely
section 1296 election with respect to the X stock, effective for taxable year 2007. The fair
market value of the X stock w a s $200 as of December 31,2006, and $240 as of December
31,2007. Additionally, Corp X m a d e no distribution with respect to its stock for the taxable
years at issue. In 2007, pursuant to paragraph (i)(2)(ii) of this section, A must include the
$90 gain in the X stock in accordance with the rules of section 1291 for purposes of
determining the deferred tax amount and any applicable interest. Nonetheless, for
purposes of determining the amount of the unreversed inclusions pursuant to paragraph
(a)(3)(ii) of this section, A will include the $90 of gain that w a s taxed under section 1291
and not the interest thereon.
(iv) Special rule for regulated investment companies. In the case of a regulated
investment company which had elected to mark to market the PFIC stock held by such
company as of the last day of the taxable year preceding such company's first taxable year
for which such company makes a section 1296 election, the amount referred to in
paragraph (a)(3)(i)(A) of this section shall include amounts previously included in gross
income by the company pursuant to such mark to market election with respect to such
stock for prior taxable years. For further guidance, see Notice 92-53 (1992-2 C.B. 384)
(see also 601.601 (d)(2) of this chapter).
(b) Application of section 1296 election-d) In general. Any United States person
and any controlled foreign corporation (CFC) that owns directly, or is treated as owning
under this section, marketable stock, as defined in '1.1296-2, in a PFIC may make an
election to mark to market such stock in accordance with the provisions of section 1296
and this section.
(2) Election applicable to specific United States person. A section 1296 election
applies only to the United States person (or CFC that is treated as a U.S. person under
paragraph (g)(2) of this section) that m a k e s the election. Accordingly, a United States
person=s section 1296 election will not apply to a transferee of section 1296 stock.
(3) Election applicable to specific corporation only. A section 1296 election is made
with respect to a single foreign corporation, and thus a separate section 1296 election must
be made for each foreign corporation that otherwise meets the requirements of this section.
A United States person=s section 1296 election with respect to stock in a foreign
corporation applies to all marketable stock of the corporation that the person owns directly,
or is treated as owning under paragraph (e) of this section, at the time of the election or that
is subsequently acquired.
(c) Effect of election--(1) Recognition of gain. If the fair market value of section 1296
stock on the last day of the United States person=s taxable year exceeds its adjusted
basis, the United States person shall include in gross income for its taxable year the excess
of the fair market value of such stock over its adjusted basis (mark to market gain).
(2) Character of gain. Mark to market gain, and any gain on the sale or other
disposition of section 1296 stock, shall be treated as ordinary income.
(3) Recognition of loss. If the adjusted basis of section 1296 stock exceeds its fair
market value on the last day of the United States person=s taxable year, such person shall
be allowed a deduction for such taxable year equal to the lesser of the amount of such
excess or the unreversed inclusions with respect to such stock (mark to market loss).
(4) Character of loss--(i) Losses not in excess of unreversed inclusions. Any mark
to market loss allowed as a deduction under paragraph (c)(3) of this section, and any loss
on the sale or other disposition of section 1296 stock, to the extent that such loss does not
exceed the unreversed inclusions attributable to such stock, shall be treated as an ordinary
loss, deductible in computing adjusted gross income.
(ii) Losses in excess of unreversed inclusions. Any loss recognized on the sale or
other disposition of section 1296 stock in excess of any prior unreversed inclusions will be
subject to the rules generally applicable to losses provided elsewhere in the Internal
Revenue Code and the regulations thereunder.
(5) Application of election to separate lots of stock. In the case in which a United
States person purchased or acquired shares of stock in a PFIC at different prices, the rules
of this section shall be applied in a manner consistent with the rules of '1.1012-1.
(6) Source rules. The source of any amount included in gross income under
paragraph (c)(1) of this section, or the allocation and apportionment of any amount allowed
as a deduction under paragraph (c)(3) of this section, shall be determined in the same
manner as if such amounts were gain or loss (as the case may be) from the sale of stock in
the PFIC.
(7) Examples. The following examples illustrate this paragraph (c):
Example 1. Treatment of gain as ordinary income. A, a United States individual,
purchases stock in FX, a foreign corporation that is not a PFIC, in 1990 for $1,000. O n
January 1, 2005, when the fair market value of the F X stock is $1,100, F X becomes a
PFIC. A makes a timely section 1296 election for taxable year 2005. O n December 31,
2005, the fair market value of the F X stock is $1,200. For taxable year 2005, A includes
$200 of mark to market gain (the excess of the fair market value of F X stock ($1,200)
over A = s adjusted basis ($1,000)) in gross income as ordinary income and pursuant to
paragraph (d)(1) of this section increases his basis in the F X stock by that amount.
Example 2. Treatment of gain as capital gain. The facts are the same as in
Example 1. For taxable year 2006, F X does not satisfy either the asset test or the
income test of section 1297(a). A does not revoke the section 1296 election it m a d e
with respect to the F X stock. O n December 1, 2006, A sells the F X stock w h e n the fair
market value of the stock is $1,500. For taxable year 2006, A includes $300 of gain (the
excess of the fair market value of FX stock ($1,500) over A's adjusted basis ($1,200)) in
gross income as long-term capital gain because at the time of sale of the F X stock by A,
FX did not qualify as a PFIC, and, therefore, the FX stock w a s not section 1296 stock at
the time of the disposition. Further, A's holding period for non-PFIC purposes w a s more
than one year.
Example 3. Treatment of losses as ordinary where thev do not exceed
unreversed inclusions. The facts are the s a m e as in Example 1. O n December 1,
2006, A sells the stock in FX for $1,100. At that time, A=s unreversed inclusions (the
amount A included in income as mark to market gain) with respect to the stock in FX are
$200. Accordingly, for taxable year 2006, A recognizes a loss on the sale of the F X
stock of $100, (the fair market value of the FX stock ($1,100) minus A's adjusted basis
($1,200) in the stock) that is treated as an ordinary loss because the loss does not
exceed the unreversed inclusions attributable to the stock of FX.
Example 4. Treatment of losses as long-term capital losses. The facts are the
s a m e as in Example 3, except that FX does not satisfy either the asset test or the
income test of section 1297(a) for taxable year 2006. For taxable year 2006, A's $100
loss from the sale of the FX stock is treated as long-term capital loss because at the
time of the sale of the F X stock by A FX did not qualify as a PFIC, and, therefore, the
FX stock w a s not section 1296 stock at the time of the disposition. Further, A's holding
period in the F X stock for non-PFIC purposes was more than one year.
Example 5. Long-term capital loss treatment of losses in excess of unreversed
inclusions. The facts are the s a m e as in Example 3, except that A sells his F X stock for
$900. At the time of A's sale of the FX stock on December 1, 2006, A = s unreversed
inclusions with respect to the FX stock are $200. Accordingly, the $300 loss recognized
by A on the disposition is treated as an ordinary loss to the extent of his unreversed
inclusions ($200). The amount of the loss in excess of A=s unreversed inclusions
($100) will be treated as a long-term capital loss because A's holding period in the F C
stock for non-PFIC purposes w a s more than one year.
Example 6. Application of section 1296 election to separate lots of stock. On
January 1, 2005, Corp A, a domestic corporation, purchased 100 shares (first lot) of
stock in FX, a PFIC, for $500 ($5 per share). O n June 1, 2005, Corp A purchased 100
shares (second lot) of F X stock for $1,000 ($10 per share). Corp A m a d e a timely
section 1296 election with respect to its FX stock for taxable year 2005. O n December
31, 2005, the fair market value of FX stock was $8 per share. For taxable year 2005,
Corp A includes $300 of gain in gross income as ordinary income under paragraph
(c)(1) of this section with respect to the first lot, and adjusts its basis in that lot to $800
pursuant to paragraph (d)(1) of this section. With respect to the second lot, Corp A is
not permitted to recognize a loss under paragraph (c)(3) of this section for taxable year
2005. Although Corp A = s adjusted basis in that stock exceeds its fair market value by
$200, Corp A has no unreversed inclusions with respect to that particular lot of stock.
O n July 1, 2006, Corp A sells 100 shares of F X stock for $900. Assuming that Corp A
adequately identifies (in accordance with the rules of ' 1.1012-1 (c)) the shares of F X
stock sold as being from the second lot, Corp A recognizes $100 of long term capital
loss pursuant to paragraph (c)(4)(ii) of this section.
(d) Adjustment to basis--(1) Stock held directly. The adjusted basis of the section
1296 stock shall be increased by the amount included in the gross income of the United
States person under paragraph (c)(1) of this section with respect to such stock, and
decreased by the amount allowed as a deduction to the United States person under
paragraph (c)(3) of this section with respect to such stock.
(2) Stock owned through certain foreign entities, (i) In the case of section 1296
stock that a United States person is treated as owning through certain foreign entities
pursuant to paragraph (e) of this section, the basis adjustments under paragraph (d)(1) of
this section shall apply to such stock in the hands of the foreign entity actually holding such
stock, but only for purposes of determining the subsequent treatment under chapter 1 of
the Internal Revenue Code of the United States person with respect to such stock. Such
increase or decrease in the adjusted basis of the section 1296 stock shall constitute an
adjustment to the basis of partnership property only with respect to the partner making the
section 1296 election. Corresponding adjustments shall be made to the adjusted basis of
the United States person=s interest in the foreign entity and in any intermediary entity
described in paragraph (e) of this section through which the United States person holds the
PFIC stock.
(ii) Example. The following example illustrates this paragraph (d)(2):
Example. F P is a foreign partnership. Corp A, a domestic corporation, o w n s a
20 percent interest in FP. Corp B, a domestic corporation, o w n s a 30 percent interest in
FP. Corp C, a foreign corporation, with no direct or indirect shareholders that are U.S.
persons, o w n s a 5 0 % interest in FP. Corp A, Corp B, and F P all use a calendar year for
their taxable year. In 2005, F P purchases stock in FX, a foreign corporation and a
PFIC, for $1,000. Corp A makes a timely section 1296 election for taxable year 2005.
O n December 31, 2005, the fair market value of the PFIC stock is $1,100. Corp A
includes $20 of ordinary income in taxable year 2005 under paragraphs (c)(1) and (2) of
this section. Corp A increases its basis in its F P partnership interest by $20. F P
increases its basis in the F X stock to $1,020 solely for purposes of determining the
subsequent treatment of Corp A, under chapter 1 of the Internal Revenue Code, with
respect to such stock. In 2006, F P sells the F X stock for $1,200. For purposes of
determining the amount of gain of Corp A, F P will be treated as having $180 in gain of
which $20 is allocated to Corp A. Corp A = s $20 of gain will be treated as ordinary
income under paragraph (c)(2) of this section. For purposes of determining the amount
of gain attributable to Corp B, F P will be treated as having $200 gain, $60 of which will
be allocated to Corp B.
(3) Stock owned indirectly by an eligible RIC. Paragraph (d)(2) of this section shall
also apply to an eligible RIC which is an indirect shareholder under' 1.1296-2(f) of stock in
a PFIC and has a valid section 1296 election in effect with respect to the PFIC stock.
(4) Stock acguired from a decedent. In the case of stock of a PFIC which is
acquired by bequest, devise, or inheritance (or by the decedent=s estate) and with
respect to which a section 1296 election was in effect as of the date of the decedent=s
death, notwithstanding section 1014, the basis of such stock in the hands of the person
so acquiring it shall be the adjusted basis of such stock in the hands of the decedent
immediately before his death (or, if lesser, the basis which would have been determined
under section 1014 without regard to this paragraph).
(5) Transition rule for individuals becoming subject to United States income
taxation-(i) In general. If any individual becomes a United States person in a taxable
year beginning after December 31, 1997, solely for purposes of this section, the
adjusted basis, before adjustments under this paragraph (d), of any section 1296 stock
owned by such individual on the first day of such taxable year shall be treated as being
the greater of its fair market value or its adjusted basis on such first day.
(ii) An example of the transition rule for individuals becoming subject to United
States income taxation is as follows:
Example. A, a nonresident alien individual, purchases marketable stock in FX, a
PFIC, for $50 in 1995. O n January 1, 2005, A becomes a United States person and
makes a timely section 1296 election with respect to the stock in accordance with
paragraph (h) of this section. The fair market value of the F X stock on January 1, 2005,
is $100. The fair market value of the F X stock on December 31, 2005, is $110. Under
paragraph (d)(5)(i) of this section, A computes the amount of mark to market gain or
loss for the F X stock in 2005 by reference to an adjusted basis of $100, and therefore A
includes $10 in gross income as mark to market gain under paragraph (c)(1) of this
section. Additionally, under paragraph (d)(1) of this section, A = s adjusted basis in the
F X stock for purposes of this section is increased to $110 (and to $60 for all other tax
purposes). A sells the F X stock in 2006 for $120. For purposes of applying section
1001, A must use its original basis of $50, with any adjustments under paragraph (d)(1)
of this section, $10 in this case, and therefore A recognizes $60 of gain. Under
paragraph (c)(2) of this section (which is applied using an adjusted basis of $110), $10
of such gain is treated as ordinary income. The remaining $50 of gain from the sale of
the F X stock is long term capital gain because A held such stock for more than one
year.
(e) Stock owned through certain foreign entities--(1) In general. Except as provided
in paragraph (e)(2) of this section, the following rules shall apply in determining stock
ownership for purposes of this section. PFIC stock owned, directly or indirectly, by or for a
foreign partnership, foreign trust (other than a foreign trust described in sections 671
through 679), or foreign estate shall be considered as being owned proportionately by its
partners or beneficiaries. PFIC stock owned, directly or indirectly, by or for a foreign trust
described in sections 671 through 679 shall be considered as being owned proportionately
by its grantors or other persons treated as owners under sections 671 through 679 of any
portion of the trust that includes the stock. The determination of a person=s proportionate
interest in a foreign partnership, foreign trust or foreign estate will be m a d e on the basis of
all the facts and circumstances. Stock considered owned by reason of this paragraph shall,
for purposes of applying the rules of this section, be treated as actually o w n e d by such
person.
(2) Stock owned indirectly by eligible RICs. The rules for attributing ownership of
stock contained in '1.1296-2(f) will apply to determine the indirect ownership of PFIC stock
by an eligible RIC.
(f) Holding period. Solely for purposes of sections 1291 through 1298, if section
1296 applied to stock with respect to the taxpayer for any prior taxable year, the taxpayers
holding period in such stock shall be treated as beginning on the first day of the first taxable
year beginning after the last taxable year for which section 1296 so applied.
(g) Special rules--(1) Certain dispositions of stock. To the extent a United States
person is treated as actually owning stock in a PFIC under paragraph (e) of this section,
any disposition which results in the United States person being treated as no longer owning
such stock, and any disposition by the person owning such stock, shall be treated as a
disposition by the United States person of the stock in the PFIC.
(2) Treatment of C F C as a United States person. In the case of a C F C that owns, or
is treated as owning under paragraph (e) of this section, section 1296 stock:
(i) Other than with respect to the sourcing rules in paragraph (c)(6) of this section,
this section shall apply to the C F C in the s a m e manner as if such corporation were a United
States person. T h e C F C will be treated as a foreign person for purposes of applying the
source rules of paragraph (c)(6).
(ii) For purposes of subpart F of part III of subchapter N of the Internal Revenue
Code-
(A) Amounts included in the C F C = s gross income under paragraph (c)(1) or (i)(2)(ii)
of this section shall be treated as foreign personal holding company income under section
954(c)(1)(A); and
(B) Amounts allowed as a deduction under paragraph (c)(3) of this section shall be
treated as a deduction allocable to foreign personal holding company income for purposes
of computing net foreign base company income under ' 1.954-1 (c).
(iii) A United States shareholder, as defined in section 951(b), of the C F C shall not
be subject to section 1291 with respect to any stock of the PFIC for the period during which
the section 1296 election is in effect for that stock, and the holding period rule of paragraph
(f) of this section shall apply to such United States shareholder.
(iv) The rules of this paragraph (g)(2) shall not apply to a United States person that
is a shareholder of the PFIC for purposes of section 1291, but is not a United States
shareholder under section 951 (b) with respect to the C F C making a section 1296 election.
(3) Timing of inclusions for stock owned through certain foreign entities. In the
case of section 1296 stock that a United States person is treated as owning through
certain foreign entities pursuant to paragraph (e) of this section, the mark to market gain
or mark to market loss is determined in accordance with paragraphs (c) and (i)(2)(ii) of
this section as of the last day of the taxable year of the foreign partnership, foreign trust
or foreign estate and then included in the taxable year of such United States person that
includes the last day of the taxable year of the entity.
(h) Elections--(1) Timing and manner for making a section 1296 election--(i)
United States persons. A United States person that o w n s marketable stock in a PFIC,
or is treated as owning marketable stock under paragraph (e) of this section, on the last
day of the taxable year of such person, and that wants to m a k e a section 1296 election,
must m a k e a section 1296 election for such taxable year on or before the due date
(including extensions) of the United States person=s income tax return for that year.
The section 1296 election must be m a d e on the Form 8621, AReturn by a Shareholder
of a Passive Foreign Investment C o m p a n y or Qualified Electing Fund@, included with
the original tax return of the United States person for that year, or on an a m e n d e d
return, provided that the a m e n d e d return is filed on or before the election due date.
(ii) Controlled foreign corporations. A section 1296 election by a C F C shall be
m a d e by its controlling United States shareholders, as defined in ' 1.964-1 (c)(5), and
shall be included with the Form 5471, Alnformation Return of U.S. Persons With
Respect To Certain Foreign Corporations®, for that C F C by the due date (including
extensions) of the original income tax returns of the controlling United States
shareholders for that year. A section 1296 election by a C F C shall be binding on all
United States shareholders of the C F C .
(iii) Retroactive elections for PFIC stock held in prior years. A late section 1296
election m a y be permitted only in accordance with ' 301.9100 of this chapter.
(2) Effect of section 1296 election--(i) A section 1296 election will apply to the
taxable year for which such election is m a d e and remain in effect for each succeeding
taxable year unless such election is revoked or terminated pursuant to paragraph (h)(3)
of this section.
(ii) Cessation of a foreign corporation as a PFIC. A United States person will not
include mark to market gain or loss pursuant to paragraph (c) of this section with
respect to any stock of a foreign corporation for any taxable year that such foreign
corporation is not a PFIC under section 1297 or treated as a PFIC under section
1298(b)(1) (taking into account the holding period rule of paragraph (f) of this section).
Cessation of a foreign corporation=s status as a PFIC will not, however, terminate a
section 1296 election. Thus, if a foreign corporation is a PFIC in a taxable year after a
year in which it is not treated as a PFIC, the United States person=s original election
(unless revoked or terminated in accordance with paragraph (h)(3) of this section)
continues to apply and the shareholder must include any mark to market gain or loss in
such year.
(3) Revocation or termination of election--(i) In general. A United States person=s
section 1296 election is terminated if the section 1296 stock ceases to be marketable; if the
United States person elects, or is required, to mark to market the section 1296 stock under
another provision of chapter 1 of the Internal Revenue Code; or if the Commissioner, in the
Commissioners discretion, consents to the United States person=s request to revoke its
section 1296 election upon a finding of a substantial change in circumstances.
A
substantial change in circumstances for this purpose m a y include a foreign corporation
ceasing to be a PFIC.
(ii) Timing of termination or revocation. W h e r e a section 1296 election is terminated
automatically (e.g., the stock ceases to be marketable), section 1296 will cease to apply
beginning with the taxable year in which such termination occurs. W h e r e a section 1296
election is revoked with the consent of the Commissioner, section 1296 will cease to apply
beginning with the first taxable year of the United States person after the revocation is
granted unless otherwise provided by the Commissioner.
(4) Examples. The operation of the rules of this paragraph (h) is illustrated by the
following examples:
Example 1. A, a United States person, o w n s stock in FX, a PFIC. A m a k e s a
Q E F election in 1996 with respect to the F X stock. For taxable year 2005, A m a k e s a
timely section 1296 election with respect to its stock, and thus its Q E F election is
automatically terminated pursuant to ' 1.1295-1 (i)(3). In 2006, A = s stock in F X ceases
to be marketable, and therefore its section 1296 election is automatically terminated
under paragraph (h)(3) of this section. Beginning with taxable year 2006, A is subject to
the rules of section 1291 with respect to its F X stock unless it m a k e s a n e w Q E F
election. S e e ' 1.1295-1 (i)(5).
Example 2. The facts are the s a m e as in Example 1, except that A = s stock in
F X becomes marketable again in 2007. A m a y m a k e a n e w section 1296 election with
respect to the F X stock for its taxable year 2007, or thereafter. A will be subject to the
coordination rules under paragraph (i) of this section unless it m a d e a n e w Q E F election
in 2006.
(i) Coordination rules for first year of election--(1) In general. Notwithstanding
any provision in this section to the contrary, the rules of this paragraph (i) shall apply to
the first taxable year in which a section 1296 election is effective with respect to
marketable stock of a PFIC if such foreign corporation w a s a PFIC for any taxable year,
prior to such first taxable year, during the United States person=s holding period (as
defined in paragraph (f) of this section) in such stock, and for which such corporation
w a s not treated as a Q E F with respect to such United States person.
(2) Shareholders other than regulated investment companies. For the first taxable
year of a United States person (other than a regulated investment company) for which a
section 1296 election is in effect with respect to the stock of a PFIC, such United States
person shall, in lieu of the rules of paragraphs (c) and (d) of this section(i) Apply the rules of section 1291 to any distributions with respect to, or disposition
of, section 1296 stock;
(ii) Apply section 1291 to the amount of the excess, if any, of the fair market value of
such section 1296 stock on the last day of the United States person=s taxable year over its
adjusted basis, as if such amount were gain recognized from the disposition of stock on the
last day of the taxpayers taxable year; and
(iii) Increase its adjusted basis in the section 1296 stock by the amount of excess, if
any, subject to section 1291 under paragraph (i)(2)(ii) of this section.
(3) Shareholders that are regulated investment companies. For the first taxable year
of a regulated investment company for which a section 1296 election is in effect with
respect to the stock of a PFIC, such regulated investment company shall increase its tax
under section 852 by the amount of interest that would have been imposed under section
1291 (c)(3) for such taxable year if such regulated investment company were subject to the
rules of paragraph (i)(2) of this section, and not this paragraph (i)(3). No deduction or
increase in basis shall be allowed for the increase in tax imposed under this paragraph
(i)(3).
(4) The operation of the rules of this paragraph (i) is illustrated by the following
examples:
Example (1). A, a United States person and a calendar year taxpayer, owns
marketable stock in FX, a PFIC that it acquired on January 1, 1992. At all times, A = s
FX stock w a s a nonqualified fund subject to taxation under section 1291. A m a d e a
timely section 1296 election effective for taxable year 2005. At the close of taxable year
2005, the fair market value of A = s F X stock exceeded its adjusted basis by $10.
Pursuant to paragraph (i)(2)(ii) of this section, A must treat the $10 gain under section
1291 as if the F X stock were disposed of on December 31, 2005. Further, A increases
its adjusted basis in the F X stock by the $10 in accordance with paragraph (i)(2)(iii) of
this section.
Example (2). Assume the same facts as in Example (1), except that A is a RIC
that had not m a d e an election prior to 2005 to mark to market the PFIC stock. In
taxable year 2005, A includes $10 of ordinary income under paragraph (c)(1) of this
section, and such amount is not subject to section 1291. A also increases its tax
imposed under section 852 by the amount of interest that would have been determined
under section 1291(c)(3), and no deduction is permitted for such amount. Finally, under
paragraph (d)(1) of this section, A increases its adjusted basis in the F X stock by $10.
(j) Effective date. The provisions in this section are applicable for taxable years
beginning on or after M a y 3, 2004.
Par. 7. Section 1.1296(e)-1 is redesignated as §1.1296-2 and amended by:
1. Revising paragraph (b)(2).
2. Adding paragraph (b)(3).
3. Revising both references to Asections 958(a)(1) and (2)@ in paragraph (f)(1) to
read Asection 1298(a) @.
The revisions and addition read as follows:
' 1.1296-2 Definition of marketable stock.
*****
(b) * * *
(2) Special rule for year of initial public offering. For the calendar year in which a
corporation initiates a public offering of a class of stock for trading on one or more qualified
exchanges or other markets, as defined in paragraph (c) of this section, such class of stock
meets the requirements of paragraph (b)(1) of this section for such year if the stock is
regularly traded on such exchanges or markets, other than in de minimis quantities, on 1/6
of the days remaining in the quarter in which the offering occurs, and on at least 15 days
during each remaining quarter of the taxpayers calendar year. In cases where a
corporation initiates a public offering of a class of stock in the fourth quarter of the calendar
year, such class of stock meets the requirements of paragraph (b)(1) of this section in the
calendar year of the offering if the stock is regularly traded on such exchanges or markets,
other than in de minimis quantities, on the greater of 1/6 of the days remaining in the
quarter in which the offering occurs, or 5 days.
(3) Anti-abuse rule. Trades that have as one of their principal purposes the meeting
of the trading requirements of paragraph (b)(1) or (2) of this section shall be disregarded.
Further, a class of stock shall not be treated as meeting the trading requirement of
paragraph (b)(1) or (2) of this section if there is a pattern of trades conducted to meet the
requirement of paragraph (b)(1) or (2) of this section. Similarly, paragraph (b)(2) of this
section shall not apply to a public offering of stock that has as one of its principal purposes
to avail itself of the reduced trading requirements under the special rule for the calendar
year of an initial public offering. For purposes of applying the immediately preceding
sentence, consideration will be given to whether the trading requirements of paragraph
(b)(1) of this section are satisfied in the subsequent calendar year.
*****
Par. 8. Section 1.6031(a)-1 is a m e n d e d by:
1. Redesignating the text of paragraph (b)(1) as (b)(1 )(i).
2. Adding a heading to newly designated paragraph (b)(1)(i).
3. Adding paragraph (b)(1)(ii).
The additions read as follows:
' 1.6031(a)-1 Return of Partnership income.
*****
(b) * * * (1) * * * (i) Filing reguirement. * * *
(ii) Special rule. For purposes of this paragraph (b)(1) and paragraph (b)(3)(iii) of
this section, a foreign partnership will not be considered to have derived income from
sources within the United States solely because a U.S. partner marks to market his pro rata
share of PFIC stock held by the foreign partnership pursuant to an
election under section 1296.
*****
Mark E. Matthews,
Deputy Commissioner of Services and Enforcement.
Approved: April 7, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
495: Treasury Department Announces a Request for Comments On the<br> "Make Available" Deter... Page 1 of 1
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
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April 29, 2004
js-1495
Treasury Department Announces a Request for Comments On the
"Make Available" Determination
The Treasury Department today announced a request for comments regarding the
requirement of the Terrorism Risk Insurance Act (TRIA) of 2002 that the Secretary
of the Treasury determine whether to extend the "make available" requirements of
the Act into the third year of the program (i.e., through December 31, 2005). The
Secretary of the Treasury is required to make this determination by September 1,
2004. Comments will be accepted for 30 days from when the notice is published in
the Federal Register.
The "make available" provisions of TRIA require that, from the date of enactment
(November 26, 2002) through the last day of the second year of the program
(December 31, 2004), each insurer must make available, in all of its commercial
property and casualty insurance policies, coverage for insured losses under the
Act. In this regard, TRIA also requires that such insurance coverage must not differ
materially from the terms, amounts and other coverage limitations applicable to
losses arising from events other than acts of terrorism.
"We encourage any who have views on the questions set forth in the request for
comments to share those views with Treasury as soon as they can, with as much
detail as they can provide," said Treasury Assistant Secretary Abemathy, who
oversees the Terrorism Risk Insurance Program. "We hope that this broad request
for public input on the 'make available' determination will facilitate the efforts of the
Secretary to make a timely determination based upon a solid basis of information
and views provided from all parts of the nation and from a wide variety of citizens,
businesses, industry experts, and others."
The request for comments and other information related to the Terrorism Risk
Insurance Program can be found at: http://www.treasury.gov/trip.
REPORTS
• Trip Make Avail Fed Reg 4.29.04
•ac OYw/rvrf»cc/rf»1p»QCf»c/ic:1 4.Q5 h t m
DEPARTMENT OF THE TREASURY
Departmental Offices
Treasury's Decision to Extend the Terrorism Risk Insurance Act's "Make
Available" Requirement
AGENCY: Department of the Treasury, Departmental Offices
ACTION: Notice; Request for Comments
SUMMARY: Title I of the Terrorism Risk Insurance Act of 2002 (Pub. L. 107-297)
requires that, from the date of enactment (November 26, 2002) through the last day of
Program Year 2 (December 31, 2004), each insurer must make available, in all of its
property and casualty insurance policies, coverage for insured losses under the Act. In
this regard, the Act requires that such insurance coverage must not differ materially from
the terms, amounts and other coverage limitations applicable to losses arising from events
other than acts of terrorism. In addition, the Act requires the Secretary of the Treasury
(Treasury) to determine, no later than September 1, 2004, whether to extend these
statutory m a k e available requirements through Program Year 3 (December 31, 2005). T o
obtain additional information to assist Treasury in its determination, the Treasury solicits
public comment on the questions listed below.
DATES: Comments must be in writing and received by [30 days after publication in the
Federal Register].
ADDRESSES: Send comments by e-mail to triacomments@do.treas.gov. Please
include your name, affiliation, address, e-mail address, and telephone number. All
submissions should be captioned "Comments on M a k e Available Determination."
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Acting Director,
Office of Financial Institutions Policy, 202-622-0715; R o y Woodall, Senior Insurance
Analyst, Office of Financial Institutions Policy, 202-622-5171; U.S. Treasury
Department (not toll- free numbers).
SUPPLEMENTARY INFORMATION:
On November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act
of 2002 (the Act). The Act was effective immediately. Title I of the Act established a
temporary federal prog-am of shared public and private compensation for insured
commercial property and casualty insured losses resulting from an act of terrorism as
defined by the Act. The Act authorized Treasury to administer and implement the three
year Terrorism Risk Insurance Program which ends on December 31, 2005.
Section 103(c)(1) of the Act requires each entity that meets the definition of an insurer
under the Act to (A) make available, in all of its property and casualty insurance polices
coverage for insured losses; and (B) m a k e available property and casualty insurance
coverage for insured losses that does not differ materially from the terms, amounts, and
other coverage limitations applicable to losses arising from events other than acts of
terrorism. These requirements apply from the date of enactment (November 26, 2002)
through the last day of Program Year 2 (December 31, 2004). l
In addition, section 103(c)(2) of the Act requires Treasury to determine, no later than
September 1, 2004, whether to extend the "make available" requirements of section
103(c)(1) through Program Year 3 (December 31, 2005). (Regardless of whether the
m a k e available requirements are extended by Treasury through Program Year 3, w e note
that the overall Program and the Act's federal backstop for insured losses for acts of
terrorism continue though December 31, 2005.) The Treasury determination on whether
to extend the m a k e available requirements through Program Year 3 is to be based on the
factors referred to in section 108(d)(1) of the Act The factors referred to in section
108(d)(1) are:
• The "effectiveness of the Program;"
• The "likely capacity of the property and casualty insurance industry to offer
insurance for terrorism risk after termination of the Program" and
• The "availability and affordability of such insurance for various policyholders,
including railroads, trucking, and public transit."
Pursuant to the Act, Treasury is now considering whether to extend the make available
requirements in section 103(c)(1)(A) and (B) to Program Year 3. A s noted above, section
103(c)(2) provides that Treasury base this determination "on the factors referred to in
section 108(d)(1)". Section 108(d) of the Act requires Treasury to conduct a study and
prepare a report to Congress by June 30, 2005 relating to the termination of the Program;
the factors described in section 108(d)(1) (and cross-referenced by section 103 of the
Act) are keyed directly to the overall effectiveness of the Program and h o w the insurance
industry might respond after the termination of the Program. T o better enable Treasury
to evaluate the overall effectiveness of the Act as required by section 108(d), Treasury is
in the process of conducting a series of nationally representative surveys of insurers and
policyholders.
The section 103(c) determination of whether to extend the make available requirements,
and its timing, differ from the purpose and timing of the study and report required by
section 108(d), but the Act requires Treasury to base the m a k e available determination on
the factors referenced in section 108(d)(1).
1
Following enactment of the Act, Treasury promptly issued interim guidance on the
m a k e available requirement and other provisions of the Act. See for example, 67 F R
76206 (December 11, 2002). This interim guidance was superceded by Treasury's
interim final rules and notice and c o m m e n t rulemaking. Treasury's final regulations
implementing the m a k e available requirements of section 103(c)(1) are located at 31 C F R
50.20-24. See also 68 F R 59720 (October 17, 2003).
2
Treasury's data collection from the surveys w e are conducting as part of our overall
evaluation of the Program for purposes of the study under section 108(d) will only be
partially complete by the time a decision on extending the m a k e available requirement
must be made. In addition, the m a k e available requirement of section 103(c)
comprises only one component of the overall Program. Thus, as Treasury considers
whether to extend the m a k e available requirement into Program Year 3, w e are
particularly interested in any specific way, or ways, in which the m a k e available
requirement has worked or affected the overall operation of the Program and whether this
ties into the factors described in section 108(d)(1).
To facilitate a determination by Treasury within the required time frame on whether to
extend the m a k e available requirement into Program Year 3, Treasury solicits general
comments from the public as well as specific responses to the following questions,
including submission of any relevant empirical data in support of such comments where
appropriate and available.
I. Effectiveness of the Make Available Requirement in the Context of the
Overall Program
1.1 Has the make available requirement contributed to the overall effectiveness of the
Program over the first two years of the Program? In particular, has the m a k e available
requirement been effective in making terrorism insurance coverage available and more
affordable to the insurance marketplace in general, to large corporate policyholders, and
to small business policyholders? ( W e specifically seek information on terrorism
coverage for railroads, trucking and public transit in response to this question.)
1.2 How would the effectiveness of the Program be affected during Program Year 3
(where the federal backstop for terrorism insurance is still maintained under the Act) if
the m a k e available requirement is not extended? W o u l d policyholders still be able to
obtain terrorism risk insurance (under what terms and conditions) and would the
affordability be impacted if the requirement is not extended? Compare your response to
the preceding questions to what you believe would be the effectiveness of the Program if
the m a k e available requirement is extended into 2005.
1.3 Has Treasury's implementation of the make available requirement contributed to
the effectiveness of the Program? In particular, has the m a k e available requirement
resulted in businesses being provided with useful information and the enhanced ability to
compare prices for terrorism risk insurance across a number of providers? Given the
experience with the m a k e available requirement since enactment and policyholders'
decisions on whether to purchase coverage provided by the Act, are there other
approaches to implementing the m a k e available requirement that are worth considering?
1.4 How would a decision on extending or not extending the make available
requirement affect policyholders' understanding of their options regarding the availability
of terrorism risk insurance coverage in Program Year 3 (e.g., that the federal backstop for
3
terrorism risk insurance is still in force)? W o u l d one course of action be better
understood by policyholders than other options?
II. The Relationship Between the Make Available Requirement and the Likely Capacity
of Property and Casualty Insurers to Offer Coverage for Terrorism Risk After
Termination of the Program
2.1 What is the relationship between the make available requirement and an insurer's
capacity to offer terrorism risk insurance coverage? H o w has the m a k e available
requirement affected or interacted with the available capacity of property and casualty
insurers to provide terrorism risk insurance coverage during the course of the Program to
date? Has the m a k e available requirement led to any build-up in capacity?
2.2. How would a Treasury decision to extend or not to extend the make available
requirement affect or interact with the capacity of property and casualty insurers
(including the availability of reinsurance) in terms of offering terrorism risk insurance
coverage in Program Year 3? In addition, would there be any effect on insurers' decision
to offer terrorism risk insurance coverage beyond 2005 that could be associated with a
decision to extend or not to extend the m a k e available requirement during Program Year
3?
III. Operational Issues
3.1 What would be the regulatory impact at the state level (e.g. on filings with the
state regulator of policy forms or exclusions) if the m a k e available requirement were
extended through Program Year 3 (2005)? Similarly, what would be the regulatory
impact at the state level if the m a k e available requirement were not extended through
Program Year 3?
3.2 Are there other operational issues that Treasury should consider as part of
determining whether or not to extend the m a k e available requirement through Program
Year 3?
Dated:
Wayne A. Abernathy
Assistant Secretary for Financial Institutions
4
5-1496: Treasury Department Announces Proposed Regulation Implementing the Litigation Manageme... Page 1 of
PRLSS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
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April 30, 2004
JS-1496
Treasury Department Announces Proposed Regulation Implementing the
Litigation Management Provisions of the Terrorism Risk Insurance Act
The Treasury Department today announced a proposed regulation under the
Terrorism Risk Insurance Act (TRIA) of 2002, which was signed into law by
President Bush on November 26, 2002.
The proposed regulation being released today implements the litigation
management provisions of TRIA and President Bush's directive that Treasury
propose regulations providing procedures for advance Treasury review and
approval of settlements related to covered losses under the Program. The
regulation is designed to protect taxpayer resources by ensuring that claims made
under the program are bona fide, as well as to facilitate expedited compensation for
legitimate losses covered under the Act. Interested parties will have the opportunity
to submit formal comments on the regulation, and the comment period will last for
60 days from the date of the regulation's publication in the Federal Register.
This proposed regulation and other information related to the Terrorism Risk
Insurance Program can be found at http://www.treasury.gov/trip/.
REPORTS
• Notice of Proposed Rulemaking
L//www trpse anv/nress/re1eases/isL4S6JltlIl
D E P A R T M E N T OF THE TREASURY
Departmental Offices
31 CFR Part 50
RIN 1505-AB08
Terrorism Risk Insurance Program; Litigation Management
AGENCY: Departmental Offices, Treasury
ACTION: Notice of Proposed Rulemaking
SUMMARY: The Department of the Treasury (Treasury) is issuing this proposed rule
as part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002 (Act).
That Act established a temporary Terrorism Insurance Program (Program) under which
the Federal Government will share the risk of insured loss from certified acts of terrorism
with commercial property and casualty insurers until the Program ends on December 31,
2005. This notice of proposed rulemaking proposes regulations concerning litigation
management related to insured losses under the Program. This proposed rule is the fifth
in a series of regulations that Treasury is issuing to implement the Program.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
60 D A Y S A F T E R D A T E O F PUBLICATION IN T H E F E D E R A L REGISTER].
ADDRESSES: Submit comments (if hard copy, preferably an original and two copies)
to the Terrorism Risk Insurance Program, Attention: Terrorism Risk Insurance Program
Public Comment Record, Room 2100, 1425 N e w York Avenue, N.W., Washington, D.C.
20220. Because paper mail in the Washington, D.C, area may be subject to delay, it is
recommended that comments be submitted electronically to: triacomments@do.treas.gov.
All comments should be captioned with "[INSERT D A T E O F P U B L I C A T I O N IN T H E
F E D E R A L REGISTER] N P R M TRIA Comments." Please include your name,
affiliation, address, e-mail address, and telephone number in your comment. Comments
may also be submitted through the Federal eRulemaking Portal: http://www.
regulations.gov. Comments will be available for public inspection by appointment only
at the Reading R o o m of the Treasury Library. To make appointments, call (202) 6220990 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: David Brummond, Legal Counsel, or
C. Christopher Ledoux, Senior Attorney, Terrorism Risk Insurance Program, (202) 6226770 (not a toll-free number).
1
SUPPLEMENTARY INFORMATION:
I. Background
A. Terrorism Risk Insurance Act of 2002
On November 26, 2002, the President signed into law the Terrorism Risk
Insurance Act of 2002 (Public L a w 107-297, 116 Stat. 2322). The Act was effective
immediately. The Act's purposes are to address market disruptions, ensure the continued
widespread availability and affordability of commercial property and casualty insurance
for terrorism risk, and to allow for a transition period for the private markets to stabilize
and build capacity while preserving State insurance regulation and consumer protections.
Title I of the Act establishes a temporary federal program of shared public and
private compensation for insured commercial property and casualty losses resulting from
an act of terrorism, which as defined in the Act is certified by the Secretary of the
Treasury, in concurrence with the Secretary of State and the Attorney General. The Act
authorizes Treasury to administer and implement the Terrorism Risk Insurance Program,
including the issuance of regulations and procedures. The Program will end on
December 31, 2005. Thereafter, the Act provides Treasury with certain continuing
authority to take actions as necessary to ensure payment, recoupment, adjustments of
compensation and reimbursement for insured losses arising out of any act of terrorism (as
defined under the Act) occurring during the period between N o v e m b e r 26, 2002, and
December 31, 2005.
Each entity that meets the definition of "insurer" (well over 2000 firms) must
participate in the Program. The amount of federal payment for an insured loss resulting
from an act of terrorism is to be determined based upon insurance company deductibles
and excess loss sharing with the Federal Government, as specified by the Act and the
implementing regulations. A n insurer's deductible increases each year of the Program,
thereby reducing the Federal Government's share prior to expiration of the Program. A n
insurer's deductible is calculated based on a percentage of the value of direct earned
premiums collected over certain statutory periods. Once an insurer has met its individual
deductible, the federal payments cover 90 percent of insured losses above the deductible,
subject to an annual industry-aggregate limit of $100 billion.
The Program provides a federal reinsurance backstop for three years. The Act
provides Treasury with authority to recoup federal payments m a d e under the Program
through policyholder surcharges, up to a m a x i m u m annual limit. The Act also prohibits
duplicative payments for insured losses that have been covered under any other federal
program.
The mandatory availability or "make available" provisions in section 103(c) of
the Act require that, for Program Year 1, Program Year 2, and, if so determined by the
2
Secretary of the Treasury, for Program Year 3, all entities that meet the definition of
insurer under the Program must m a k e available in all of their property and casualty
insurance policies coverage for insured losses resulting from an act of terrorism. This
coverage cannot differ materially from the terms, amounts and other coverage limitations
applicable to losses arising from events other than acts of terrorism. The Secretary of the
Treasury m a y determine, not later than September 1, 2004, to extend the m a k e available
requirements through Program Year 3, based on factors referenced in section 108(d)(1) of
the Act. Regardless of whether the m a k e available requirements of section 103 are
extended, the Program and the Act's federal backstop for insured losses resulting from
acts of terrorism continue through December 31, 2005.
As conditions for federal payment under the Program, insurers must provide clear
and conspicuous disclosure to the policyholders of the premium charged for insured
losses covered by the Program and the Federal share of compensation for insured losses
under the Program. In addition, the Act requires that insurers submit claims and m a k e
certain certifications to Treasury. Treasury has recently published in the Federal
Register a proposed rule concerning claims regulations for the Program. See 68 F R
67100 (Dec. 1,2003).
The Act also contains specific provisions designed to manage litigation arising
out of or resulting from a certified act of terrorism. A m o n g other provisions, section 107
creates, upon certification of an act of terrorism by the Secretary, an exclusive Federal
cause of action and remedy for property damage, personal injury, or death arising out of
or relating to an act of terrorism; preempts certain State causes of action; provides for
consolidation of all civil actions in Federal court for any claim (including any claim for
loss of property, personal injury, or death) relating to or arising out of an act of terrorism;
and provides that amounts awarded in actions for property damage, personal injury, or
death that are attributable to punitive damages are not to be counted as "insured losses"
and not paid under the Program. The Act also provides the United States with the right of
subrogation with respect to any payment or claim paid by the United States under the
Program. In this rulemaking, Treasury is proposing to implement these provisions of the
Act to the extent that regulations are necessary for administration of the Program or
involve the Federal share of compensation under the Program. This proposed regulation
addresses the advance approval of proposed settlements of causes of action described in
section 107 of the Act, as directed by the President in & Memorandum
to the Secretary of
the Treasury. See 38 W E E K L Y C O M P . PRES. D O C . 2096 (Nov. 25, 2002)(also accessible at
w w w . treasury. go v/trip).
In implementing the Program, Treasury is guided by several goals. First, Treasury
strives to implement the Act in a transparent and effective manner that treats comparably
those insurers required to participate in the Program and provides necessary information
to policyholders in a useful and efficient manner. Second, in accord with the Act's stated
purposes, Treasury seeks to rely as m u c h as possible on the State insurance regulatory
structure. In that regard, Treasury has coordinated the implementation of all aspects of
3
the Program with the National Association of Insurance Commissioners (NAIC). Third,
to the extent possible within statutory constraints, Treasury seeks to allow insurers to
participate in the Program in a manner consistent with procedures used in their normal
course of business. Finally, given the temporary and transitional nature of the Program,
Treasury is guided by the Act's goal that insurers develop their o w n capacity, resources,
and mechanisms for terrorism insurance coverage w h e n the Program expires.
B. Previously Issued Interim Guidance and Regulations
To assist insurers, policyholders, and other interested parties in complying with
immediately applicable requirements of the Act prior to the issuance of regulations,
Treasury issued interim guidance in four separate notices, on December 3 and 18, 2002
and on January 22 and March 25, 2003. The interim guidance addressed issues requiring
clarification to immediately applicable provisions. The guidance was to be relied upon
by insurers until superseded by regulations or a subsequent notice.
Treasury's first notice of Interim Guidance was published in the Federal Register
at 67 F R 76206 on December 11, 2002, and addressed, a m o n g other matters, statutory
disclosure obligations of insurers as conditions for federal payment under the Program;
the requirement that an insurer "make available" terrorism insurance; and h o w insurers
were to calculate the "direct earned premium" received from commercial lines of
property and casualty insurance as well as their "insurer deductibles" for purposes of the
Program.
Treasury's second notice of interim guidance was published at 67 FR 78864 on
December 26, 2002. The Interim Guidance addressed the statutory categories of
"insurers" that are required to participate in the Program, including their "affiliates";
provided clarification on the scope of insured losses covered by the Program; and
provided additional guidance to enable eligible surplus line carriers listed on the N A I C
Quarterly Listing of Alien Insurers or Federally approved insurers to calculate their
insurer deductibles for purposes of the Program. This was followed by Treasury's third
notice of interim guidance, which was published at 68 F R 4544 on January 29, 2003, and
further clarified certain disclosure and certification requirements, and addressed issues
concerning non-U. S. insurers, and the scope of the term "insured loss" under the Act.1
On February 28, 2003 (68 FR 9804) Treasury published an interim final rule
together with a proposed rule addressing the scope of the program, key definitions and
1
Treasury's fourth interim guidance, published at 68 F R 15039 on March 27, 2003,
provided insurers a procedure by which they could seek to rebut a presumption of control
established in Treasury's first set of interim final regulations. The Interim Guidance has
subsequently been superseded by a provision in the final rule for Subpart A of Part 50,
Title 31 published at 68 F R 41250 (July 11, 2003).
4
certain general provisions to lay the groundwork for program implementation. This
interim final rule was finalized and published in the Federal Register at 68 F R 41250
(July 11, 2003) (as amended at 68 F R 48280 (Aug. 13, 2003)) and created Subpart A of
Part 50 in Title 31 of the Code of Federal Regulations. Treasury's second regulation
created Subparts B and C of Part 50 as an interim final rule published in the Federal
Register at 68 F R 19301 (Apr. 18, 2003) and was finalized and published at 68 F R 59720
(Oct. 17, 2003). These regulations address disclosures that insurers must m a k e to
policyholders as a condition for federal payment under the Act, and requirements that
insurers m a k e available, in their commercial property and casualty insurance policies,
terrorism risk coverage for insured losses under the Program.
Treasury also created a Subpart D to Part 50 of Title 31, which was first proposed
and published in the Federal Register at 68 F R 19309 (Apr. 18, 2003) and finalized and
published at 68 F R 59715 (Oct. 17, 2003). This regulation applies the provisions of the
Act to State residual market insurance entities and State workers' compensation funds.
Most recently, Treasury published a proposed rule in the Federal Register at 68
F R 67100 (December 1, 2003) that adds Subparts F and G to Part 50 of Title 31. Subpart
F establishes procedures for filing claims for payment of the Federal share of
compensation for insured losses. Subpart G addresses information to be retained related
to the handling and settlement of claims to enable Treasury to perform financial and
claim audits.
II. The Proposed Rule
A. Overview
The rule proposed in this notice would create Subpart I of Part 50 in Title 31 of
the Code of Federal Regulations. It would implement the litigation management
provisions in section 107 of the Act, provide for advance approval of settlements of
certain causes of action, and clarify related aspects of the Program. U p o n certification of
an act of terrorism by the Secretary, section 107 creates a Federal cause of action for
property damage, personal injury, or death arising out of or resulting from the act of
terrorism, which is the exclusive cause of action and remedy for such losses. In addition,
section 107 provides that:
• all State causes of action of any kind for property damage, personal injury,
or death arising out of or resulting from an act of terrorism that are
otherwise available under State law are preempted;
• civil actions are to be consolidated in a Federal district court or courts, as
designated by the Judicial Panel on Multidistrict Litigation, which shall
have original and exclusive jurisdiction over all actions for any claim
5
(including any claim for loss of property, personal injury, or death)
relating to or arising out of an act of terrorism;
• the substantive law for decision in such actions shall be derived from the
law, including choice of law principles, of the State in which the act of
terrorism occurred, unless such law is otherwise inconsistent with or
preempted by Federal law;
• any amounts awarded in any action for property damage, personal injury,
or death under section 107 that are attributable to punitive damages shall
not count as "insured losses" for purposes of the Program;
• contractual arbitration rights are preserved; and
• the United States has a right of subrogation with respect to any payment or
claim paid pursuant to the Act.
In connection with the implementation of the litigation management provisions of
the Act, the President directed the Secretary to use his authority under the Act to require
insurers to obtain Treasury's advance approval before settling certain causes of action
described in section 107 of the Act. The following discussion includes a section-bysection analysis of these proposed regulatory provisions.
B. Exclusive Federal Cause of Action and Remedy (Section 50.80)
Section 107(a)(1) of the Act states that once the Secretary has certified that an act
of terrorism has occurred pursuant to section 102 of the Act, there shall exist a Federal
cause of action for property damage, personal injury, or death arising out of or resulting
from such act of terrorism. The Federal cause of action shall be the exclusive cause of
action and remedy for claims for property damage, personal injury, or death arising out of
or relating to such act of terrorism, except as provided in section 107(b) of the Act, as
discussed further below. The exclusive Federal cause of action created by the Act applies
to all actions for property damage, personal injury, or death arising out of or resulting
from a certified act of terrorism, regardless of whether the cause of action involves an
insured loss covered by commercial property and casualty insurance. Section 50.80(a) of
the proposed rule follows this provision of the Act.
Section 107(b) of the Act creates an exception to the exclusive Federal cause of
action and remedy established in section 107(a) by stating that nothing in the litigation
management provisions of section 107 shall in any w a y limit the liability of any
government, organization, or person w h o knowingly participates in, conspires to commit,
aids and abets, or commits any act of terrorism certified as such under the Act. The
proposed rule reflects this exception.
6
Section 107(e) of the Act provides that section 107 applies only to actions for
property damage, personal injury, or death that arise out of or result from acts of
terrorism that occur or occurred during the effective period of the Program. Under the
Act, the Program terminates on December 31, 2005 {see section 108(a) of the Act);
therefore the proposed rule provides that the exclusive cause of action and remedy exists
only for those causes of action that arise out of or result from certified acts of terrorism
that occur through December 31, 2005.
Finally, section 107(d) of the Act provides that section 107 shall not be construed
to affect (1) any party's contractual right to arbitrate a dispute; or (2) any provision of the
Air Transportation Safety and System Stabilization Act (Public L a w 107-42; 49 U.S.C.
40101 note). Section 50.80(c) of the proposed rule follows the provisions of the Act.
C. Preemption of State Causes of Action (Section 50.81)
The Act preempts all State causes of action for property damage, personal injury,
or death arising out of or resulting from an act of terrorism that are otherwise available
under State law, except as provided in section 107(b). See section 107(a)(2) of the Act.
Section 50.81 of the proposed rule reflects this statutory preemption and includes the
circumstances where the Act does not limit liability (i.e., for causes of action against any
government, organization, or person w h o knowingly participates in, conspires to commit,
aids and abets, or commits any act of terrorism.)
Treasury recognizes that the Act's preemption of State causes of action for
personal injury or death raises a question regarding the treatment of workers'
compensation claims under section 107. It is Treasury's view that section 107(a)(2) of
the Act does not preempt workers' compensation claims involving personal injury or
death on the basis that workers' compensation claims are not "causes of action" for
personal injury or death within the meaning of section 107. A "cause of action" is a
group of operative facts giving rise to one or more bases for one person to sue and obtain
a remedy in court from another person.2 A s a general matter, the laws of the various
States have eliminated "causes of action" for work-related injuries and replaced them
with various types of workers' compensation systems; therefore, there are no "causes of
action . . . otherwise available under State law" for work related injuries within the
meaning of section 107(a)(2). Thus, it is Treasury's view that the preemption provision in
section 107(a)(2) does not extend to workers' compensation systems in the various
States.
2
See B L A C K ' S L A W D I C T I O N A R Y 214 (7th ed. 1999).
7
D.
Program Procedures for Notifying Federal Court
Section 107(a)(4) of the Act provides that for each act of terrorism certified by the
Secretary pursuant to section 102 of the Act, the Judicial Panel on Multidistrict Litigation
shall designate one district court or, if necessary, multiple district courts of the United
States that shall have original and exclusive jurisdiction over all actions for any claim
(including any claim for loss of property, personal injury, or death) relating to or arising
out of an act of terrorism.
The Act also provides that the Judicial Panel on Multidistrict Litigation is to
designate the district court or courts not later than 90 days after the occurrence of an act
of terrorism. However, it is the Secretary's certification of an act of terrorism that
triggers the creation of the exclusive Federal cause of action and the need for the Judicial
Panel to designate a district court for the consolidation of actions. Therefore, to facilitate
administration of the Program, Treasury intends to notify the Panel as soon as practicable
following any certification of an act of terrorism. In this regard, Treasury is considering
the appropriate operational procedures that it would follow once an act of terrorism is
certified by the Secretary. Treasury invites comments on such procedures from all
interested parties.
E. Failure to Litigate in Federal Court Pursuant to the Act
In applying section 107(a)(4) of the Act specifically to the Program, Treasury is
considering whether it is appropriate or necessary to include in Part 50 a rule providing
that any amounts awarded in any civil action relating to or arising out of an act of
terrorism that are not awarded by the district court or district courts designated by the
Judicial Panel on Multidistrict Litigation shall be ineligible for compensation, regardless
of whether the amounts awarded are insured losses covered by commercial property and
casualty insurance issued by an insurer. Treasury solicits public c o m m e n t on such a
provision from all interested parties.
F. Treasury's Advance Approval of Settlements (Section 50.82)
On November 26, 2002, upon signing the Terrorism Risk Insurance Act of 2002,
the President issued a Memorandum
to the Secretary of the Treasury that directed the
Secretary to propose a rule requiring insurers to obtain the advance approval of Treasury
of any proposed settlements of causes of action described in section 107 of the Act
arising out of or resulting from an act of terrorism. 38 W E E K L Y C O M P . P R E S . D O C . 2096
(Nov. 25, 2002) (also accessible at www.treasury.gov/trip).
The Act authorizes Treasury to administer the Program, investigate and audit
claims, and pay the Federal share of compensation for insured losses, (see section 104(a)
of the Act). In addition, under section 103(b)(3) of the Act, Treasury is authorized to
prescribe reasonable procedures concerning insurers' processing of claims for insured
8
losses, which become conditions for federal payment. Pursuant to its administrative
authority under the Act and to protect the interests of the United States, the proposed rule
requires advance approval by Treasury of proposed settlements of certain causes of action
described in section 107, to the extent liability for such causes of action is covered by or
paid, in whole or in part, by an insurer pursuant to coverage for insured losses under the
Program, provided that the insurer intends to submit the settlement as part of its claim for
federal payment under the Program.
1. Pre-Approval of Certain Proposed Settlements
Under section 104(a)(2), the Secretary is authorized to prescribe regulations to
administer and implement the Program effectively. Treasury believes that establishing
monetary thresholds below which an insurer is not required to seek pre-approval by
Treasury of settlements balances the need to protect the interests of the United States with
the administrative costs involved in the advance approval of settlements. Treasury
invites comments on these thresholds (which are explained in more detail below) from all
interested parties.
Treasury's proposed rule would require an insurer to seek Treasury's advance,
written approval where an insurer (directly or through its insured) intends to settle a
Federal cause of action involving third-party liability claims (by a third party against an
insured and/or the insurer) for property damage, personal injury, or death arising out of or
resulting from an act of terrorism when:
• any portion of the proposed settlement amount that is attributable to liability for
personal injury or death is $1 million or more, or that is attributable to liability for
property damage (including loss of use) is $5 million or more, regardless of the
number of third-party liability claims being settled; and
• all or part of the settlement amount is expected to be part of the insurer's claim for
federal payment under the Program (included in the insurer's aggregate insured
losses). N o approval is required if the insurer does not intend to and does not
submit all or part of the settlement as part of its claim for federal payment of
insured losses under the Program.
Treasury notes that its proposed settlement approval requirement applies to
Federal causes of action described above regardless of whether a lawsuit has actually
been filed or an arbitration c o m m e n c e d with respect to the matter.
Treasury also notes that settlements that are not required to be submitted for prior
approval are still subject to Treasury review, like any other claim, at the point of claim
submission by the insurer or at the time of any audit (see Subparts F and G proposed as
part of claims and audit rulemakings, 68 F R 67100 (Dec. 1, 2003).
9
Treasury views this prior approval requirement as extending to settlements for
insured losses arising from third-party claims for property damage, personal injury or
death against a commercial insured. Most commercial liability policies provide coverage
for the insured's defense of such action. In this regard, the insurer is usually involved in
the settlements of litigated third-party property and casualty claims. Through the insurer,
Treasury will have final settlement approval authority.
Coverage disputes and other civil actions involving contract rights are not
included in the scope of the civil actions requiring advanced settlement approval by
Treasury. Such disputes involve causes of action that are based on contract law, not on
property damage, personal injury, or death and are not subject to prior approval by
Treasury.
Treasury seeks comments on how frequently claims are received by commercial
property and casualty insurers under commercial liability policies where the insured
settles directly with a claimant and then notifies the insurer after the settlement has been
consummated. In this situation, if the insurer was not promptly notified in advance of the
settlement, the insurer m a y have difficulty meeting the requirement to obtain prior
approval from Treasury of the proposed settlement, jeopardizing the application of
federal reinsurance under the Program. Treasury invites public comments on the
frequency of such situations, the size of claims usually involved, and possible approaches
to address these situations.
2. Factors to be Reviewed by Treasury
In determining whether to approve a proposed settlement, and in keeping with its
obligation to safeguard the use of taxpayer resources, Treasury will consider the nature of
the insured loss, the facts and circumstances surrounding the loss, and other factors such
as whether:
• the proposed settlement compensates for a bona fide loss that is an insured
loss under the terms and conditions of the underlying commercial property
and casualty insurance policy;
• any amount of the proposed settlement is attributable to punitive or
exemplary damages intended to punish or deter (whether or not
specifically so described as such damages);
• the settlement amount offsets amounts received from the United States
pursuant to any other Federal program;
• attorneys' fees and expenses in connection with the settlement are
unreasonable or inappropriate, in whole or in part and whether they have
10
caused the insured losses under the underlying commercial property and
casualty insurance policy to be overstated; and
• any other criteria that Treasury may consider appropriate, depending on
the facts and circumstances surrounding the settlement, including the
information contained in section 50.83.
Additionally, Treasury will review any proposed settlement in accordance with
proposed section 50.50 of Subpart F, including whether:
• the settlement was fraudulent, collusive, in bad faith, or otherwise
dishonest; and
• the insurer took all businesslike steps reasonably necessary to properly and
carefully investigate and ascertain the amount of the loss consistent with
appropriate business practices.
3. Settlement Without Treasury's Approval
If an insurer settles a cause of action after Treasury has rejected the proposed
settlement, or if an insurer settles a cause of action without seeking Treasury's approval
in advance, as required by section 50.82, the insurer will not be entitled to the Federal
share of the amount paid as part of its claim for federal payment unless the insurer can
demonstrate, to the satisfaction of the Treasury, extenuating circumstances. Also, the
insurer shall not be entitled to include the paid settlement amount as an insured loss in its
aggregate insured losses (whether or not those aggregate insured losses exceed the insurer
deductible) for purposes of calculating the Federal share of compensation due to the
insurer under the Program. Treasury is proposing to m a k e advance approval of certain
settlements a condition for federal payment under the Program, unless the insurer
demonstrates, to the satisfaction of the Treasury, that extenuating circumstances
prevented the insurer from seeking Treasury's advance approval.
4. Ensuring that Punitive Damages are Not Compensated for Under the
Program.
Section 107(a)(5) of the Act provides that any amounts awarded in actions under
section 107(a)(1) of the Act (exclusive Federal cause of action for property damage,
personal injury, or death arising out of or resulting from an act of terrorism) that are
attributable to punitive damages shall not count as insured losses under the Act. Punitive
damages, sometimes also referred to as exemplary damages, are damages that are not
compensatory in nature but are an award of m o n e y m a d e to a claimant solely to punish or
deter a wrongdoer. Because section 107(a)(5) of the Act does not consider punitive
damages as "insured losses" under the Act, the Federal Government will not compensate
an insurer for such damages. Accordingly, Treasury has proposed amending section 50.5
11
of Subpart A (as part of another proposed rulemaking recently published in the Federal
Register) and amending the definition of "insured loss" specifically to exclude punitive or
exemplary damages as compensable under the Program.
Consistent with the proposed claims procedures rule, a factor Treasury will
consider in approving a proposed settlement is whether the settlement excludes punitive
damages, regardless of h o w the parties to the settlement agreement characterize the
payment. A n insurer shall be required to identify any portion of a proposed settlement
amount that is attributable to punitive damages, or that intends to compromise a claim or
demand for punitive damages in a cause of action for which punitive damages could be
awarded. Treasury will review proposed settlements to determine whether all or part of
the settlement amount is intended to compromise an actual or threatened claim for
punitive or exemplary damages, even if the settlement does not indicate that the payment
includes punitive or exemplary damages.
5. Evaluating A ttorneys' Fees and Expenses
One of the factors Treasury will take into account in reviewing proposed
settlements is the amount of attorneys' fees and other legal expenses. In evaluating the
appropriateness of attorneys' fees and expenses that are part of any proposed settlement,
Treasury intends to consider such factors as those weighed by Federal courts regarding
the reasonableness of attorneys' fees under applicable law. A m o n g the factors Treasury
m a y consider are the time and labor required; the novelty and difficulty of the questions;
the skill requisite to perform the legal service properly; the customary fee; whether the
fee is fixed or contingent; the amount involved and results obtained; the experience,
reputation, and the ability of the attorneys; and awards in similar cases. In addition,
Treasury will determine whether the attorneys' fees in question have caused the insured
losses under the underlying commercial property and casualty insurance policy to be
overstated.
G. Procedures for Requesting Approval of Settlements (Section 50.83)
Section 50.83 of the proposed rule establishes a procedure for an insurer to submit
proposed settlements for advance approval by Treasury. Generally, within 30 days after
Treasury's receipt of a complete notice of the proposed settlement and an insurer's
request that the proposed settlement be approved, Treasury m a y issue a written response
and either approve or disapprove the proposed settlement, in whole or in part. If
Treasury does not issue a written response within 30 days after its receipt of a complete
notice (or within the time as extended in writing by Treasury), the request for advance
approval of the settlement will be deemed approved under section 50.83. (The settlement
will still be subject to review under the claims procedures.) The proposed rule also
outlines the m i n i m u m information Treasury believes m a y be relevant and useful in
considering whether to approve a proposed settlement. Treasury invites public c o m m e n t
concerning this settlement approval request process.
12
H.
Right of Subrogation (Section 50.84)
Section 107(c) of the Act provides that the United States shall have the right of
subrogation with respect to any payment or claim paid by the United States under the
Act. In most commercial insurance policies, insurance companies become subrogated to
the rights of the persons they pay, to the extent of payment. In section 50.85, Treasury
proposes to require insurers to take steps to preserve rights of subrogation under section
107(c).
III. Procedural Requirements
Executive Order 12866, "Regulatory Planning and Review ". This proposed rule
is a significant regulatory action for purposes of Executive Order 12866, "Regulatory
Planning and Review," and has been reviewed by the Office of Management and Budget.
Regulatory Flexibility Act. Pursuant to the Regulatory Flexibility Act, 5 U.S.C.
601 et seq., it is hereby certified that this proposed rule will not have a significant
economic impact on a substantial number of small entities. Accordingly, a regulatory
flexibility analysis is not required. The proposed rule establishes requirements for
advance approval of settlements w h e n claims are to be submitted for insured losses.
There is no impact on small insurers unless an act of terrorism occurs and federal
compensation is sought by small insurers entitled to reimbursement for their insured
losses. If an act of terrorism occurs and federal payment is sought through a claim, the
proposed rule's impact on small insurers is likely to be minimal because most of the
information that would have to be submitted in connection with Treasury approval of
settlements largely duplicates information already contained in an insurer claim file or an
attorney case file. Moreover, the $1 million and $5 million thresholds for the submission
of settlements to Treasury for approval is likely further to minimize burdens on small
insurers.
Paperwork Reduction Act. The collection of information contained in this
proposed rule has been submitted to the Office of Management and Budget ( O M B ) for
review under the requirements of the Paperwork Reduction Act, 44 U.S.C. 3507(d). A n
agency m a y not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number assigned by O M B .
Organizations and individuals desiring to submit comments concerning the
collection of information in the proposed rule should direct them to the Desk Officer for
the Department of the Treasury, Office of Information and Regulatory Affairs, Office of
Management and Budget, Washington, D.C. 20503 (preferably by F A X to 202-395-6974,
or by email tojlackeyj@omb.eop.gov). A copy of the comments should also be sent to
Treasury at the following address: Terrorism Risk Insurance Program, Attention:
Terrorism Risk Insurance Program Public C o m m e n t Record, R o o m 2100, 1425 N e w
13
York Avenue, N.W., Washington, D.C. 20220 and electronically to:
triacomments@do.treas.gov. C o m m e n t s on the collection of information should be
received by [ I N S E R T 30 D A Y S A F T E R P U B L I C A T I O N ] .
Treasury specifically invites comments on: (a) whether the proposed collection of
information is necessary for the proper performance of the mission of Treasury and
whether the information will have practical utility; (b) the accuracy of the estimate of the
burden of the collections of information (see below); (c) ways to enhance the quality,
utility, and clarity of the information collection; (d) ways to minimize the burden of the
information collection, including through the use of automated collection techniques or
other forms of information technology; and (e) estimates of capital or start-up costs and
costs of operation, maintenance, and purchase of services to maintain the information.
The collection of information in the proposed rule is the information required in
connection with requests for Treasury approval of proposed settlements in § 50.83. The
submission of specified information in connection with a proposed settlement is
mandatory for any insurer that seeks payment of a Federal share of compensation.
If an act of terrorism is certified under the Act, the number of settlements, if any,
will be determined by the size and nature of the certified act of terrorism. Because of the
extreme uncertainty regarding any such event, a "best estimate" has been developed
based on the considered judgment of Treasury. This estimate has 100 insurers sustaining
insured losses; each of these insurers would process an average of 100 underlying claims
for a total of 10,000 claims. If one in five claims involves amounts in dispute that exceed
the monetary thresholds in § 50.82(a), there would be 2,000 claims eligible for
settlement. If 90 percent of these claims settle before any judgment or award, this would
require 1,800 claims to be submitted to Treasury for advance approval under Subpart I.
The information required by Treasury in connection with a request for advanced
approval of a proposed settlement in § 50.83 largely duplicates information already
contained in an insurer claim file or an attorney case file. The burden associated with
compiling and submitting such information to Treasury is therefore relatively moderate.
Accordingly, Treasury estimates that the proposed rule will impose 5 hours of burden
with respect to each claim. The estimated annual burden of the proposed rule is therefore
9,000 hours.
List of Subjects in 31 C F R Part 50
Terrorism risk insurance.
Authority and Issuance
For the reasons set forth above, 31 CFR part 50 is proposed to be amended as
14
follows:
PART 50 - TERRORISM RISK INSURANCE P R O G R A M
1. The authority citation for part 50 continues to read as follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-297, 116 Stat. 2322
(15 U.S.C. 6701 note).
2. Subpart I of part 50 is proposed to be added to read as follows:
SUBPART I - FEDERAL CAUSE OF ACTION; APPROVAL OF
SETTLEMENTS
§ 50.80 Federal Cause of Action and Remedy.
(a) General. Upon certification of an act of terrorism pursuant to section 102 of
the Act, there shall exist a Federal cause of action for property damage, personal injury,
or death arising out of or resulting from such act of terrorism, pursuant to section 107 of
the Act, which shall be the exclusive cause of action and remedy for claims for property
damage, personal injury, or death arising out of or relating to such act of terrorism, except
as provided in paragraph (c) of this section.
(b) Effective period. The exclusive Federal cause of action and remedy described
in paragraph (a) of this section shall exist only for causes of action for property damage,
personal injury, or death that arise out of or result from acts of terrorism that occur or
occurred during the effective period of the Program as set forth in section 108 of the Act.
(c) Rights not affected. Nothing in section 107 of the Act or this Subpart shall in
any way:
(1) Limit the liability of any government, organization, or person who knowingly
participates in, conspires to commit, aids and abets, or commits any act of terrorism;
(2) Affect any party's contractual right to arbitrate a dispute; or
(3) Affect any provision of the Air Transportation Safety and System
Stabilization Act (Public L a w 107-42; 49 U.S.C. 40101 note).
§ 50.81 State Causes of Action Preempted.
Upon certification of an act of terrorism pursuant to section 102 of the Act, all
State causes of action of any kind for property damage, personal injury, or death arising
15
out of or resulting from such act of terrorism that are otherwise available under State law
are preempted, except that, pursuant to section 107(b) of the Act, nothing in this section
shall limit in any w a y the liability of any government, organization, or person w h o
knowingly participates in, conspires to commit, aids and abets, or commits the act of
terrorism certified by the Secretary.
§ 50.82 Advance Approval of Settlements.
(a) General. An insurer shall submit to Treasury for advance approval any
proposed agreement to settle or compromise any Federal cause of action for property
damage, personal injury, or death, including any agreement between its insured(s) and
third parties, involving an insured loss, all or part of the payment of which the insurer
intends to submit as part of its claim for Federal payment under the Program, when:
(1) Any portion of the proposed settlement amount that is attributable to an
insured loss or losses involving personal injury or death in the aggregate is $ 1 million or
more, regardless of the number of causes of action or insured losses being settled; or
(2) Any portion of the proposed settlement amount that is attributable to an
insured loss or losses involving property damage (including loss of use) in the aggregate
is $5 million or more, regardless of the number of causes of action or insured losses being
settled.
(b) Factors. In determining whether to approve a proposed settlement in
advance, Treasury will consider the nature of the loss, the facts and circumstances
surrounding the loss, and other factors such as whether:
(1) The proposed settlement compensates for a loss that is an insured loss under
the terms and conditions of the underlying commercial property and casualty insurance
policy;
(2) Any amount of the proposed settlement is attributable to punitive or
exemplary damages intended to punish or deter (whether or not specifically so described
as such damages);
(3) The settlement amount offsets amounts received from the United States
pursuant to any other Federal program;
(4) The settlement does not involve unreasonable or inappropriate attorneys' fees
and legal expenses and whether they have caused the insured losses under the underlying
commercial property and casualty insurance policy to be overstated; and
16
(5) A n y other criteria that Treasury m a y consider appropriate, depending on the
facts and circumstances surrounding the settlement, including the information contained
in §50.83.
(c) Settlement Without Seeking Advance Approval or Despite Disapproval. If an
insurer settles a cause of action or agrees to the settlement of a cause of action without
submitting the proposed settlement for Treasury's advance approval in accordance with
this section and in accordance with §50.83 or despite Treasury's disapproval of the
proposed settlement, the insurer will not be entitled to include the paid settlement amount
(or portion of the settlement amount, to the extent partially disapproved) in its aggregate
insured losses for purposes of calculating the Federal share of compensation of its insured
losses, unless the insurer can demonstrate, to the satisfaction of Treasury, extenuating
circumstances.
§ 50.83 Procedure for Requesting Approval of Proposed Settlements.
(a) Submission of Notice. Insurers must request advance approval of a proposed
settlement by submitting a notice of the proposed settlement and other required
information in writing to the Terrorism Risk Insurance Program Office or its designated
representative. The address where notices are to be submitted will be available at
http://www.treasury.gov/trip following any certification of an act of terrorism pursuant to
section 102(1) of the Act.
(b) Complete Notice. Treasury will review requests for advance approval and
determine whether additional information is needed to complete the notice.
(c) Treasury Response or Deemed Approval. Within 30 days after Treasury's
receipt of a complete notice, or as extended in writing by Treasury, Treasury m a y issue a
written response and indicate its partial or full approval or rejection of the proposed
settlement. If Treasury does not issue a response within 30 days after Treasury's receipt
of a complete notice, unless extended in writing by Treasury, the request for advance
approval is deemed approved by Treasury. A n y settlement is still subject to review under
the claim procedures pursuant to § 50.50.
(d) Notice Format. A notice of a proposed settlement should be entitled, "Notice
of Proposed Settlement — Request for Approval," and should provide the full n a m e and
address of the submitting insurer and the name, title, address, and telephone number of
the designated contact person. A n insurer must provide all relevant information,
including the following, as applicable:
(1) A brief description of the insured's underlying claim, the insured's loss, the
amount of the claim, the operative policy terms, defenses to coverage, and all damages
sustained;
17
(2) A n itemized statement of all damages by category (i.e., actual, economic and
non-economic loss, punitive damages, etc.);
(3) A statement from the insurer or its attorney recommending the settlement and
the basis for the recommendation;
(4) The total dollar amount of the proposed settlement;
(5) Indication as to whether the settlement was negotiated by counsel;
(6) The net amount to be paid to the insured and/or third party;
(7) The amount to be paid that will compensate attorneys for their services and
expenses and an explanation as to w h y the amount is not unreasonable;
(8) The amount received from the United States pursuant to any other Federal
program for compensation of insured losses related to an act of terrorism;
(9) The proposed terms of the written settlement agreement, including release
language and subrogation terms;
(10) Other relevant agreements, including:
(i) Admissions of liability or insurance coverage;
(ii) Determinations of the number of occurrences under a commercial property
and casualty insurance policy;
(iii) The allocation of paid amounts or amounts to be paid to certain policies, or
to specific policy, coverage and/or aggregate limits; and
(iv) Any other agreement that may affect the payment or amount of the Federal
share of compensation to be paid to the insurer;
(11) A statement indicating whether the proposed settlement has been approved
by the Federal court or is subject to such approval and whether such approval is expected
or likely; and
(12) Such other information as may be requested by Treasury or its designee.
§50.84 Subrogation.
18
A n insurer shall not waive its rights of subrogation under its insurance policy and
shall take all steps necessary to preserve the subrogation right of the United States as
provided by section 107(c) of the Act.
Dated: April ,2004
W a y n e A. Abernathy
Assistant Secretary of the Treasury
19
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 3, 2004
JS-1497
The Honorable John W. Snow
Prepared Remarks to: The Council of the Ameri
Thank you so much for having me here today.
In a world that has grown smaller thanks to information and travel technology, it is
more important and more attainable than ever before that a plurality of nations is
prosperous. It is also easier than ever for nations to work together to achieve that
goal.
The continuation of that growth is important to each individual country, and it is
important to the world collectively.
I was reminded of that fact during my conversation with the G7 Ministers and
Governors here in Washington two weekends ago.
The unifying theme of our discussions was economic growth, and the strengthening
global recovery provided an upbeat backdrop.
I was proud to share the news of terrific economic growth here in the United States.
President Bush's tax cuts have precipitated the growth that our country needed,
and indicators are very good across the board, from G D P to consumer and
business confidence to job creation.
And there is good news beyond the United States. Japan has turned in several
good quarters, as has the United Kingdom. In continental Europe, there are some
encouraging initial signs of an upturn, but growth still lags in too many areas and
thus needs to be more broad-based.
My fellow G7 ministers and I agreed that this is the time to redouble our efforts to
strengthen and broaden growth for the future. We reviewed the progress made
under the G 7 Agenda for Growth, including key steps on tax reform, and labor
markets flexibility.
But we also agreed that additional pro-growth reforms are essential to boost
employment and raise incomes. W e focused in particular on the importance of low
marginal tax rates in encouraging job creation and income growth.
Of course, sound fiscal policies are also fundamental to sustained growth, and we
underscored the need for fiscal consolidation during times of expansion.
During the G7 meetings we were reminded of how important it is for leaders and
governments to work together toward the shared goal of global growth. The
purpose of your group is to encourage and foster that type of cooperation among
countries in this region, and I applaud your work.
Latin America is a region that is very important to the United States. Our desire to
see the Americas flourish is strong, and w e appreciate the good working
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JS-1497: The Honorable John W . Snow<br>Prepared Remarks to: The Council of the Am... Page 2 of 4
relationship that w e have established with so m a n y of the governments and leaders
of the region.
There have been a considerable amount of improvements to economies in the
region that I'd like to talk about today - because I think there are s o m e key factors
behind the successes.
I'd also like to discuss the efforts of the United States to reinforce the region's
economic recovery and help the countries of Latin America lay a solid foundation
for sustained growth.
Although the United States is a "young" country by world standards, we are the
clear global leader in terms of prosperity and growth. Other countries are in a w e of
our resilience and our strength, and wish to emulate our formula for success.
I believe our economic strength has lasted, and recovered after hard times,
because w e have a solid foundation. Our country w a s built on the principles of the
rights of the individual and the strength of the individual. In our founding, w e
established a free-market economy that w e have maintained, and today strive to
keep as unfettered as possible-deferring to individuals and businesses as engines
of growth, not government. Government can only create the environment for
growth.
Economic stability is a prerequisite for a thriving free-market society. The countries
of Latin America have m a d e important progress in improving economic stability
over the last year and a half. Financial conditions have strengthened and capital
flows to the region are up. I would like to take a few minutes to talk about the
stronger fundamentals and better economic policies that are behind these
improvements.
First, economic growth in the region is picking up along with the recovery in the
global economy. G D P in the Americas w a s flat during 2002, then increased to 1.7
percent growth in 2003 and is expected to grow 3.5 to 4.0 percent in 2004. That's
terrific news.
Second, external balances are strengthening in the countries of Latin America. The
current account as a share of the region's G D P swung into surplus for the first time
in decades in 2003. Central banks have wisely used the opportunity to increase
their accumulation of foreign reserves to provide a cushion against future market
turbulence.
Third, Latin American authorities have pursued sound fiscal and monetary policies.
For example, six of the seven largest economies in Latin America - Brazil,
Argentina, Colombia, Mexico, Chile and Peru - successfully increased primary
budget surpluses to bring down debt levels overtime and reduced or maintained
low inflation in 2003.
Achievements in monetary policy in Brazil and Argentina merit special recognition.
Both countries experienced large currency depreciations in 2002, but good
monetary management prevented these depreciations from turning into inflationary
spirals.
The positive consequences of strong fiscal and monetary policies are ongoing. In
Brazil, for example, improved confidence in fiscal policy and the downward trend in
inflationary expectations have enabled the central bank to aggressively cut interest
rates over the last 10 months. Real interest rates are n o w less than 10 percent,
which helps spur faster economic growth and levels of investment.
A fourth step that has led to improved, more stable economies is countries'
progress on strengthening their debt profiles and deepening their domestic capital
markets. For example, Brazil has sharply reduced the proportion of its debt that is
linked to the exchange rate. Last year Mexico issued its first 20-year fixed-rate
peso-denominated debt.
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I should note that Latin American countries have also played a leading role and had
great success in making bonds with collective action clauses the market standard,
with Brazil, Colombia, Peru, Panama, Costa Rica, Uruguay and Venezuela
following Mexico's pioneering issuance in February of 2003.
A final trend that has improved economic health in the region is countries' steps
toward making structural reforms that will lock in improvements in macroeconomic
policy.
For example, Argentina and Peru have worked to fight tax evasion and improve tax
compliance. Success in those efforts is needed to avoid the pattern of everincreasing tax rates chasing ever-lower collections.
Brazil and Colombia have moved forward with reforms of their public pensions,
which free up savings that can be used to reduce public debt or increase key
infrastructure investments.
More needs to be done in the region to lock in sound public finances, but the
direction today is good. And the incentive to continue in this direction is strong. After
all, countries that achieve and maintain good policies are positioned to benefit from,
and contribute to, global economic growth.
With this progress in improving economic stability, it is now time to energize our
efforts to remove the other barriers to higher long-run economic growth. W h a t
barriers stand in the way?
Simply put, anything that is constraining entrepreneurs and the formation of capital
must be loosened or removed for the enormous potential of the region to be
unleashed.
The economic success of the United States is due to the government policies that
have done well by the entrepreneur. A good example of this: it takes an average of
70 days to start a business in Latin America. In the U.S., it takes about four days.
Reducing the time it takes to start a business provides an enormous incentive for
starting n e w enterprises and creating n e w jobs.
Businesses also need access to credit. So banks have to be sound and wellregulated, and do a better job of providing access to capital for productive
entrepreneurs.
Labor markets have to operate efficiently and flexibly, allowing each individual to
find jobs that maximize his or her potential. Society as a whole loses when poorly
designed labor policies keep unemployment high and relegate workers to
employment in the informal sector.
The tax, legal and regulatory environments also has to be such that risking capital
is more attractive, more promising. This is especially true in the case of large,
multi-year infrastructure projects where the returns are generated over an extended
period of time.
Governments have to invest in health and education for their citizens - basic needs
that build a foundation for human success.
And markets for goods and services have to be open for competition and for
international trade.
These are the kinds of policies are essential for success in any country, anywhere
in the world. Progress is being m a d e on these fronts in the Americas, but a great
deal remains to be done.
Our desire to see other countries prosper is why the Bush Administration has acted
consistently and quickly to support countries that are pursuing pro-growth policies.
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Accountability and ownership are essential to the success of these policies.
This has guided our approach to IMF engagement in the Americas. U.S. support for
IMF programs in Colombia and Brazil in 2002 is a good example. In both instances,
the governments articulated strong policy programs aimed at restoring stability
through fiscal discipline and other reforms. International support succeeded in these
instances because of the countries' strong ownership of good economic policies.
This emphasis on accountability and ownership has also guided our approach to
U.S. development assistance, as evidenced in President Bush's Millennium
Challenge Account (MCA), targeted toward countries that invest in people, pursue
good governance and the rule of law, and promote economic freedom.
The MCA is an example of an initiative aimed at increasing economic growth,
promoting job creation, and raising the standards of living in poor countries. That's
also why w e have such an ambitious trade agenda for the region. The U.S.-Chile
Free Trade Agreement has already been completed, and an agreement with five
Central American countries and the Dominican Republic has already been
negotiated (CAFTA).
We have also announced our intent to negotiate an agreement with the Andean
countries—aimed at eventually including Colombia, Peru, Ecuador and Bolivia—
and to launch negotiations with Panama. A successful trade capacity-building
exercise will continue under C A F T A and be replicated in negotiations for the
Andean FTA. Our efforts also continue toward a Free Trade Area of the Americas
that would encompass all countries in the Hemisphere in an integrated market.
We are committed to working with those in the region to create the environment for
encouraging entrepreneurs. The U.S. is also proud to have led the effort at the
Summit of the Americas to establish goals regarding the cutting of time and
expense for starting a n e w business, and tripling bank lending to small and medium
enterprises - with the help of the Inter-American Development Bank - by 2007. I do
not need to tell this audience that small business is the engine of growth and job
creation in Latin America and throughout the world.
A final issue that I want to mention today is U.S. support for facilitating access to
remittances from workers in the United States to their families back home. This is a
powerful and largely untapped source of funds for economic development, and w e
are committed to working with the countries of the region to achieve the Summit of
the America's goal of halving the average cost of remittance transfers in the region
by 2008.
When looking at the positive trends in the Americas, I am optimistic. Sustaining
them and implementing additional pro-growth policies will take a lot of work, but I
believe the time is ripe for economic success in the region.
I look forward to working with you on achieving that goal.
Thank you very much.
htfr»'/A*™r.T, +*-a.nr, ^rrtx T l-nr-QC C /fP»1 P 5 CPs/i S 1 4 Q 7
h1"TTl
5/6/2005
JS-1498: Treasury Issues Guidance on <BR>Business Meal & Entertainment Expenses
Page 1 of 1
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
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May 3, 2004
JS-1498
Treasury Issues Guidance on
Business Meal & Entertainment Expenses
The Treasury Department and the Internal Revenue Service today issued a
revenue procedure providing guidance on the use of statistical sampling in
determining deductible business meal and entertainment (M&E) expenses.
"Use of statistical sampling in this context significantly reduces taxpayer burden,"
said Acting Assistant Secretary for Tax Policy Gregory F. Jenner. "Providing
guidance on how to use statistical sampling provides certainty and will reduce
future controversy."
Deductions for M&E expenses generally are limited to 50 percent of the expense.
However, the 50 percent disallowance does not apply to certain M & E expenses.
This revenue procedure provides a statistical sampling methodology for use in
establishing the amount of substantiated M & E expenses excepted from the 50
percent disallowance. The proper use of statistical sampling will relieve taxpayers,
especially those with large M & E accounts, of the burden of scrutinizing each and
every item relating to an M & E amount.
REPORTS
• Rev. Proc. 2004-29
hrhv/Axm™, h-Poc rTr>Wr>reCQ/re1ftases/is1498.htm
5/6/2005
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatementdetermination of correct tax liability.
(Also Part I, §§ 132, 162, 274; 1.132-6.)
Rev. Proc 2004-29
SECTION 1. PURPOSE
This revenue procedure provides the statistical sampling methodology that a
taxpayer may use in establishing the amount of substantiated meal and entertainment
expenses excepted from the 50% deduction disallowance of § 274(n)(1) of the Internal
Revenue Code by reason of § 274(n)(2)(A), (B), (C), (D), or (E).
SECTION 2. BACKGROUND
.01 Section 162(a) allows a deduction for all ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business, including
certain expenses for meals and entertainment.
.02 Section 274(d) disallows a § 162 deduction for any expense for travel
(including meals and lodging while away from home), entertainment, gifts, or listed
property unless the taxpayer substantiates the elements of the expense by adequate
records or by sufficient evidence. See § 1.274-5T of the Income Tax Regulations.
2
.03 Section 274(n)(1) provides that the amount allowable as a deduction for any
expense for food or beverages, or any item with respect to an activity that is of a type
generally considered to constitute entertainment, amusement, or recreation, or with
respect to a facility used in connection with these activities, may not exceed 50% of the
amount of the expense.
.04 Section 274(n)(2)(A) provides that the 50% deduction disallowance of
§ 274(n)(1) does not apply to expenses described in § 274(e)(2) (expenses treated on
the taxpayer's return as compensation to an employee under chapter 1 and as wages to
the employee for purposes of chapter 24), (e)(3) (expenses paid or incurred under a
reimbursement or similar arrangement in connection with the performance of services),
(e)(4) (recreational and similar expenses for employees), (e)(7) (expenses relating to
items available to the public), (e)(8) (expenses relating to entertainment sold to
customers), or (e)(9) (expenses includible in income of persons who are not
employees).
.05 Section 274(n)(2)(B) provides that the 50% deduction disallowance of
§ 274(n)(1) does not apply to an expense for food or beverages that is excludable from
the gross income of the recipient under § 132(e) (relating to de minimis fringe benefits
excluded from income under § 132(a)(4)).
.06 Section 132(e) defines a de minimis fringe as any property or service the
value of which is (after taking into account the frequency with which similar fringes are
provided by the employer to the employer's employees) so small as to make accounting
for it unreasonable or administratively impracticable. Under § 1.132-6(c), a cash fringe
benefit (other than overtime meal money and local transportation fare) is never
excludable as a de minimis fringe benefit. For example, expenses for meals and
3
entertainment reimbursed to employees under an accountable plan (as defined in
§ 1.62-2(c)(2)) do not qualify as de minimis fringe benefits.
.07 Section 1.132-6(b) provides that the frequency with which similar fringes are
provided by the employer to the employer's employees is generally determined by
reference to the frequency with which the employer provides the fringes to each
individual employee. However, if it would be administratively difficult to determine
frequency with respect to individual employees, the frequency with which similar fringes
are provided by the employer to the employer's employees is determined by reference
to the workforce as a whole. This exception to the employee-measured frequency
requirement does not apply to overtime meals, meal money, or local transportation fare.
.08 Section 274(n)(2)(C) provides that the 50% deduction disallowance of
§ 274(n)(1) does not apply to an expense covered by a package involving a ticket
described in § 274(I)(1)(B) (exception for certain charitable sports events).
.09 Section 274(n)(2)(D) provides that the 50% deduction disallowance of
§ 274(n)(1) does not apply to taxable payments or reimbursements of moving expenses
of an employee by the employer.
.10 Section 274(n)(2)(E) provides that the 50% deduction disallowance of
§ 274(n)(1) does not apply to expenses for food or beverages (i) required by Federal
law to be provided to crew members of a commercial vessel, (ii) provided to crew
members of certain commercial vessels, or (iii) provided on or in proximity to certain oil
or gas platforms or drilling rigs.
SECTION 3. SCOPE
This revenue procedure applies to a taxpayer filing an original return, under
examination, in litigation, or making a refund claim that desires to establish with respect
4
to its income tax liability the amount of substantiated expenses paid or incurred for
meals and entertainment excepted from the 50% deduction disallowance of § 274(n)(1)
by reason of § 274(n)(2)(A), (B), (C), (D), or (E).
SECTION 4. APPLICATION
.01 In general. A taxpayer filing an original return, under examination, in
litigation, or making a refund claim, may use statistical sampling in connection with
establishing, with respect to its income tax liability, the amount of the taxpayer's
substantiated expenses paid or incurred for meals and entertainment excepted from the
50% deduction disallowance of § 274(n)(1) by reason of § 274(n)(2)(A), (B), (C), (D), or
(E) by following the procedures provided in Appendix A (Sampling Plan Standards),
Appendix B (Sampling Documentation Standards), Appendix C (Technical Formulas),
and (in the case of de minimis fringes) in paragraph 4.02 of this revenue procedure.
.02 Additional procedures required for de minimis fringe benefits.
(1) Reimbursements under accountable plans. In conducting the study,
expenses for meals and entertainment reimbursed by employers to employees under an
accountable plan may not be treated as de minimis fringe benefits.
(2) Determination of freguency. To establish the amount of identified
expenses that are excepted from § 274(n)(1) by reason of § 274(n)(2)(B), a taxpayer is
required to determine the frequency with which similar fringes were provided by the
taxpayer to the taxpayer's employees on an employee-measured or employermeasured basis, as described in paragraphs (3) and (4) below. Thus, after selecting a
statistical sample, as discussed below, the taxpayer may be required to review
documentation from outside both the sample and the target population (the set of items
from which the sample is drawn) to identify similar fringes included in employees' gross
5
income and similar fringes previously excluded from employees' gross income as de
minimis fringe benefits.
(3) Employee-measured freguency.
(a) In general. When using employee-measured frequency to
determine the amount of identified expenses that are excepted from § 274(n)(1) by
reason of § 274(n)(2)(B), the taxpayer must establish the frequency with which similar
fringes were provided to each individual employee of the taxpayer. Therefore, after
identifying the statistical sample, the taxpayer must review the remainder of the target
population (and records that document similar fringes that are not included in the target
population) to identify the aggregate number of similar fringes provided to the individual
employees included in the statistical sample.
(b) Example. Taxpayer maintains a meal and entertainment
expense account that includes invoices for meals provided in-kind to Taxpayer's
employees that may be de minimis fringe benefits. The invoices specifically identify the
employees who received the in-kind meals. Therefore, it would not be administratively
difficult to determine the frequency with which in-kind meals were provided to individual
employees, and Taxpayer must determine the frequency with which it provided in-kind
meals to each of the individual employees included in the sample. Taxpayer has no
other accounts that include expenses for in-kind meals provided to employees.
Taxpayer selects a statistical sample of the meal and entertainment expense
account that identifies 10 employees who have received in-kind meals. In order to
determine if the meals are de minimis fringes, Taxpayer must review documentation
(such as invoices) in the remainder of the target population to identify all in-kind meals
provided to each of the 10 individual employees included in the sample. Taxpayer must
6
consider in-kind meals that Taxpayer included in each employee's gross income and
similar fringes previously excluded from the employees' gross income as de minimis
fringe benefits in determining the frequency with which similar fringes were provided to
each of the 10 employees. After conducting this review, Taxpayer determines (after
considering both the value and frequency of the meals) that the meals provided to 4 of
the 10 employees in the sample are de minimis fringe benefits not subject to the 50%
deduction disallowance of § 274(n)(1). Taxpayer may increase proportionately the
deductible amount of expenses in the population not subject to the § 274(n)(1)
limitation. See paragraph 6 of Appendix A.
(4) Employer-measured freguency.
(a) In general. When using employer-measured frequency to
determine the amount of identified expenses that are excepted from § 274(n)(1) by
reason of § 274(n)(2)(B), the taxpayer must establish the frequency with which similar
fringes were provided to the taxpayer's workforce as a whole. Thus, the target
population must include all relevant records prior to selection of the statistical sample in
order to determine the aggregate number of similar fringes provided to all eligible
employees and the aggregate number of employees eligible to receive such fringes.
(b) Example. Taxpayer maintains a meal and entertainment
expense account that includes invoices for meals provided in-kind to Taxpayer's
employees that may be de minimis fringe benefits. The invoices are for in-kind meals of
a type for which it is administratively difficult to identify the particular employees who
received the meals, and the invoices do not specifically identify those employees.
Therefore, it would be administratively difficult to determine the frequency with which inkind meals were provided to individual employees, and Taxpayer may determine the
7
frequency with which similar fringes were provided by Taxpayer to Taxpayer's
employees by reference to all employees eligible to receive in-kind meals. Taxpayer
maintains an account in addition to the meal and entertainment expense account that
includes expenses for in-kind meals provided to employees. Taxpayer's workforce
includes 500 employees who are eligible to receive the fringe benefit of in-kind meals.
Taxpayer merges the meal and entertainment expense account and the other
account that includes expenses for in-kind meals to create a target population that
includes all relevant records and conducts a statistical sample of the merged accounts.
In determining whether the in-kind meals included in the sample are de minimis fringes,
Taxpayer must consider in-kind meals that Taxpayer included in eligible employees'
gross income and similar fringes previously excluded from employees' gross income as
de minimis fringe benefits. Taxpayer identifies in the sample 50 in-kind meals provided
to employees. The 50 meals represent 1000 in-kind meals in the target population as a
whole, or two meals per eligible employee. Assuming that the provision of two meals
with a given cost per eligible employee results in a value that is so small as to make
accounting for it unreasonable or administratively impracticable, Taxpayer may treat all
of the in-kind meals in the meal and entertainment expense account as de minimis
fringe benefits not subject to the 50% deduction disallowance of § 274(n)(1), subject,
however, to a pro rata reduction to the extent that any in-kind meals are evaluated
under employee-measured frequency and fail to qualify as de minimis fringes.
.03 Limitations.
(1) This revenue procedure does not authorize the use of statistical
sampling to substantiate meal and entertainment expenses as required by § 274(d).
8
(2) This revenue procedure does not authorize the use of statistical
sampling to determine a taxpayer's liability for employment taxes or whether an amount
is excludable from a taxpayer's income.
(3) This revenue procedure does not establish the correctness of a
taxpayer's interpretation of § 274(n) or characterization of meal and entertainment
expenses as expenses excepted from § 274(n)(1).
(4) This revenue procedure does not preclude the Internal Revenue
Service from raising or pursuing any income, employment, or other tax issues identified
in the review of a statistical sample.
S E C T I O N 5. E F F E C T I V E D A T E
This revenue procedure is effective for taxable years ending on or after M a y 3,
2004. However, with respect to the use of statistical sampling by a taxpayer for a
taxable year ending before M a y 3, 2004, for which the applicable period of limitations
has not expired, the Service will permit, but not require, application of this revenue
procedure.
S E C T I O N 6. 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 1545-1847.
An agency m a y 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 Appendix B. This
information is required to ensure compliance with the statistical sampling methodology
9
contained in this revenue procedure. The information will be used to evaluate
compliance with the procedures described in this revenue procedure. The collection of
information is mandatory. The likely recordkeepers are businesses or other for-profit
institutions.
The estimated total annual recordkeeping burden is 3200 hours. The estimated
annual burden per recordkeeper varies from six to ten hours, depending on individual
circumstances, with an estimated average of eight hours. The estimated number of
recordkeepers is 400.
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 interna I 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 Kari L. Fisher of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure, contact Ms. Fisher at (202) 622-4970 (not a toll-free
call). For further information regarding Appendices A, B and C, contact Ed Cohen of the
Large and Mid-Size Business Division at (212) 719-6693 (not a toll-free call).
APPENDIX A
SAMPLING PLAN STANDARDS
The statistical sampling must be conducted in accordance with the following
methodology.
1. Statistical (probability) sampling methodology m a y not include the use of judgment
sampling.
10
2. Taxpayers m a y apply the results of a statistical sample only to the taxable years
included in the sample.
3. A statistical sample m a y include data from no more than three consecutive taxable
years.
4. Data from a taxable year m a y be included in only one statistical sample.
5. The estimated amount of expenses not subject to the § 274(n)(1) limitation must be
based on a statistical (probability) sample, in which each sampling unit has a known
(non-zero) chance of selection, using either a simple random sampling method or
stratified random sampling method.
6. In general, the computation of the estimated amount of expenses not subject to the
§ 274(n)(1) limitation must be at the least advantageous 9 5 % one-sided confidence
limit. The "least advantageous" confidence limit is either the upper or lower limit that
results in the least benefit to the taxpayer. However, if the precision of the change in
the estimated deductible amount of expenses not subject to the § 274(n)(1) limitation
(see paragraph 9 below) divided by the change in the estimated deductible amount of
expenses not subject to the § 274(n)(1) limitation does not exceed 1 0 % , the point
estimate m a y be used in place of the least advantageous confidence limit. All strata for
which "substantially all" of the population sampling units are sampled will be treated as
1 0 0 % strata. That is, the overall point estimate and its precision will be estimated by
treating all 1 0 0 % strata appropriately for the sample design used. Also, the calculation
of the denominator for the relative precision will exclude all 1 0 0 % strata. For this
revenue procedure, "substantially all" is defined as 8 0 % or more.
7. Recognizing that m a n y methods exist to estimate population values from the sample
data, the Service will consider acceptable only the following estimators. Variable
11
estimators permitted include the m e a n (also known as the direct projection method),
difference (using "paired variables"), (combined) ratio (using a variable of interest and a
"correlated" variable), and (combined) regression (using a variable of interest and a
"correlated" variable). T h e first variable used for the difference, ratio and regression
estimators must be the variable used in the m e a n estimator. T h e second variable used
for the difference, ratio and regression estimators must be a variable that can be paired
with the first variable and should be related to the first variable. For example, in a
typical audit-sampling situation, the first variable would be the audited value of a
transaction and the second variable would be the originally reported value of the s a m e
transaction. Since the latter two variable methods are statistically biased, there must be
a demonstration that the bias is negligible before the Service will accept the method.
8. Variable sampling plans must use the qualifying final estimate with the smallest
overall standard error as an absolute value (for example, the size of the estimate is
irrelevant in the determination of the reported value).
9. Variable sampling plans must calculate confidence limits by addition and subtraction
of the precision of the estimate from the point estimate in which the determination of
precision proceeds by multiplication of the standard error by (i) the 9 5 % one-sided
confidence coefficient based on the Student's f-distribution with the appropriate degrees
of freedom, or (ii) 1.645 (the normal distribution), assuming the sample size is at least
100 in each n o n - 1 0 0 % stratum.
10. For either the (combined) ratio or regression methods, to demonstrate little
statistical bias exists, the following applies after excluding all strata tested on 1 0 0 %
basis (the entire population of a stratum is selected for evaluation).
a. T h e total sample size of all strata must be at least 100 units.
12
b. Each stratum for a population estimate should contain at least 30 sample
units.
c. The coefficient of variation of the paired variable must be 15% or less. The
coefficient of variation of the paired variable (y) is defined as the standard error of the
total "y" variables divided by point estimate of the total "y" variables when the "y"
variables are commonly the reported values in accounting situations.
d. The coefficient of variation of the primary variable of interest, represented by
either the corrected value or the difference between the reported and corrected values
in common accounting situations, must be 15% or less. The coefficient of variation for
the corrected value (x) is defined as the standard error of the total "x" variables divided
by point estimate of the total "x" variables when the "x" variables are commonly the
corrected values in accounting situations. The coefficient of variation for the difference
(d) between the reported and corrected values (x-y) is defined as the smaller of the
standard error of the total "x-y" or total "d" variables divided by the amount equaling total
population value represented by "Y" plus point estimate of the total "x-y" or total "d"
variables or the standard error of the total "x-y" or total "d" variables divided by the total
"x-y" or total "d" variables when the "x-y" variables are commonly the difference ("d")
between the reported ("y") and corrected ("x") values in accounting situations.
e. For only the (combined) ratio method, the reported values of units must be of
the same sign.
11. When sampling the same expense accounts for multiple taxable years, if a single
projection does not materially affect other computations that are more appropriately
made on a yearly basis, it is permissible to combine the accounts into one population.
13
There should be allocation of the combined result by a reasonable method determined
prior to the selection of the sampling units.
12. A written sampling plan is required prior to the execution of a sample. Apian must
include the following:
a. The objective of the plan including a description of the value for estimation
and the applicable taxable year(s);
b. Population definition and reconciliation of the population to the tax return;
c. Definition of the sampling frame;
d. Definition of the sampling unit;
e. Source of the random numbers, the starting point or seed, and the method of
selection;
f. Sample size, along with supporting factors in the determination;
g. Method to associate random numbers to the frame;
h. Steps to ensure that the serialization of the frame is independent of the
drawing of random numbers;
i. Steps for evaluating the sampling unit; and
j. The estimator that w a s used for appraising the sample.
APPENDIX B
SAMPLING DOCUMENTATION STANDARDS
The taxpayer must retain adequate documentation to support the statistical
application, sample unit findings, and all aspects of the sample plan and execution. T h e
execution of the sample must include information for each of the following items:
1. The seed or starting point of the random numbers;
14
2. The pairing of random numbers to the frame along with supporting information to
retrace the process;
3. List of sampling units selected and the results of the evaluation of each unit;
4. Supporting documentation such as notes, invoices, purchase orders, project
descriptions, etc., which support the conclusion reached about each sample item;
5. The calculation of the projected estimate(s) to the population, including computation
of the standard error of the estimate(s);
6. A statement describing any slips or blemishes in the execution of the sampling
procedure and any pertinent decision rules; and
7. Computation of all associated adjustments.
APPENDIX C
TECHNICAL FORMULAS
The formulas below are included to clarify the statistical sampling terms used and
to ensure consistent application of the procedures described in the revenue procedure.
UNSTRATIFIED (SIMPLE RANDOM SAMPLE) STRATIFIED
M E A N ESTIMATOR
Sample Mean of Audited Amounts
— Z x,
x =
n
Estimate of Total Audited Amount
XM = Nx XMs=UN~Xi)
Estimated Standard Deviation of the Audited Amount
M E A N ESTIMATOR
15
[l(x*)]-n(xZ)
sx
n-\
Estimated Standard Error of the Total Audited A m o u n t
Ns
>^F%
v«
<*(*„) =
<*(*«,) = J l N,'N
t
*i
-II,)-
n:
Achieved Precision of the Total Audited A m o u n t
NU * * , / - >
N
A'-
4-Ms ~ U R \L N,{N, -»,) Xi
->Jn
n,
UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
DIFFERENCE ESTIMATOR
STRATIFIED
DIFFERENCE ESTIMATOR
Estimate of Total Difference
D = Nd
Ds = I(JV, d,)
Estimate of Total Audited Amount
XDs=Y
XD = Y +D
+ D!
Estimated Standard Deviation of the Difference A m o u n t
£
=
/[l
(d))\n(d2)
V
n-\
Estimated Standard Error of the Difference Amount
<f(D) =
SDJ
Vn
J(DS) = JI. N,{N, -«,.)
Achieved Precision of the Difference Amount
n
16
N
,
_
uRsD^-yN
A' -
)D:
^D.=UjZ
UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
RATIO ESTIMATOR
N,(N, -«,)
n:
STRATIFIED
C O M B I N E D RATIO E S T I M A T O R
Estimated Ratio of Audited Amount to Recorded Amount
I d .
X
R = S J
R.
J
1+
_ Z(N,x,)
f
JLjN.d,)
2(^,7,)
Estimate of Total Audited Amount
X D = YR
X
Rc
-
YR
C
Estimated Standard Deviation of the Ratio
]
H(xj)+
^
R2Ii(y2J)-2RT(xiyi)
^
n-\
Estimated Standard Deviation of the Ratio in /th Stratum
'[(£^-(Zx y ) 2 /^ )MRcayfj-(Tyu)2/ni )H2Rc(Lxyyy-nixiyi )]
sRe.
Estimated Standard Error of the Ratio Amounts
NS
* ^ >
N
<*(**) =
SR(
*(*,c)= J I Nt (N, - n,)
It;
•yjn
Achieved Precision of the Ratio Amounts
A' -
NU *SRJ\-»/N
ARC
~ UR \L N,(N, -«,.)
Sr<RC;2
n
UNSTRATIFIED (SIMPLE RANDOM SAMPLE)
REGRESSION ESTIMATOR
STRATIFIED
COMBINED REGRESSION ESTIMATOR
17
Estimated Regression Coefficient
b
[Xxjyj)]-nxy _u[Hdjyj)]-ndy
E(y,2)]-"(/) lL(y2j)]-n(y2)
c
^ _ !#,(#, -n, )Sxyi/ni
^ ZNt(Nt -n, )Sjr.
HNt{Nt-nt)S^ln, 7LNt(Nt-n,)S2jn
Estimate of Total Audited Amount
XG = Nx + b(Y - Ny) XGc = Z(7V,. x,) + bc[Y- Z(AT y~)]
Estimated Standard Deviation of the Regression Amounts
S =
° J^i
2 (JXxjyj)-nxy):
[I(*;)]-«(* ) -2
ny-)-n(y )
Estimated Covariance between the Audited and Recorded Amounts in ith Stratum
[ Z O ^ ) ] - ni Xi y.
Estimated Standard Deviation between the Audited and Recorded Amounts in ith Stratum
O
O
/
2
2 2
= J SXi -IbcSxy. +bc SYi
Estimated Standard Error of the Audited and Recorded Amounts
NS
<t(*G) =
^VN
V«
ScGc2
rf(*Cr) = J I N, (N, - n, )
n:
Achieved Precision of the Audited and Recorded Amounts
, _NU*SaJ\-n/N
A'
-
N, (N,
4*=uJl.
Definition of Symbols
TERM
DEFINITION
SGC'S
- n,)
n..
18
n
Sample Size
N
Population Size
X
The value of the sampling unit that is being used as the primary variable of interest. In audit
sampling, this would be the audited (or revised) value of the transaction.
y
The value of the sampling unit that is being used as the "paired" variable that is related to the
variable of interest. In audit sampling, this would be the reported (or original) value of the
transaction.
d
The value of the sampling unit that is the difference between "paired" variable (y) and the
variable of interest (x). That is, d = x - y . In audit sampling, this would be the difference (or the
change) of each transaction's value.
X
The total value of the primary variable of interest. In audit sampling, this would be the estimated
total audited value of the population. Typically, this value is not k n o w n for the entire population
and is estimated based on the probability sample selected.
Y
The total value of the variable that is paired with variable of interest. In audit sampling, this
would be the total reported value of the population. Typically, this value is k n o w n for the entire
population and m a y be estimated based on the probability sample selected.
D
uR
The total value of the difference between the "paired" variable and the variable of interest. In
audit sampling, this would be the estimated total difference of the population. Typically, this
value is not k n o w n for the entire population and is estimated based on the probability sample
selected.
The confidence coefficient which is based on either the Student's /-distribution or the normal
distribution. For example, a 9 5 % one-sided confidence coefficient based on the normal
distribution is 1.645. This term is often referred to as the /-value and the z-value.
JS-1489: Treasury Announces Market Financing Estimates
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May 3, 2004
JS-1489
Treasury Announces Market Financing Estimates
The Treasury Department announced today that it expects net borrowing of
marketable debt to total $38 billion in the April - June 2004 quarter. The projected
cash balance on June 30 is $45 billion. In the last quarterly announcement on
February 2, 2004, Treasury announced that it expected net borrowing to total $75
billion with an end-of-quarter cash balance of $45 billion. The decrease in
borrowing is due to higher receipts, both from lower refunds and higher payroll and
individual taxes, lower outlays, and higher State and Local Government Series net
issuances.
Treasury also announced that it expects net borrowing of marketable debt to total
$91 billion in the July - September 2004 quarter. The projected cash balance on
September 30 is $35 billion.
During the January - March 2004 quarter, Treasury's net marketable borrowing
totaled $146 billion and the cash balance on March 31 was $21 billion. On
February 2, Treasury announced that it expected net marketable borrowing to total
$177 billion with an end-of-quarter cash balance of $20 billion. The decrease in
borrowing is largely attributable to lower tax refunds and higher payroll taxes.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, May 5.
REPORTS
• Treasury Announces Market Financing Estimates
(flp.7/www trpag. gnv/nress/releases/is 1489.htm
5/6/2005
TREASURY ANNOUNCES MARKET FINANCING ESTIMATES
Today, the Treasury Department announced net borrowing of marketable debt for the April June 2004 and July - September 2004 quarters.
Estimated
End-of-Quarter
Borrowing
Cash Balance
($ billion)
($ billion)
Apr-Jun 2004
$38
$45
Jul-Sep 2004
$91
$35
Quarter
Since 1997, the average forecast error in net market borrowing for the current quarter is $10
billion, of which $1 billion is attributable to differences in the end-of-quarter cash balance.
Similarly, the average forecast error for the following quarter is $45 billion, of which $10 billion
is attributable to differences in the end-of-quarter cash balance.
The following tables display and reconcile the variation between forecasted and actual net
marketable borrowing in the Jan - M a r 2004 quarter.
Quarter
Estimated
Borrowing
Actual
Borrowing
($ billions)
Estimated
End-of-Quarter
Cash Balance
($ billions)
Actual
End-of-Quarter
Cash Balance
($ billions)
$146
$20
$21
($ billions)
Jan - M a r
2004
$177
-more-
Categories
Receipts
Outlays
Non-Marketable
Activity
Change
in
Cash
Balance
Chg from
Feb Estimate
+$30**
+$4
-$2
-$1
** includes tax refunds
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, M a y 5.
-30-
JS-1499: Assistant Secretary of the Office of Economic Policy<BR>Mark J. Warshawsky... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 3, 2004
JS-1499
Assistant Secretary of the Office of Economic Policy
Mark J. Warshawsky
Statement for the Treasury Borrowing Advisory Committee
of the Bond Market Association
The three months since the previous meeting of the Advisory Committee saw the
economy continue to grow at a lively pace. The strong gains in real G D P that w e
experienced in the last two quarters of 2003 extended into the first quarter, with
G D P rising at a 4.2 percent annual rate. The 5.5 percent average pace in the latest
three quarters was the largest since 1984. With the assistance of tax cuts, growth
has become self-sustaining. It is also more balanced than earlier in the recovery,
with numerous supports providing a strong platform for continued economic
momentum going forward.
Business investment in equipment and software posted its third straight double-digit
increase in the first quarter, rising at an 11.5 percent rate. Demand for capital goods
continues to be supported by the expensing provisions of the stimulus legislation of
the past two years, as well as the renewed strength in corporate profits in recent
quarters. Corporate profits in economic terms (from current production, as
measured in the G D P accounts) were almost 30 percent higher at the end of last
year than a year earlier, and the profit margin (profits in relation to gross domestic
income) hit a 6-year high, in large part because sizable gains in productivity are
holding down unit costs. Increased inventory building also added to growth in each
of the past two quarters, although by only a small amount in the first quarter.
Inventory-sales ratios are extremely low by any measure, suggesting that future
sales increases will have to be met through additional production rather than by
drawing down already-low stocks. In addition, as business confidence in the
durability of aggregate demand strengthens further, inventory investment should be
a positive influence on real growth in coming quarters. The resumption of inventory
accumulation and strong demand for investment and consumer goods has already
led to increased production, with manufacturing output rising at approximately a
6 percent annual rate in each of the past two quarters.
Rising profits and investment, as well as renewed optimism, spurred businesses to
hire additional workers. After modest gains in the prior six months, employment
roared back in March with a 308,000 surge in the number of payroll jobs. Combined
with sizable upward revisions to the figures for January and February, that brought
total job growth to 759,000 over the past seven months. Other indicators of labor
market activity are also showing signs of strength. For example, initial
unemployment insurance claims are in a range that is consistent with job growth,
corporate layoff announcements as measured by the job placement firm
Challenger, Gray and Christmas diminished, and the purchasing managers' indexes
for both manufacturing and non-manufacturing are signaling job growth.
Renewed job gains have already led to improved growth of aggregate wages and
salaries. Combined with lower taxes, this helped boost growth of disposable
personal income (DPI) to a 4.3 percent annual rate in the first quarter in real terms
and by 4.1 percent over the past year, representing the largest 4-quarter increase in
real DPI in almost two years. Strength in income has supported personal spending.
Led by increased purchases of services and nondurable goods such as apparel,
real personal consumption expenditures accelerated from a 3.2 percent pace in the
fourth quarter to 3.8 percent in the first, despite reduced expenditures on motor
hltm//www.treas. gnv/nregs/rel eases/is 1499.htm
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JS-1499: Assistant Secretary of the Office of Economic Policy<BR>Mark J. Warshawsky... Page 2 of 2
vehicles. Stronger job and w a g e growth should provide a solid impetus to
consumption in coming quarters.
The housing market also provided a lift to the economy in the first quarter. New
h o m e sales hit a record 1.2 million unit annual rate in March, as performance
continues to surprise on the upside. Mortgage rates c a m e down in the last two
quarters which helped spur h o m e sales, though rates crept up in April. Strong
underlying fundamentals have supported the high level of housing demand,
including favorable demographic trends, greater levels of affordability due to rising
after-tax incomes, innovations in housing finance that expanded the market to more
creditors without compromising credit quality, and the low interest rates. These
factors have helped push the homeownership rate to a record 68.6 percent in the
last two quarters.
Exports posted a third straight quarterly increase in the first quarter, though the
pace slowed substantially. Exports grew at a 3.2 percent annual rate compared to
an outsized gain of more than 20 percent in the previous quarter. Imports rose as
well but the changes were offsetting, leaving the net export trade deficit virtually
unchanged at $514.6 billion in real (2000 $) terms.
Inflation remains generally subdued with the exception of energy prices and prices
of selected commodities at the earliest stages of processing, such as lumber and
metals. The price index for core personal consumption expenditures (excluding
food and energy), probably the best barometer of underlying inflation trends, rose
2.0 percent at an annual rate in the first quarter but w a s up just 1.3 percent over the
past year. Special factors can cause inflation to m o v e around from quarter to
quarter but the underlying fundamentals suggest that it will remain benign for s o m e
time to come. Excess capacity in both product and labor markets, along with strong
productivity growth, indicates that prices should remain well contained.
The U.S. economy is poised for a continuation of solid growth in real GDP through
the rest of the year and into 2005. Productivity, corporate profits and investment are
expected to maintain strong rates of growth, and consumption will also be
supported by rising employment and income.
_ httrj.7/www U-PQC anA//r»rf»cc/rp1^ases/is 1 4 9 9 . h t m
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J-1500: Terrorist Kidnappers Designated by Treasury<br>Captors Boast Ties to al Qaida
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
April 30, 2004
JS-1500
Terrorist Kidnappers Designated by Treasury
Captors Boast Ties to al Qaida
The U.S. Department of the Treasury today announced the designation of four
individuals with ties to the Salafist Group for Preaching and Combat (GSPC) for the
kidnappings of 32 tourists between February and March of 2003. This designation
was taken pursuant to Executive Order 13224.
The U.S. is taking action today in support of Germany's decision to designate the
individuals and submit their names to the United Nations (U.N.) 1267 Sanctions
Committee to be added to the Consolidated List of individuals and entities
designated due to their affiliation with U s a m a bin Laden, al Qaida and the Taliban..
"Terrorists continue to use all means and methods to threaten the safety of the
citizens of the world - regardless of their nationality, race or religion," said Juan
Zarate, the Treasury Department's Deputy Assistant Secretary for the Executive
Office for Terrorist Financing and Financial Crimes.
"Our action today to designate these kidnapping thugs, in support of the
German notification to the United Nations, is part of the ongoing global
commitment to combat terrorism. Our success in the financial war on terror will
continue to depend on the diligence, aggressiveness and cooperation of our
international partners," Zarate continued.
The kidnappings, which took place in south-east Algeria, included sixteen Germans,
ten Austrians, four Swiss, one Dutch and one Swede who was born and currently
resides in Germany. In May 2003, Algerian armed forces freed 17 tourists being
held hostage by the G S P C . After negotiations led by representatives of the
Government of Mali and with the participation of representatives of the German
Federal Government, the remaining hostages were released in August of that year.
While in captivity, one of the hostages died of heatstroke.
The individuals being designated today, Kamel Djermane, Ahmad Zerfaoui, Dhou
El-Aich and Hacene Allane, are considered to be part of subgroups of the Tarek Ibn
Ziad group. These subgroups, Thabet and Adel, were involved in the G S P C
kidnappings.
Kamel Djermane - According to information, Dejermane is a member of the
intermediate leadership of the Tarek Ibn Ziad group.
Ahmad Zerfaoui - Information concludes that Zerfaoui, as the leader of a Tarek
Ibn Ziad subgroup, w a s responsible for the kidnapping of the first group of tourists
that were taken hostage in February of 2003.
Dhou El-Aich - Particular information concluded that El-Aich was a leader of the
Thabet subgroup of the Tarek Ibn Ziad group.
Hacene Allane - Accusations conclude that Allane belonged to the intermediate
leadership of the Adel subgroup of the Tarek Ibn Ziad group and that he acted as a
communicator between the kidnappers and the hostages.
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S-1500: Terrorist Kidnappers Designated by Treasury<br>Captors Boast Ties to al Qaida
Page 2 of 2
Saifi A M M A R I , the individual mainly responsible for the kidnappings, w a s
designated by the Treasury Department on December 5, 2003 and w a s added to
the U.N.'s Consolidated List. G S P C w a s previously designated by the U.S. as a
specially designated global terrorist and has been on the list of the U.N.'s al
Qaida/Taliban Sanctions Committee since October 6, 2001.
Executive Order 13224 provides means to disrupt the support network for
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, w h o act for or on the behalf of designated
terrorists or w h o are otherwise associated with designated terrorists. 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 and any future transactions through the
formal financial system are restricted. Blocking actions serve additional functions
as well, including serving as a deterrent for non-designated parties w h o might
otherwise be willing to finance terrorist activity; exposing terrorist financing "money
trails" that m a y generate leads to previously unknown terrorist cells and financiers;
disrupting terrorist financing networks by encouraging designated terrorist
supporters to disassociate themselves from terrorist activity and renounce their
affiliation with terrorist groups; terminating terrorist cash flows by shutting d o w n the
pipelines used to m o v e terrorist-related assets; forcing terrorists to use alternative,
more costly and higher-risk m e a n s of financing their activities; and engendering
international cooperation and compliance with obligations under U.N. Security
Council Resolutions.
With today's action, the U.S. and our international partners have designated 365
individuals and organizations as terrorists and terrorist supporters and have frozen
approximately $139 million and seized more than $60 million in terrorist-related
assets.
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5-1501: Testimony of Samuel W . Bodman, Deputy Secretary U.S. Department of the Treasury Before th... Page 1 of 15
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 29, 2004
js-1501
Testimony of Samuel W. Bodman, Deputy Secretary U.S. Department of the
Treasury Before the Senate Committee on Banking, Housing and Urban
Affairs
I. Introduction
Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee,
thank you for inviting m e to testify today about the Treasury Department's central
role in the international war against terrorist financing and financial crime. I
welcome this opportunity to discuss this subject with you, and to outline our vision
for moving forward in this vitally important fight.
Though I have only been at the Treasury Department for a short period, it is clear to
m e that this Department is well placed to shape policy and practice in areas of
financial and economic interest that affect our national security. Through its broad
authorities and expertise, the Treasury Department is charged with preserving the
integrity of the financial system and does so every day by charting our counterterrorist financing campaign; setting and implementing anti-money laundering and
counter-terrorist financing polices, regulations, and standards at h o m e and abroad;
gathering and sharing financial information with law enforcement and foreign
counterparts regarding financial crime; implementing our nation's economic
sanctions; and enforcing relevant regulations and laws related to these missions.
Of course, this is done in close coordination with our partners at the Departments of
Justice, State, Homeland Security, and all other relevant Federal departments and
agencies.Immediately after September 11th, the President directed the Treasury
Department to guide the Federal Government's efforts in the global war against the
financing of terrorism. Since that time, w e have continued to devote our resources
and extensive expertise to ensure that financial intermediaries and facilitators w h o
infuse terrorist organizations with money, materiel, and support are held
accountable along with those w h o perpetrate terrorist acts.
The war on terrorist financing is a vital responsibility of the Department. Terrorists
- like any other organized criminals - rely on financial networks to fund and support
their activities. Disrupting and dismantling those networks can m a k e it more difficult
for terrorists to carry out their deadly activities. Our success, therefore, can save
the lives of Americans and of our friends and allies.
We know that the United States Government has had an effect on the ability of al
Qaida and other terrorists to raise and m o v e money around the world. T h e
designations and other actions w e have taken have m a d e it riskier and costlier for
them to try to use the formal financial system - which previously provided an open
gateway for their funds to be sent instantly around the world. Our domestic and
international efforts have tightened the net in the international financial system through greater oversight, transparency, diligence, and capacity. Because of these
efforts, terrorists have had to change the way they do business and are relying
more on home-grown methods of raising money and slower methods of moving
money. These are signals of our success.
As the recent bombings in Madrid and Riyadh demonstrate, however, we still have
m u c h work to do. Commitment to defeat terrorism is not enough. W e must ensure
that our commitment to disrupt and dismantle terrorist financing networks is
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-1501: Testimony of Samuel W . Bodman, Deputy Secretary U.S. Department of the Treasury Before th... Page 2 of 15
matched by tangible results. I believe that w e have achieved important and
considerable results, but that w e can and must do more, building not only upon our
successes against terrorist financing, but also upon our experience and expertise in
combating financial crime generally.
What is clear is that the rest of world has now begun to view the world as Treasury
and others in the U.S. Government have always seen it. Dirty m o n e y and tainted
financial flows not only corrupt the financial system but also threaten the lives of
innocents and the economic and political stability of the world. Whether it is
financing raised and moved to fuel terrorism or financial networks created to
facilitate the proliferation of weapons of m a s s destruction, the global mission is
clear: to disrupt and deter criminal activity that threatens our national security. In
this endeavor, w e must leverage all of our power to dismantle the financial
infrastructure of such networks and of rogue regimes. This is n o w the axiom of the
international community, and it is so because the U.S. Government has helped
reshape the w a y the international community thinks about these issues.
In my testimony today, I will first explain how Treasury has helped to lead our
nation's efforts in the campaign against terrorist financing and financial crime more
generally. I will then describe how w e have marshaled our resources over the past
year to achieve significant and meaningful results against terrorist financing and
other criminal networks. I will conclude by laying out s o m e of our n e w initiatives,
the most important of which is the establishment of the Office of Terrorism and
Financial Intelligence.
During the past year, our people have worked extremely hard and achieved many
significant results. At the s a m e time, w e all recognize that our enemies are
sophisticated and determined, and so w e must continue to adapt and revitalize
ourselves so that w e can continue to achieve results. This n e w office - which will
bring together under one roof: intelligence, regulatory, law enforcement, sanctions,
and policy offices - will build upon our achievements over the past year, and allow'
Treasury to be more effective in the war on terrorist financing and in preserving the
international financial system.
II. Treasury's Role in Combating Financial Crime
The Treasury Department has traditionally had the responsibility of safeguarding
the integrity of the U.S. and international financial systems from all threats. This
has resulted in the Treasury Department's developing expertise in the wide range of
disciplines necessary to meet that responsibility. Today, Treasury has expertise in
disciplines that stretch across the entire counter-terrorist financing spectrum.
These include:
• application and implementation of sanctions and administrative powers;
• direct law enforcement action and law enforcement support,
• international initiatives;
• private sector outreach and engagement; and
• financial regulation and supervision.
As reflected in Congress' decision five years ago to charge Treasury with the
leading role in the development of the National Money Laundering Strategy,
Treasury's wide range of authorities, skills and relationships makes it wellpositioned to devise, coordinate, and help to implement government-wide strategies
to target, attack, and dismantle the financial networks that support terrorism and
other criminal activity. W e take a targeted as well as a systemic approach to these
complex issues, using all possible regulatory, economic, diplomatic and strategic
tools and policies to ensure our systems are not abused by m o n e y launderers,
terrorists and other criminals.
In an effort to consolidate these tools and policies against all elements of financial
crime, one year ago the Secretary of the Treasury established the Executive Office
for Terrorist Financing and Financial Crime (Executive Office). This Office is
i^ffiW.treas. g o v/nrpss/rpl pases/is 1 5 0 1 .htm
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s-1501: Testimony of Samuel W . Bodman, Deputy Secretary U.S. Department of the Treasury Before th... Page 3 of 15
responsible for developing policies relating to the Department's anti-money
laundering, terrorist financing and financial crimes mission. It also oversees the
offices and Bureaus responsible for implementing and administering these
policies, i.e., the Office of Foreign Assets Control (OFAC), the Financial Crimes
Enforcement Network (FinCEN), and the Treasury Executive Office for Asset
Forfeiture (TEOAF). It also works very closely with the Internal Revenue Service's
Criminal Investigation Division (IRS-CI) which possesses unparalleled financial
investigation experience.
Treasury's authorities and expertise relating to combating financial crimes m a y also
be leveraged to accomplish financial missions of critical importance to our national
security interests. This is perhaps best seen in the hunt for Iraqi assets. I would
like to briefly explain our efforts in the campaign to identify and repatriate Iraqi
assets as one example of h o w Treasury has leveraged its resources and
coordinated those of the interagency community to advance a mission critical to our
national security interests.
O n March 20, 2003, President Bush directed the Treasury Department to a worldwide hunt for S a d d a m Hussein's assets and directed Treasury's newly-formed
Executive Office to lead the U.S. government's efforts to find, freeze, and repatriate
Iraq's m o n e y for use in the reconstruction of Iraq. Consequently, the Treasury
Department established and chairs the Iraqi Assets Working Group (IAWG),
comprised of all the relevant elements of this U.S. Government effort, including the
National Security Council, the Departments of State, Justice, Homeland Security,
Defense, and the law enforcement and intelligence communities. In this context,
the Treasury Department has coordinated the intelligence and law enforcement
efforts of this hunt - relying on IRS-CI investigators and O F A C and intelligence
analysts to unearth Saddam's hidden accounts and front companies around the
world - and our diplomatic actions - leveraging the contacts and influence of the
State Department and the Treasury abroad to gain international cooperation.
Since Secretary Snow's announcement of the campaign to identify, freeze and
repatriate stolen Iraqi assets on March 20 t h of last year, the Treasury, working
closely with other parts of the United states Government, has achieved important
results in returning assets to the Iraqi people and in uncovering the schemes and
networks used by the regime to steal from Iraq:
• Almost $2 billion of Iraqi assets has been newly identified and frozen
outside the U.S. and Iraq;
• More than three-quarters of a billion dollars have been transferred by
foreign sources to the Development Fund for Iraq (DFI). In total, the United
States, foreign countries, and the Bank for International Settlements have
transferred back to Iraq over $2.6 billion in frozen Iraqi funds;
• Approximately $1.3 billion in cash and valuables has been recovered in Iraq.
• W e continue to identify key individuals and entities whose assets should be
frozen. In the past few weeks, the Department of the Treasury has
undertaken the following important actions: (i) designated 16 immediate
family m e m b e r s of senior officials of the former Iraqi regime pursuant to
Executive Order 13315; (ii) listed 191 Iraqi parastatal (quasi-governmental)
entities; (iii) designated five front companies of the former Iraqi regime and
four associated individuals; (iv) re-designated three other front companies
and one individual previously designated by the Treasury department; and
(v) through the U.S. Mission to the U.N., submitted the n a m e s of all of these
entities and individuals to the United Nations, requesting that they be listed
by the U N 1518 Committee under U N S C R 1483.
• In Iraq, our financial investigators from IRS-CID have conducted over 80
interviews of key individuals w h o have information relating to Iraqi assets,
ranging from the top ministers of the State Oil Marketing Organization
( S O M O ) , to the laborers w h o buried Saddam's U.S. currency. These
investigators are finding and interrogating key financial facilitators like
accountants and bankers, w h o have knowledge about the movement of
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s-1501: Testimony of Samuel W . Bodman, Deputy Secretary U.S. Department of the Treasury Before th... Page 4 of 15
Iraqi assets. Under IRS-CI questioning, these witnesses have identified
assets that can be recovered for the DFI, and which w e are aggressively
pursuing.
• While searching for Iraqi assets abroad, IRS-CI agents determined that the
former Iraqi Ambassador to Russia had stolen $4 million in Iraqi assets that
had been entrusted to him. A s a result, that amount has been frozen in
Russia, and w e are working to have it repatriated.
• Working closely with the governments of Liechtenstein, Switzerland, and
Jordan, w e are attempting to recover one of Saddam's Falcon 50 corporate
jets and to uncover a financial network that had been used by the Iraqis to
m o v e m o n e y and people in the heart of Europe.
• The financial investigation teams have also uncovered important leads for
other IRS-CI financial investigators to follow up on in jurisdictions outside of
Iraq. W e have identified bank accounts and other assets held in over
twenty countries, including Switzerland, France, Germany, Liechtenstein,
Russia, Spain, Egypt, Thailand, Indonesia, Lebanon, Belarus, Iran, South
Korea, Malaysia, Japan, Morocco, Saudi Arabia, U A E , British Virgin Islands,
Jordan, Syria and Y e m e n .
• A s a result of interagency cooperation and investigative and other efforts in
Baghdad and at Headquarters, the Departments of Treasury and State have
provided identifying information on over 570 identified Iraqi bank accounts to
41 countries for review and follow-up. Those accounts were identified as
belonging to the Central Bank of Iraq, Rafidain Bank, and Rasheed Bank.
The identification and recovery of stolen Iraqi assets is just one area in which we
have helped to drive key efforts and initiatives. This - and other Treasury initiatives
- demonstrate our ability to help to coordinate government efforts and achieve
positive results.
I would like to review briefly s o m e of our successes under the U.S. Government's
strategy for combating financial crime.
III. Treasury's Recent Accomplishments in Combating Financial Crime
A. Background and Strategy
Treasury's success in combating terrorist financing and financial crime reflects a
strategic approach of developing and implementing policies that utilize our
administrative powers, law enforcement resources, international relationships,
engagement with the private sector and regulatory authorities to attack financial
crime on a targeted and systemic basis. W e have focused our efforts on identifying
and interdicting key financial networks that support terrorist and other criminal
activity, and on protecting financial systems from terrorist and criminal infiltration.
Our systemic efforts are improving the transparency and accountability of financial
systems around the world, making it easier to identify, disrupt and dismantle those
terrorists and criminal networks that continue to abuse such systems. A s w e
succeed in these goals, w e have expanded our efforts to address alternative and
informal financial systems that are vulnerable to terrorist and criminal abuse,
including charities, alternative remittance systems, and cash couriers.
Targeting money flows is among the best means of tracking, exposing and
capturing terrorists and their facilitators, narco-trafficking cartels and their
supporting infrastructure, organized crime networks, and deposed kleptocratic
regimes and their ill-gotten assets worldwide. Money flows leave a signature, an
audit trail, and provide a road m a p of terrorist and other criminal activity. Financial
investigations lead upstream to those w h o are generating the underlying financial
crimes, as well as downstream to provide a roadmap to those financial
professionals w h o facilitate the terrorist or criminal activity itself. A s w e and our
international partners work together to follow and stop terrorist or illicit funds, w e
strengthen the integrity of our financial systems and erode the infrastructure that
supports terrorists and other criminals.
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B.
Economic Sanctions and Administrative Powers
Treasury wields a broad range of powerful economic sanctions and administrative
powers to attack various forms of financial crime. W e have continued to use these
authorities in the campaign against terrorist financing, drug trafficking, money
laundering and other criminal financial activity.ln combating terrorist financing, our
primary, and most public, tool is the ability to designate terrorists and those w h o
support terrorists, and to implement orders that freeze the assets of terrorists
through Executive Order 13224. These designation actions not only prevent
terrorist activity by freezing terrorist-related assets and bankrupting terrorist
operations, but they also:
• identify existing terrorist activity through financial trails evident in the
accounts and transactions of designated parties;
• shut down sources of and pipelines for terrorist financing;
• force terrorists to expend resources developing alternative and higher risk
m e a n s of raising and moving money;
• alienate terrorist supporters from the global economy by shutting them off
from the U.S. financial system and prohibiting any U.S. person from
engaging in any future financial or other related services with such
designated parties; and
• deter those w h o might otherwise be inclined to support, financially or
otherwise, terrorist activities or organizations.
Through our designation actions, we have made it more difficult for terrorist groups,
like al Qaida, to raise and m o v e money around the world. Under E.O. 13224, w e
have designated a total of 361 individuals and entities, as well as frozen or seized
approximately $200 million of terrorist-related funds worldwide. Designations under
E.O. 13224 in the past year include the following:
• Ten al Qaida loyalists related to the Armed Islamic Group (GIA) on March
18
• Shaykh Abd Al-Zindani (al Qaida-related) on February 24, 2004
• Four branches of the Al Haramain Islamic Foundation (al Qaida-related) on
January 22, 2004);
• Abu Ghaith (al Qaida-related) on January 16, 2004;
• Dawood Ibrahim (al Qaida-related) on October 17, 2003;
• Al Akhtar Trust International (al Qaida-related) on October 14, 2003;
• A b u Musa'ab Al-Zarqawi (al Qaida-related) on September 24, 2003;
• Yassin Sywal, Mukhlis Yunos, Imam Samudra, Huda bin Abdul Haq,
•Parlindungan Siregar, Julkipli Salamuddin, Aris Munandar, Fathur R o h m a n
A1-Ghozi, Agus Dwikarna, and Abdul Hakim Murad (members of Jemaah
Islamiyah) on September 5, 2003;
• Sheik A h m e d Yassin (Gaza), Imad Khalil Al-Alami (Syria), U s a m a H a m d a n
(Lebanon), Khalid Mishaal (Syria), Musa Abu Marzouk (Syna), and Abdel
Aziz Rantisi (Gaza) (Hamas political leaders) on August 22, 2003;
• Comite de Bienfaisance et de Secours aux Palestiniens (France),
Association de Secours Palestinien (Switzerland), Interpal (UK), Palestinian
Association in Austria, and the Sanibil Association for Relief and
Development (Lebanon) (all Hamas-related charities) on August 22, 2003;
• The National Council of Resistance of Iran (including its U.S. representative
office and all other offices worldwide) and the People's Mujahedin
Organization of Iran (including its U.S. press office and all other offices
worldwide) on August 15, 2003;
• Shamil Basayev (al Qaida-related) on August 8, 2003; and
• The Al-Aqsa International Foundation (Hamas-related) on M a y 29, 2003.
Together with the State and Justice Departments and other agencies, we are using
our diplomatic resources and regional and multilateral engagements to ensure
international cooperation, collaboration and capability in designating these and
other terrorist-related parties through the United Nations and around the world.
In combating drug trafficking, Treasury continues to apply its authorities under the
Foreign Narcotics Kingpin Designation Act to administer and enforce the provisions
of law relating to the identification and sanctioning of major foreign narcotics
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traffickers. The Kingpin Act, enacted in December 1999, operates on a global scale
and authorizes the President to deny significant foreign narcotics traffickers, and
their related businesses and operatives, access to the U.S. financial system and all
trade and transactions involving U.S. companies and individuals. During 2003, the
President named seven n e w kingpins, including two U.S.-designated foreign
terrorist organizations -- Revolutionary Armed Forces of Colombia and United SelfDefense Forces of Columbia - and a Burmese narco-trafficking ethnic guerilla
army, bringing the total number designated to 38.
Since the inception of the Kingpin Act and after multi-agency consultations,
Treasury has named 14 foreign businesses and 37 foreign individuals in Mexico,
Colombia, and the Caribbean as derivative ("Tier II") designations. These
derivative designations are flexible, and permit Treasury to attack the financial
infrastructure of these kingpins as their infrastructure changes. A total of 104
organizations, individuals and businesses in 12 countries are n o w designated under
the Kingpin Act. O n February 19, 2004, Treasury designated 40 key individuals
and companies associated with the Colombian narco-terrorist organizations, the
F A R C and the A U C . These two organizations were previously named by the
President on M a y 29, 2003 as drug kingpins. W e are currently working with the
interagency community to develop a list of n e w designations to be issued by the
President later this Spring
Another weapon that our government uses aggressively against narco-traffickers
and money launderers is that of seizure and confiscation. In fiscal year 2003,
Treasury's Executive Office for Asset Forfeiture (TEOAF) received over 234 million
dollars in annual forfeiture revenue from the combined efforts of the former Bureau
of Alcohol, Tobacco and Firearms, the U.S. Secret Service (USSS), the Internal
Revenue Service (IRS), and the former U.S. Customs Service (USCS). This
represents a significant increase over fiscal year 2002, in which T E O A F received
over $152 million dollars of forfeiture revenue. Such an increase is particularly
impressive when considering the transition undertaken by three of these law
enforcement bureaus in the government reorganization last year.
In combating money laundering and financial crime generally, Treasury continues to
direct its resources and coordinate efforts to administer and enforce the Bank
Secrecy Act. Working through FinCEN, IRS, the Office of the Comptroller of the
Currency, the Office of Thrift Supervision and other outside agencies, Treasury
administers and enforces B S A provisions relating to monetary transaction and
transportation reporting and recordkeeping requirements, suspicious activity, antim o n e y laundering programs and other obligations as set forth in the Act.
In addition, Treasury, after appropriate interagency consultations, has applied its
new authority under Section 311 of the U S A P A T R I O T Act (Patriot Act) to designate
jurisdictions and institutions of primary money laundering concern. Most recently,
w e designated the jurisdiction of Burma, consistent with the Financial Action Task
Force's (FATF) demand for countries to impose additional counter-measures
against that country. At the s a m e time, Treasury designated the M y a n m a r
Mayflower Bank and Asia Wealth Bank, two Burmese banks that are linked to the
United W a State Army, a notorious drug trafficking organization in Southeast Asia.
It is important to note that this is Treasury's first application of Section 311 against
financial institutions. W e are focused on identifying additional foreign banks that
either facilitate m o n e y laundering or are otherwise involved in financial crime as
potential Section 311 targets.
These accomplishments and responsibilities are just a few examples that
demonstrate the wide range of economic sanctions and administrative powers that
the Treasury continually applies and implements in our ongoing mission to combat
financial crime.
C. Law Enforcement
In addition to these economic sanction and other administrative authorities,
Treasury combats various forms of financial crime through the direct law
enforcement actions of IRS-CI and the law enforcement support provided by
FinCEN and Treasury's regulatory authorities.
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Whether working with D E A on the m o n e y laundering component of significant drug
investigations, the FBI on terrorist financing cases, or investigating offshore tax
shelters and other tax-related matters, IRS-CI brings an unparalleled financial
investigative expertise to the table. T h e financial forensic expertise of our IRS
criminal investigators around the country and the world is critical in the U S law
enforcement community's attack on sources and schemes of terrorist financing.
A good example of our direct law enforcement action through IRS-CI is evident in
our efforts to attack terrorist financing emanating from abroad. Since September of
2003, IRS-CI agents have been actively participating in a joint U.S./Saudi
counterterrorism task force located in Riyadh. The Task Force both provides and
receives investigative lead information on various terrorist financing matters.
Additionally, the investigators seek assistance from Saudi counterparts in following
terrorist financing, and using that information to identify and attack terrorist cells and
operations. Information received by U S agents is passed through FBI's Terrorist
Financing Operations Section in Washington to the interagency JTTFs nationwide.
A s a part of this initiative and under the auspices of the State Department chaired
Terrorist Financing Working Group, IRS-CI participated in two, w e e k long classes of
financial investigation training to Saudi Arabian criminal investigators. T h e courses
delivered by IRS-CI included the following specialized topics: charitable entities,
m o n e y laundering, net worth method of proof, expenditures method, documenting
financial crimes, and computer sources of financial information. A third class will be
presented this spring.
We complement such direct law enforcement action with law enforcement support.
Through FinCEN, Treasury serves as a repository and analytical hub for Bank
Secrecy Act information, which aids investigators across the interagency
community in finding financial links to criminal enterprises and terrorist networks.
Since February 2003. w e have also used Section 314(a) of the Patriot Act to enable
law enforcement, through FinCEN "Blastfaxes" to more than 31,800 financial
institutions as of April 27, 2004, to locate quickly the accounts and transactions of
those suspected of m o n e y laundering or the financing of terrorism. Since Section
314(a)'s creation, the system has been used to send the n a m e s of 1,712 persons
suspected of terrorism financing or m o n e y laundering to financial institutions, and
has resulted in 12,280 matches that were passed on to law enforcement. W e
understand the sensitivity of the use of this system, and will continue to ensure
through vigorous review that this system is used only in cases where terrorist
financing is suspected, or in the most egregious money laundering cases.
As a result of these efforts, FinCEN has made 342 proactive case referrals to law
enforcement potentially involving terrorism based upon analysis of information in
the Bank Secrecy Act database. The Terror Hotline established by FinCEN has
resulted in 853 tips passed on to law enforcement since 9/11. FinCEN is also
implementing an Electronic Reports program that will further enhance law
enforcement's ability to utilize this information. Additionally, with the expansion of
the Suspicious Activity Report (SAR) regime, as of April 28, 2004, financial
institutions nationwide have filed 4,294 S A R s reporting possible terrorist financing
directly to FinCEN, includingl ,866 S A R S in which terrorist financing represented a
primary suspicion. This has further enhanced our efforts to identify and vigorously
investigate terrorist financing w e b s and dismantle them.
D. International Initiatives
The success of our efforts to combat financial crime and particularly terrorist
financing, depends in large part on the support of our allies and the international
community. Treasury - working through the Executive Office for Terrorist Financing
and Financial Crime and the Office of International Affairs - has worked with other
elements of the U.S. Government to engage the international community to develop
and strengthen counter-terrorist financing initiatives and regimes, and to enhance
the transparency and accountability of global financial systems generally.
Internationally w e have received support from over 200 countries and jurisdictions,
including blocking orders to freeze assets from 170 countries and jurisdictions, and
other direct actions around the globe to deal with the c o m m o n scourge of terrorism.
W e are working constantly with other governments on a bilateral, regional, and
multilateral basis to focus their attention on this issue and to deal with identified
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risks.
We have developed and implemented a multi-pronged strategy to globalize the
campaign against terrorist financing and strengthen our efforts to combat financial
crime, using all of our authorities, expertise, resources and relationships with
various international bodies and other governments. Our strategy includes: (i)
improving global capabilities to identify and freeze terrorist-related assets; (ii)
establishing or improving international standards to address identified
vulnerabilities; (iii) ensuring global compliance with these standards; (iv) addressing
financing mechanisms of particular concern, and (v) facilitating the sharing of
information to defeat these threats.
1. Improving Global Asset-Freezing Regimes
A focal point of our international efforts to combat financial crime over the past year
has been to improve the effectiveness of global asset-freezing regimes in the
campaign against terrorist financing. After m a n y months of negotiation and
discussion at the FATF, w e successfully developed interpretive guidance to clarify
and specify international obligations and best practices in identifying and freezing
terrorist-related assets. In October 2003, the F A T F issued an Interpretive Note and
Best Practices Paper to F A T F Special Recommendation III, describing these
obligations and standards. This accomplishment will provide a basis for countries
to develop or reform their existing asset-freezing regimes to improve their
effectiveness. W e are currently using these obligations and standards to
encourage necessary reforms to asset-freezing regimes in countries around the
world, including our European allies. Pursuant to these efforts, the European Union
is n o w considering adjustments to the E U Clearinghouse process used to identify
and freeze terrorist-related assets across the EU. W e are working with the
Europeans, both bilaterally and collectively, to assist in this process.
In addition to these international public sector efforts, we are working with leading
global financial institutions to develop a technical assistance initiative within the
private sector to enhance capabilities in identifying and freezing terrorist-related
assets. This initiative seeks to leverage existing banking expertise through bank-tobank training, awareness and outreach.
2. Setting International Standards
Internationally, we have worked not only through the United Nations on blocking
efforts, but also through multilateral organizations and on a bilateral basis to
promote international standards and protocols for combating terrorist financing and
financial crime generally. Such standards and protocols are essential to developing
the financial transparency and accountability required to identify and attack
elements of financial crime, including terrorist financing networks.
We have primarily focused our efforts to establish international standards against
terrorist financing and financial crime through the FATF. The F A T F is the premier
international body in the international effort against money laundering and terrorist
financing. Created by the G-7 in 1989, the F A T F has since grown to 33 members,
along with numerous observers, including the United Nations, IMF, and World
Bank. T h e FATF's primary mission is to articulate international standards in the
areas of m o n e y laundering and terrorist financing, and to work toward worldwide
implementation. Treasury's Executive Office for Terrorist Financing and Financial
Crime heads the U.S. delegation to the F A T F and co-chairs the FATF's Working
Group on Terrorist Financing.
We have worked with our counterparts in the FATF to revise the 40
Recommendations, thereby enhancing international standards of transparency and
accountability required to effectively combat m o n e y laundering and other financial
crimes. In June 2003, the F A T F issued the revised 40 Recommendations by
adding shell banks, politically-exposed persons, correspondent banking, bearer
shares, the regulation of trusts, the regulation of trust and company service
providers, and the regulation of lawyers and accountants. These newly revised
Recommendations were endorsed by the G-7 Finance Ministers in a public
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statement issued the s a m e day the revised Recommendations were adopted by
FATF.
We have also capitalized on the FATF's expertise on money laundering to
specifically attack terrorist financing, largely through the Eight Special
Recommendations on Terrorist Financing developed and adopted by the F A T F in
October 2001. A s co-chair to the FATF's Working Group on Terrorist Financing,
the Treasury has worked closely with F A T F members to issue interpretive guidance
on the Eight Special Recommendations, particularly with respect to: freezing
terrorist-related assets; regulating and monitoring alternative remittance systems
such as hawala; ensuring accurate and meaningful originator information on crossborder wire transfers, and protecting non-profit organizations from terrorist abuse.
W e are currently directing the FATF's Working Group on Terrorist Financing to
further attack the problem of terrorist financing through charities and cash couriers.
Through our efforts in the FATF, many countries have taken important steps to
improve their legal regimes and strengthen the oversight of their financial sectors,
acknowledging the need for strong anti-money laundering requirements to fight
terrorist financing. Countries like Egypt, Guatemala, Indonesia, Israel, Lebanon,
and the Philippines have taken important strides to develop and implement effective
and comprehensive anti-money laundering regimes, strengthening their institutions
and their enforcement of anti-money laundering and counter-terrorist financing laws
and regulations. Treasury has played an important role in the development of antimoney laundering and counter-terrorist financing regimes in each of these '
countries.
Moreover, we have engaged the IMF and World Bank to gain their recognition of
the F A T F 40 + 8 Recommendations as one of the 12 Key International Standards
and Codes. In March of this year, owing largely to the leadership of the G 7 , the
IMF/World Bank m a d e their A M L / C F T assessment program permanent and
comprehensive, thereby ensuring that all countries throughout the world are
assessed against F A T F standards. Additionally, Treasury, along with the State and
Justice Departments, has furthered our efforts to globalize the F A T F standards
through our work with various FATF-style regional bodies (FSRBs). W e are
currently engaged in the development of two n e w F S R B s to cover the regions of the
Middle East / North Africa and Central Asia.
3. Promoting Worldwide Implementation of International Standards
Establishing international standards is only the first step toward identifying and
destroying terrorist and criminal networks and denying these groups access to the
international financial system. If these standards are not implemented worldwide,
terrorists and other criminals will enter the international financial system at the point
of least resistance, and preventive national efforts will be rendered considerably
less effective.
The United States is working together with the international community to ensure
global compliance with improved international standards through a three-prong
approach that includes: (i) objectively assessing all countries against the
international standards; (ii) providing capacity-building assistance for key countries
in need, and (iii) isolating and punishing those countries and institutions that
facilitate terrorist financing.
Our federal government has identified 24 countries as priorities for receiving
counter-terrorist financing technical assistance and training, and Treasury is a key
supporter of the State Department-led efforts of the interagency community to work
bilaterally to deliver such assistance to these priority countries.
Together with other federal government agencies and departments, we are also
working with our allies in the G-8 Counter-Terrorism Action Group ( C T A G ) the IMF,
World Bank and the F A T F to coordinate bilateral and international technical
assistance efforts to additional priority countries in the campaign against terrorist
financing. A s part of these coordinated international efforts, the F A T F Working
Group on Terrorist Financing has completed terrorist financing technical needs
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assessment reports in several priority countries. These reports will be used by the
C T A G to match appropriate donor states with identified needs in each of these
priority countries.
Moreover, we will continue to utilize domestic tools - including those made
available through the Patriot Act -- to focus on jurisdictions that are not taking
adequate steps to address terrorist financing, m o n e y laundering and other financial
crimes concerns. A s discussed above, Treasury is has used Section 311 of the
Patriot Act to address primary m o n e y laundering concerns on a jurisdictional and
institutional basis. Working in cooperation with the law enforcement and
intelligence communities, w e have designated three foreign jurisdictions and two
financial institutions under Section 311. In addition to the Burmese designations
described above, Treasury has also designated the jurisdictions of Ukraine and
Nauru under Section 311. Ukraine responded to this designation almost
immediately by enacting significant anti-money laundering legislation. This quick
response demonstrates the power of Section 311 in promoting positive reform and
addressing vulnerabilities in the international financial system. Moreover, even the
possibility of a Section 311 designation can result in other nations making important
changes to their legal and regulatory regimes that enhance the global anti-money
laundering and anti-terrorist financing infrastructure. W e will continue to seek out
appropriate opportunities to utilize these n e w powers to protect the U.S financial
system.
4. Addressing Financing Mechanisms of Particular Concern
In addition to developing and implementing broad initiatives and systemic reforms
to increase the transparency and accountability of international financial systems,
w e have targeted specific financing mechanisms that are particularly vulnerable or
attractive to terrorist financiers. These mechanisms include the abusive use of
charities and N G O s , hawala and other alternative remittance or value transfer
systems, wire transfers, and cash couriers, as well as trade-based m o n e y
laundering and cyber-terrorist financing.
Our strategy for attacking terrorist financing and financial crime perpetrated through
these mechanisms is consistent with our global strategy for combating financial
crime in the formal international financial system: w e will continue working
domestically and with the international community to develop the transparency and
accountability required to identify, disrupt and destroy terrorist financing and other
criminal networks embedded in these sectors. W e will also continue allocating
resources to focus on high-risk elements of these sectors and concentrate our
efforts on high-value targets.
To effectively counter the threat of terrorist financing through charities, we have
engaged countries through the F A T F to examine and analyze existing oversight
mechanisms and vulnerabilities in their domestic charitable sectors. These efforts
capitalize on the FATF's expertise in promoting transparency and accountability in
formal financial sectors, as well as the experience gained in developing
international best practices to protect charities from terrorist abuse in accordance
with the FATF's Special Recommendation VIII.
We have also engaged the international community bilaterally and multilaterally to
combat the threat of terrorist financing and financial crime through alternative
remittance systems, such as hawala. Over the past two years, w e have achieved
significant progress on this issue, as reflected in the A b u Dhabi Declaration m a d e at
the conclusion of the first International Conference on Hawala in M a y 2002, and the
adoption of interpretive guidance to F A T F Special Recommendation VI in February
and June of 2003. Earlier this month, Treasury led a delegation to the United Arab
Emirates to continue advancing these issues in the second International
Conference on Hawala.
We are also working with the international community to attack the illicit use of cash
couriers by m o n e y launderers and terrorist financing networks. Treasury leads the
U S delegation to the Asia-Pacific Group and is working through that regional body
to examine various information sharing, criminalization, and reporting mechanisms
to identify and interdict the illicit use of cash couriers.
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5. Facilitating International Information Sharing
Information sharing is critical to fighting terrorism and financial crime. Domestically,
w e have taken advantage of important information-sharing provisions of the Patriot
Act to assimilate information from the financial, intelligence and law enforcement
communities in identifying and attacking terrorist financing networks. T o improve
the global flow of financial information related to terrorist financing, w e have also
worked to establish and expand formal and informal, international informationsharing channels, both bilaterally and multilaterally. Through FinCEN, the U.S.
Financial Intelligence Unit (FIU), w e have persuaded the Egmont Group, which
represents 84 FlUs from various countries around the world, to leverage its
information collection, analysis and sharing capabilities to support the global war on
terrorism. These ongoing efforts have greatly improved our ability to identify and
unravel terrorist financing networks by tracking and tracing terrorist m o n e y trails
through multiple jurisdictions.
Our efforts to combat terrorist financing and financial crime also depend upon
promoting a greater understanding of the financial threats w e face. T o facilitate
such an understanding internationally, w e have worked bilaterally, regionally and
globally with other governments and international bodies to develop and share case
studies and typologies of financial crime, including terrorist financing.
E. Private Sector Outreach
The private sector serves as the front-line in the campaign against terrorist
financing, m o n e y laundering, and other financial crime. Cooperation with the
private sector, including banks and trade associations, has been essential to
increasing our vigilance against the abuse of our financial system by terrorists and
criminal groups. With the expansion of our anti-money laundering provisions to
n e w segments of the financial community pursuant to the Patriot Act, w e will
continue and expand such cooperation by working with our domestic financial
community, including banks, securities broker-dealers, mutual funds, futures
[1]
commission merchants, and operators of credit card systems, as well as the
charitable sector outside the framework of Patriot Act regulations, to enhance their
abilities to detect and report possible terrorist financing and m o n e y laundering
activities.
Our ongoing outreach initiatives with the private sector promote a greater
understanding of terrorist financing, m o n e y laundering and other criminal financial
activity and assist us in designing effective regulations and practices to defeat these
threats. W e will continue to improve the effectiveness of our partnership with the
private sector by: (1) increasing the amount of information the U.S. Government
provides with respect to its ongoing efforts; (2) providing feedback on the
usefulness of the private sector's efforts; (3) educating the private sector to
recognize terrorist financing-related typologies and "red flags"; (4) reinvigorating the
law enforcement-industry partnership to develop "best practices" for corporations to
follow to avoid trade-based money-laundering transactions, and (5) enhancing
ongoing due diligence efforts, while balancing the d e m a n d s on institutions.
These goals will enhance the ability of both the public and private sectors to
insulate the financial system and charitable sector from abuse, while ensuring the
free flow of capital and commerce and the continued practice of charitable giving.
W e will advance these goals through existing mechanisms, such as the Bank
Secrecy Act Advisory Group ( B S A A G ) , and publications, such as the S A R Activity
Review issued by FinCEN. In addition, Treasury officials are constantly engaged
with the private financial sector on m o n e y laundering and terrorist financing issues
through various conferences and meetings with trade associations and industry
professionals, both domestically and internationally. W e will continue to take
advantage of these opportunities whenever and wherever possible to advance our
partnership with the private sector in combating financial crime.
Treasury is also engaged in sustained outreach with the charitable sector. In
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November 2002, the Treasury Department issued Anti-Terrorist Financing
Guidelines: Voluntary Best Practices for U.S.-Based Charities to enhance donor
awareness of the kinds of practices that charities m a y adopt to reduce the risk of
terrorist financing. Since then, Treasury officials have participated in several
conferences within the charitable sector to explain these Guidelines and n e w
developments in the campaign against terrorist financing. Earlier this week, the
Treasury Department hosted an outreach event with representatives from
approximately 30 charitable organizations to further explain and discuss the
Guidelines and developments related to terrorist abuse of the charitable sector. W e
anticipate conducting similar outreach meetings with the charitable sector to
continue advancing our collective interests in facilitating charitable giving by
protecting charitable funds from terrorist abuse.
F. Regulation and Supervision
We have taken many steps to investigate and regulate sectors that offer
opportunities for terrorists and other criminals to raise and m o v e funds. Through
outreach efforts such as those described above, w e have built relationships with the
private sector to enlist their support in broadening and deepening the regulatory
structure and reporting requirements in the domestic financial system. W e are
creating a level-playing field and attacked money laundering and terrorist financing
through non-banking financial systems under the Patriot Act, subjecting n e w
sectors of the economy (the securities and futures industries) to anti-money
laundering controls like record-keeping and reporting requirements previously
imposed primarily on banks.
In addition to the successful implementation and applications of Sections 314(a)
and 311 as discussed above, a recent example of our implementation of the Patriot
Act is Section 326. This provision mandates basic, uniform customer identification
and verification procedures for individuals and businesses that open accounts with
banks (including thrifts and credit unions), securities brokers, mutual funds, and
future commission merchants.
IV. The Future of Treasury's Efforts in the Battle against Terrorist Financing
and Financial Crimes
The efforts and accomplishments of the past year have shown two things. First, the
Treasury Department plays and must continue to play a critical role in driving
national policies related to terrorist financing, money laundering, financial crimes,
and economic sanctions. The is well placed - given its authorities, expertise, and
contacts - to deal with issues that cut across several disciplines and require
concerted attention to identify and interdict tainted financial flows. Second, these
efforts have to be improved, amplified, and supported because of their growing
importance at h o m e and abroad.
we have had real success in fighting this war, but as the recent bombings in Madrid
and Riyadh demonstrate, there is no end to our work. Our enemies are numerous,
resourceful, and dedicated, and they continually adapt to the changing
environment. W e must do the same. W e can and must do more - using every tool
that w e have. W e must also recognize that -- unfortunately -- w e are in this fight for
the long term -- and so the Department needs to be organized to reflect that reality.
This is precisely why the Administration has collaborated with Congress and this
Committee to develop a n e w Treasury structure -- a high profile office led by an
Under Secretary -- one of only three in the Department -- and two Assistant
Secretaries. It is an office that will bring together Treasury's intelligence, regulatory,
law enforcement, sanctions, and policy components.
I want to specifically note the important contributions made by the Chairman and
Ranking M e m b e r of this Committee, which resulted in an exchange of letters with
Secretary S n o w at the end of last year. I also want to thank the Congress for
establishing the n e w Assistant Secretary for Intelligence position. Since that time,
the Administration has worked hard to implement the concepts described in those
letters.
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O n March 8th, 2004, Treasury formally announced the creation of this office,
entitled the Office of Terrorism and Financial Intelligence (TFI) in the Department of
the Treasury. O n March 10th, the President announced that he would nominate
Stuart Levey, currently the Principal Associate Deputy Assistant Attorney General,
for the Under Secretary position, and Juan Zarate, currently the Deputy Assistant
Secretary in charge of terrorist financing at Treasury, for one of the two Assistant
Secretary positions. Both of those nominations have since been transmitted to the
Senate. W e are working diligently to identify the most qualified individual to serve
as the Assistant Secretary for Intelligence. In the meantime, w e have appointed a
very capable Deputy Assistant Secretary to get this office up and running.
The creation of TFI will redouble Treasury's efforts in at least four specific ways.
First, it will allow us to better develop and target our intelligence analysis and
financial data to detect h o w terrorists are exploiting the financial system and to
design methods to stop them. TFI will be responsible for producing tailored
products to support the Treasury Department's contributions to the war against
terrorist financing. Second, it will allow us to better coordinate an aggressive
enforcement program, including the use of important n e w tools that the Patriot Act
gave to Treasury. Third, it will help us continue to develop the strong international
coalition to combat terrorist financing. A unified structure will promote a robust
international engagement and allow us to intensify outreach to our counterparts in
other countries. Fourth, it will ensure accountability and help achieve results for this
essential mission.
TFI will have two major components. An Assistant Secretary will lead the Office of
Terrorist Financing. The Office of Terrorist Financing will build on the functions that
have been underway at Treasury over the past year. In essence, this will be the
policy and outreach apparatus for the Treasury Department on the issues of
terrorist financing, m o n e y laundering, financial crime, and sanctions issues. The
office will help to lead and integrate the important functions of O F A C and FinCEN.
This office will continue to assist in developing, organizing, and implementing U.S.
government strategies to combat these issues of concern, both internationally and
domestically. This will m e a n increased coordination with other elements of the U.S.
government, including law enforcement and regulatory agencies. This office will
continue to represent the United States at international bodies dedicated to fighting
terrorist financing and financial crime such as the Financial Action Task Force and
will increase our multilateral and bilateral efforts in this field. W e will use this office
to create global solutions to these evolving international problems. In this regard,
w e will also have a more vigorous role in the implementation of measures that can
affect the behavior of rogue actors abroad.
Domestically, this office will be charged with continuing to develop and implement
the m o n e y laundering strategies as well as other policies and programs to fight
financial crimes. It will continue to develop and help implement our policies and
regulations in support of the Bank Secrecy Act and the Patriot Act. W e will further
increase our interaction with federal law enforcement and continue to work closely
with the Criminal Investigators at the IRS - including integration of their Lead
Development Centers, such as the one in Garden City, N e w York - to deal with
emerging domestic and international financial crimes of concern. Finally, this office
will serve as a primary outreach body - to the private sector and other stakeholders
- to ensure that w e are maximizing the effectiveness of our efforts.
A second Assistant Secretary will lead the Office of Intelligence and Analysis. In
determining the structure of OIA, w e have first focused on meeting our urgent shortterm needs. W e have assembled a team of analysts to closely monitor and review
current intelligence threat reporting. These analysts, w h o are sitting together in
secure space in the Main Treasury building, are ensuring that Treasury can track,
analyze any financial angles, and then take any appropriate action to counter these
threats. Treasury will m a k e sure to coordinate with all relevant agencies, including
the Terrorist Threat Integration Center (TTIC).
In the near term, the Department plans to further develop our analytical capability in
untapped areas, such as strategic targeting of terrorist financial networks and their
key nodes. W e also plan to analyze trends and patterns and non-traditional targets
li//www.treas.gov/Dress/releases/is 1501.htm
5/27/2005
-1501: Testimony of Samuel W . Bodman, Deputy Secretary U.S. Department of the Treasury Before... Page 14 of 15
such as hawalas and couriers. In order to accomplish these goals, w e plan to hire
several n e w analysts as well as to draw on additional resources from O F A C and
FinCEN. The precise number of analysts has yet to be determined -- as w e are
still ensuring that w e have the proper leadership in place and that w e do not disrupt
our important ongoing efforts. Certain specifics, such as the physical location of
the analysts, will be determined by a number of factors, including expertise, skills
mix, and lessons learned as w e go.
This Assistant Secretary will focus on enhancing the Department's relations with the
intelligence community -- making sure that w e are not duplicating the efforts of
other agencies, but instead, are filling any gaps in intelligence targets. Ultimately,
w e envision that all of Treasury's intelligence analysis will be coordinated through
the Office of Intelligence and Analysis. This will include intelligence support for
Treasury's senior leadership on the full range of political and economic issues
We are currently confronting the question of staffing and funding for TFI. As
Secretary S n o w wrote in an April 16 th letter to Members of Congress, President
Bush has proposed significant spending increases in his Fiscal Year 2005 Budget
to continue the fight against terror financing and financial crimes. The Secretary
also stated that the Department would use currently appropriated Fiscal Year 2004
resources to ensure that TFI has the necessary resources to staff the n e w offices,
as well as to bolster capabilities of existing functions.
I am able to provide some more detail today about those issues. We believe that
through a combination of prudent and targeted use of resources, Treasury will be
able to spend up to an additional $2 million on staffing and other start-up needs of
TFI during the rest of the current fiscal year. W e anticipate that w e will be able to
bring on board up to 15 new personnel during the remainder of the fiscal year.
Looking forward to the next fiscal year, we have not made firm decisions about how
much money w e will devote to the new office. W e will evaluate our needs, and w e
are prepared to m a k e the hard decisions about how to allocate our limited
resources. Fighting the war on terror is a priority of the President and of this
Department -- and w e will spend whatever w e need to carry out our duties in a
responsible manner. And, of course, w e will work with the Congress in making
those decisions.
As can be seen from the description above, TFI will enhance the Treasury
Department's ability to meet our own mission and to work cooperatively with our
partners in the law enforcement and intelligence communities. W e are confident
that TFI will compliment and not duplicate the important work being done by the
Department of Justice and Department of Homeland Security, and by the various
intelligence agencies, and will be fully integrated into already established task
forces and processes.
President Bush and this entire Administration are firmly committed to waging a
relentless war on terrorists and those w h o offer them support. Our fight is guided
by 5 goals.
• To leverage all of the government's assets to identify and attack the
financial infrastructure of terrorist groups;
• T o focus Treasury's powers on identifying and addressing vulnerabilities in
domestic and international financial systems, including informal financial
systems;
• T o direct our government's efforts on financial missions of critical
importance to our national security interests, such as proliferation finance
and identifying and recovering stolen Iraqi assets;
• T o promote a stronger partnership with the private financial sector by
sharing more complete and timely information;
• T o improve domestic and international coordination and collaboration by
combating financial crime by increasing the frequency and value of financial
information shared across our government and with other governments.
These goals are critical to protecting and promoting our national security interests.
^//www.treas.pov/nress/releases/is 1 5 0 1 .htm
5/27/200S
1-1501: Testimony of Samuel W . B o d m a n , Deputy Secretary U.S. Department of the Treasury Before... Page 15 of 15
The n e w office of TFI will improve our ability to advance these goals by further
consolidating Treasury's unique assets in the campaign against financial crime, and
by integrating and coordinating these assets with those of the interagency
community.
I look forward to continuing to work with the Congress and this Committee in the
creation of TFI and in advancing our mission in the war on terrorism and financial
crime.
-30-
The list also includes insurance companies; money order and traveler's check
issuers and redeemers; check cashers; wire remitters; currency exchangers; and a
myriad of other non-bank financial institutions.
[i//www.treas.gov/Dress/releases/js 1501 .htm
5/27/2005
Pagel of 8
)04 - April FFB Activity
federal financing jbaLixk
WASI-ING rUh, "i C 2D22.Z
NEW
FEDERAL FINANCING BANK
2004 PRESS RELEASE
April 2 0 0 4
Brian D. Jackson, Chief Financial Officer, Federal Financing Bank (FFB)
announced the following activity for the month of April 2004.
FFB holdings of obligations issued, sold or guaranteed by other Federal
agencies totaled $29.4 billion on April 30, 2004, posting a decrease of $695.3
million from the level on March 31, 2004. This net change w a s the result of
decreases in holdings of agency debt (U.S. Postal Service) of $873.6 million and
in holdings of agency assets of $75.0 million, and an increase in net holdings of
government-guaranteed loans of $253.3 million. The F F B m a d e 68
disbursements and received 4 prepayments during the month of April.
Below are tables presenting FFB April 2004 loan activity and FFB
holdings as of April 30, 2004.
PRINT
FEDERAL FINANCING BANK
April 2004 ACTIVITY
Borrower
Amount
Date
Final
Interest
Semi-Annually
Rata
AGENCY DEBT
U.S. POSTAL SERVICE
U.S. Postal Service
3/01
$1,500,000,000.00
3/2/2004
1.092%
Semi-Annually
U.S. Postal Service
3/01
$88,200,000.00
3/2/2004
1.091%
Semi-Annually
SMwww.treas.eov/ffb/oress releases/2004-04.html
5/31/2005
)04 - April F F B Activity
U.S. Postal Service
Page 2 of 8
|
3/02
J$1,200,000,000.00|
3/3/2004
1.071%
| Semi-Annually
U.S. Postal Service
3/02
$79,800,000.0C)
3/3/2004
1.109%
Semi-Annually
U.S. Postal Service
3/03
$950,000,000.0C)
3/4/2004
1.091%
Semi-Annually
U.S. Postal Service
3/03
$129,800,000.0C)
3/4/2004
1.099%
Semi-Annually
U.S. Postal Service
3/04
$750,000,000.0CI
3/5/2004
1.109%
Semi-Annually
U.S. Postal Service
3/04
$89,200,000.0C
3/5/2004
1.099%
Semi-Annually
U.S. Postal Service
3/05
$650,000,000.0C
3/8/2004
1.099%
Semi-Annually
U.S. Postal Service
3/08
$372,200,000.00
3/9/2004
1.079%
Semi-Annually
U.S. Postal Service
3/09
$77,200,000.00
3/10/2004
1.109°s
Semi-Annually
U.S. Postal Service
3/12
$700,000,000.00
3/15/2004
1.099%
Semi-Annually
U.S. Postal Service
3/12
$159,800,000.00
3/15/2004
1.089%
Semi-Annually
U.S. Postal Service
3/15
$1,000,000,000.00)
3/16/2004
1.089%
Semi-Annually
U.S. Postal Service
3/15
$149,100,000.00
3/16/2004
1.068%
Semi-Annually
U.S. Postal Service
3/16
$750,000,000.00
3/17/2004
1.089%
Semi-Annually
U.S. Postal Service
3/16
$156,900,000.00
3/17/2004
1.099%
Semi-Annually
U.S. Postal Service
3/17
$600,000,000.00
3/18/2004
1.068%
Semi-Annually
U.S. Postal Service
3/17
$138,700,000.00
3/18/2004
1.069%
Semi-Annually
U.S. Postal Service
3/18
$400,000,000.00
3/20/2004
1.099%
Semi-Annually
U.S. Postal Service
3/18
$165,600,000.00
3/20/2004
1.058%
Semi-Annually
U.S. Postal Service
3/20
$400,000,000.00
3/22/2004
1.069%
Semi-Annually
U.S. Postal Service
3/20
$88,300,000.00
3/22/2004
1.058%
Semi-Annually
U.S. Postal Service
3/22
$458,300,000.00
3/23/2004
1.068%
Semi-Annually
U.S. Postal Service
3/23
$216,100,000.00
3/24/2004
1.089%
Semi-Annually
U.S. Postal Service
3/24
$28,600,000.00
3/25/2004
1.079%
Semi-Annually
U.S. Postal Service
3/26
$750,000,000.00
3/29/2004
1.079%
Semi-Annually
U.S. Postal Service
3/26
$188,000,000.00
3/29/2004
1.069%
Semi-Annually
U.S. Postal Service
3/29
$1,000,000,000.00
3/30/2004
107.900%
Semi-Annually
U.S. Postal Service
3/29
$272,200,000.00
3/30/2004
1.079%
Semi-Annually
U.S. Postal Service
3/30
$900,000,000.00
3/31/2004
1.069%
Semi-Annually
U.S. Postal Service
3/30
$121;700;000.00
3/31/2004
1.099%
Semi-Annually
U.S. Postal Service
3/31
$1,300,000,000.00
4/1/2004
1.079%
Semi-Annually
U.S. Postal Service
3/31
$193,800,000.00
4/1/2004
1.089%
Semi-Annually
San Francisco Bldg Lease
3/10
$3,709,981.18
8/01/05
1.409%
Semi-Annually
San Francisco O B
3/18
$121,559.04
8/1/2005
1.430%
Semi-Annually
San Francisco O B
3/20
$132,507.93
8/1/2005
0.014%
Semi-Annually
Foley Square Office Bldg.
3/24
$181,609.00
7/31/2025
427.700%
Semi-Annually
Daviess-Martin County #670
3/16
$100,000.00
1/2/2035
4.504%
Quarterly
PRTCommunications #798
3/16
$773,159.00
6/30/2004
0.971%
Quarterly
|
GOVT-GUARANTEED L O A N S
GENERAL SERVICES
AnMIMICJDATinM
|
to://wunV.treas.gov/ffb/press releases/2004-04.html
5/31/2005
304 - April F F B Activity
Page 3 of 8
4.481%
Quarterly
12/31/2036
4.482%
Quarterly
12/31/2024
4.074%
Quarterly
$819,000.00
6/30/2004
0.937%
Quarterly
3/20
$9,524,000.00
1/3/2034
4.466%
Quarterly
Fox Islands Elec. Coop. #2106
3/22
$45,000.00
12/31/2037
4.576%
Quarterly
A & N Electric #868
3/25
$1,190,000.00
12/31/2036
4.493%
Quarterly
Harrison County rural #609
3/25
$475,000.00
6/30/2014
3.647%
Quarterly
Harrison County rural #609
3/25
$225,000.00
1/3/2034
4.427%
Quarterly
North Carolina R S A 3 Tel #2009
3/26
$5,559,827.00
6/30/2004
0.935%
Quarterly
Tri-County Elec. Coop. #646
3/26
$5,000,000.00
1/2/2035
4.482%
Quarterly
Cornbelt Power #2099
3/30
$15,719,000.00
1/3/2033
4.433%
Quarterly
Cornbelt Power #2099
3/30
$2,004,000.00
1/3/2033
4.433%
Quarterly
Peoples Cooperative Svcs #2024
3/30
$1,000,000.00
12/31/2036
4.658%
Quarterly
Runestone Electric Ass. #886
3/30
$350,000.00
6/30/2004
0.965%
Quarterly
Southeastern Indiana #2062
3/30
$3,700,000.00
6/30/2004
0.964%
Quarterly
*Adams Rural Electric #706
3/31
$493,105.59
6/30/2004
0.955%
Quarterly
*Adams Rural Electric #706
3/31
$493,316.96
6/30/2004
0.955%
Quarterly
*Adams Rural Electric #706
3/31
$639,606.87
6/30/2004
0.955%
Quarterly
*Amicalola Electric #664
3/31
$4,808,948.60
6/30/2004
0.955%
Quarterly
*Amicalola Electric #664
3/31
$6,679,167.99
6/30/2004
0.955%
Quarterly
*Atlantic Telephone M e m . #805
3/31
$5,696,143.18
6/30/2004
0.955%
Quarterly
*Bailey County Elec. #856
3/31
$1,883,701.90
6/30/2004
0.955%
Quarterly
*Bailey County Elec. #856
3/31
$611,010.91
6/30/2004
0.955%
Quarterly
*Basin Electric #425
3/31
$12,407,829.27
6/30/2004
1.080%
Quarterly
*Basin Electric #2005
3/31
$3,000,000.00
6/30/2004
0.955%
Quarterly
*Big Sand Elec. #540
3/31
$747,904.02
6/30/2004
0.955%
Quarterly
*Big Sand Elec. #540
3/31
$560,928.01
6/30/2004
0.955%
Quarterly
*Big Sand Elec. #540
3/31
$937,749.83
6/30/2004
0.955%
Quarterly
*Big Sand Elec. #540
3/31
$2,180,959.00
6/30/2004
0.955%
Quarterly
*Big Sand Elec. #540
3/31
$2,724,510.71
6/30/2004
0.955%
Quarterly
*Blue Grass Energy #674
3/31
$4,811,869.63
6/30/2004
0.955%
Quarterly
*Blue Grass Energy #674
3/31
$1,922,354.35
6/30/2004
0.955%
Quarterly
*Blue Grass Energy #674
3/31
$4,898,561.11
6/30/2004
0.955%
Quarterly
*Brazos Electric #844
3/31
$4,403,252.55
6/30/2004
0.955%
Quarterly
*Brazos Electric #844
3/31
$4,967,568.31
6/30/2004
0.955%
Quarterly
*Brazos Electric #844
3/31
$4,967,568.31
6/30/2004
0.955%
Quarterly
*Brazos Electric #844
3/31
$4,967,568.31
6/30/2004
0.955%
Quarterly
*Brown County Elec. #687
3/31
$238,877.84
6/30/2004
0.955%
Quarterly
*Brown County Elec. #687
3/31
$573,306.85
6/30/2004
0.955%
Quarterly
*Brown County Elec. #687
3/31
$286,699.63
6/30/2004
0.955%
Quarterly
East Central Energy #825
3/17
$598,000.00
12/31/2036
North Central Elec Coop. #2015
3/17
$800,000.00
Union Electric #783
3/17
$iO;00o,ooo.oo
McLeod Coop. Power #554
3/20
S. Illinois Power #818
i
I
Mwww.treas.gov/ffb/nress releases/2004-04.html
I
|
I
5/31/2005
Pa
004 - April F F B Activity
Se 4
4.703%
Quarterly
6/30/2004
0.955%
Quarterly
$1,869,475.14
6/30/2004
0.955°%
Quarterly
3/31
$4,172,102.03
6/30/2004
0.955%
Quarterly
*Clark Energy Coop. #611
3/31
$3,489,111.29
6/30/2004
0.955%
Quarterly
*Clark Energy Coop. #611
3/31
$2,527,317.83
6/30/2004
0.955%
Quarterly
•Cumberland Valley #668
3/31
$4,013,147.94
6/30/2004
0.955%
Quarterly
'Cumberland Valley #668
3/31
$4,819,784.97
6/30/2004
0.955%
Quarterly
*Cooper Valley Tel. #648
3/31
$942,787.77
6/30/2004
0.955%
Quarterly
*Cooper Valley Tel. #648
3/31
$214,530.58
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$1,723,346.54
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
-$396-;993.19
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$191,343.57
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$226,214.58
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$164,519.69
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$244,097.16
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$201,002.15
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$1,365,929.31
6/30/2004
0.955%
Quarterly
'Darien Telephone Co. #719
3/31
$254,830.05
6/30/2004
0.955%
Quarterly
'Darien Telephone Co. #719
3/31
$502,845.66
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$366,264.08
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$453,907.88
6/30/2004
0.955%
Quarterly
*Darien Telephone Co. #719
3/31
$637,288.55
6/30/2004
0.955%
Quarterly
'Delaware County Elec. #682
3/31
$630,724.60
1/2/2035
4.622%
Quarterly
'East River Power #453
3/31
$363,515.91
6/30/2004
1.080%
Quarterly
*East River Power #453
3/31
$179,274.97
6/30/2004
1.080°%
Quarterly
*East River Power #601
3/31
$3,131,854.14
6/30/2004
0.955%
Quarterly
'East River Power #793
3/31
$615,824.78
6/30/2004
0.955%
Quarterly
East Mississippi Elec. #740
3/31
$3,000,000.00
12/31/2030
4.523%
Quarterly
*Fairfield Elec. #684
3/31
$3,089,873.72
6/30/2004
0.955%
Quarterly
farmer's Rural Elec. #2046
3/31
$5,000,000.00
6/30/2004
0.955%
Quarterly
'Farmer's Rural Elec. #2046
3/31
$1,000,000.00
6/30/2004
0.955%
Quarterly
'Farmer's Telephone #459
3/31
$20,362.99
6/30/2004
1.080%
Quarterly
'Farmer's Telephone #459
3/31
$193,715.90
6/30/2004
1.080%
Quarterly
'Fleming-Mason Energy #644
3/31
$2,438,149.53
6/30/2004
0.955%
Quarterly
'Fleming-Mason Energy #644
3/31
$1,312,849.72
6/30/2004
0.955%
Quarterly
'Fleming-Mason Energy #644
3/31
$1,406,624.73
6/30/2004
0.955%
Quarterly
'Fleming-Mason Energy #644
3/31
$2,063,049.59
6/30/2004
0.955%
Quarterly
'Fleming-Mason Energy #644
3/31
$1,312,849.72
6/30/2004
0.955%
Quarterly
'Fleming-Mason Energy #644
3/31
$2,844,720.57
6/30/2004
0.955%
Quarterly
'Fleming-Mason Energy #644
3/31
$2,819,142.50
6/30/2004
0.955%
'Central Texas Elec. #520
3/31
$1,897,493.54
1/3/2033
*Clark Energy Coop. #611
3/31
$2,813,249.46
*Clark Energy Coop. #611
3/31
*Clark Energy Coop. #611
|
I
Quarterly
I
of 8
004 - April F F B Activity
Page 5 of 8
'Fleming-Mason Energy #644
3/31
$2,978,732.39
6/30/2004
0.955%
Quarterly
'Freeborn-Mower Coop. #736
3/31
$720,806.08
6/30/2004
0.955%
Quarterly
'Freeborn-Mower Coop. #736
3/31
$480,551.52
6/30/2004
0.955%
Quarterly
'Farmers Telephone #476
3/31
$9,143,703.08
6/30/2004
1.080%
Quarterly
'Farmers Telephone #476
3/31
$6,811,406.12
6/30/2004
1.080%
Quarterly
'Farmers Telephone #476
3/31
$5,289,426.15
6/30/2004
1.080%
Quarterly
*FTC Communications #709
3/31
$2,451,387.40
6/30/2004
0.955%
Quarterly
*FTC Communications #709
3/31
$3,135,098.34
6/30/2004
0.955%
Quarterly
*FTC Communications #709
3/31
$1,104,808.61
6/30/2004
0.955%
Quarterly
'Goodhue County #672
3/31
$404,517.32
1/2/2035
4.622%
Quarterly
'Grady Electric #690
3/31
$3,038,965.40
6/30/2004
0.955%
Quarterly
'Grady Electric #746
3/31
$3,145,798.60
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$1,125,299.79
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$562,649.90
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$937,749.83
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$1,214,883.75
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$959,632.93
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$2,430,291.70
6/30/2004
0.955%
Quarterly
'Grayson Rural Elec. #619
3/31
$992,910.80
6/30/2004
0.955%
Quarterly
'Greenbelt Elec. #743
3/31
$1,693,755.56
6/30/2004
0.955%
Quarterly
'Greenbelt Elec. #743
3/31
$488x939.21
6/30/2004
0.955%
Quarterly
'Grundy Elec.Coop. #744
3/31
$1,209,922.54
6/30/2004
0.955%
Quarterly
'Grundy Elec.Coop. #744
3/31
$968,068.36
6/30/2004
0.955%
Quarterly
'Grundy Elec.Coop. #744
3/31
$493,362.28
6/30/2004
0.955%
Quarterly
'Grundy County Elec. #689
3/31
$198,622.33
6/30/2004
0.955%
Quarterly
'Harrison County #532
3/31
$933,936.28
6/30/2004
0.955%
Quarterly
'Harrison County #532
3/31
$840,542.66
6/30/2004
0.955%
Quarterly
'Harrison County #532
3/31
$940,237.24
6/30/2004
0.955%
Quarterly
'Harrison County #532
3/31
$1,533,207.74
6/30/2004
0.955%
Quarterly
'Harrison County #532
3/31
$1,650,685.19
6/30/2004
0.955%
Quarterly
'Hudson Valley Datanet #833
3/31
$4,927,429.95
6/30/2004
0.955%
Quarterly
'Hudson Valley Datanet #833
3/31
$3,591,000.00
6/30/2004
0.955%
Quarterly
'Hudson Valley Datanet #833
3/31
$1,970,971.98
6/30/2004
0.955%
Quarterly
'Inter-County Energy #592
3/31
$1,400,904.41
6/30/2004
0.955%
Quarterly
'Inter-County Energy #592
3/31
$1,867,872.56
6/30/2004
0.955%
Quarterly
'Inter-County Energy #592
3/31
$2,434,771.88
6/30/2004
0.955%
Quarterly
'Inter-County Energy #592
3/31
$207,242.70
6/30/2004
0.955%
Quarterly
'Inter-County Energy #850
3/31
$3,974,054.65
6/30/2004
0.955%
Quarterly
Inter-County Energy #850
3/31
$1,987,027.32
6/30/2004
0.955%
Quarterly
'Inter-County Energy #850
3/31
$1,987,152.13
6/30/2004
0.955%
Quarterly
*Jackson Energy #794
3/31
$3,895,930.01
6/30/2004
0.955%
Quarterly
i
004 - April F F B Activity
'Jackson Energy #794
Page 6 of 8
|
3/31
|
$2,921,947.50
6/30/2004
|
0.955%
|
Quarterly
'Jackson Energy #794
3/31
$4,577,717.76
6/30/2004
0.955%
Quarterly
'Jackson Energy #794
3/31
$1,947,965.01
6/30/2004
0.955%
Quarterly
'Jackson Energy #794
3/31
$2,434,956.25
6/30/2004
0.955°s
Quarterly
'Jackson Energy #794
3/31
$1,948,024.09
6/30/2004
0.955%
Quarterly
'Jackson Energy #794
3/31
$7,251,936.34
6/30/2004
0.955%
Quarterly
'Johnson County E1ec. #482
3/31
$1,497,488.66
6/30/2004
1.080%
Quarterly
'Kenergy Corp. #2068
3/31
$6,000,000.00
6/30/2004
0.955%
Quarterly
'Licking Valley Elec. #522
3/31
$2,567,390.83
6/30/2004
0.955%
Quarterly
'Licking Valley Elec. #854
3/31
$2,000,000.00
6/30/2004
0.955%
Quarterly
'Magnolia Electric #560
3/31
$4,677,707.61
6/30/2004
1.080%
Quarterly
'Medina Electric #622
3/31
$1,443,419.78
3/31/2006
1.617%
Quarterly
'Medina Electric #622
3/31
$1,449,972.16
3/31/2006
1.617%
Quarterly
'North Carolina R S A 3 Tel #2009
3/31
$9,600,000.00
6/30/2004
0.955%
Quarterly
'New Horizon Elec. #791
3/31
$2,019,297.75
6/30/2004
0.955%
Quarterly
'New Horizon Elec. #791
3/31
$1,365,554.86
6/30/2004
0.955%
Quarterly
'New Horizon Elec. #791
3/31
$1,674,002.46
6/30/2004
0.955%
Quarterly
'New Horizon Elec. #791
3/31
$1,026,642.07
6/30/2004
0.955%
Quarterly
'Noun Rural Elec. #528
3/31
$1,767,941.36
6/30/2004
0.955%
Quarterly
'Noun Rural Elec. #577
3/31
$2,412,357.43
6/30/2004
0.955%
Quarterly
'Noun Rural Elec. #577
3/31
$2,412,357.43
6/30/2004
0.955%
Quarterly
'Noun Rural Elec. #840
3/31
$3,974,054.65
6/30/2004
0.955%
Quarterly
'Noun Rural Elec. #840
3/31
$2,928,878.27
6/30/2004
0.955%
Quarterly
'Northstar Technology #811
3/31
$1,756,119.83
6/30/2004
0.955%
Quarterly
'Northstar Technology #811
3/31
$957,800.65
6/30/2004
0.955%
Quarterly
'Oglethorpe Power #445
3/31
$13,621,742.21
1/2/2024
4.208%
Quarterly
'Owen Electric #525
3/31
$1,870,480.43
6/30/2004
0.955%
Quarterly
'Owen Electric #525
3/31
$1,866,702.96
6/30/2004
0.955%
Quarterly
'Owen Electric #525
3/31
$941,785.51
6/30/2004
0.955%
Quarterly
'Owen Electric #525
3/31
$1;899;216.97
6/30/2004
0.955%
Quarterly
'Owen Electric #525
3/31
$1,935,111.20
6/30/2004
0.955%
Quarterly
'Pennyrile Elec. #513
3/31
$5,717,873.97
6/30/2004
1.080%
Quarterly
'Pennyrile Elec. #513
3/31
$5,412,652.01
6/30/2004
1.080%
Quarterly
'PRTCommunications #798
3/31
$4,644,329.38
6/30/2004
0.955%
Quarterly
*PRTCommunications #798
3/31
$1,740,898.15
6/30/2004
0.955%
Quarterly
'Runestone Electric Ass. #886
3/31
$1,500,000.00
6/30/2004
0.955%
Quarterly
*San Miguel Electric #919
3/31
$7,043,290.13
6/30/2004
0.955%
Quarterly
*San Miguel Electric #919
3/31
$7,395,537.05
6/30/2004
0.955%
Quarterly
*Southeastern Indiana #2062
3/31
$2,650,000.00
6/30/2004
0.955%
Quarterly
*Southeastern Indiana #2062
3/31
$2,650,000.00
6/30/2004
0.955%
Quarterly
$917,958.27
6/30/2004
0.955%
Quarterly
3/31
*Surry-Yadkin Elec. #534
I
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I
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I
I
|
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Page 7 of 8
;004 - April F F B Activity
|
Quarterly
'Surry-Yadkin Elec. #534
3/31
$917,958.27|
6/30/2004
'Surry-Yadkin Elec. #534
3/31
$458,979.14
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #534 3/31
3/31
$917,958.27
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #534 3/31
3/31
$917,958.27
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #534 3/31
3/31
$933,008.72
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #534 3/31
3/31
$939,082.61
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #534 3/31
3/31
$2,169,366.29
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #852 3/31
3/31
$1,000,000.00
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #852 3/31
3/31
$2,000,000.00
6/30/2004
0.955%
Quarterly
'Surry-Yadkin Elec. #852 3/31
3/31
$500,000.00
6/30/2004
0.955%
Quarterly
'Thumb Electric #767
3/31
$393,053.85
3/31/2034
4.641%
Quarterly
'Thumb Electric #767
3/31
$493,355.78
3/31/2034
4.641%
Quarterly
'Thumb Electric #767
3/31
$616,687.69
6/30/2004
0.955%
Quarterly
'United Elec. Coop. #870 3/31
3/31
$12,000,000.00
6/30/2004
0.955%
Quarterly
'United Elec. Coop. #870 3/31
3/31
$3,000,000.00
6/30/2004
0.955%
Quarterly
'Upsala Coop. Tele. #429 3/31
3/31
$229,830.52
1/2/2018
3.810%
Quarterly
'Virgin Islands Telephone #2089 3/31
3/31
$64,655,000.00
6/30/2004
0.955%
Quarterly
'Webster Electric #705 3/31
3/31
$2,119,681.86
6/30/2004
0.955%
Quarterly
'West Plains Elec. #501 3/31
3/31
$2,199,220.17
6/30/2004
1.080%
Quarterly
|
0.955%
Return To top
FEDERAL FINANCING BANK HOLDINGS
April 2004
(in millions of dollars)
April 30, 2004
rogram
gency Debt:
March
31, 2004
Monthly
Fiscal Year
Net Change
Net Change
4/1/04- 4/30/04 10/1/03- 4/3C
$620.20
$1,493.80
($873.60)
($6,653
$620.20
$1,493.80
($873.60)
($6,653
nHA-RDIF
$515.00
$590.00
($75.00)
($290
nHA-RHIF
$1,830.00
$1,830.00
$0.00
$(
ural Utilities Service-CBO
$4,270.20
$4,270.20
$0.00
$(
$6,615.20
$6,690.20
($75.00)
($290
$1,572.50
$1,575.20
($2.70)
($115
$126.60
$126.10
$0.50
$4"
J5 Pnctal Qar\/\na
Subtotal*
gency Assets:
Subtotal*
overnment-Guaranteed Lending:
OD-Foreign Military Sales
oEd-HBCU+
hXlhsrWW trAoc rr^r/ffkW^oc r^1p3SR<;/?004-Q4Jltml
5/31/2005
Page 8 of 8
;004 - April F F B Activity
$1.00|
$1.00|
3HUD-Community Dev. Block Grant
$0.0
($1
3HUD-Public Housing Notes
$1,054.80
$1,054.80
$0.00
($78
Seneral Services Administration+
$2,142.30
$2,139.20
$3.10
($4
$8.20
$8.20
$0.00
($1
$597.30
$597.30
$0.00
($10
$16,626.50
$16,372.70
$253.90
$1,00i
$65.20
$66.60
($1.40)
($12
$3.00
$3.00
$0.00
Subtotal*
$22,197.40
$21,944.00
$253.30
($0
$83
Grand total*
$29,432.80
$30,128.00
($695.30)
($6,111
DOI-Virgin Islands
r)ON-Ship Lease Financing
Rural Utilities Service
3BA-State/Local Development Cos.
30T-Section 511
*figures may not total due to rounding; +does not include capitalized interest
Return To top
2004 Press Releases
Return to All PRESS RELEASES
Last Updated on 6/10/04
jtftY/wnnr rrrng cxnv /fifk/^co
r^^Q^nOOA-Od
html
5/31/2005
ureau of the Public Debt: I BONDS TO EARN 2.19% W H E N BOUGHT FROM NOVEMBER 2003 ... Page 1 of
BONDS TO EARN 3.39% WHEN BOUGHT FROM MAY THROUGH OCTOBER 2004
OR RELEASE AT 10:00 AM EST
ay 3, 2004
BOND EARNINGS RATE 3.39%
ie earnings rate for I Bonds is a combination of a fixed rate, which will apply for the life of the bond, and the inflation rate. Th
jrcent earnings rate for I Bonds bought from M a y through October 2004 will apply for the first six months after their issue. The earnings
te combines the 1.0 percent fixed rate of return with the 2.38 percent annualized rate of inflation as measured by the Consumer Price
dex for all Urban Consumers (CPI-U). The CPI-U increased from 185.2 to 187.4 from September 2003 to March 2004, a six-month
crease of 1.19 percent.
easury's inflation-indexed I Bonds are designed to offer all Americans a way to save that protects the purchasing power of their
vestment by assuring them a real rate of return above inflation. I Bonds have features that m a k e them attractive to m a n y investors.
iey are sold at face value in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000 and earn interest for as long
30 years. I Bond earnings are added every month and interest is compounded semiannually. They are State and local income tax
empt, and Federal income tax on I Bond earnings can be deferred until the bonds are cashed or they stop earning interest after 30
ars. Investors cashing I Bonds before five years are subject to a 3-month earnings penalty.
ivers and investors can now open an on-line account to purchase I Bonds in electronic form through the website
vw.treasurydirect.gov. Account holders can purchase, manage, and redeem such I Bonds over the Internet 2 4 hours a day, seven days
week. These rates also apply to electronic I Bonds.
30ND FIXED RATE 1.0%
ries I, inflation-indexed savings bonds purchased from May through October 2004 will earn a 1.0 percent fixed rate of return above
lation. The 1.0 percent fixed rate applies for the 30-year life of I Bonds purchased during this six-month period.
kRNINGS RATES FOR ALL I BONDS
rnings rates and actual yields for I Bonds are shown in the I Bond Earnings Report.
DRE INFORMATION
'ormation about savings bonds is available at Public Debt's website at www.treasurydirect.gov. Check out our Savings Bond Calculator
see how easy it is to find out what your bonds are worth, what they're earning, and even keep track of them. Or, download the free
vings Bond Wizard™ to keep track of your savings bond portfolio. An Earnings Report, which contains rate and yield information for
nds is available by mail. Send a postcard asking for "Earnings Report" to Bureau of the Public Debt, 200 Third Street, Parkersburg, W V
106-1328.
-647
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Access bility | Data Quality
U.S. Department of :ne Treasury, Bureau of the Public Debt
Last Updated September 27, 2004
xj 5 - /503
Bureau of the Public Debt: BUREAU OF THE PUBLIC DEBT ANNOUNCES SERIES EE SAVINGS ... Page 1 o
Bureau of "he
Public * :
United oforei Department
at r,!,e 7'r05L"v
BUREAU OF THE PUBLIC DEBT ANNOUNCES SERIES EE SAVINGS BOND RATE
COR MAY THROUGH OCTOBER 2004
:0R RELEASE AT 10:00 AM EST
lay 3, 2004
he Bureau of the Public Debt today announced the rate for Series EE savings bonds issued on or after May 1, 1997.
ERIES EE SAVINGS BOND RATE - 2.84%
he 2.84 percent Series EE savings bond rate is in effect for bonds issued on or after May 1, 1997, that enter semiannual earn
eriods from May through October 2004. The rate is 90 percent of the average 5-year Treasury securities yields for the preceding six
lonths. A new interest rate is announced effective each May 1 and November 1. A 3-month interest penalty is applied to these bonds if
adeemed before five years. The Series EE bonds on sale now increase in value monthly. The bond's interest rate is compounded
jmiannually.
avers and investors can now open an on-line account to purchase EE Bonds in electronic form through the website
ww.treasurydirect.gov. Account holders can purchase, manage, and redeem such EE Bonds over the Internet 24 hours a day, seven
ays a week. These rates also apply to electronic EE Bonds.
ERIES EE BONDS ISSUED BEFORE MAY 1997
;ries EE Bonds issued before May 1997 earn various rates for semiannual earnings periods beginning between May 1 and October
)04, depending on dates of issue. See the Earnings Report for earnings on Series EE bonds issued from January 1980.
ATURED SERIES E SAVINGS BONDS AND SAVINGS NOTES
;ries E savings bonds continue to reach final maturity and stop earning interest. Bonds issued from May 1941 through April
th those issued from December 1965 through April 1974, have stopped earning interest. All Savings Notes, issued from May 1967
rough October 1970, have stopped earning interest. Series E Bonds with issue dates shown here will reach final maturity in the next six
Dnths.
Bonds Issued Stop Earning Interest
ay 1964 through October 1964 May 2004 through October 2004
ay 1974 through October 1974 May 2004 through October 2004
DRE INFORMATION
"ormation about savings bonds is available at Public Debt's website at www.treasurydirect.gov. Check out our Savings Bond C
see how easy it is to find out what your bonds are worth, what they're earning, and even keep track of them. Or, download the free
vings Bond Wizard™ to keep track of your savings bond portfolio. The table on the back of this release shows actual yields for Series
bonds. An Earnings Report, which contains rate and yield information for bonds is available by mail. Send a postcard asking for
arnings Report" to Bureau of the Public Debt, 200 Third Street, Parkersburg, W V 26106-1328.
-648
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004
Js - i 50 H
JS-1505: Media Advisory: Treasury Assistant Secretary for Financial Institutions <br> W... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 4, 2004
JS-1505
Media Advisory: Treasury Assistant Secretary for Financial Institutions,
W a y n e Abernathy
To Present Honorary Certificate of Recognition
To 1st Educational Savings Branch at
Wakefield Memorial High School in Westfield, Massachusetts
Treasury Assistant Secretary for Financial Institutions, Wayne A. Abernathy, will
present a certificate of recognition to 1st Educational Savings Branch (1st E S B ) for
its financial education efforts to high school students. Assistant Secretary
Abernathy will lead the presentation of the certificate with remarks about the
importance of financial education for students, at Wakefield Memorial High School.
The 1st ESB is a fully operational bank branch of The Savings Bank operated by
students attending Wakefield Memorial High School. The Savings Bank established
the 1 stESB in April of 1981, the first of its kind in the country.
WHO:
Assistant Secretary of Financial Institutions Wayne A. Abernathy
Brian D. McCoubrey, President and C E O , The Savings Bank
Cindy Lyons, Branch Manager and Student Trainer, 1st Educational Savings
Branch
WHAT:
Senior Treasury official will present an honorary certificate of recognition to 1st
Educational Savings Branch for its efforts in financial education to high school
students.
WHEN:
Thursday, May 6, 2004
9:45 a.m. E D T
WHERE:
Wakefield Memorial High School
60 Farm Street
Wakefield, M A 01880
**Media interested in covering this event should call
Treasury's Office of Public Affairs at (202) 622-2960
-30-
httn-//www trpas anv/nrffss/releases/is 1505.htm
5/6/2005
JS-1506: Secretary S n o w Welcomes Selection of Rodrigo Rato as Managing Director oft... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 4, 2004
JS-1506
Secretary Snow Welcomes Selection of Rodrigo Rato as Managing Director of
the International Monetary Fund
We are very pleased with the IMF Executive Board's decision to approve the
nomination of Rodrigo Rato as Managing Director. As a former Finance Minister, he
directed substantial economic progress in Spain and has an excellent
understanding of the realities of economic policymaking. W e expect Rodrigo Rato
will be a strong and skillful leader of the IMF and will focus on continuing to
strengthen the institution, to the benefit of all its members.
httn-//www ttv>Qg crr>Wr>rpgg/rp1 eases/is 1506.htm
5/6/2005
S-1507: Economic Growth in the Greater Middle East<br>Under Secretary John B. Taylor Remarks<br... Page 1 of 4
PRESS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 7, 2004
JS-1507
Economic Growth in the Greater Middle East
Under Secretary John B. Taylor Remarks
to the Middle East and North Africa (MENA) Region Conference
on the Challenges of Growth and Globalization
April 7, 2004
It is a pleasure for me to speak at this conference. I thank the IMF's Middle East
and Central Asia Department and the IMF Institute for inviting me. I have greatly
benefited and enjoyed working with dedicated professionals - like George Abed
and Mohsin Khan - at the IMF.
I wish that I could have participated in the whole conference, especially to have
been here this morning to listen to the papers by George Abed and others. That this
type of economic growth research is having a significant impact on development
policy is one of the themes of my remarks today. And it would have been a special
pleasure to spend more time interacting with my former Stanford colleague, Guido
Tabellini, in a rough-and-tumble seminar setting. But my job now is much more
about applying economic research in practice than conducting such research.
Economic growth in the greater Middle East is a high priority of the Bush
administration. As President Bush made clear in his National Endowment for
Democracy speech on the greater Middle East last November, these economic
growth issues are closely linked with political and security issues, perhaps even
more so than in any other part of our foreign policy. One indication of the
importance of economic issues in this region for the U.S. Treasury is that I have
traveled to the Middle East or key neighboring regions a dozen times since I was
sworn in as Under Secretary in 2001.
My most recent trip was six weeks ago. I visited Baghdad, Amman, Kabul,
Jerusalem, and Ramallah. I learned a tremendous amount - I want to emphasize
this. I met with the finance ministers and other government officials in each city. I
talked about U.S. assistance packages, about fundraising, and about ways to
increase economic growth. I visited reconstruction projects and schools to see how
our assistance is being used, and I met with entrepreneurs to listen to their views
on economic reform. On this trip, I covered almost exactly the same ground as I did
on a trip last June, when I visited the finance ministers and other officials from Iraq,
Jordan, Afghanistan, Israel, and the Palestinian Authority. The two trips were
separated in time by only eight months, yet, it was striking to m e how much had
transpired in each of these five places during that period. I would like to highlight
these changes to illustrate our approach to economic growth in the Middle East.
Let me first emphasize, as President Bush said in his speech last November, "As
we watch and encourage reforms in the region, we are mindful that modernization
is not the same as Westernization.... There are, however, essential principles
common to every successful society, in every culture."
Many of those common principles are essential for raising economic growth. Again
to quote President Bush, successful societies: (1) "protect freedom and the
consistent, impartial rule of law;" (2) "invest in the health and education of their
people;" and (3) "privatize their economies and secure the rights of property."
These essential principles closely parallel the principles that underlie the new
Millennium Challenge Account, which is an important new initiative in U.S. foreign
fav/AlriTr,T, trpkr,c, ^T f /«fann/i-o1oogpo/ig1 S 0 7 httP
S-1507: Economic Growth in the Greater Middle East<br>Under Secretary John B. Taylor Remarks<br... Page 2 of 4
aid. In that context, w e speak of policies of "governing justly, investing in people,
and encouraging economic freedom" as essential for economic growth.
But how do we know that these principles are essential? First of all, it is clear that
the lack of high productivity jobs is the source of poverty and low incomes in the
world, including the poorer areas of the Middle East and North Africa. If there are
only low productivity jobs - or no jobs - then incomes will be low and there will be
more poverty. It is almost a tautology.
Unfortunately, the recent trends in productivity growth in the Middle East are not
good. Guido Tabellini, in his paper for this conference, notes that productivity
actually fell in the Middle East in the last 20 years, by 0.7 percent per year. In
contrast, this is a period when productivity w a s increasing in the United States,
Europe and East Asia. This contrast is particularly strong and, I think, worrisome.
And the pressure on increasing productivity and creating jobs will not diminish in the
years ahead in the Middle East. Projections are that the working age population in
the Middle East and North Africa will increase by about 50 million in the next ten
years.
Why are so few high productivity jobs being created? According to basic economic
growth theory, productivity depends on two things: the amount of capital each
person has to work with and the level of technology. If there are no impediments to
the flow and accumulation of capital and technology, then countries or areas that
are behind in productivity should have a higher productivity growth rate. Capital will
flow to where it is in short supply relative to labor and, with more capital, higher
productivity jobs can be created. Similarly, technology can spread through
education and training. For these reasons, poor areas or countries can and should
be catching up to rich areas or countries.
There is evidence for such catch-up when there are few impediments to the use
and accumulation of capital and technology. It is unfortunate that there is little
evidence of such catch-up in the last twenty years in the greater Middle East as a
whole. W h y has there not been more catch-up? More and more evidence has
been accumulating that significant impediments to investment and the adoption of
technology are holding back countries and people.
One can group these impediments into three areas. It is not a coincidence that
these three areas correspond to the principles I listed from President Bush's recent
speech on the greater Middle East, or principles from the Millennium Challenge
Account.
First, poor governance - for example, the lack of the rule of law - creates
disincentives to invest, to start up n e w firms, and to expand existing firms with highproductivity jobs. This has a negative impact on capital formation and
entrepreneurial activity. In developing the Millennium Challenge Account, w e used
several indicators to measure the rule of law - s o m e developed by the World Bank
Institute and s o m e by other organizations; all are publicly available. The measures
of the rule of law for M E N A have a rating which is relatively low. For example, it is
about one-fourth that of Canada: the numbers are 0.52 for the Middle East region
and 2.11 for Canada, which in this context is representative of Europe, U.S., Japan
and other industrialized nations. Of course, there is diversity within the greater
Middle East area. The U A E measure, for instance, is much closer to Canada's
number than to the Middle East average.
Second, poor education and health impede the development of human capital.
Workers without adequate education do not have the skills to take on highproductivity jobs or to adopt n e w technologies which increase the productivity of the
jobs that they have already.
What do we know here? It depends on how much students are learning. As a
former professor, I know that sometimes you don't know h o w effective you are until
20 years later. But the measures w e have now, for example, on primary education
completion rates show that the average for M E N A is a 75 percent completion rate.
In industrialized countries, the completion rate is much higher. So, again there is a
tnJJwwnir frann ^ „ / « ^ n o / M 1 f l o p o c / i c 1 ^ H 7 Vltm
5/31/2005
S-1507: Economic Growth in the Greater Middle East<br>Under Secretary John B. Taylor Remarks<br... Page 3 of 4
difference in education which could explain s o m e of the differences in productivity
which I discussed earlier.
The third impediment to growth relates to economic freedom. Too many restrictions
on economic transactions prevent people from trading goods and services and from
adopting n e w technologies. Lack of openness to trade, state monopolies, and
excessive regulation are all examples of restrictions that reduce the incentives for
innovation and investment needed to boost productivity.
What do we know about this? Again, there are indicators that we have tried to use
in practice. O n e indicator of which I a m particularly fond is the length of time it takes
to start a business. The literature shows that this is a predictor of growth. In the
M E N A area, the average number of days that it takes to start a business is 43. In
Canada, the average is three days, while in s o m e countries in the M E N A , it's much
longer than 43 days.
Trade openness is another indicator that has been measured by many objective
institutions. Here, a higher number in the index means less openness. For M E N A ,
the number is 4.0, while it's 2.0 for both Canada and Australia. Of course, other
economic indicators show less difference with industrialized countries. Inflation, for
example, is one of the indices on which the M E N A region performs very well.
As a policy maker, I ask: How do we translate these very good ideas, research and
measures of performance into what w e do everyday? People like us ask these
questions and remain convinced that improvement in the policies of ruling justly,
investing in people, and encouraging economic freedom is what is needed to
increase economic growth in the Middle East. I'd like to share with you several
examples of what is actually happening on the ground, based on m y recent visits to
the Middle East region.
First, when I speak with finance ministers, central bank governors, and private
business people in the greater Middle East countries, I find no disagreement with
this w a y of thinking about economic growth. They tell m e what I've said here today.
Indeed, I usually hear these s a m e ideas even before I begin talking. It's no secret
that in order to raise economic growth, one has to focus on these measures.
Second, it is clear that cases within the Middle East where good progress has been
and is being made. There are many examples of market-oriented economies that
are removing barriers to economic growth. To n a m e a few:
• Bahrain is a leading financial and trading center.
• Dubai has transformed itself into an important regional economic center.
• Morocco, as part of its free trade agreement with the United States,
committed to keep its financial sector open to foreign investment. It also
agreed to m a k e its procedures for new regulation more transparent by
allowing interested parties the opportunity to comment on proposed
regulations.
Next, I'd like to share with you a few snapshots of my recent trips that illustrate how
much has improved in the last eight months:
In Afghanistan, in the last few months, a new currency has been issued, roads has
been completed and a new banking law has been passed which should assist in
attracting foreign capital. Now, many more boys and girls are in school; industrial
parks are being built; and customs facilities are being improved. Much work is also
being done on land titling to establish property rights.
In Iraq, within only a few months, a new currency was introduced, and a seminal
law w a s passed to m a k e the central bank independent. Recently, I met with a
group of private bankers in Baghdad w h o were forming a trade group. Foreign
bank entry is progressing, with three foreign banks being considered for banking
licenses, including the National Bank of Kuwait.
to/Zwiim, ireas pnv/nrftgg/relftages/isl S 0 7 . h t m
5/31/2005
S-1507: Economic Growth in the Greater Middle East<br>Under Secretary John B. Taylor Remarks<br... Page 4 of 4
I also recently traveled to Jordan, where the government recently passed a n e w
budget that will reduce subsidies that have been making it difficult for the economy
to adjust. Jordan has used qualified industrial zones to increase trade with great
results. Exports in Jordan grew by over 20 percent in 2001 and 2002.
For the Palestinian Authority, Finance Minister Fayyad has made remarkable
progress toward a good, transparent budget process, including a direct deposit
system under which funds are disbursed directly to employees. H e has also helped
to bring the petroleum monopoly under the control of the Finance Ministry. The
business community similarly recognizes that better regulation, better infrastructure
and, of course, peace in that region would m a k e a considerable difference in
economic growth.
In Israel, Finance Minister Netanyahu has put through a number of laudable
reforms, including tax reductions and welfare and pension system reforms. Israel is
poised to continue on this path with further privatization, improvements in the
regulatory process, and increasing competition in the financial sector.
These are some of the very encouraging, significant measures that have taken
place in a period of eight months in the greater Middle East region. I wish to leave
you with a few examples of how w e can continue to interact and engage one
another constructively on these issues.
Secretary Snow had a very important meeting with the Finance Ministers from
the region in Dubai last September to begin a dialogue about h o w w e can best work
together on financial sector issues. The United States is also establishing a
Partnership for Financial Excellence, which is an effort to provide technical
assistance and training in the region.
In 2002, Treasury held a very successful workshop entitled "Islamic Finance
101" to educate U.S. policymakers about developments in Islamic finance.
I was very impressed to learn about a recent European Central Bank meeting
with the governors of the central banks from the M E N A region.
Finally, I am very pleased that the IMF has proposed establishing a training
center in the region.
I look forward to continued progress on these and other important initiatives to
promote economic growth in the M E N A region. And I thank you again for giving m e
the opportunity to speak here today.
J2i//^mv.treas. pnv/nrpqs/rel eases/is 1 5 0 7 . h t m
5/31/2005
i'H-ESS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 5, 2004
2004-5-5-15-1-6-19739
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $82,199 million as of the end of that week, compared to $82,944 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
April 23, 2004
Ap ril 30, 2004
82,944
82,199
Euro
Yen
TOTAL
Euro
Yen
TOTAL
9,070
14,380
23,450
9,204
14,252
23,456
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,898
2,889
14,787
12,068
2,864
14,932
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
21,219
20,322
12,443
12,445
11,045
11,045
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
April 23, 2004
Euro
1. Foreign currency loans and securities
Yen
April 30, 2004
TOTAL
Euro
0
Yen
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
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
April 23, 2004
Euro
Yen
April 30, 2004
TOTAL
1. Contingent liabilities in foreign currency
Euro
Yen
TOTAL
0
0
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
0
0
4. a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1508: M E D I A ADVISORY<br>Treasury Secretary Snow To Visit Wisconsin and Illi... Page 1 of 2
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
May 5, 2004
JS-1508
MEDIA ADVISORY
Treasury Secretary Snow To Visit Wisconsin and Illinois This Week
Treasury Secretary John W. Snow will travel to Racine, Wisconsin and Chicago,
Illinois May 6-7 to meet with local business leaders, announce recipients of
Treasury's New Markets Tax Credit awards, and to give a speech on the
President's efforts to strengthen the economy.
As a result of President Bush's tax reform legislation in 2001 and 2003, more than
2.1 million taxpayers in Wisconsin and more than 4.6 million taxpayers in Illinois will
have lower income tax bills in 2004.
The New Market Tax Credit (NMTC) program attracts private-sector capital
investment into urban and rural low-income areas to help finance community
development projects, stimulate economic opportunity and create jobs in the areas
that need it most.
Established by Congress in December 2000, the NMTC program stimulates
investment and creates jobs in our nation's low income communities. It permits
individual and corporate taxpayers to receive a credit against Federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs). Substantially, all of the taxpayer's
investment must in turn be used by the C D E to make qualified investments
supporting certain business activities in low-income communities. The credit
provided to the investor totals 39 percent of the face value of the investment and is
claimed over a seven-year credit allowance period.
The following events are open to the media:
Thursday, May 6
New Market Tax Credit press conference
1:30pmCDT
The Johnson Building
555 Main Street
Racine, Wl
** Media must arrive by 12:45 p m and must wear their official media
credentials
Friday, May 7
Remarks to Federal Reserve Bank of Chicago
8:30 a m C D T
Fairmont Hotel
200 North Columbus Drive
Chicago, IL
** Media must arrive by 7:45 a m and must wear their official media credentials
New Market Tax Credit press conference
11:30 a m C D T
- i t o : / / w w w tress trnv/nress/releases/is 1508Jitm
JS-1508: M E D I A ADVISORY<br>Treasury Secretary Snow To Visit Wisconsin and Illi... Page 2 of 2
The Pablo Friere Child Care Center
1653 West 43rd Street
Chicago, IL
** Media must arrive by 10:00 a m and must wear their official media
credentials
htto://www trp ag <mWnrpgg/re1 eases/is 1508.htm
5/6/2005
js-1509: Treasury Secretary Snow Statement on House Passage<BR> to Extend Alternati... Page 1 of 1
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 5, 2004
js-1509
Treasury Secretary S n o w Statement on House Passage
to Extend Alternative Minimum Tax Relief
The expected growth in the individual alternative minimum tax (AMT) is a major
problem in the tax code that must be addressed. I applaud the House of
Representatives for acting to extend the temporary A M T relief for millions of middle
class families. These temporary provisions will keep the number of taxpayers
affected by the A M T from rising significantly in the near-term. More importantly, this
temporary extension 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.
H.R. 4227 extends through 2005 temporary Alternative Minimum Tax (AMT) relief.
Specifically, H.R. 4227 would maintain the current A M T exemption amount indexed
for inflation through 2005.
i M / w w w . t r e a s . pnv/nress/rftl eases/is 1509.htm
5/6/2005
JS-1510: Treasury Issues Proposed Regulations<br> Regarding Tax-Exempt Bonds for S... 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®.
May 5, 2004
JS-1510
Treasury Issues Proposed Regulations
Regarding Tax-Exempt Bonds for Solid Waste Disposal Facilities
Today the Treasury Department and the Internal Revenue Service issued proposed
regulations relating to tax-exempt private activity bonds issued to finance solid
waste disposal facilities.
"These proposed regulations update the existing regulations and provide certainty
to issuers and holders of tax-exempt bonds for solid waste disposal facilities,"
stated Acting Treasury Assistant Secretary for Tax Policy Greg Jenner.
In 2002, the Treasury Department and the IRS requested public comments on the
application of the rules for solid waste disposal facility bonds to recycling facilities.
In response to comments received, the proposed regulations take into account
changes in the waste recycling industry that have occurred since the existing
regulations were issued in 1972.
The existing regulations provide that a facility will not qualify as a solid waste
disposal facility if the material processed at the facility has any market or other
value. As a result of changes in the waste recycling industry, the proposed
regulations do not include this requirement. The proposed regulations provide
guidance on the types of material that constitute solid waste and the types of
activities that are permitted uses of a solid waste disposal facility, which include
final disposal, conversion, recovery, and transformation processes as well as
preliminary functions and functionally related and subordinate activities.
-30-
REPORTS
• The text of the proposed regulations
Vwww.trfifls o-nv/nress/releases/is 1510.htm
5/6/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-140492-02]
RIN 1545-BD04
Definition of Solid Waste Disposal Facilities for Tax-exempt Bond
Purposes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public
hearing.
SUMMARY: This document contains proposed regulations on the
definition of solid waste disposal facilities for purposes of the
rules applicable to tax-exempt bonds issued by State and local
governments. These regulations provide guidance to State and
local governments that issue tax-exempt bonds to finance solid
waste disposal facilities and to taxpayers that use those
facilities. This document also contains a notice of public
hearing on these proposed regulations.
DATES: Written or electronic comments must be received by
[INSERT DATE 90 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE
FEDERAL REGISTER] . Outlines of topics to be discussed at the
public hearing scheduled for August 11, 2004, at 10 a.m., must be
received by August 4, 2004.
1
ADDRESSES:
Send submissions to CC:PA:LPD:PR (REG-140492-02),
room 5203, 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-140492-02), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically to
the IRS Internet site at www.irs.gov/regs, or via the Federal
eRulemaking Portal at www.regulations.gov (IRS - REG-140492-02).
The public hearing will be held in the auditorium, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Michael P. Brewer, (202) 622-3980; concerning submissions and the
hearing, Sonya Cruse, (202) 622-4693 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Generally, interest on a State or local bond is excluded
from gross income under section 103 of the Internal Revenue Code
(Code). However, section 103(b) provides that the exclusion does
not apply to a private activity bond unless the bond is a
qualified bond. Section 141(e) defines qualified bond to include
an exempt facility bond that meets certain requirements. Section
142(a) lists the categories of exempt facility bonds, which
include bonds for solid waste disposal facilities under section
2
142(a) (6) .
Section 1.103-8(f) (2) (ii) (a) of the Income Tax Regulations
generally defines solid waste disposal facilities as any property
or portion thereof used for the collection, storage, treatment,
utilization, processing, or final disposal of solid waste.
Section 1.103-8(f) (2) (ii) (b) provides that the term solid waste
has the same meaning as in former section 203(4) of the Solid
Waste Disposal Act (42 U.S.C. 3252(4)), as quoted in §1.1038(f)(2)(ii)(b) , except that material will not qualify as solid
waste unless, on the date of issue of the obligations issued to
provide the facility to dispose of the waste material, it is
property that is useless, unused, unwanted, or discarded solid
material that has no market or other value at the place where the
property is located (the no-value test). Thus, under the
existing regulations, when any person is willing to purchase the
property, at any price, the material is not waste. However, if
any person is willing to remove the property at his own expense
but is not willing to purchase it at any price, the material is
waste under the existing regulations.
Former section 203(4) of the Solid Waste Disposal Act, as
quoted in §1.103-8 (f) (2) (ii) (b), provides that the term solid
waste means,
garbage, refuse, and other discarded solid materials,
including solid-waste materials resulting from
industrial, commercial, and agricultural operations,
3
and from community activities, but does not include
solids or dissolved material in domestic sewage or
other significant pollutants in water resources, such
as silt, dissolved or suspended solids in industrial
waste water effluents, dissolved materials in
irrigation return flows or other common water
pollutants.
Section 1.103-8(f) (2) (ii) (c) states that a facility that
disposes of solid waste by reconstituting, converting, or
otherwise recycling it into material that is not waste also
qualifies as a solid waste disposal facility if solid waste
constitutes at least 65 percent, by weight or volume, of the
total materials introduced into the recycling process. Such a
recycling facility does not fail to qualify as a solid waste
disposal facility under the existing regulations solely because
it operates at a profit.
Section 17.1(a) of the temporary Income Tax Regulations
generally provides that, in the case of property that has both a
solid waste disposal function and a function other than the
disposal of solid waste, only the portion of the cost of the
property allocable to the function of solid waste disposal is
taken into account as an expenditure to provide solid waste
disposal facilities. However, under §17.1(a), a facility that
otherwise qualifies as a solid waste disposal facility will not
be treated as having a function other than solid waste disposal
merely because material or heat that has utility or value is
recovered or results from the disposal process. Section 17.1(a)
4
provides that, when materials or heat are recovered, the waste
disposal function includes the processing of those materials or
heat that occurs in order to put them into the form in which the
materials or heat are in fact sold or used, but does not include
further processing that converts the materials or heat into other
products.
Section 17.1(b) provides that the portion of the cost of
property allocable to solid waste disposal is determined by
allocating the cost of the property between the property's solid
waste disposal function and any other functions by any method
which, with reference to all the facts and circumstances with
respect to the property, reasonably reflects a separation of
costs for each function of the property.
In Notice 2002-51 (2002-2 C.B. 131) the IRS and Treasury
Department requested public comments on the application of
section 142(a)(6) to recycling facilities. Notice 2002-51 also
invited comments on any other issues concerning the application
of that Code provision.
In response to the Notice, commentators suggested that the
rules governing exempt facility bonds for solid waste disposal
facilities should be consistent with national policies to
encourage, facilitate, and increase recycling. For example,
commentators stated that the rules should not deny tax-exempt
financing to recycling while providing such financing to
5
landfills and municipal waste incinerators.
Commentators suggested revisions to the no-value test used
for determining whether material is solid waste. For example,
commentators suggested that material that has a market or other
value at the place it is located only by reason of its value for
recycling should not be considered to have a market or other
value. Commentators also suggested that material acquired by a
recycler should qualify as solid waste if the amounts paid to the
packer, collector or similar party are not in excess of the cost
of transporting and handling the material. Some commentators
suggested that the determination of whether material is waste
should be made at the point of generation prior to the time costs
are incurred to divert the material from the waste stream.
Commentators also suggested that the determination of when
the waste recycling process stops should not depend on whether
the activity is being carried out by a single party or multiple
parties, or whether there has been a change of ownership of the
material.
The IRS and Treasury Department have considered these
comments, and the proposed regulations contained in this document
(the proposed regulations) implement a number of these
recommendations.
Explanation of Provisions
I. Solid Waste
6
The proposed regulations contain proposed amendments to 26
CFR part 1 regarding exempt facility bonds for solid waste
disposal facilities. In light of the changes that have occurred
in the waste recycling industry since the existing regulations
were issued in 1972, the proposed regulations eliminate the novalue test for determining whether material is solid waste. The
proposed regulations retain the definition of solid waste under
former section 203(4) of the Solid Waste Disposal Act, quoted
above, and provide guidance for determining whether material
constitutes "garbage, refuse and other discarded solid materials''
under that definition.
Thus, the proposed regulations provide that the term solid
waste means garbage, refuse, and other discarded solid materials,
including solid-waste materials resulting from industrial,
commercial, and agricultural operations, and from community
activities, but does not include solids or dissolved material in
domestic sewage or other significant pollutants in water
resources, such as silt, dissolved or suspended solids in
industrial waste water effluents, dissolved materials in
irrigation return flows or other common water pollutants.
For these purposes, the proposed regulations provide that
garbage, refuse and other discarded solid materials means
material that is solid and that is introduced into a final
disposal process, conversion process, recovery process, or
7
transformation process (as those terms are defined in the
proposed regulations and described in part II below) unless the
material falls within one of several categories of excluded
items.
The first category of material that does not constitute
solid waste is material that is introduced into a conversion
process if the material is either: (1) a fossil fuel; or (2) any
material that is grown, harvested, produced, mined, or otherwise
created for the principal purpose of converting the material to
heat, hot water, steam, or another useful form of energy. For
this purpose, material is not treated as grown, harvested,
produced, mined, or otherwise created for the principal purpose
of converting the material to heat, hot water, steam, or another
useful form of energy just because an operation is performed on
the material to make the material more conducive to being
converted to heat, hot water, or steam. For example, if material
that is not otherwise grown, harvested, produced, mined, or
created for the principal purpose of converting the material to a
useful form of energy is formed into pellets to make the material
more conducive to being incinerated to produce steam, the
creation of pellets does not cause the material to be produced or
created for the principal purpose of converting the material to
steam.
The second category of material that does not constitute
8
solid waste is any precious metal that is introduced into a
recovery process.
The regulations are reserved with respect to any additional
category of excluded material that may be specified with respect
to a transformation process.
Under the proposed regulations, hazardous material is not
solid waste if the material is disposed of at a facility that is
subject to final permit requirements under subtitle C of title II
of the Solid Waste Disposal Act (as in effect on October 22,
1986, the date of the enactment of the Tax Reform Act of 1986).
Thus, under the proposed regulations, a hazardous waste disposal
facility described in section 142(h) (1) would not qualify as a
solid waste disposal facility.
Finally, the proposed regulations provide that radioactive
material is not solid waste.
II. Solid Waste Disposal Facility
A. In General
The proposed regulations provide that a facility is a solid
waste disposal facility to the extent that the facility is: (1)
used to perform a solid waste disposal function (as defined in
the proposed regulations and discussed in part II, B below); (2)
used to perform a preliminary function (as defined in the
proposed regulations and discussed in part II, C below); or (3)
functionally related and subordinate (within the meaning of
9
§1.103-8(a)(3)) to a facility that is used to perform a solid
waste disposal function or a preliminary function.
B. Solid Waste Disposal Function
The proposed regulations define solid waste disposal
function as the processing of solid waste in (1) a final disposal
process, (2) a conversion process, (3) a recovery process, or (4)
a transformation process.
1. Final Disposal Process
Under the proposed regulations, a final disposal process is
(1) the placement of material in a landfill or (2) the
incineration of material without any useful energy being
captured. Comments are requested on whether other types of
processes should be included in the definition of final disposal
process.
2. Conversion Process
The proposed regulations define conversion process as a
process in which material is incinerated and heat, hot water, or
steam is created and captured as useful energy. For this
purpose, the conversion process begins with the incineration of
material and ends at the point at which the latest of heat, hot
water, or steam is created. Thus, the conversion process ends
before any transfer or distribution of heat, hot water or steam.
Comments are requested on the definition of conversion process in
the proposed regulations, including whether the definition should
10
include processes in which useful energy in a form other than
heat, hot water, or steam is created.
3. Recovery Process
The proposed regulations define recovery process as a
process that starts with the melting or re-pulping of material to
return the material to a form in which the material previously
existed for use in the fabrication of an end product and ends
immediately before the material is processed in the same or
substantially the same way that virgin material is processed to
fabricate the end product.
The proposed regulations further provide that, if an end
product is fabricated entirely from non-virgin material, the
recovery process ends immediately before the non-virgin material
is processed in the same or substantially the same way that
virgin material is processed in a comparable fabrication process
that uses only virgin material or a combination of virgin and
non-virgin material.
The proposed regulations also specify that refurbishing,
repair, or similar activities are not recovery processes.
Comments are requested on the definition of recovery process
in the proposed regulations, including whether the definition
should include processes, other than melting or re-pulping, that
return material to a form in which the material previously
existed.
11
4. Transformation Process
The IRS and Treasury Department recognize that certain
processes in which material is transformed for use in the
creation of a useful product (transformation processes) should be
treated as solid waste disposal functions. A transformation
process could include, for example, shredding used tires for use
as roadbed material. However, defining a transformation process
requires clear criteria that distinguish a transformation process
from a manufacturing or production process that uses material
other than solid waste. The proposed regulations reserve on the
definition of transformation process so that the public may
comment on how the definition should be crafted to meet this
objective within the context of the proposed regulations.
Comments are requested in particular on whether the definition of
a transformation process should be limited to the processing of
particular types of materials to produce certain categories of
products, and, if so, what types of materials and which
categories of products should be included.
C. Preliminary Function
A facility is a solid waste disposal facility under the
proposed regulations to the extent that the facility is used to
perform a preliminary function. For this purpose, a preliminary
function is the collection, separation, sorting, storage,
treatment, processing, disassembly, or handling of solid material
12
that is preliminary and directly related to a solid waste
disposal function. However, no portion of a collection,
separation, sorting, storage, treatment, processing, disassembly,
or handling activity is a preliminary function unless, for each
year while the issue is outstanding, more than 50 percent, by
weight or volume, of the total materials that result from the
entire activity (both the part that is preliminary and directly
related to a solid waste disposal function and the part that is
not preliminary and directly related to a solid waste disposal
function) is solid waste. For example, if a facility sorts
material and some of the sorted material is processed in a solid
waste disposal function and some of the sorted material is
processed in another manner, a portion of the sorting facility is
a solid waste disposal facility if, for each year while the issue
is outstanding, more than 50 percent, by weight or volume, of all
the sorted material is solid waste.
D. Mixed-Function Facilities
The proposed regulations provide that, in general, if a
facility is used to perform both (1) a solid waste disposal
function or a preliminary function, and (2) another function,
then the costs of the facility allocable to the solid waste
disposal function or the preliminary function are determined
using any reasonable method, based on all the facts and
circumstances. This rule applies, for example, if a facility is
13
used (1) to process solid waste in a recovery process and (2) to
perform another function that is neither a solid waste disposal
function (because it does not process solid waste in a final
disposal process, conversion process, recovery process, or
transformation process) nor a preliminary function (because it is
not preliminary and directly related to a solid waste disposal
function).
The proposed regulations also contain a special rule to
determine the portion of the costs of property that are allocable
to a solid waste disposal function if the property is used to
perform a final disposal process, conversion process, recovery
process, or transformation process and the inputs to the process
consist of solid waste and material that is not solid waste.
Under this special rule, the portion of the costs of property
used to perform such a process that are allocable to a solid
waste disposal function equals the lowest percentage of solid
waste processed in the process in any year while the issue is
outstanding. The percentage of solid waste processed in such a
process for any year is the percentage, by weight or volume, of
the total materials processed in the process that constitute
solid waste for that year. If, however, for each year while the
issue is outstanding, solid waste constitutes at least 80
percent, by weight or volume, of the total materials processed in
the process, all of the costs of the property used to perform the
14
process are allocable to a solid waste disposal function.
Proposed Effective Date
The proposed regulations will apply to bonds that are: (1)
sold on or after the date that is 60 days after the date of
publication of final regulations under section 142(a)(6) in the
Federal Register; and (2) subject to section 142. However, the
proposed regulations provide that an issuer is not required to
apply the regulations to bonds described in the preceding
sentence that are issued to refund a bond to which the
regulations do not apply if the weighted average maturity of the
refunding bonds is not longer than the weighted average maturity
of the refunded bonds. Section 1.103-8 (f) (2) of the Income Tax
Regulations and §17.1 of the temporary Income Tax Regulations
will not apply to bonds that are subject to the final regulations
under section 142(a)(6).
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 the regulations do not impose a
collection of information on small entities, the Regulatory
15
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 Department
request comments on the clarity of the proposed rules and how
they can be made easier to understand. All comments will be
available for public inspection and copying.
A public hearing has been scheduled for August 11, 2004, at
10 a.m. in the auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building
security procedures, visitors must enter at the Constitution
Avenue entrance. In addition, all visitors must present photo
identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the lobby 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.
16
The rules of 26 CFR 601.601(a) (3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments by [INSERT DATE 90 DAYS AFTER PUBLICATION
OF THIS DOCUMENT IN THE FEDERAL REGISTER] and submit an outline
of the topics to be discussed and the amount of time to be
devoted to each topic by August 4, 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.
Comments are requested on all aspects of the proposed
regulations, including those aspects for which specific requests
for comments are set forth above.
Drafting Information
The principal authors of these regulations are Michael P.
Brewer, Timothy L. Jones and Rebecca L. Harrigal, Office of Chief
Counsel, IRS (TE/GE). 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as
17
follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.142 (a) (6)-1 is added to read as follows:
§1.142 (a) (6)-l Exempt facility bonds: solid waste disposal
facilities.
(a) In general. Section 103(a) provides that, generally,
interest on a state or local bond is not included in gross
income. However, this exclusion does not apply to any private
activity bond that is not a qualified bond. Section 141(e)
defines qualified bond to include an exempt facility bond that
meets certain requirements. Section 142(a) defines exempt
facility bond as any bond issued as part of an issue 95 percent
or more of the net proceeds of which are to be used to provide a
facility specified in section 142 (a) . One type of facility
specified in section 142 (a) is a solid waste disposal facility.
This section defines the term solid waste disposal facility for
purposes of section 142 (a) .
(b) Solid waste disposal facility—(1) In general. The term
solid waste disposal facility means a facility to the extent that
the facility is-(i) Used to perform a solid waste disposal function (within
18
the meaning of paragraph (b)(2) of this section);
(ii) Used to perform a preliminary function (within the
meaning of paragraph (b)(3) of this section); or
(iii) Functionally related and subordinate (within the
meaning of §1.103-8 (a) (3)) to a facility that is used to perform
a solid waste disposal function or a preliminary function.
(2) Solid waste disposal function. A solid waste disposal
function is the processing of solid waste (as defined in
paragraph (c) of this section) in—
(i) A final disposal process (as defined in paragraph (d) of
this section);
(ii) A conversion process (as defined in paragraph (e) of
this section);
(iii) A recovery process (as defined in paragraph (f) of
this section); or
(iv) A transformation process (as defined in paragraph (g)
of this section).
(3) Preliminary function. A preliminary function is the
collection, separation, sorting, storage, treatment, processing,
disassembly, or handling of solid material that is preliminary
and directly related to a solid waste disposal function.
However, no portion of a collection, separation, sorting,
storage, treatment, processing, disassembly, or handling activity
is a preliminary function unless, for each year while the issue
19
is outstanding, more than 50 percent, by weight or volume, of the
total materials that result from the entire activity is solid
waste.
(4) Mixed-function facilities. Paragraph (h) of this
section provides rules for determining the portion of a facility
that is a solid waste disposal facility for a facility that is
used to perform-(i) A solid waste disposal function or a preliminary
function; and
(ii) Another function.
(c) Solid Waste--(1) In general. For purposes of this
section, the term solid waste means garbage, refuse, and other
discarded solid materials (as defined in paragraph (c)(2) of this
section), including solid-waste materials resulting from
industrial, commercial, and agricultural operations, and from
community activities, but does not include solids or dissolved
material in domestic sewage or other significant pollutants in
water resources, such as silt, dissolved or suspended solids in
industrial waste water effluents, dissolved materials in
irrigation return flows or other common water pollutants. Liquid
or gaseous waste is not solid waste.
(2) Garbage, refuse and other discarded solid materials—(i)
In general. For purposes of paragraph (c)(1) of this section,
garbage, refuse and other discarded solid materials means
20
material that is solid and that is introduced into a final
disposal process, conversion process, recovery process, or
transformation process unless the material is described in
paragraph (c) (2) (ii), (iii), (iv), (v) or (vi) of this section.
(ii) Certain material introduced into a conversion process.
Material is described in this paragraph (c)(2)(ii) if the
material is introduced into a conversion process and the material
is-(A) A fossil fuel; or
(B) Any material that is grown, harvested, produced, mined,
or otherwise created for the principal purpose of converting the
material to heat, hot water, steam, or another useful form of
energy. For example, organic material that is closed-loop
biomass under section 45 (c) is described in this paragraph
(c) (2) (ii) if the material is introduced into a conversion
process. Material is not treated as described in this paragraph
(c)(2)(ii) just because an operation is performed on the material
to make the material more conducive to being converted to heat,
hot water, or steam. For example, if material that is not
otherwise grown, harvested, produced, mined, or created for the
principal purpose of converting the material to a useful form of
energy is formed into pellets to make the material more conducive
to being incinerated to produce steam, the creation of pellets
does not cause the material to be produced or created for the
21
principal purpose of converting the material to steam.
(iii) Certain material introduced into a recovery process.
Material is described in this paragraph (c)(2)(iii) if the
material is introduced into a recovery process, and the material
is a precious metal.
(iv) Certain material introduced into a transformation
process. [Reserved].
(v) Certain hazardous material. Material is described in
this paragraph (c)(2)(v) if the material is hazardous material
and it is disposed of at a facility that is subject to final
permit requirements under subtitle C of title II of the Solid
Waste Disposal Act (as in effect on October 22, 1986, the date of
the enactment of the Tax Reform Act of 1986). See section
142(h) (1) .
(vi) Radioactive material. Material is described in this
paragraph (c)(2)(vi) if the material is radioactive.
(d) Final disposal process. The term final disposal process
means —
(1) The placement of material in a landfill; or
(2) The incineration of material without any useful energy
being captured.
(e) Conversion process. The term conversion process means a
process in which material is incinerated and heat, hot water, or
steam is created and captured as useful energy. The conversion
22
process begins with the incineration of material and ends at the
point at which the latest of heat, hot water, or steam is
created. Thus, the conversion process ends before any transfer
or distribution of heat, hot water or steam.
(f) Recovery process—(1) In general. The term recovery
process means a process that starts with the melting or repulping of material to return the material to a form in which the
material previously existed for use in the fabrication of an end
product and ends immediately before the material is processed in
the same or substantially the same way that virgin material is
processed to fabricate the end product. For example, melting
non-virgin metal to fabricate a metal product is not a recovery
process if virgin metal is melted in the same or substantially
the same process to fabricate the product.
(2) End products fabricated entirely from non-virgin
material. If an end product is fabricated entirely from nonvirgin material, the recovery process ends immediately before the
non-virgin material is processed in the same or substantially the
same way that virgin material is processed in a comparable
fabrication process that uses only virgin material or a
combination of virgin and non-virgin material. For example, if
new paper is fabricated entirely from re-pulped, non-virgin
material, the recovery process ends immediately before the nonvirgin material is processed in the same or substantially the
23
same manner that virgin material is processed in the fabrication
of paper made only with virgin material, or with a mixture of
virgin and non-virgin material.
(3) Refurbishing, repair, or similar activities.
Refurbishing, repair, or similar activities are not recovery
processes.
(g) Transformation process. [Reserved].
(h) Mixed-function facilities—(1) In general. Except to
the extent provided in paragraph (h)(2) of this section, if a
facility is used to perform both a solid waste disposal function
or a preliminary function and another function, then the costs of
the facility allocable to the solid waste disposal function or
the preliminary function are determined using any reasonable
method, based on all the facts and circumstances. See §1.1038(a)(1) for rules relating to which amounts are used to provide
an exempt facility.
(2) Mixed inputs—(i) In general. Except as provided in
paragraph (h)(2)(ii) of this section, for each final disposal
process, conversion process, recovery process, or transformation
process, the percentage of costs of the property used to perform
such process that are allocable to a solid waste disposal
function equals the lowest percentage of solid waste processed in
that process in any year while the issue is outstanding. The
percentage of solid waste processed in such process for any year
24
is the percentage, by weight or volume, of the total materials
processed in that process that constitute solid waste for that
year.
(ii) Special rule for mixed-input processes if at least 80
percent of the materials processed are solid waste. For each
final disposal process, conversion process, recovery process, or
transformation process, all of the costs of the property used to
perform such process are allocable to a solid waste disposal
function if, for each year while the issue is outstanding, solid
waste constitutes at least 80 percent, by weight or volume, of
the total materials processed in the process.
(i) Examples. The following examples illustrate the
application of this section:
Example 1. Final disposal process. Garbage trucks collect
solid material at curbside from businesses and residences and
dump the material in a landfill owned by Company A. The landfill
is not subject to final permit requirements under subtitle C of
title II of the Solid Waste Disposal Act (as in effect on the
date of the enactment of the Tax Reform Act of 1986). The
placement of material in the landfill is a final disposal
process. The solid material placed in the landfill is solid
waste under paragraph (c) of this section. Therefore, the
landfill is a solid waste disposal facility.
Example 2. Recovery process. Company B re-pulps magazines
and cleans the pulp. After cleaning, B mixes the pulp with
virgin material and uses the mixed material to produce rolls of
paper towels. Before the mixing, the re-pulped material is not
processed in the same or substantially the same way that virgin
material is processed to produce the paper towels. The process
starting with the re-pulping of the magazines and ending
immediately before the re-pulped material is mixed with the
virgin material is a recovery process. The magazines introduced
into the recovery process are solid waste. Therefore, the
25
property that re-pulps the magazines and the property that cleans
the re-pulped material are used to perform a solid waste disposal
function.
Example 3. Preliminary function. Company C owns a paper
mill. At the mill, logs from nearby timber operations are
processed through a machine that removes bark. The stripped logs
are used to manufacture paper. The stripped bark falls onto a
conveyor belt that transports the bark to a storage bin used to
briefly store the bark until C feeds the bark into a boiler. The
conveyor belt and storage bin are used only for these purposes.
The boiler is used only to create steam by burning the bark, and
the steam is used to generate electricity. The creation of steam
from the stripped bark is a conversion process that starts with
the incineration of the stripped bark. The conversion process is
a solid waste disposal function. The conveyor belt performs a
collection activity that is preliminary and that is directly
related to the solid waste disposal function. The storage bin
performs a storage function that is preliminary and that is
directly related to the solid waste disposal function. Thus, the
conveyor belt and storage bin are solid waste disposal
facilities. The removal of the bark does not have a sufficient
nexus to the conversion process to be directly related to the
conversion process; the process of removing the bark does not
become directly related to the conversion process merely because
it results in material that will be waste used in the conversion
process.
Example 4. Mixed-input facility. Company D owns an
incinerator financed by an issue and uses the incinerator
exclusively to burn coal (a fossil fuel) and other solid material
to create steam that is used to generate electricity. Each year
while the issue is outstanding, 30 percent by volume and 40
percent by weight of the solid material that D processes in the
conversion process is a fossil fuel. The remainder of the solid
material processed is neither a fossil fuel nor material that was
grown, harvested, produced, mined, or otherwise created for the
principal purpose of converting the material to heat, hot water,
steam, or another useful form of energy. Seventy percent of the
costs of the property used to perform the conversion process are
allocable to a solid waste disposal function.
Example 5. Mixed-function facility. Company E owns and
operates a facility financed by an issue and uses the facility
exclusively to sort damaged bottles from bottles that may be refilled. The damaged bottles are directly introduced into a
process that melts them for use in the fabrication of an end
26
product. The melting process is a recovery process. Each year
while the issue is outstanding, more than 50 percent, by weight
or volume, of all of the bottles that pass out of the sorting
process are damaged bottles that are processed in a recovery
process. The sorting facility performs a preliminary function,
but it also performs another function. The costs of the sorting
facility allocable to the preliminary function are determined
using any reasonable method, based on all the facts and
circumstances.
(j) Effective date—(1) In general. Except as provided in
paragraph (j)(2) of this section, this section applies to bonds
that are—
(i) Sold on or after the date that is 60 days after the date
of publication of final regulations in the Federal Register; and
(ii) Subject to section 142.
(2) Certain refunding bonds. An issuer is not required to
apply this section to bonds described in paragraph (j)(1) of this
section that are issued to refund a bond to which this section
does not apply if the weighted average maturity of the refunding
27
bonds is not longer than the weighted average maturity of the
refunded bonds.
Mark E. Matthews
Deputy Commissioner for Services and Enforcement.
js-1511: Under Secretary Taylor to travel to China, Japan, Korea for economic, developm... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 6, 2004
js-1511
Under Secretary Taylor to travel to China, Japan, Korea for economic,
development meetings
John Taylor, U.S. Treasury Under Secretary for International Affairs, will travel to
China, Japan and Korea May 10-16, with attention to current global and regional
economic issues.
In Beijing, China, Taylor will be joined by Ambassador Paul Speltz, recently named
by Secretary John Snow as his personal emissary to China on economic and
financial relations between the nations. O n May 10-11, Taylor and Speltz will meet
with senior officials of the government of China's economic team to discuss the
Chinese economy, progress on financial liberalization, the state of the banking
system, and issues related to China's currency. They will also meet with
economists, financial analysts and members of the business community.
Taylor will be in Japan on May 12-14 where he will meet with officials from Japan's
Ministry of Finance and the Bank of Japan to discuss the improving outlook for the
Japanese economy. Taylor will also be interested in the continued attention to
Japan's efforts to end deflation and to resolve non-performing loans in the
Japanese banking system. Taylor will also meet with economic analysts in Tokyo.
On May 14 Taylor will travel to Jeju, Korea to participate in the annual meetings of
the Asian Development Bank (ADB). Taylor will focus on the ADB's efforts to raise
living standards in the region, including the progress of their reconstruction efforts in
Afghanistan. In addition to the A D B meetings, Taylor will hold a number of bilateral
discussions with countries from the region. Taylor will depart Korea to return to
Washington, D C on May 16.
####
httn://www.treas.gov/press/releases/is 1511 .htm
5/6/2005
JS-1512: Treasury Issues Final Regulations O n Student Loan Interest Deduction
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®.
May 6, 2004
JS-1512
Treasury Issues Final Regulations On Student Loan Interest Deduction
The Treasury Department and the Internal Revenue Service today issued final
regulations relating to the deduction for interest paid on qualified education loans.
"The final regulations issued today clarify which amounts qualify for the student
loan interest deduction to ensure that students obtain the m a x i m u m deduction
permitted under the law," said Acting Assistant Secretary for Tax Policy Greg
Jenner. "These regulations also provide guidance to help lenders meet their
reporting obligations."
The student loan interest deduction was enacted in 1997 and expanded in 2001,
w h e n Congress eliminated the 60-month limit on the time during which interest
payments are deductible. These final regulations provide guidance on the
treatment of amounts such as capitalized interest and loan origination fees, the
deductibility of interest payments m a d e by persons other than the taxpayer, the
definition of "qualified education loan," and other issues.
Related regulations on information reporting by institutions that receive payments of
interest on qualified education rules were finalized in 2002. Those regulations
provided a transition rule for reporting loan origination fees and capitalized interest.
In response to comments, the student loan interest regulations issued today provide
additional time for institutions to begin reporting payments of capitalized interest
and loan origination fees by extending the transition rule for eight months.
Institutions will be required to begin reporting those amounts with respect to
qualified education loans m a d e on or after September 1, 2004.
-30
REPORTS
• TD9125
httn://www tre.as.Pov/nress/releases/js 1512.htm
5/6/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD9125]
RIN 1545-AW01
Deduction for Interest on Qualified Education Loans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations relating to the deduction under
section 221 of the Internal Revenue Code (Code) for interest paid on qualified education
loans. The final regulations reflect the enactment and amendment of section 221 by the
Taxpayer Relief Act of 1997, the Internal Revenue Service Restructuring and Reform
Act of 1998, the Omnibus Consolidated and Emergency Supplemental Appropriations
Act of 1999, and the Economic Growth and Tax Relief Reconciliation Act of 2001. This
document also contains amendments to the final regulations under section 6050S
relating to the information reporting requirements for interest payments received on
qualified education loans. The final regulations affect taxpayers who pay interest on
qualified education loans and payees who receive payments of interest on qualified
education loans.
DATES: Effective Date: These final regulations are effective May 7, 2004.
Applicability Dates: Section 1.221-1 is applicable to periods governed by section
2
221 as amended in 2001, which relates to interest paid on qualified education loans
after December 31, 2001, and on or before December 31, 2010. Section 1.221-2 is
applicable to interest due and paid on qualified education loans after January 21,1999,
but before January 1, 2002, and again after December 31, 2010. Taxpayers also may
apply §1.221-2 to interest due and paid on qualified education loans after December 31,
1997, but before January 21, 1999. The amendments to §1.6050S-3 provide a
transitional rule for certain interest payments with respect to qualified education loans
made before September 1, 2004, and provide guidance applicable to qualified
education loans made on or after that date.
FOR FURTHER INFORMATION CONTACT: Sean M. Dwyer at (202) 622-5020 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On January 21, 1999, the IRS published a notice of proposed rulemaking (REG116826-97) in the Federal Register (64 FR 3257) under section 221 of the Code. The
notice of proposed rulemaking implemented section 202 of the Taxpayer Relief Act of
1997, Public Law 105-34 (111 Stat. 778), which added section 221 to the Code. The
IRS received written, including electronic, comments responding to the proposed
regulations. There were no requests for a public hearing and none was held.
Subsequent to the publication of the proposed regulations, section 412 of the
Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (115
Stat. 38) (2001 Act) amended section 221 by eliminating the 60-month limitation period
3
and the restriction on deductions of interest a taxpayer pays during a period when the
lender does not require payments. The 2001 Act also increased the income limitations
relating to interest deductions under section 221 from $55,000 ($75,000 for married
individuals filing jointly) to $65,000 ($130,000 for married individuals filing jointly) and
the income phase-out range from $40,000-$55,000 ($60,000-$75,000 for married
individuals filing jointly) to $50,000-$65,000 ($100,000-$130,000 for married individuals
filing jointly).
The 2001 Act amendments apply to interest paid on qualified education loans
after December 31, 2001. Accordingly, the final regulations appear in two sections to
reflect the law before and after the effective date of the 2001 Act. Section 1.221-1 is
applicable to periods governed by section 221 as amended in 2001, which relates to
interest paid on qualified education loans after December 31, 2001, and on or before
December 31, 2010. Section 1.221-2 is applicable to interest due and paid on qualified
education loans after January 21, 1999, but before January 1, 2002. Taxpayers also
may apply §1.221-2 to interest due and paid on qualified education loans after
December 31, 1997, but before January 21, 1999. Unless the 2001 Act amendments
are extended by future legislation, section 1.221-2 also will apply to interest due and
paid on qualified education loans after December 31, 2010.
After consideration of all the comments, the proposed regulations under section
221 are adopted as amended by this Treasury decision.
On April 29, 2002, the IRS published final regulations (TD 8992) in the Federal
Register (67 FR 20901) under section 6050S relating to information reporting for
4
interest payments received on qualified education loans. The Taxpayer Relief Act of
1997 added section 6050S to the Code, as well as section 221.
Explanation and Summary of Comments
Many of the comments concerned issues relating to the 60-month limitation
period, which the 2001 Act eliminated. These comments are discussed in 7. and 8.
below because the 60-month period continues to apply to interest on qualified education
loans due and paid after December 31, 1997, but before January 1, 2002, and again
after December 31, 2010.
1. Treatment of Capitalized Interest and Certain Fees
Several commentators discussed the treatment of capitalized interest, loan
origination fees, late fees, and certain insurance fees. Courts have defined the term
"interest," for income tax purposes, as compensation paid for the use or forbearance of
money. See, e.g., Deputy v. Du Pont, 308 U.S. 488 (1940). Consistent with this
definition, the final regulations provide that capitalized interest is deductible as qualifie
education loan interest. Generally, fees, such as loan origination fees or late fees, are
interest if the fees represent a charge for the use or forbearance of money. Therefore, if
the fees represent compensation to the lender for the cost of specific services
performed in connection with the borrower's account, the fees are not interest for
Federal income tax purposes. See Rev. Rul. 69-188 (1969-1 C.B. 54), amplified by
Rev. Rul. 69-582 (1969-2 C.B. 29); see also, e.g., Trivett v. Commissioner. T.C. Memo.
1977-161, aff'don other grounds, 611 F.2d 655 (6th Cir. 1979) (Tax Court found that
certain fees, including insurance fees, were similar to payments for services rendered
5
and not deductible as interest).
S o m e commentators expressed confusion about h o w to apply the rules in the
proposed regulations for allocating payments to principal or interest. In response to
these comments, the final regulations provide guidance on the treatment and allocation
of such amounts. Under the final regulations, a payment generally first applies to
interest that has accrued and remains unpaid as of the date the payment is due and
then applies to the outstanding principal. A n example is included.
2. Interest Paid by S o m e o n e Other Than the Taxpayer
Several commentators requested guidance on the treatment of an interest
payment m a d e by s o m e o n e other than the taxpayer. To provide consistency with
section 221(a), the final regulations provide, "Under section 221, an individual taxpayer
m a y deduct from gross income certain interest paid by the taxpayer during the taxable
year on a qualified education loan." (Emphasis added.) The final regulations also
clarify that certain third party payments of interest are treated as first paid to the
taxpayer and then paid by the taxpayer to the lender, in a manner similar to the
treatment of third party payments of tuition under §1.25A-5(b)(1). The final regulations
provide for this treatment if a third party makes a payment of interest on a qualified
education loan on behalf of a taxpayer.
Thus, for example, if a third party pays interest on behalf of the taxpayer, as a gift
to the taxpayer, the taxpayer m a y deduct this interest for Federal income tax purposes,
assuming fulfillment of all other requirements of section 221. Similarly, if an employer
pays interest to a lender on behalf of the taxpayer, and the taxpayer as required by
6
section 61 includes the payment in income for Federal income tax purposes, the
taxpayer may deduct this interest, assuming fulfillment of all other requirements of
section 221.
A commentator also recommended the allowance of a deduction to an individual
even if the individual qualifies as a dependent of a taxpayer under section 151. This
recommendation was not adopted because it is contrary to section 221(c).
3. Definition of Eligible Educational Institution
Several commentators suggested expanding the definition of eligible educational
institution in a manner that is not consistent with the statutory definition under sections
221(d)(2) (formerly section 221(e)(2) (redesignated by the 2001 Act)) and 25A(f)(2).
Accordingly, these comments were not adopted. Another commentator requested
guidance on the deductibility of interest paid on a qualified education loan if the
educational institution loses its status as an eligible educational institution after the end
of the academic period for which the loan was incurred. The final regulations include a
new example illustrating that the deductibility of interest on the loan is not affected by
the institution's subsequent change in status.
4. Definition of Qualified Education Loan
The definition of Qualified education loan in section 221(d)(1) (formerly section
221(e)(1) (redesignated by the 2001 Act)) provides, in part, that the indebtedness must
be incurred by the taxpayer solely to pay higher education expenses that are paid within
a reasonable period of time before or after the indebtedness is incurred. Several
comments were received in connection with this "reasonable period of time"
7
requirement.
O n e commentator suggested extending the 60-day safe harbor provided in the
proposed regulations for satisfying the "reasonable period of time" requirement to 90
days or changing it so that the beginning of the safe harbor period is the earlier of 60
days prior to the start of the academic period or the end of the previous academic
period. T w o commentators suggested extending the safe harbor to 90 days after the
end of the academic period. Another commentator expressed concern that expenses
paid with loans disbursed outside the 60-day window would not satisfy the "reasonable
period of time" requirement. Finally, one commentator interpreted the safe harbor to
impose a 60-day limit on loans that are part of a federal postsecondary loan program.
The final regulations provide that what constitutes a reasonable period of time is
determined based on all the relevant facts and circumstances. The final regulations
also provide that qualified higher education expenses are treated as paid or incurred
within a reasonable period of time under the following circumstances: 1) the expenses
are paid with the proceeds of education loans that are part of a federal postsecondary
education loan program; or 2) the expenses relate to a particular academic period and
the loan proceeds used to pay the expenses are disbursed within a period that begins
90 days before the start of, and ends 90 days after the end of, the academic period to
which the expenses relate.
O n e commentator recommended expansion of the federal loan safe harbor
described above to include expenses paid with the proceeds of any non-federal loan
disbursed under policies mirroring the awarding and disbursement policies governing
8
certain federal loans. Although the final regulations do not adopt this suggestion, the
IRS and Treasury Department believe that loans described by the commentator
probably would fall within the 90-day safe harbor, or satisfy the "reasonable period of
time" requirement based on the facts and circumstances.
Another requirement of a "qualified education loan" is that the borrower obtain
the loan "solely" to pay higher education expenses. One commentator suggested that if
a taxpayer refinances a qualified education loan and receives an amount in excess of
the original qualified education loan, the taxpayer may take an interest deduction under
section 221 for interest paid on the refinanced loan. The commentator is correct, but
only if the taxpayer uses the excess amount solely to pay higher education expenses
and satisfies all other requirements of a qualified education loan. Thus, if the taxpayer
uses the excess amount for any other purpose, the refinanced loan is not "solely" to pay
higher education expenses, and no interest paid on the loan will be deductible.
5. Miscellaneous Comments and Changes
Federal Postsecondary Education Loan Program - The final regulations clarify
that a federal postsecondary education loan program includes, but is not limited to, the
Federal Perkins Loan, Federal Family Education Loan, and William D. Ford Federal
Direct Loan Programs under Title IV of the Higher Education Act of 1965, and the
Health Education Assistance Loan and the Nursing Student Loan Programs under Titles
VII and VIII of the Public Health Service Act.
Eligible Educational Institution - Although the Higher Education Amendments Act
of 1998 moved section 481 from Title IV to Title I, the regulations do not reflect this
9
change, as the statutory language refers to section 481 of the Higher Education Act as
in effect on the date that section 221 was enacted.
Interest Charges on a University In-House Deferred Payment Plan - One
commentator requested clarification of the deductibility of interest charges on a
university's in-house deferred payment plan, which is a revolving credit account that can
include a variety of expenditures in addition to qualified higher education expenses.
This situation is addressed by Example 6 of 31.221-1 (e)(4) and Example 6 of 31.2212(f)(4) concerning mixed use loans.
6. Refinanced and Consolidated Loans
The final regulations reserve a place for more detailed treatment of refinanced
and consolidated loans.
7. Periods of Deferment or Forbearance
Prior to the 2001 Act, section 221(d) stated that a "deduction shall be allowed
under this section only with respect to interest paid on any qualified education loan
during the first 60 months (whether or nor consecutive) in which interest payments are
required."
Some commentators recommended that the 60-month limitation period should
not be suspended during a period of deferment or forbearance. Other commentators
suggested that the 60-month limitation period should be suspended during all periods of
deferment or forbearance, whether or not the taxpayer makes payments.
Commentators also asked whether rules under which the 60-month period is not
suspended apply to loans made under federal programs as well as non-federal loans.
10
Finally, commentators asked whether interest payments made during periods of
reduced payment forbearance are deductible.
Section 221, prior to the 2001 Act, and the legislative history provide that only
interest payments required under the terms of a loan are deductible. Under that
provision, interest a borrower pays voluntarily during a period when payments are not
required, such as during a period of deferment or forbearance or before loan repayment
begins, is not deductible.
Therefore, §1.221-2 of the final regulations retains the rule that interest payments
are not deductible if paid voluntarily during a period of deferment or forbearance.
However, the final regulations provide that interest payments made during a period of
deferment, forbearance, or reduced payment forbearance are deductible if required as
part of the terms of the deferment, forbearance, or reduced payment agreement. The
final regulations include a new example involving reduced payment forbearance.
In addition, §1.221-2 of the final regulations provides for suspension of the 60month period for loans not issued or guaranteed under a federal postsecondary
education loan program under certain conditions. The promissory note must contain
conditions for deferment or forbearance that are substantially similar to the conditions
established by the U.S. Department of Education for Federal student loan programs
under Title IV of the Higher Education Act of 1965 and the borrower must satisfy one of
those conditions.
8. Start of the 60-Month Limitation Period
A commentator expressed concern that the month a loan first enters repayment
11
status may not be the same as the month the first interest payment is required. Section
1.221-2 of the final regulations clarifies that the beginning of the 60-month period
commences on the first day of the month in which the first interest payment is required.
9. Information Reporting for Interest Payments Received on Qualified Education Loans
Section 6050S requires information reporting by certain lenders or other payees
that receive payments of interest on qualified education loans. Section 1.6050S-3(b)(1)
provides that interest includes stated interest, loan origination fees (other than fees for
services), and capitalized interest. Section 1.6050S-3(e)(1) provides a special
transitional rule for reporting loan origination fees and capitalized interest. Under the
transitional rule, a payee is not required to report payments of loan origination fees and
capitalized interest for loans made before January 1, 2004.
Several commentators representing payees requested that the transitional rule
be extended because the necessary programming changes to capture and report these
amounts could not be made in the absence of final regulations under section 221.
Based on the comments received, these regulations amend §1.6050S-3(e)(1) to extend
the transitional rule to loans made before September 1, 2004.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because
the regulations do not impose a collection of information on small entities, the
12
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the Code, the proposed regulations that preceded these regulations were
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these final regulations is Sean M. Dwyer, Office of the
Associate Chief Counsel (Income Tax & Accounting). 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 record keeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1 - INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.221-2 also issued under 26 U.S.C. 221(d). * * *
Section 1.6050S-3 also issued under 26 U.S.C. 6050S(g). * * *
Par. 2. Sections 1.221-1 and 1.221-2 are added to read as follows:
§1.221-1 Deduction for interest paid on Qualified education loans after December 31.
2001.
(a) In qeneral--(1) Applicability. Under section 221, an individual taxpayer may
deduct from gross income certain interest paid by the taxpayer during the taxable year
13
on a qualified education loan. See paragraph (b)(4) of this section for rules on
payments of interest by third parties. The rules of this section are applicable to periods
governed by section 221 as amended in 2001, which relates to deductions for interest
paid on qualified education loans after December 31, 2001, in taxable years ending
after December 31, 2001, and on or before December 31, 2010. For rules applicable to
interest due and paid on qualified education loans after January 21, 1999, if paid before
January 1, 2002, see §1.221-2. Taxpayers also may apply §1.221-2 to interest due and
paid on qualified education loans after December 31, 1997, but before January 21,
1999. To the extent that the effective date limitation (sunset) of the 2001 amendment
remains in force unchanged, section 221 before amendment in 2001, to which §1.221-2
relates, also applies to interest due and paid on qualified education loans in taxable
years beginning after December 31, 2010.
(2) Example. The following example illustrates the rules of this paragraph (a). In
the example, assume that the institution the student attends is an eligible educational
institution, the loan is a qualified education loan, the student is legally obligated to make
interest payments under the terms of the loan, and any other applicable requirements, if
not otherwise specified, are fulfilled. The example is as follows:
Example. Effective dates. Student A begins to make monthly interest payments
on her loan beginning January 1, 1997. Student A continues to m a k e interest payments
in a timely fashion. However, under the effective date provisions of section 221, no
deduction is allowed for interest Student A pays prior to January 1, 1998. Student A
m a y deduct interest due and paid on the loan after December 31, 1997. Student A m a y
apply the rules of §1.221-2 to interest due and paid during the period beginning January
1, 1998, and ending January 20, 1999. Interest due and paid during the period January
21, 1999, and ending December 31, 2001, is deductible under the rules of §1.221-2,
and interest paid after December 31, 2001, is deductible under the rules of this section.
14
(b) Eligibility—(1) Taxpayer must have a legal obligation to make interest
payments. A taxpayer is entitled to a deduction under section 221 only if the taxpayer
has a legal obligation to make interest payments under the terms of the qualified
education loan.
(2) Claimed dependents not eligible--(i) In general. An individual is not entitled to
a deduction under section 221 for a taxable year if the individual is a dependent (as
defined in section 152) for whom another taxpayer is allowed a deduction under section
151 on a Federal income tax return for the same taxable year (or, in the case of a fiscal
year taxpayer, the taxable year beginning in the same calendar year as the individual's
taxable year).
(ii) Examples. The following examples illustrate the rules of this paragraph (b)(2):
Example 1. Student not claimed as dependent. Student B pays $750 of interest
on qualified education loans during 2003. Student B's parents are not allowed a
deduction for her as a dependent for 2003. Assuming fulfillment of all other relevant
requirements, Student B m a y deduct under section 221 the $750 of interest paid in
2003.
Example 2. Student claimed as dependent. Student C pays $750 of interest on
qualified education loans during 2003. Only Student C has the legal obligation to m a k e
the payments. Student C's parent claims him as a dependent and is allowed a
deduction under section 151 with respect to Student C in computing the parent's 2003
Federal income tax. Student C is not entitled to a deduction under section 221 for the
$750 of interest paid in 2003. Because Student C's parent w a s not legally obligated to
m a k e the payments, Student C's parent also is not entitled to a deduction for the
interest.
(3) Married taxpayers. If a taxpayer is married as of the close of a taxable year,
he or she is entitled to a deduction under this section only if the taxpayer and the
taxpayer's spouse file a joint return for that taxable year.
(4) Payments of interest bv a third party -- (i) In general. If a third party who is
15
not legally obligated to m a k e a payment of interest on a qualified education loan m a k e s
a payment of interest on behalf of a taxpayer who is legally obligated to make the
payment, then the taxpayer is treated as receiving the payment from the third party and,
in turn, paying the interest.
(ii) Examples. The following examples illustrate the rules of this paragraph (b)(4):
Example 1. Payment by employer. Student D obtains a qualified education loan
to attend college. Upon Student D's graduation from college, Student D works as an
intern for a non-profit organization during which time Student D's loan is in deferment
and Student D m a k e s no interest payments. A s part of the internship program, the nonprofit organization m a k e s an interest payment on behalf of Student D after the
deferment period. This payment is not excluded from Student D's income under section
108(f) and is treated as additional compensation includible in Student D's gross income.
Assuming fulfillment of all other requirements of section 221, Student D m a y deduct this
payment of interest for Federal income tax purposes.
Example 2. Payment by parent. Student E obtains a qualified education loan to
attend college. Upon graduation from college, Student E makes legally required
monthly payments of principal and interest. Student E's mother m a k e s a required
monthly payment of interest as a gift to Student E. A deduction for Student E as a
dependent is not allowed on another taxpayer's tax return for that taxable year.
Assuming fulfillment of all other requirements of section 221, Student E m a y deduct this
payment of interest for Federal income tax purposes.
(c) Maximum deduction. The amount allowed as a deduction under section 221
for any taxable year may not exceed $2,500.
(d) Limitation based on modified adjusted gross income-(1) In general. The
deduction allowed under section 221 is phased out ratably for taxpayers with modified
adjusted gross income between $50,000 and $65,000 ($100,000 and $130,000 for
married individuals who file a joint return). Section 221 does not allow a deduction for
taxpayers with modified adjusted gross income of $65,000 or above ($130,000 or above
for married individuals who file a joint return). See paragraph (d)(3) of this section for
16
inflation adjustment of amounts in this paragraph (d)(1).
(2) Modified adjusted gross income defined. The term modified adjusted gross
income m e a n s the adjusted gross income (as defined in section 62) of the taxpayer for
the taxable year increased by any amount excluded from gross income under section
911, 931, or 933 (relating to income earned abroad or from certain United States
possessions or Puerto Rico). Modified adjusted gross income must be determined
under this section after taking into account the inclusions, exclusions, deductions, and
limitations provided by sections 86 (social security and tier 1 railroad retirement
benefits), 135 (redemption of qualified United States savings bonds), 137 (adoption
assistance programs), 219 (deductible qualified retirement contributions), and 469
(limitation on passive activity losses and credits), but before taking into account the
deductions provided by sections 221 and 222 (qualified tuition and related expenses).
(3) Inflation adjustment. For taxable years beginning after 2002, the amounts in
paragraph (d)(1) of this section will be increased for inflation occurring after 2001 in
accordance with section 221 (f)(1). If any amount adjusted under section 221 (f)(1) is not
a multiple of $5,000, the amount will be rounded to the next lowest multiple of $5,000.
(e) Definitions-d) Eligible educational institution. In general, an eligible
educational institution m e a n s any college, university, vocational school, or other
postsecondary educational institution described in section 481 of the Higher Education
Act of 1965 (20 U.S.C. 1088), as in effect on August 5, 1997, and certified by the U.S.
Department of Education as eligible to participate in student aid programs administered
by the Department, as described in section 25A(f)(2) and §1.25A-2(b). For purposes of
17
this section, an eligible educational institution also includes an institution that conducts
an internship or residency program leading to a degree or certificate awarded by an
institution, a hospital, or a health care facility that offers postgraduate training.
(2) Qualified higher education exoenses-(i) In general. Qualified higher
education expenses means the cost of attendance (as defined in section 472 of the
Higher Education Act of 1965, 20 U.S.C. 108711, as in effect on August 4, 1997), at an
eligible educational institution, reduced by the amounts described in paragraph (e)(2)(ii)
of this section. Consistent with section 472 of the Higher Education Act of 1965, a
student's cost of attendance is determined by the eligible educational institution and
includes tuition and fees normally assessed a student carrying the same academic
workload as the student, an allowance for room and board, and an allowance for books,
supplies, transportation, and miscellaneous expenses of the student.
(ii) Reductions. Qualified higher education expenses are reduced by any amount
that is paid to or on behalf of a student with respect to such expenses and that is(A) A qualified scholarship that is excludable from income under section 117;
(B) An educational assistance allowance for a veteran or member of the armed
forces under chapter 30, 31, 32, 34 or 35 of title 38, United States Code, or under
chapter 1606 of title 10, United States Code;
(C) Employer-provided educational assistance that is excludable from income
under section 127;
(D) Any other amount that is described in section 25A(g)(2)(C) (relating to
amounts excludable from gross income as educational assistance);
18
(E) Any otherwise includible amount excluded from gross income under section
135 (relating to the redemption of United States savings bonds);
(F) Any otherwise includible amount distributed from a Coverdell education
savings account and excluded from gross income under section 530(d)(2); or
(G) Any otherwise includible amount distributed from a qualified tuition program
and excluded from gross income under section 529(c)(3)(B).
(3) Qualified education loan-(i) In general. A Qualified education loan means
indebtedness incurred by a taxpayer solely to pay qualified higher education expenses
that are(A) Incurred on behalf of a student who is the taxpayer, the taxpayer's spouse, or
a dependent (as defined in section 152) of the taxpayer at the time the taxpayer incurs
the indebtedness;
(B) Attributable to education provided during an academic period, as described in
section 25A and the regulations thereunder, when the student is an eligible student as
defined in section 25A(b)(3) (requiring that the student be a degree candidate carrying
at least half the normal full-time workload); and
(C) Paid or incurred within a reasonable period of time before or after the
taxpayer incurs the indebtedness.
(ii) Reasonable Period. Except as otherwise provided in this paragraph (e)(3)(H),
what constitutes a reasonable period of time for purposes of paragraph (e)(3)(i)(C) of
this section generally is determined based on all the relevant facts and circumstances.
However, qualified higher education expenses are treated as paid or incurred within a
19
reasonable period of time before or after the taxpayer incurs the indebtedness if(A) The expenses are paid with the proceeds of education loans that are part of a
Federal postsecondary education loan program; or
(B) The expenses relate to a particular academic period and the loan proceeds
used to pay the expenses are disbursed within a period that begins 90 days prior to the
start of that academic period and ends 90 days after the end of that academic period.
(iii) Related party. A qualified education loan does not include any indebtedness
owed to a person who is related to the taxpayer, within the meaning of section 267(b) or
707(b)(1). For example, a parent or grandparent of the taxpayer is a related person. In
addition, a qualified education loan does not include a loan made under any qualified
employer plan as defined in section 72(p)(4) or under any contract referred to in section
72(p)(5).
(iv) Federal issuance or guarantee not reguired. A loan does not have to be
issued or guaranteed under a Federal postsecondary education loan program to be a
qualified education loan.
(v) Refinanced and consolidated indebtedness-(A) In general. A qualified
education loan includes indebtedness incurred solely to refinance a qualified education
loan. A qualified education loan includes a single, consolidated indebtedness incurred
solely to refinance two or more qualified education loans of a borrower.
(B^ Treatment of refinanced and consolidated indebtedness. [Reserved.]
(4) Examples. The following examples illustrate the rules of this paragraph (e):
Example 1. Eligible educational institution. University F is a postsecondary
educational institution described in section 481 of the Higher Education Act of 1965.
20
The U.S. Department of Education has certified that University F is eligible to participate
in federal financial aid programs administered by that Department, although University F
chooses not to participate. University F is an eligible educational institution.
Example 2. Qualified higher education expenses. Student G receives a $3,000
qualified scholarship for the 2003 fall semester that is excludable from Student G's
gross income under section 117. Student G receives no other forms of financial
assistance with respect to the 2003 fall semester. Student G's cost of attendance for
the 2003 fall semester, as determined by Student G's eligible educational institution for
purposes of calculating a student's financial need in accordance with section 472 of the
Higher Education Act, is $16,000. For the 2003 fall semester, Student G has qualified
higher education expenses of $13,000 (the cost of attendance as determined by the
institution ($16,000) reduced by the qualified scholarship proceeds excludable from
gross income ($3,000)).
Example 3. Qualified education loan. Student H borrows money from a
commercial bank to pay qualified higher education expenses related to his enrollment
on a half-time basis in a graduate program at an eligible educational institution. Student
H uses all the loan proceeds to pay qualified higher education expenses incurred within
a reasonable period of time after incurring the indebtedness. The loan is not federally
guaranteed. The commercial bank is not related to Student H within the meaning of
section 267(b) or 707(b)(1). Student H's loan is a qualified education loan within the
meaning of section 221.
Example 4. Qualified education loan. Student I signs a promissory note for a
loan on August 15, 2003, to pay for qualified higher education expenses for the 2003 fall
and 2004 spring semesters. O n August 20, 2003, the lender disburses loan proceeds
to Student I's college. The college credits them to Student I's account to pay qualified
higher education expenses for the 2003 fall semester, which begins on August 25,
2003. O n January 26, 2004, the lender disburses additional loan proceeds to Student
I's college. T h e college credits them to Student I's account to pay qualified higher
education expenses for the 2004 spring semester, which began on January 12, 2004.
Student I's qualified higher education expenses for the two semesters are paid within a
reasonable period of time, as the first loan disbursement occurred within the 90 days
prior to the start of the fall 2003 semester and the second loan disbursement occurred
during the spring 2004 semester.
Example 5. Qualified education loan. The facts are the same as in Example 4
except that in 2005 the college is not an eligible educational institution because it loses
its eligibility to participate in certain federal financial aid programs administered by the
U.S. Department of Education. The qualification of Student I's loan, which w a s used to
pay for qualified higher education expenses for the 2003 fall and 2004 spring
semesters, as a qualified education loan is not affected by the college's subsequent
21
loss of eligibility.
Example 6. Mixed-use loans. Student J signs a promissory note for a loan
secured by Student J's personal residence. Student J will use part of the loan proceeds
to pay for certain improvements to Student J's residence and part of the loan proceeds
to pay qualified higher education expenses of Student J's spouse. Because Student J
obtains the loan not solely to pay qualified higher education expenses, the loan is not a
qualified education loan.
(f) lnterest--(1) In general. Amounts paid on a qualified education loan are
deductible under section 221 if the amounts are interest for federal income tax
purposes. For example, interest includes(i) Qualified stated interest (as defined in §1.1273-1 (c)); and
(ii) Original issue discount, which generally includes capitalized interest. For
purposes of section 221, capitalized interest means any accrued and unpaid interest on
a qualified education loan that, in accordance with the terms of the loan, is added by the
lender to the outstanding principal balance of the loan.
(2) Operative rules for original issue discount--(i) In general. The rules to
determine the amount of original issue discount on a loan and the accruals of the
discount are in sections 163(e), 1271 through 1275, and the regulations thereunder. In
general, original issue discount is the excess of a loan's stated redemption price at
maturity (all payments due under the loan other than qualified stated interest payments)
over its issue price (the amount loaned). Although original issue discount generally is
deductible as it accrues under section 163(e) and §1.163-7, original issue discount on a
qualified education loan is not deductible until paid. See paragraph (f)(3) of this section
to determine when original issue discount is paid.
(ii) Treatment of loan origination fees bv the borrower. If a loan origination fee is
22
paid by the borrower other than for property or services provided by the lender, the fee
reduces the issue price of the loan, which creates original issue discount (or additional
original issue discount) on the loan in an amount equal to the fee. See §1.1273-2(g).
For an example of how a loan origination fee is taken into account, see Example 2 of
paragraph (f)(4) of this section.
(3) Allocation of payments. See §§1.446-2(e) and 1.1275-2(a) for rules on
allocating payments between interest and principal. In general, these rules treat a
payment first as a payment of interest to the extent of the interest that has accrued and
remains unpaid as of the date the payment is due, and second as a payment of
principal. The characterization of a payment as either interest or principal under these
rules applies regardless of how the parties label the payment (either as interest or
principal). Accordingly, the taxpayer may deduct the portion of a payment labeled as
principal that these rules treat as a payment of interest on the loan, including any
portion attributable to capitalized interest or loan origination fees.
(4) Examples. The following examples illustrate the rules of this paragraph (f). In
the examples, assume that the institution the student attends is an eligible educational
institution, the loan is a qualified education loan, the student is legally obligated to make
interest payments under the terms of the loan, and any other applicable requirements, if
not otherwise specified, are fulfilled. The examples are as follows:
Example 1. Capitalized interest. Interest on Student K's loan accrues while
Student K is in school, but Student K is not required to m a k e any payments on the loan
until six months after he graduates or otherwise leaves school. At that time, the lender
capitalizes all accrued but unpaid interest and adds it to the outstanding principal
amount of the loan. Thereafter, Student K is required to m a k e monthly payments of
interest and principal on the loan. The interest payable on the loan, including the
23
capitalized interest, is original issue discount. See section 1273 and the regulations
thereunder. Therefore, in determining the total amount of interest paid on the loan each
taxable year, Student K m a y deduct any payments that §1.1275-2(a) treats as
payments of interest, including any principal payments that are treated as payments of
capitalized interest. S e e paragraph (f)(3) of this section.
Example 2. Allocation of payments. The facts are the same as in Example 1,
except that, in addition, the lender charges Student K a loan origination fee, which is not
for any property or services provided by the lender. Under §1.1273-2(g), the loan
origination fee reduces the issue price of the loan, which reduction increases the
amount of original issue discount on the loan by the amount of the fee. The amount of
original issue discount (which includes the capitalized interest and loan origination fee)
that accrues each year is determined under section 1272 and §1.1272-1. In effect, the
loan origination fee accrues over the entire term of the loan. Because the loan has
original issue discount, the payment ordering rules in §1.1275-2(a) must be used to
determine h o w m u c h of each payment is interest for federal tax purposes. S e e
paragraph (f)(3) of this section. Under §1.1275-2(a), each payment (regardless of its
designation by the parties as either interest or principal) generally is treated first as a
payment of original issue discount, to the extent of the original issue discount that has
accrued as of the date the payment is due and has not been allocated to prior
payments, and second as a payment of principal. Therefore, in determining the total
amount of interest paid on the qualified education loan for a taxable year, Student K
m a y deduct any payments that the parties label as principal but that are treated as
payments of original issue discount under §1.1275-2(a).
(g) Additional Rules--(1) Payment of interest made during period when interest
payment not reguired. Payments of interest on a qualified education loan to which this
section is applicable are deductible even if the payments are made during a period
when interest payments are not required because, for example, the loan has not yet
entered repayment status or is in a period of deferment or forbearance.
(2) Denial of double benefit. No deduction is allowed under this section for any
amount for which a deduction is allowable under another provision of Chapter 1 of the
Internal Revenue Code. No deduction is allowed under this section for any amount for
which an exclusion is allowable under section 108(f) (relating to cancellation of
indebtedness).
24
(3) Examples. The following examples illustrate the rules of this paragraph (g).
In the examples, assume that the institution the student attends is an eligible
educational institution, the loan is a qualified education loan, and the student is legally
obligated to make interest payments under the terms of the loan:
Example 1. Voluntary payment of interest before loan has entered repayment
status. Student L obtains a loan to attend college. The terms of the loan provide that
interest accrues on the loan while Student L earns his undergraduate degree but that
Student L is not required to begin making payments of interest until six full calendar
months after he graduates or otherwise leaves school. Nevertheless, Student L
voluntarily pays interest on the loan during 2003, while enrolled in college. Assuming all
other relevant requirements are met, Student L is allowed a deduction for interest paid
while attending college even though the payments were m a d e before interest payments
were required.
Example 2. Voluntary payment during period of deferment or forbearance. The
facts are the s a m e as in Example 2, except that Student L makes no payments on the
loan while enrolled in college. Student L graduates in June 2003 and begins making
monthly payments of principal and interest on the loan in January 2004, as required by
the terms of the loan. In August 2004, Student L enrolls in graduate school on a fulltime basis. Under the terms of the loan, Student L m a y apply for deferment of the loan
payments while Student L is enrolled in graduate school. Student L applies for and
receives a deferment on the outstanding loan. However, Student L continues to m a k e
s o m e monthly payments of interest during graduate school. Student L m a y deduct
interest paid on the loan during the period beginning in January 2004, including interest
paid while Student L is enrolled in graduate school.
(h) Effective date. This section is applicable to periods governed by section 221
as amended in 2001, which relates to interest paid on a qualified education loan after
December 31, 2001, in taxable years ending after December 31, 2001, and on or before
December 31, 2010.
§1.221-2 Deduction for interest due and paid on Qualified education loans before
January 1. 2002.
(a) In general. Under section 221, an individual taxpayer may deduct from gross
25
income certain interest due and paid by the taxpayer during the taxable year on a
qualified education loan. The deduction is allowed only with respect to interest due and
paid on a qualified education loan during the first 60 months that interest payments are
required under the terms of the loan. See paragraph (e) of this section for rules relating
to the 60-month rule. S e e paragraph (b)(4) of this section for rules on payments of
interest by third parties. The rules of this section are applicable to interest due and paid
on qualified education loans after January 21, 1999, if paid before January 1, 2002.
Taxpayers also m a y apply the rules of this section to interest due and paid on qualified
education loans after December 31, 1997, but before January 21, 1999. To the extent
that the effective date limitation ("sunset") of the 2001 amendment remains in force
unchanged, section 221 before amendment in 2001, to which this section relates, also
applies to interest due and paid on qualified education loans in taxable years beginning
after December 31, 2010. For rules applicable to periods governed by section 221 as
a m e n d e d in 2001, which relates to deductions for interest paid on qualified education
loans after December 31, 2001, in taxable years ending after December 31, 2001, and
before January 1, 2011, see §1.221-1.
(b) Eligibility—(1) Taxpayer must have a legal obligation to m a k e interest
payments. A taxpayer is entitled to a deduction under section 221 only if the taxpayer
has a legal obligation to m a k e interest payments under the terms of the qualified
education loan.
(2) Claimed dependents not eligible—(i) In general. A n individual is not entitled to
a deduction under section 221 for a taxable year if the individual is a dependent (as
26
defined in section 152) for whom another taxpayer is allowed a deduction under section
151 on a Federal income tax return for the same taxable year (or, in the case of a fiscal
year taxpayer, the taxable year beginning in the same calendar year as the individual's
taxable year).
- (ii) Examples. The following examples illustrate the rules of this paragraph (b)(2):
Example 1. Student not claimed as dependent. Student A pays $750 of interest
on qualified education loans during 1998. Student A's parents are not allowed a
deduction for her as a dependent for 1998. Assuming fulfillment of all other relevant
requirements, Student A m a y deduct the $750 of interest paid in 1998 under section
221.
Example 2. Student claimed as dependent. Student B pays $750 of interest on
qualified education loans during 1998. Only Student B has the legal obligation to m a k e
the payments. Student B's parent claims him as a dependent and is allowed a
deduction under section 151 with respect to Student B in computing the parent's 1998
Federal income tax. Student B m a y not deduct the $750 of interest paid in 1998 under
section 221. Because Student B's parent w a s not legally obligated to m a k e the
payments, Student B's parent also m a y not deduct the interest.
(3) Married taxpayers. If a taxpayer is married as of the close of a taxable year,
he or she is entitled to a deduction under this section only if the taxpayer and the
taxpayer's spouse file a joint return for that taxable year.
(4) Payments of interest by a third partv--(i) In general. If a third party who is not
legally obligated to make a payment of interest on a qualified education loan makes a
payment of interest on behalf of a taxpayer who is legally obligated to make the
payment, then the taxpayer is treated as receiving the payment from the third party and,
in turn, paying the interest.
(ii) Examples. The following examples illustrate the rules of this paragraph (b)(4):
Example 1. Payment by employer. Student C obtains a qualified education loan
to attend college. Upon Student C's graduation from college, Student C works as an
27
intern for a non-profit organization during which time Student C's loan is in deferment
and Student C makes no interest payments. A s part of the internship program, the nonprofit organization makes an interest payment on behalf of Student C after the
deferment period. This payment is not excluded from Student C's income under section
108(f) and is treated as additional compensation includible in Student C's gross income.
Assuming fulfillment of all other requirements of section 221, Student C m a y deduct this
payment of interest for Federal income tax purposes.
Example 2. Payment bv parent. Student D obtains a qualified education loan to
attend college. Upon graduation from college, Student D makes legally required
monthly payments of principal and interest. Student D's mother makes a required
monthly payment of interest as a gift to Student D. A deduction for Student D as a
dependent is not allowed on another taxpayer's tax return for that taxable year.
Assuming fulfillment of all other requirements of section 221, Student D m a y deduct this
payment of interest for Federal income tax purposes.
(c) Maximum deduction. In any taxable year beginning before January 1, 2002,
the amount allowed as a deduction under section 221 may not exceed the amount
determined in accordance with the following table:
Taxable Year Beginning in Maximum Deduction
1998 $1,000
1999 $1,500
2000 $2,000
2001 $2,500
(d) Limitation based on modified adjusted gross income--(1) In general. The
deduction allowed under section 221 is phased out ratably for taxpayers with modified
adjusted gross income between $40,000 and $55,000 ($60,000 and $75,000 for married
individuals who file a joint return). Section 221 does not allow a deduction for taxpayers
with modified adjusted gross income of $55,000 or above ($75,000 or above for married
individuals w h o file a joint return).
28
(2) Modified adjusted gross income defined. The term modified adjusted gross
income means the adjusted gross income (as defined in section 62) of the taxpayer for
the taxable year increased by any amount excluded from gross income under section
911, 931, or 933 (relating to income earned abroad or from certain United States
possessions or Puerto Rico). Modified adjusted gross income must be determined
under this section after taking into account the inclusions, exclusions, deductions, and
limitations provided by sections 86 (social security and tier 1 railroad retirement
benefits), 135 (redemption of qualified United States savings bonds), 137 (adoption
assistance programs), 219 (deductible qualified retirement contributions), and 469
(limitation on passive activity losses and credits), but before taking into account the
deduction provided by section 221.
(e) 60-month rule-(1) In general. A deduction for interest paid on a qualified
education loan is allowed only for payments made during the first 60 months that
interest payments are required on the loan. The 60-month period begins on the first day
of the month that includes the date on which interest payments are first required and
ends 60 months later, unless the 60-month period is suspended for periods of
deferment or forbearance within the meaning of paragraph (e)(3) of this section. The
60-month period continues to run regardless of whether the required interest payments
are actually made. The date on which the first interest payment is required is
determined under the terms of the loan agreement or, in the case of a loan issued or
guaranteed under a federal postsecondary education loan program (such as loan
programs under Title IV of the Higher Education Act of 1965 (20 U.S.C. 1070) and Titles
29
VII and VIII of the Public Health Service Act (42 U.S.C. 292, and 42 U.S.C. 296) under
applicable Federal regulations. For a discussion of interest, see paragraph (h) of this
section. For special rules relating to loan refinancings, consolidated loans, and
collapsed loans, see paragraph (i) of this section.
(2) Loans that entered repayment status prior to January 1. 1998. In the case of
any qualified education loan that entered repayment status prior to January 1, 1998,
section 221 allows no deduction for interest paid during the portion of the 60-month
period described in paragraph (e)(1) of this section that occurred prior to January 1,
1998. Section 221 allows a deduction only for interest due and paid during that portion,
if any, of the 60-month period remaining after December 31, 1997.
(3) Periods of deferment or forbearance. The 60-month period described in
paragraph (e)(1) of this section generally is suspended for any period w h e n interest
payments are not required on a qualified education loan because the lender has
granted the taxpayer a period of deferment or forbearance (including postponement in
anticipation of cancellation). However, in the case of a qualified education loan that is
not issued or guaranteed under a Federal postsecondary education loan program, the
60-month period will be suspended under this paragraph (e)(3) only if the promissory
note contains conditions substantially similar to the conditions for deferment or
forbearance established by the U.S. Department of Education for Federal student loan
programs under Title IV of the Higher Education Act of 1965, such as half-time study at
a postsecondary educational institution, study in an approved graduate fellowship
program or in an approved rehabilitation program for the disabled, inability to find full-
30
time employment, economic hardship, or the performance of services in certain
occupations or federal programs, and the borrower satisfies one of those conditions.
For any qualified education loan, the 60-month period is not suspended if under the
terms of the loan interest continues to accrue while the loan is in deferment or
forbearance and either(i) In the case of deferment, the taxpayer agrees to pay interest currently during
the deferment period; or
(ii) In the case of forbearance, the taxpayer agrees to m a k e reduced payments,
or payments of interest only, during the forbearance period.
(4) Late payments. A deduction is allowed for a payment of interest required in
one month but actually m a d e in a subsequent month prior to the expiration of the 60month period. A deduction is not allowed for a payment of interest required in one
month but actually m a d e in a subsequent month after the expiration of the 60-month
period. A late payment m a d e during a period of deferment or forbearance is treated,
solely for purposes of determining whether it is m a d e during the 60-month period, as
m a d e on the date it is due.
(5) Examples. The following examples illustrate the rules of this paragraph (e).
In the examples, a s s u m e that the institution the student attends is an eligible
educational institution, the loan is a qualified education loan and is issued or guaranteed
under a federal postsecondary education loan program, the student is legally obligated
to m a k e interest payments under the terms of the loan, the interest payments occur
after December 31, 1997, but before January 1, 2002, and with respect to any period
31
after December 31, 1997, but before January 21, 1999, the taxpayer elects to apply the
rules of this section. The examples are as follows:
Example 1. Payment prior to 60-month period Student E obtains a loan to
attend college. The terms of the loan provide that interest accrues on the loan while
Student E earns his undergraduate degree but that Student E is not required to begin
making payments of interest until six full calendar months after he graduates.
Nevertheless, Student E voluntarily pays interest on the loan while attending college.
Student E is not allowed a deduction for interest paid during that period, because those
payments were m a d e prior to the start of the 60-month period. Similarly, Student E
would not be allowed a deduction for any interest paid during the six month grace period
after graduation w h e n interest payments are not required.
Example 2. Deferment option not exercised. The facts are the same as in
Example 1 except that Student E makes no payments on the loan while enrolled in
college. Student E graduates in June 1999, and is required to begin making monthly
payments of principal and interest on the loan in January 2000. The 60-month period
described in paragraph (e)(1) of this section begins in January 2000. In August 2000,
Student E enrolls in graduate school on a full-time basis. Under the terms of the loan,
Student E m a y apply for deferment of the loan payments while enrolled in graduate
school. However, Student E elects not to apply for deferment and continues to m a k e
required monthly payments on the loan during graduate school. Assuming fulfillment of
all other relevant requirements, Student E m a y deduct interest paid on the loan during
the 60-month period beginning in January 2000, including interest paid while enrolled in
graduate school.
Example 3. Late payment, within 60-month period. The facts are the same as in
Example 2 except that, after the loan enters repayment status in January 2000, Student
E makes no interest payments until March 2000. In March 2000, Student E pays
interest required for the months of January, February, and March 2000. Assuming
fulfillment of all other relevant requirements, Student E m a y deduct the interest paid in
March for the months of January, February, and March because the interest payments
are required under the terms of the loan and are paid within the 60-month period, even
though the January and February interest payments m a y be late.
32
Example 4. Late payment during deferment but within 60-month period. The
terms of Student F's loan require her to begin making monthly payments of interest on
the loan in January 2000. The 60-month period described in paragraph (e)(1) of this
section begins in January 2000. Student F fails to m a k e the required interest payments
for the months of November and December 2000. In January 2001, Student F enrolls in
graduate school on a half-time basis. Under the terms of the loan, Student F obtains a
deferment of the loan payments due while enrolled in graduate school. The deferment
becomes effective January 1, 2001. In March 2001, while the loan is in deferment,
Student F pays the interest due for the months of November and December 2000.
Assuming fulfillment of all other relevant requirements, Student F m a y deduct interest
paid in March 2001, for the months of November and December 2000, because the late
interest payments are treated, solely for purposes of determining whether they were
m a d e during the 60-month period, as m a d e in November and December 2000.
Example 5. 60-month period. The terms of Student G's loan require him to
begin making monthly payments of interest on the loan in November 1999. The 60month period described in paragraph (e)(1) of this section begins in November 1999. In
January 2000, Student G enrolls in graduate school on a half-time basis. A s permitted
under the terms of the loan, Student G applies for deferment of the loan payments due
while enrolled in graduate school. While awaiting formal approval from the lender of his
request for deferment, Student G pays interest due for the month of January 2000. In
February 2000, the lender approves Student G's request for deferment, effective as of
January 1, 2000. Assuming fulfillment of all other relevant requirements, Student G
m a y deduct interest paid in January 2000, prior to his receipt of the lender's approval,
even though the deferment was retroactive to January 1, 2000. As of February 2000,
there are 57 months remaining in the 60-month period for that loan. Because Student G
is not required to m a k e interest payments during the period of deferment, the 60-month
period is suspended. After January 2000, Student G m a y not deduct any voluntary
payments of interest m a d e during the period of deferment.
Example 6. 60-month period. The terms of Student H's loan require her to begin
making monthly payments of interest on the loan in November 1999. The 60-month
period described in paragraph (e)(1) of this section begins in November 1999. In
January 2000, Student H enrolls in graduate school on a half-time basis. A s permitted
under the terms of the loan, Student H applies to m a k e reduced payments of principal
and interest while enrolled in graduate school. After the lender approves her
application, Student H pays principal and interest due for the month of January 2000 at
the reduced rate. Assuming fulfillment of all other relevant requirements, Student H
m a y deduct interest paid in January 2000. A s of February 2000, there are 57 months
remaining in the 60-month period for that loan.
Example 7. Reduction of 60-month period for months prior to January 1. 1998.
The first payment of interest on a loan is due in January 1997. Thereafter, interest
payments are required on a monthly basis. The 60-month period described in
33
paragraph (e)(1) of this section for this loan begins on January 1, 1997, the first day of
the month that includes the date on which the first interest payment is required.
However, the borrower m a y not deduct interest paid prior to January 1, 1998, under the
effective date provisions of section 221. Assuming fulfillment of all other relevant
requirements, the borrower m a y deduct interest due and paid on the loan during the 48
months beginning on January 1, 1998 (unless such period is extended for periods of
deferment or forbearance under paragraph (e)(3) of this section).
(f) Definitions--(1) Eligible educational institution. In general, an eligible
educational institution means any college, university, vocational school, or other postsecondary educational institution described in section 481 of the Higher Education Act
of 1965, 20 U.S.C. 1088, as in effect on August 5, 1997, and certified by the U.S.
Department of Education as eligible to participate in student aid programs administered
by the Department, as described in section 25A(f)(2) and § 1.25A-2(b). For purposes of
this section, an eligible educational institution also includes an institution that conducts
an internship or residency program leading to a degree or certificate awarded by an
institution, a hospital, or a health care facility that offers postgraduate training.
(2) Qualified higher education expenses--(i) In general. Qualified higher
education expenses means the cost of attendance (as defined in section 472 of the
Higher Education Act of 1965, 20 U.S.C. 108711, as in effect on August 4, 1997), at an
eligible educational institution, reduced by the amounts described in paragraph (f)(2)(ii)
of this section. Consistent with section 472 of the Higher Education Act of 1965, a
student's cost of attendance is determined by the eligible educational institution and
includes tuition and fees normally assessed a student carrying the same academic
workload as the student, an allowance for room and board, and an allowance for books,
supplies, transportation, and miscellaneous expenses of the student.
34
(ii) Reductions. Qualified higher education expenses are reduced by any amount
that is paid to or on behalf of a student with respect to such expenses and that is(A) A qualified scholarship that is excludable from income under section 117;
(B) A n educational assistance allowance for a veteran or m e m b e r of the armed
forces under chapter 30, 31, 32, 34 or 35 of title 38, United States Code, or under
chapter 1606 of title 10, United States Code;
(C) Employer-provided educational assistance that is excludable from income
under section 127;
(D) Any other amount that is described in section 25A(g)(2)(C) (relating to
amounts excludable from gross income as educational assistance);
(E) Any otherwise includible amount excluded from gross income under section
135 (relating to the redemption of United States savings bonds); or •
(F) Any otherwise includible amount distributed from a Coverdell education
savings account and excluded from gross income under section 530(d)(2).
(3) Qualified education loan--(i) In general. A gualified education loan m e a n s
indebtedness incurred by a taxpayer solely to pay qualified higher education expenses
that are(A) Incurred on behalf of a student w h o is the taxpayer, the taxpayer's spouse, or
a dependent (as defined in section 152) of the taxpayer at the time the taxpayer incurs
the indebtedness;
(B) Attributable to education provided during an academic period, as described in
section 2 5 A and the regulations thereunder, when the student is an eligible student as
35
defined in section 25A(b)(3) (requiring that the student be a degree candidate carrying
at least half the normal full-time workload); and
(C) Paid or incurred within a reasonable period of time before or after the
taxpayer incurs the indebtedness.
(ii) Reasonable period. Except as otherwise provided in this paragraph (f)(3)(H),
what constitutes a reasonable period of time for purposes of paragraph (f)(3)(i)(C) of
this section generally is determined based on all the relevant facts and circumstances.
However, qualified higher education expenses are treated as paid or incurred within a
reasonable period of time before or after the taxpayer incurs the indebtedness if(A) The expenses are paid with the proceeds of education loans that are part of a
federal postsecondary education loan program; or
(B) The expenses relate to a particular academic period and the loan proceeds
used to pay the expenses are disbursed within a period that begins 90 days prior to the
start of that academic period and ends 90 days after the end of that academic period.
(iii) Related party. A qualified education loan does not include any indebtedness
owed to a person w h o is related to the taxpayer, within the meaning of section 267(b) or
707(b)(1). For example, a parent or grandparent of the taxpayer is a related person. In
addition, a qualified education loan does not include a loan m a d e under any qualified
employer plan as defined in section 72(p)(4) or under any contract referred to in section
72(p)(5).
(iv) Federal issuance or guarantee not reguired. A loan does not have to be
issued or guaranteed under a federal postsecondary education loan program to be a
36
qualified education loan.
(v) Refinanced and consolidated indebtedness--^ In general. A qualified
education loan includes indebtedness incurred solely to refinance a qualified education
loan. A qualified education loan includes a single, consolidated indebtedness incurred
solely to refinance two or more qualified education loans of a borrower.
(B) Treatment of refinanced and consolidated indebtedness. [Reserved.]
(4) Examples. The following examples illustrate the rules of this paragraph (f):
Example 1. Eligible educational institution. University J is a postsecondary
educational institution described in section 481 of the Higher Education Act of 1965.
The U.S. Department of Education has certified that University J is eligible to participate
in federal financial aid programs administered by that Department, although University J
chooses not to participate. University J is an eligible educational institution.
Example 2. Qualified higher education expenses. Student K receives a $3,000
qualified scholarship for the 1999 fall semester that is excludable from Student K's
gross income under section 117. Student K receives no other forms of financial
assistance with respect to the 1999 fall semester. Student K's cost of attendance for
the 1999 fall semester, as determined by Student K's eligible educational institution for
purposes of calculating a student's financial need in accordance with section 472 of the
Higher Education Act, is $16,000. For the 1999 fall semester, Student K has qualified
higher education expenses of $13,000 (the cost of attendance as determined by the
institution ($16,000) reduced by the qualified scholarship proceeds excludable from
gross income ($3,000)).
Example 3. Qualified education loan. Student L borrows money from a
commercial bank to pay qualified higher education expenses related to his enrollment
on a half-time basis in a graduate program at an eligible educational institution. Student
L uses all the loan proceeds to pay qualified higher education expenses incurred within
a reasonable period of time after incurring the indebtedness. The loan is not federally
guaranteed. The commercial bank is not related to Student L within the meaning of
section 267(b) or 707(b)(1). Student L's loan is a qualified education loan within the
meaning of section 221.
Example 4. Qualified education loan. Student M signs a promissory note for a
loan on August 15, 1999, to pay for qualified higher education expenses for the 1999 fall
and 2000 spring semesters. O n August 20, 1999, the lender disburses loan proceeds
to Student M's college. The college credits them to Student M's account to pay
37
qualified higher education expenses for the 1999 fall semester, which begins on August
23, 1999. O n January 25, 2000, the lender disburses additional loan proceeds to
Student M's college. The college credits them to Student M's account to pay qualified
higher education expenses for the 2000 spring semester, which began on January 10,
2000. Student M's qualified higher education expenses for the two semesters are paid
within a reasonable period of time, as the first loan disbursement occurred within the 90
days prior to the start of the fall 1999 semester, and the second loan disbursement
occurred during the spring 2000 semester.
Example 5. Qualified education loan. The facts are the same as in Example 4,
except that in 2001 the college is not an eligible educational institution because it loses
its eligibility to participate in certain federal financial aid programs administered by the
U.S. Department of Education. The qualification of Student M's loan, which w a s used to
pay for qualified higher education expenses for the 1999 fall and 2000 spring
semesters, as a qualified education loan is not affected by the college's subsequent
loss of eligibility.
Example 6. Mixed-use loans. Student N signs a promissory note for a loan that
is secured by Student N's personal residence. Student N will use part of the loan
proceeds to pay for certain improvements to Student N's residence and part of the loan
proceeds to pay qualified higher education expenses of Student N's spouse. Because
Student N obtains the loan not solely to pay qualified higher education expenses, the
loan is not a qualified education loan.
(g) Denial of double benefit. No deduction is allowed under this section for any
amount for which a deduction is allowable under another provision of Chapter 1 of the
Internal Revenue Code. No deduction is allowed under this section for any amount for
which an exclusion is allowable under section 108(f) (relating to cancellation of
indebtedness).
(h) lnterest--(1) In general. Amounts paid on a qualified education loan are
deductible under section 221 if the amounts are interest for Federal income tax
purposes. For example, interest includes(i) Qualified stated interest (as defined in §1.1273-1 (c)); and
(ii) Original issue discount, which generally includes capitalized interest. For
38
purposes of section 221, capitalized interest means any accrued and unpaid interest on
a qualified education loan that, in accordance with the terms of the loan, is added by the
lender to the outstanding principal balance of the loan.
(2) Operative rules for original issue disnnnnt~m In general. The rules to
determine the amount of original issue discount on a loan and the accruals of the
discount are in sections 163(e), 1271 through 1275, and the regulations thereunder. In
general, original issue discount is the excess of a loan's stated redemption price at
maturity (all payments due under the loan other than qualified stated interest payments)
over its issue price (the amount loaned). Although original issue discount generally is
deductible as it accrues under section 163(e) and §1.163-7, original issue discount on a
qualified education loan is not deductible until paid. See paragraph (h)(3) of this section
to determine when original issue discount is paid.
(ii) Treatment of loan origination fees by the borrower. If a loan origination fee is
paid by the borrower other than for property or services provided by the lender, the fee
reduces the issue price of the loan, which creates original issue discount (or additional
original issue discount) on the loan in an amount equal to the fee. See §1.1273-2(g).
For an example of how a loan origination fee is taken into account, see Example 2 of
paragraph (h)(4) of this section.
(3) Allocation of payments. See §§1.446-2(e) and 1.1275-2(a) for rules on
allocating payments between interest and principal. In general, these rules treat a
payment first as a payment of interest to the extent of the interest that has accrued and
remains unpaid as of the date the payment is due, and second as a payment of
39
principal. The characterization of a payment as either interest or principal under these
rules applies regardless of how the parties label the payment (either as interest or
principal). Accordingly, the taxpayer may deduct the portion of a payment labeled as
principal that these rules treat as a payment of interest on the loan, including any
portion attributable to capitalized interest or loan origination fees.
(4) Examples. The following examples illustrate the rules of this paragraph (h).
In the examples, assume that the institution the student attends is an eligible
educational institution, the loan is a qualified education loan, the student is legally
obligated to make interest payments under the terms of the loan, and any other
applicable requirements, if not otherwise specified, are fulfilled. The examples are as
follows:
Example 1. Capitalized interest. Interest on Student O's qualified education loan
accrues while Student O is in school, but Student O is not required to m a k e any
payments on the loan until six months after he graduates or otherwise leaves school. At
that time, the lender capitalizes all accrued but unpaid interest and adds it to the
outstanding principal amount of the loan. Thereafter, Student O is required to m a k e
monthly payments of interest and principal on the loan. The interest payable on the
loan, including the capitalized interest, is original issue discount. Therefore, in
determining the total amount of interest paid on the qualified education loan during the
60-month period described in paragraph (e)(1) of this section, Student O m a y deduct
any payments that §1.1275-2(a) treats as payments of interest, including any principal
payments that are treated as payments of capitalized interest. S e e paragraph (h)(3) of
this section.
Example 2. Allocation of payments. The facts are the same as in Example 1 of
this paragraph (h)(4), except that, in addition, the lender charges Student O a loan
origination fee, which is not for any property or services provided by the lender. Under
§1.1273-2(g), the loan origination fee reduces the issue price of the loan, which
reduction increases the amount of original issue discount on the loan by the amount of
the fee. T h e amount of original issue discount (which includes the capitalized interest
and loan origination fee) that accrues each year is determined under section 1272 and
§1.1272-1. In effect, the loan origination fee accrues over the entire term of the loan.
Because the loan has original issue discount, the payment ordering rules in §1.1275-
40
2(a) must be used to determine h o w m u c h of each payment is interest for federal tax
purposes. S e e paragraph (h)(3) of this section. Under §1.1275-2(a), each payment
(regardless of its designation by the parties as either interest or principal) generally is
treated first as a payment of original issue discount, to the extent of the original issue
discount that has accrued as of the date the payment is due and has not been allocated
to prior payments, and second as a payment of principal. Therefore, in determining the
total amount of interest paid on the qualified education loan during the 60-month period
described in paragraph (e)(1) of this section, Student O m a y deduct any payments that
the parties label as principal but that are treated as payments of original issue discount
under §1.1275-2(a). The 60-month period does not begin in the month in which the
lender charges Student O the loan origination fee.
(i) Special rules regarding 60-month limitation-d) Refinancing. A qualified
education loan and all indebtedness incurred solely to refinance that loan constitute a
single loan for purposes of calculating the 60-month period described in paragraph
(e)(1) of this section.
(2) Consolidated loans. A consolidated loan is a single loan that refinances more
than one qualified education loan of a borrower. For consolidated loans, the 60-month
period described in paragraph (e)(1) of this section begins on the latest date on which
any of the underlying loans entered repayment status and includes any subsequent
month in which the consolidated loan is in repayment status.
(3) Collapsed loans. A collapsed loan is two or more qualified education loans of
a single taxpayer that constitute a single qualified education loan for loan servicing
purposes and for which the lender or servicer does not separately account. For a
collapsed loan, the 60-month period described in paragraph (e)(1) of this section begins
on the latest date on which any of the underlying loans entered repayment status and
includes any subsequent month in which any of the underlying loans is in repayment
status.
41
(4) Examples. The following examples illustrate the rules of this paragraph (i):
Example 1. Refinancing. Student P obtains a qualified education loan to pay for
an undergraduate degree at an eligible educational institution. After graduation,
Student P is required to m a k e monthly interest payments on the loan beginning in
January 2000. Student P makes the required interest payments for 15 months. In April
2001, Student P borrows m o n e y from another lender exclusively to repay the first
qualified education loan. The new loan requires interest payments to start immediately.
At the time Student P must begin interest payments on the n e w loan, which is a
qualified education loan, there are 45 months remaining of the original 60-month period
referred to in paragraph (e)(1) of this section.
Example 2. Collapsed loans. To finance his education, Student Q obtains four
separate qualified education loans from Lender R. The loans enter repayment status,
and their respective 60-month periods described in paragraph (e)(1) of this section
begin, in July, August, September, and December of 1999. After all of Student Q's
loans have entered repayment status, Lender R informs Student Q that Lender R will
transfer all four loans to Lender S. Following the transfer, Lender S treats the loans as
a single loan for loan servicing purposes. Lender S sends Student Q a single statement
that shows the total principal and interest, and does not keep separate records with
respect to each loan. With respect to the single collapsed loan, the 60-month period
described in paragraph (e)(1) of this section begins in December 1999.
(j) Effective date. This section is applicable to interest due and paid on qualified
education loans after January 21, 1999, if paid before January 1, 2002. Taxpayers also
may apply this section to interest due and paid on qualified education loans after
December 31, 1997, but before January 21, 1999. This section also applies to interest
due and paid on qualified education loans in a taxable year beginning after December
31,2010.
Par. 3. Section 1.6050S-3 is amended by revising paragraphs (d)(1)(iii)(B) and
(e)(1) to read as follows:
$1.6050S-3 Information reporting for payments of interest on Qualified education loans.
* * * * *
(d)***(1)***
42
(iii)* * *
(B) In the case of qualified education loans m a d e before September 1, 2004, for
which the payee does not report payments of interest other than stated interest, state
that the payor m a y be able to deduct additional amounts (such as certain loan
origination fees and capitalized interest) not reported on the statement;
*****
(e) Special rules--(1) Transitional rule for reporting of loan origination fees and
capitalized interest - (i) Loans m a d e before September 1, 2004. For qualified
education loans m a d e before September 1, 2004, a payee is not required to report
payments of loan origination fees or capitalized interest or to take such payments into
account in determining the $600 amount for purposes of paragraph (a)(1) of this
section.
(ii) Loans m a d e on or after September 1, 2004. For qualified education loans
m a d e on or after September 1, 2004, a payee is required to report payments of interest
as described in §1.221-1(f). Under §1.221-1(f), interest includes loan origination fees
that represent charges for the use or forbearance of m o n e y and capitalized interest.
Under this paragraph (e)(1)(ii), a payee shall take such payments of interest into
account in determining the $600 amount for purposes of paragraph (a)(1) of this
section. For purposes of this section and section 6050S, interest (including capitalized
interest and loan origination fees) is treated as received, and is reportable, in the year
the interest is treated as paid under the allocation rules in §1.221-1(f)(3).
43
S e e §1.221-1(f) for rules relating to capitalized interest, and §1.221-1 (f)(2)(H) for rules
relating to loan origination fees, on qualified education loans.
*****
Deputy Commissioner for Services and Enforcement.
Approved:
Assistant Secretary of the Treasury.
JS-1513: Treasury Issues Guidance on Transactions Involving Contested Liability Trusts
Page 1 of 1
PRESS ROOM
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®.
May 6, 2004
JS-1513
Treasury Issues Guidance on Transactions Involving Contested Liability
Trusts
The Treasury Department and IRS today issued a revenue procedure that sets forth
the exclusive administrative procedures by which taxpayers may obtain consent to
change their method of accounting for transactions that improperly use contested
liability trusts to attempt to accelerate deductions.
"In the interest of sound tax administration, the Service is exercising its discretion to
modify the terms and conditions applicable to changes in method of accounting for
these transactions," said Acting Assistant Secretary for Tax Policy Gregory Jenner.
"These modifications are appropriate given the nature of these transactions and the
disclosure otherwise required for many of these transactions as a result of the
recently issued listing notice."
The revenue procedure applies to transfers to contested liabilities trusts identified
as listed transactions in Notice 2003-77, including transfers for which the transferor
has retained control over the trust assets and transfers that do not satisfy the
economic performance requirement. Taxpayers that entered into contested liability
trust transactions that are required to be disclosed as listed transactions must file
amended returns to change their method of accounting for these transactions.
Taxpayers that entered into contested liability trust transactions that are not
required to be disclosed as listed transactions may either file amended returns or
request a change in method of accounting. Taxpayers requesting a change in
method of accounting for these transactions will be required to take the entire
section 481 (a) adjustment into account in the year of change.
-30REPORTS
• Rev. Proc. 2004-31
• Notice 2003-77
_ httD.V/www.treas.eov/press/releases/js 1513.htm
5/6/2005
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part I, " 461,481; 1.461-2.)
Revenue Procedure 2004-31
SECTION 1. PURPOSE
This revenue procedure provides procedures for taxpayers to change their method
of accounting for deducting under § 461(f) of the Internal Revenue Code amounts
transferred to trusts in transactions described in Notice 2003-77, 2003-49 I.R.B. 1182.
S E C T I O N 2. B A C K G R O U N D
.01 O n November 19, 2003, the Internal Revenue Service and Treasury Department
filed with the Federal Register proposed and temporary regulations under § 461 (f). 68
Fed. Reg. 65634, 65645; 2003-49 I.R.B. 1175,1191. These regulations clarify that the
transfer of a taxpayer's note or promise to provide property or services in the future is not a
transfer for the satisfaction of a contested liability under § 461 (f). The regulations also
provide that a transfer of a taxpayer's stock or the stock or note of a related party is not a
transfer for the satisfaction of a contested liability under § 461 (f). The regulations further
provide that, in general, economic performance does not occur when a taxpayer transfers
money or other property to a trust, escrow account, or court to provide for the satisfaction of
a contested workers compensation, tort, or other payment liability. Rather, economic
2
performance occurs w h e n payment is m a d e to the claimant.
.02 Notice 2003-77, 2003-49 I.R.B. 1182, identifies 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, transactions in which
taxpayers established trusts purported to qualify under § 461 (f) that are the s a m e as or
substantially similar to the following transactions:
(1) Transactions in which a taxpayer transfers m o n e y or other property in taxable
years beginning after December 31,1953, and ending after August 16,1954, and retains
certain powers over the m o n e y or other property transferred;
(2) Transactions in which a taxpayer transfers any indebtedness of the taxpayer
or any promise by the taxpayer to provide services or property in the future in taxable years
beginning after D e c e m b e r 31,1953, and ending after August 16,1954;
(3) Transactions in which a taxpayer using an accrual method of accounting
transfers m o n e y or other property after July 18,1984, to provide for the satisfaction of a
workers compensation or tort liability (unless the trust is the person to which the liability is
owed, or payment to the trust discharges the taxpayer's liability to the claimant);
(4) Transactions in which a taxpayer using an accrual method of accounting
transfers m o n e y or other property in taxable years beginning after December 31,1991, to
provide for the satisfaction of a liability for which payment is economic performance under
' 1.461-4(g) (unless the trust is the person to which the liability is owed, or payment to the
trust discharges the taxpayer's liability to the claimant), other than a liability for workers
compensation or tort; and
(5) Transactions in which a taxpayer transfers stock issued by the taxpayer, or
indebtedness or stock issued by a party related to the taxpayer (as defined in ' 267(b)), on
3
or after November 19, 2003.
.03 Section 1.6011-4(a) provides that every taxpayer that has participated (as
described in § 1.6011-4(c)(3)) in a reportable transaction and that is required to file a tax
return must attach a disclosure statement to its return. A reportable transaction includes
any transaction that is the same as or substantially similar to one of the types of
transactions that the IRS has determined to be a tax avoidance transaction and identified
by published guidance as a listed transaction. Section 1.6011-4(b)(2). Generally, a listed
transaction is not treated as a reportable transaction if the transaction affected the
taxpayer's Federal income tax liability as reported on any tax return filed on or before
February 28, 2000. Section 1.6011-4T(b)(2) as published in T.D. 8877 in 65 Fed. Reg.
11205. See also §1.6011-4(h).
.04 Sections 446(e) and 1.446-1 (e) provide that, except as otherwise provided, a
taxpayer must secure the consent of the Commissioner before changing a method of
accounting for federal income tax purposes. Section 1.446-1 (e)(3)(i) provides that, to
obtain the Commissioner's consent to an accounting method change, a taxpayer must file
a Form 3115, Application for Change in Accounting Method, during the taxable year in
which the taxpayer desires to make the proposed change. Section 1.446-1 (e)(3)(H)
authorizes the Commissioner to prescribe administrative procedures setting forth the
limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain
consent to change a method of accounting in accordance with ' 446(e).
.05 Rev. Proc. 97-27, 1997-1 C.B. 680, (as modified and amplified by Rev. Proc.
4
2002-19, 2002-1 C.B. 696, as amplified and clarified by Rev. Proc. 2002-54, 2002-2 C.B.
432), provides procedures for obtaining the consent of the Commissioner to change a
method of accounting for federal income tax purposes. In general, under these procedures
a taxpayer must file a Form 3115 during the year of change and may not request or make a
retroactive change in method of accounting unless specifically authorized by the
Commissioner. Rev. Proc. 97-27, sections 5.01, 2.04. In addition, under these
procedures a taxpayer generally takes into account a positive § 481 (a) adjustment
resulting from the change in method of accounting ratably over four taxable years and
receives audit protection for taxable years prior to the year of change. Rev. Proc. 97-27,
sections 5.02(3)(a), 9.01. However, section 8.01 of Rev. Proc. 97-27 states that the
Service reserves the right to decline to process a Form 3115 "in situations in which it would
not be in the best interest of sound tax administration to permit the requested change. In
this regard, the Service will consider whether the change in method of accounting would
clearly and directly frustrate compliance efforts of the Service in administering the income
tax laws."
.06 Rev. Rul. 90-38,1990-1 C.B. 57, provides that, if a taxpayer uses an erroneous
method of accounting for two or more consecutive taxable years, the taxpayer has adopted
a method of accounting. The ruling further provides that a taxpayer may not without the
Commissioner's consent, retroactively change from an erroneous to a permissible method
of accounting by filing an amended return.
5
.07 A change from deducting an asserted liability in the taxable year of transfer of
money or other property to a trust described in Notice 2003-77 to deducting the liability in
the taxable year of payment to the claimant is a change in method of accounting. The
Service has determined that it is not in the best interest of sound tax administration to
permit a prospective change in method of accounting for such deductions in transactions
that are required to be disclosed as listed transactions under § 1.6011-4. In addition, in
the interest of sound tax administration, the Service has determined that the terms and
conditions set forth in Rev. Proc. 97-27 should be modified for changes in methods of
accounting for such deductions in transactions that are not required to be disclosed as
listed transactions under § 1.6011-4.
SECTION 3. SCOPE
This revenue procedure applies to taxpayers that desire to change a method of
accounting for transactions described in section 2.02 of this revenue procedure.
SECTION 4. APPLICATION
.01 Change in method of accounting for transactions described in Notice 2003-77
that are reguired to be disclosed as listed transactions under § 1.6011-4. The Service will
not process applications for changes in method of accounting filed for transactions within
the scope of this revenue procedure that are required to be disclosed under § 1.6011-4.
Taxpayers may change their method of accounting for these transactions by filing an
amended return in accordance with section 4.04 of this revenue procedure.
6
•02 Change in method of accounting for transactions described in Notice 2003-77
that are not reguired to be disclosed as listed transactions under § 1.6011 -4. Taxpayers
that desire to change a method of accounting for transactions within the scope of this
revenue procedure that are not required to be disclosed under § 1.6011-4 may change
their method of accounting for these transactions by filing an amended return in
accordance with section 4.04 of this revenue procedure or may request a change in
method of accounting in accordance with the advance consent procedures of Rev. Proc.
97-27 with the following modifications:
(1) In lieu of the four year spread period for positive § 481(a) adjustments
provided in section 5.02(3)(a) of Rev. Proc. 97-27, the taxpayer must take into account the
entire amount of a positive § 481 (a) adjustment in the taxable year of change; and
(2) The taxpayer must describe each transaction, explain in the Form 3115
why the transaction is not required to be disclosed under § 1.6011-4, and state the amount
of § 481 (a) adjustment for that transaction.
.03 Change in method of accounting by taxpayers that have engaged in multiple
transactions described in Notice 2003-77, some of which are reguired to be disclosed as
listed transactions under § 1.6011-4. A taxpayer changing its method of accounting for
multiple transactions within the scope of this revenue procedure, some of which are
required to be disclosed under § 1.6011-4 and some of which are not required to be
disclosed under § 1.6011-4:
7
(1) May change its method of accounting for transactions that are not
required to be disclosed under § 1.6011 -4 in accordance with section 4.02 of this revenue
procedure, but must take into account in computing the § 481(a) adjustment only amounts
attributable to those transactions; and
(2) Must file amended returns in accordance with sections 4.01 and 4.04 of
this revenue procedure to change its method of accounting for all transactions required to
be disclosed under § 1.6011-4 prior to filing the Form 3115 for transactions not required to
be disclosed.
.04 Change in method of accounting by filing amended return.
(1) In accordance with § 1.446-1 (e)(3)(ii) and Rev. Rul. 90-38, consent is
hereby granted for any taxpayer that has engaged in a transaction within the scope of this
revenue procedure to file amended returns to retroactively change an impermissible
method of accounting for amounts transferred to trusts purported to qualify under § 461 (f) to
a method that complies with § 461 (f) and the regulations thereunder. This consent is
granted only if the taxpayer files such amended returns for the first taxable year in which the
taxpayer used the impermissible method of accounting for these transactions (or if the
period of limitations has expired for such taxable year, for the first taxable year for which
the period of limitations has not expired) and for each subsequent taxable year in which the
taxpayer's use of the impermissible method of accounting for these transactions reduced
the taxpayer's taxable income. If the period of limitations has expired for the first taxable
year in which a taxpayer used the impermissible method of accounting for these
8
transactions and the taxpayer files amended returns pursuant to this consent, the amended
return for the first taxable year for which the period of limitations has not expired must
include the entire amount of the § 481 (a) adjustment attributable to the change in
accounting method.
(2) A taxpayer that complies with section 4.04(1) of this revenue procedure
also may file amended returns for any taxable years in which the taxpayer's use of the
impermissible method of accounting for these transactions increased its taxable income.
(3) Taxpayers filing amended returns under this revenue procedure must
write "FILED UNDER REVENUE PROCEDURE 2004-31 "at the top of the amended
return. Taxpayers also must comply with the requirements of § 1.6011-4 including, but not
limited to, attaching to the amended return any disclosure statements that may be required
in accordance with § 1.6011-4(a) and (e).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective on (INSERT DATE OF RELEASE).
DRAFTING INFORMATION
The principal author of this revenue procedure is Norma Rotunno of the Office of the
Associate Chief Counsel (Income Tax & Accounting). For further information regarding this
notice, contact Ms. Rotunno at (202) 622-7900 (not a toll-free number).
Part III - Administrative, Procedural, and Miscellaneous
Transfers to Trusts to Provide for the Satisfaction of Contested Liabilities
Notice 2003-77
The Internal Revenue Service and Treasury Department are aware of certain
transactions that use contested liability trusts improperly to attempt to accelerate
deductions for contested liabilities under' 461(f) of the Internal Revenue Code. This
notice alerts taxpayers and their representatives that these transactions are tax avoidance
transactions and identifies these transactions, and substantially similar transactions, 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.
This notice also alerts parties involved with these transactions of certain responsibilities
that m a y arise from their involvement with these transactions.
LAW
Section 461(f) provides an exception to the general rules of tax accounting by
allowing a taxpayer to deduct a contested liability in a year prior to the resolution of the
contest if the following conditions are satisfied: (1) the taxpayer contests an asserted
liability; (2) the taxpayer transfers m o n e y or other property to provide for the satisfaction of
the asserted liability; (3) the contest with respect to the asserted liability exists after the
time of transfer; and (4) but for the fact that the asserted liability is contested, a deduction
would be allowed for the taxable year of the transfer (or for an earlier taxable year)
2
determined after the application of the economic performance rules. If these requirements
are satisfied, a taxpayer m a y deduct the liability in the taxable year of the transfer.
O n November 19, 2003, the Service and Treasury Department filed with the Federal
Register proposed and temporary regulations under' 461(f). Section 1.461-2T(c)(1) of
these temporary regulations, which replaces and restates ' 1.461-2(c)(1), provides that a
transfer for the satisfaction of an asserted liability is a transfer of m o n e y or property beyond
the taxpayers control to: (1) the person asserting the liability; (2) an escrowee or trustee
pursuant to a written agreement (among the escrowee or trustee, the taxpayer, and the
person w h o is asserting the liability) providing that the m o n e y or other property be
delivered in accordance with the settlement of the contest; (3) an escrowee or trustee
pursuant to an order of a court or government entity providing that the m o n e y or other
property be delivered in accordance with the settlement of the contest; or (4) a court with
jurisdiction over the contest. A n account is in the taxpayers control unless the taxpayer has
relinquished all authority over the m o n e y or other property transferred.
Section 1.461-2T(c)(1)(iii) provides that the following actions are not transfers to
provide for the satisfaction of an asserted liability: (1) the purchase of a bond to guarantee
payment of the asserted liability; (2) an entry on the taxpayers books of account; and (3) a
transfer to an account in the taxpayers control. The temporary regulations clarify that a
transfer in taxable years beginning after December 31,1953, and ending after August 16,
1954, of any indebtedness of a taxpayer or any promise by the taxpayer to provide
services or property in the future is not a transfer to provide for the satisfaction of an
asserted liability. In addition, the temporary regulations provide the express rule that a
transfer (other than to the person asserting the liability) of a taxpayer-s stock, or the
3
indebtedness or stock of a person related to the taxpayer (as defined in section 267(b)), is
not a transfer to provide for the satisfaction of an asserted liability.
Section 461 (h)(2)(C) provides that, if a workers compensation or tort liability
requires a payment to another person, then economic performance occurs as payments to
the person are made. The Conference Report accompanying enactment of' 461(h)
states:
In the case of workers: compensation or tort liabilities of the
taxpayer requiring payments to another person, economic
performance occurs as payments are m a d e to that person.
Since payment to a section 461(f) trust is not a payment to
the claimant and does not discharge the taxpayers liability
to the claimant, such payment does not satisfy the economic
performance test.
H.R. Rep. No. 861, 98th Cong., 2d Sess. 871, 876 (1984).
Section 461(h)(2)(D) provides that in the case of other liabilities, economic
performance occurs at the time determined under regulations prescribed by the Secretary.
Section 1.461-4(g)(2) through (7) describes other liabilities for which payment is economic
performance.
Section 1.461-4(g)(1 )(ii)(A) provides that payment does not include the furnishing of
a note or other evidence of indebtedness of the taxpayer.
Section 1.461-4(g)(1)(i) provides that, for certain liabilities for which payment is
economic performance, economic performance does not occur as a taxpayer makes
payments in connection with the liability to any other person, including a trust, escrow
account, court-administered fund, or any similar arrangement, unless the payments
constitute payment to the person to which the liability is owed. In Maxus Energy
4
Corporation and Subsidiaries v. United States, 31 F.3d 1135,1144,1145 (Fed. Cir.
1994), the taxpayers payment to a settlement fund effectively constituted payment to the
person to which the liability was owed because the claimants agreed to look solely to the
fund to satisfy their claims and, therefore, the taxpayers payment to the fund discharged its
liability to the claimant.
Section 1.461-2T(e)(2) provides that, except as provided in ' 468B or the
regulations thereunder, economic performance does not occur when a taxpayer transfers
money or other property to a trust, escrow account, or court to provide for the satisfaction of
a contested workers compensation, tort, or other liability designated in ' 1.461-4(g) unless
the trust, escrow account, or court is the claimant or the taxpayers payment to the trust,
escrow account, or court discharges the taxpayers liability to the claimant.
ANALYSIS
The Service and Treasury Department have become aware of transactions in which
taxpayers have established trusts purported to qualify under' 461(f), but that fail to comply
with the requirements of' 461 (f) or the regulations by reason of: (1) retention of powers
over the trust assets (such as the power to substitute assets, to pay the contested liabilities
out of assets other than those in the trust, or to limit the trustee=s ability to sell the taxpayers
assets that the taxpayer transferred to the trust), contrary to the requirement that the
taxpayer relinquish control over the property transferred; (2) transfer to the trust of related
party notes under circumstances indicating the liability is not genuine or that there is no
intent between the parties to enforce the obligation, which is not a valid transfer to provide
for the satisfaction of an asserted liability; or (3) establishment of trusts for contested tort,
5
workers compensation, or other liabilities designated in ' 1.461 -4(g), for which economic
performance requires payment to the claimant.
Transactions that are the s a m e as, or substantially similar to, the following
transactions are identified as Alisted transactions® for purposes of' * 1.60114(b)(2), 301.6111 -2(b)(2) and 301.6112-1 (b)(2):
(1) transactions in which a taxpayer transfers m o n e y or other property in taxable
years beginning after D e c e m b e r 31,1953, and ending after August 16,1954, to a trust
purported to be established under' 461(f) to provide for the satisfaction of an asserted
liability and retains any one or more of the following powers over the m o n e y or other
property transferred: to pay any liabilities ultimately due to the claimant out of assets other
than those transferred to the trust; to substitute m o n e y or other property for property
transferred to the trust; to prohibit payment to the claimant by the trustee until instructed by
the taxpayer; to prohibit notification to the claimant of the trusts establishment; to limit the
trustees ability to sell the property after it is transferred to the trust; and to limit the trustee=s
ability to enforce notes or rights relating to other property transferred to the trust;
(2) transactions in which a taxpayer transfers any indebtedness of the taxpayer or
any promise by the taxpayer to provide services or property in the future in taxable years
beginning after D e c e m b e r 31,1953, and ending after August 16,1954, to a trust purported
to be established under' 461 (f) to provide for the satisfaction of an asserted liability;
(3) transactions in which a taxpayer using an accrual method of accounting transfers
m o n e y or other property after July 18,1984, to a trust purported to be established under
' 461(f) to provide for the satisfaction of a workers compensation or tort liability (unless the
trust is the person to which the liability is owed, or payment to the trust discharges the
6
taxpayer's liability to the claimant);
(4) transactions in which a taxpayer using an accrual method of accounting transfers
m o n e y or other property in taxable years beginning after December 31,1991, to a trust
purported to be established under' 461 (f) to provide for the satisfaction of a liability for
which payment is economic performance under' 1.461-4(g) (unless the trust is the person
to which the liability is owed, or payment to the trust discharges the taxpayer's liability to the
claimant), other than a liability for workers compensation or tort; and
(5) transactions in which a taxpayer transfers stock issued by the taxpayer, or
indebtedness or stock issued by a party related to the taxpayer (as defined in * 267(b)), on
or after November 19, 2003, to a trust purported to be established under' 461(f) to
provide for the satisfaction of any asserted liability.
Independent of their classification as Alisted transactions,® transactions that are the
s a m e as, or substantially similar to, the transactions described in this notice m a y already
be subject to the disclosure requirements of' 6011 (' 1.6011-4), the tax shelter
registration requirements of' 6111 (" 301.6111-1T, 301.6111-2), or the list maintenance
requirements of' 6 1 1 2 (' 301.6112-1). Persons required to register these tax shelters
under '6111 w h o have failed to do so m a y be subject to the penalty under' 6707(a).
Persons required to maintain lists of investors under' 6112 who have failed to do so (or
w h o fail to provide such lists w h e n requested by the Service) m a y be subject to the penalty
under' 6708(a). In addition, the Service m a y impose penalties on parties involved in
these transactions or substantially similar transactions, including the accuracy-related
penalty under' 6662.
7
Transactions that are the same as, or substantially similar to, the transactions
described in this notice are identified as "listed transactions" for purposes of §§ 1.60114(b)(2), 301.6111 -2(b)(2) and 301.6112-1 (b)(2) effective November 19, 2003, the date this
notice is released to the public. The references to specific taxable years and dates in the
description of transactions covered by this notice are intended to provide consistency with
the temporary and proposed regulations under § 461 (f) filed with the Federal Register on
November 19, 2003. Only those transactions covered by the provisions (including the
effective date provisions) of the disclosure, tax shelter registration, and list maintenance
requirements under §§ 6011, 6111, and 6112 and the regulations thereunder will be
subject to those requirements.
DRAFTING INFORMATION
The principal author of this notice is Norma Rotunno of the Office of the Associate
Chief Counsel (Income Tax & Accounting). For further information regarding this notice,
contact Ms. Rotunno at (202) 622-7900 (not a toll-free number).
JS-1514: Treasury and IRS Issue Guidance O n Capital Gain Dividends
Page 1 of 1
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
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May 6, 2004
JS-1514
Treasury and IRS Issue Guidance On Capital Gain Dividends
The IRS and the Treasury Department today issued guidance to clarify that capital
gain dividends received from a mutual fund in 2004 will be taxed at the new, lower
capital gain rates enacted last year.
"Last year the President's Jobs and Growth Tax Relief Reconciliation Act of 2003
lowered the capital gains rates on dividends," said Acting Assistant secretary for
Tax policy Greg Jenner. "These lower rates mean taxpayers will have more money
to invest, save for their children's education or buy a home"
Mutual funds with net capital gains may designate some of their dividends as
"capital gain dividends," which are taxed to the fund's shareholders like long term
capital gains. Since 1997, mutual funds' designations of capital gain dividends
have included an additional designation of which rate applies to the dividend
because long term capital gains from different sources have been taxed at different
tax rates.
Concern had been expressed that the existing rules for dividend designation and
the transition to the new, lower capital gain rates enacted last year might cause
some 2004 capital gain dividends to be taxed to fund shareholders at the old,
higher capital gain rates. The guidance issued today clarifies that this will not
occur.
-30REPORTS
• Notice 2004-39
htto://www treas.gov/press/releases/is 1514.htm
5/6/2005
Part III—Administrative, Procedural, and Miscellaneous
Capital Gain Dividends of RICs and REITs
Notice 2004-39
SECTION 1. PURPOSE
This notice provides guidance to regulated investment companies ("RICs"), real
estate investment trusts ("REITs"), and their shareholders in applying § 1(h) of the
Internal Revenue Code to capital gain dividends of RICs and REITs. The notice
explains how the changes to § 1(h) m a d e by the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (the "JGTRRA"), Pub. L. No. 108-27, 117 Stat. 752, apply to
RIC and REIT capital gain dividends paid (or accounted for as if paid) in taxable years
that end on or after M a y 6, 2003.
SEC. 2. BACKGROUND
For individuals, estates, and trusts, § 1(h) imposes differing rates of tax on
various transactions depending on the types of transactions giving rise to net capital
gains. For transactions taken into account during taxable years ending before
May 6, 2003, a taxpayer's long-term capital gains and losses generally are separated
into three tax-rate groups: a 20-percent group, a 25-percent group, and a 28-percent
group. See Notice 97-59, 1997-2 C.B. 309. For certain taxpayers, transactions in the
20-percent group m a y be taxed at a 10-percent rate, or at an 8-percent rate if the gain
is qualified 5-year gain under § 1(h)(9) (as in effect before the enactment of the
JGTRRA).
For transactions taken into account during taxable years ending on or after
May 6, 2003, and beginning before January 1, 2009, the J G T R R A reduced the 2 0 percent rate to 15 percent, reduced the 10-percent rate to 5 percent (0 percent for
taxable years beginning after 2007), and repealed the rules dealing with qualified 5year gain. For a taxable year that includes May 6, 2003, the reduction in rates and the
repeal of the rules dealing with qualified 5-year gain apply to gain or loss properly taken
into account for the portion of the taxable year on or after M a y 6, 2003. Because this
effective date generally occurs sometime during a taxpayer's taxable year, the amount
of capital gain that benefits from the reduced 15-percent (or 5-percent) rate is generally
the lesser of the net capital gain for the entire taxable year or the net capital gain
determined using only gain and loss properly taken into account for the portion of the
taxable year on or after M a y 6, 2003. J G T R R A § 301(c)(1)-(2) ("the J G T R R A transition
rule"). In applying the J G T R R A transition rule with respect to a pass-through entity, the
determination of when gains and losses are properly taken into account is m a d e at the
2
entity level. Id. § 301(c)(4). See the last paragraph of Section 3 of this notice for the
application of this rule.
The Secretary has authority to issue regulations concerning the application of
§ 1(h) to sales and exchanges by (and of interests in) pass-through entities, including
RICs and REITs. § 1(h)(9).
To the extent that a RIC or a REIT has net capital gain for a taxable year, it may
designate as capital gain dividends the dividends that it pays during the year, the
dividends that § 855 or 858 d e e m s it to pay during the year, or deficiency dividends
under § 860 that it pays for that year. In general, a capital gain dividend is treated by
the shareholders that receive it as a gain from the sale or exchange of a capital asset
held for more than one year.
Notice 97-64, 1997-2 C.B. 323, describes regulations that will be issued under
§ 1(h) concerning the application of § 1(h) to capital gain dividends of RICs and REITs,
effective for taxable years ending on or after M a y 7, 1997. A s described in Notice 9 7 64, the regulations will allow a RIC or REIT to m a k e additional designations of capital
gain dividends to reflect the differing tax-rate groups under § 1(h) and will provide
limitations on the amounts that can be designated in the differing tax-rate groups. In
calculating those limitations, the regulations will provide for a deferral adjustment or
bifurcation adjustment in certain situations. In addition, the regulations will provide
special rules for distributions of § 1202 gain.
Moreover, when those regulations are issued, they will reflect changes to § 1(h)
since the publication of Notice 97-64. (For example, the Tax and Trade Relief
Extension Act of 1998, Pub. L. No. 105-277, 112 Stat. 2681-886, ended the relevance
of holding a capital asset for more than 18 months.)
This Notice 2004-XX describes how the reduction in rates made by the JGTRRA
and the J G T R R A transition rule (for taxable years that include M a y 6, 2003), apply to
capital gain dividends of RICs and REITs. Future guidance m a y be issued to clarify
certain of the rules originally described in Notice 97-64 and to m a k e other modifications
to take into account industry experience with the rules. That guidance generally will
apply on a prospective basis.
SEC. 3 APPLICATION OF § 1(h) TO RIC AND REIT CAPITAL GAIN DIVIDENDS
For taxable years ending on or after May 6, 2003, the rules described in
Notice 97-64 continue to apply to capital gain dividends of RICs and REITs, with
appropriate modifications to take into account the changes that have been m a d e to
§ 1(h) since that notice w a s published. Thus, if a RIC or REIT designates a dividend as
a capital gain dividend, the RIC or REIT m a y m a k e an additional designation of the
dividend as a 15%-rate gain distribution, subject to the limitations described in section 5
3
of Notice 97-64, including the limitation that the additional designation of a class of
capital gain dividend not exceed the m a x i m u m distributable amount in that class.
In general, a RIC or REIT determines the maximum distributable amounts that
m a y be designated in each class of capital gains dividends by performing the
computation required by § 1(h) as if the RIC or REIT were an individual w h o s e ordinary
income is subject to a marginal tax rate of at least 28 percent. The m a x i m u m
distributable gain in each class of capital gain dividends is equal to the amount that, in
the computation under § 1(h), is multiplied by the corresponding rate gain percentage.
The computation under § 1(h), however, is modified in the following ways:
• The RIC or REIT disregards qualified dividend income. That is, net capital
gain is not increased by qualified dividend income, and qualified dividend
income is disregarded in determining the amount of gain properly taken into
account for the portion of a taxable year on or after M a y 6, 2003. (Under
§ 854(b) or § 857(c), qualified dividend income received by the RIC or REIT
m a y contribute to a separate designation of other RIC or REIT dividends.)
• The RIC or REIT m a k e s the deferral adjustment or bifurcation adjustment
described in section 6 of Notice 97-64.
• The computation takes into account, if applicable, the J G T R R A transition rule
for taxable years that contain M a y 6, 2003. The J G T R R A transition rule,
however, interacts with the deferral adjustment in a w a y that differs from the
interaction between that adjustment and the transition rule for the 1997
reductions in capital gains rates. That is, for purposes of the J G T R R A
transition rule, the deferral adjustment is applied in determining whether a
gain or loss is taken into account before M a y 6, 2003, or after M a y 5, 2003.
For example, if a RIC sells shares of stock before M a y 6, 2003, but the sale is
treated under § 852(b)(3)(C) and § 1.852-11 (e) as arising after that date, the
sale is taken into account on the later date for purposes of the J G T R R A
transition rule. This application of the deferral adjustment differs from the
special rule in section 6 of Notice 97-64 for transactions occurring during
1997.
The JGTRRA transition rule applies at both the RIC/REIT level and at the
shareholder level. That is, the rule applies at the RIC/REIT level to taxable years of the
RIC or REIT that contain M a y 6, 2003, to govern h o w capital gain dividends m a y be
designated, and it applies to taxable years of RIC/REIT shareholders that contain
M a y 6, 2003, to govern the application of § 1(h) to the shareholder for that taxable year.
Thus, if a RIC or REIT pays a capital gain dividend during 2004 that it properly
designates as a 20%-rate gain distribution and the dividend is received by a fiscal year
trust in a year of the trust that includes M a y 6, 2003, the dividend is treated by the trust
as gain that is properly taken into account for the portion of the taxable year before
M a y 6, 2003. O n the other hand, if that s a m e capital gain dividend is received during
2004 by an individual shareholder, or a trust, whose taxable year is the calendar year,
4
the dividend is subject to tax at a rate no higher than 15 percent, because the J G T R R A
transition rule applies only to shareholder taxable years that include May 6, 2003.
In taxable years beginning on or after May 6, 2003, some taxpayers may receive
a RIC or REIT distribution amount that is designated as a 20%-rate gain distribution
and that includes a portion constituting 5-year gain. As a result of the repeal of the
separate rules for 5-year gains, the 5-year gain portion of that 20%-rate gain
distribution is not subject to the prior-law 8-percent rate for 5-year gain. These
taxpayers, however, will not be disadvantaged by the rate changes. The 5-year gain
portion will be treated the same as any other 20%-rate gain distribution that is received
in a taxable year beginning on or after May 6, 2003, and therefore will be taxed at a rate
no higher than 15 percent (5 percent for certain taxpayers). Any taxpayer that would
have been eligible in a taxable year to pay tax at the 8-percent rate for some or all 5year gain had the prior rates remained in effect will be eligible under the new rules to
pay tax on that amount of 5-year gain at the 5-percent rate.
SEC. 4 EXAMPLES
(1) Example 1. RIC X's taxable year ends on April 30. X has only the following
capital gains and losses for the periods indicated, all of which are from sales of stock
held for less than five years:
5/1 to 5/5/2003
Long-term capital gain or loss
Short-term capital gain or loss
5/6 to 10/31/2003
Long-term capital gain or loss
Short-term capital gain or loss
11/1 to 4/30/2004
Long-term capital gain or loss
Short-term capital gain or loss
GAIN
LOSS
NET
100x
100x
0
0
100x
100x
0
0
0
0
(90x)
(90x)
110x
0
0
110x
0
0
X_does not make a deferral adjustment because X_does not have a post-October
net capital loss or net long-term capital loss for its taxable year ending April 30, 2004. X
must make a bifurcation adjustment, however, because it has a pre-November net
capital gain, it has a taxable year ending in April, and it does not make a deferral
adjustment. Because X must apply both the bifurcation adjustment and the J G T R R A
transition rule, for the pre-November and post-October portions of this taxable year X
must make separate determinations of the maximum amounts that may be designated
as 20%-rate gain and 15%-rate gain. The sum of these amounts determines the
5
various maximum amounts that can be designated in the different classes of gain for the
entire year.
For the pre-November period, the JGTRRA transition rule applies because the
period includes May 6, 2003. Thus, X determines a net capital gain amount using only
gain and loss properly taken into account for the portion of the taxable year that is on or
after May 6, 2003 (and, because the determination is for the pre-November period, on
or before October 31, 2003). The amount so determined is $0. X's net capital gain for
the entire pre-November period is $100x. Thus, for the pre-November period, X's
maximum designation of 20%-rate gain is $100x and its maximum designation of 1 5 % rate gain is $0. (X also has a net short-term gain of $10x in the pre-November period,
which results in a dividend that is not specially designated and is treated by
shareholders as ordinary income.)
For the post-October period, the JGTRRA transition rule does not apply because
that period does not include May 6, 2003. Because X has $110x of net capital gain for
that period, X's maximum designation of 15%-rate gain is $110x.
For the taxable year ending April 30, 2004, therefore, X may designate up to
$21 Ox of capital gain dividends, of which up to $110x may be designated as 15%-rate
gain distributions and up to $100x may be designated as 20%-rate gain distributions.
(2) Example 2. RIC Y's taxable year ends on April 30. Y has only the following
capital gains and losses for the periods indicated, all of which are from sales of stock
held for less than five years:
5/1 to 5/5/2003
Long-term capital gain or loss
Short-term capital gain or loss
5/6 to 10/31/2003
Long-term capital gain or loss
Short-term capital gain or loss
11/1 to 4/30/2004
Long-term capital gain or loss
Short-term capital gain or loss
GAIN
LOSS
NET
90x
0
0
0
90x
0
0
0
(90x)
(90x)
0
0
0
0
100x
100x
0
0
Y does not make a deferral adjustment because it does not have a post-October
net capital loss or net long-term capital loss for its taxable year ending April 30, 2004. Y
does not make a bifurcation adjustment because it does not have a net capital gain for
the pre-November portion of its taxable year ending April 30, 2004. Because Y's
6
taxable year ending April 30, 2004, includes M a y 6, 2003, the J G T R R A transition rule
applies in determining Y's m a x i m u m designations of capital gain for that taxable year.
Y's net capital gain for the entire year is $100x. Y's net capital gain determined
using only gain and loss properly taken into account for the portion of the taxable year
on or after M a y 6, 2003, however, is $10x. For this taxable year, Y m a y designate up to
$1 OOx of capital gain dividends, of which up to $1 Ox m a y be designated as 15%-rate
gain distributions and up to $90x m a y be designated as 20%-rate gain distributions.
Assume that Y pays a capital gain dividend on December 1, 2004, and that,
under § 855(a), Y treats the dividend as having been paid during its taxable year ending
April 30, 2004, but that, under § 855(b), Y's shareholders treat the dividend as having
been received in their taxable years that contain December 1, 2004. A s s u m e also that
shareholder A of Y is an individual, estate, or trust whose taxable year is the calendar
year and that, on December 1, 2004, A receives from Y a dividend of $10x, of which $1x
is designated as a 15%-rate gain distribution and $9x is designated as a 20%-rate gain
distribution. Because A's 2004 taxable year does not include M a y 6, 2003, neither the
J G T R R A transition rule nor J G T R R A § 301(c)(4) applies to A for that taxable year.
Thus, the $10x capital gain dividend received by A in 2004 is subject to a tax rate no
higher than 15 percent.
DRAFTING INFORMATION
The principal author of this notice is Sonja Kotlica of the Office of Associate Chief
Counsel (Financial Institutions & Products). For further information regarding this
notice, contact M s . Kotlica on (202) 622-3960 (not a toll-free call).
-1515: Treasury and IRS Issue Guidance on Interest Deductions and Tax-Exempt Interest Income
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
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May 6, 2004
JS-1515
Treasury and IRS Issue Guidance on Interest Deductions and Tax-Exempt
Interest Income
Today, the Treasury Department and the IRS released guidance regarding the
disallowance of deductions for interest paid on funds borrowed to purchase or carry
tax-exempt obligations.
The guidance issued today addresses questions that have arisen regarding interest
deductions by a borrower that lends or contributes money to a related entity that is
a dealer in tax-exempt obligations. The guidance also clarifies the interaction
between the adjustments required under the interest disallowance rules and certain
adjustments required under the consolidated return regulations. In addition, the
Treasury Department and the IRS requested comments regarding the application of
the interest deduction disallowance rules in other situations in which a party related
to the borrower invests in tax-exempt obligations or an intermediary comes between
the borrower and a dealer in tax-exempt obligations.
"The guidance issued today answers several significant questions," said Acting
Assistant Secretary for Tax Policy Gregory Jenner. "The comments requested will
help the IRS and the Treasury Department to provide additional guidance on
related issues."
-30-
REPORTS
• Revenue Ruling 2004-47
• Reg. 128572-03
• Reg. 128590-03
vw.treas. eov/nress/releases/is 1515 .htm
5/31/2005
Parti
Section 265(a)(2).—Expenses and interest relating to tax-exempt income
26 CFR 1.265-2: Interest relating to tax-exempt income.
Rev. Rul. 2004-47
ISSUE
If a member of an affiliated group borrows money and transfers the money to
another member of the group that is a dealer in tax-exempt obligations, does ' 265(a)(2)
of the Internal Revenue Code apply to disallow the interest expense of the borrowing
corporation?
FACTS
Situation 1. - P and S are corporations that are members of the same affiliated group, but
file separate tax returns. P and S use the calendar year as their taxable year. S is a dealer
in tax-exempt obligations, whose general business includes purchasing and carrying taxexempt securities.
On January 1, 2004, L, a bank unrelated to the affiliated group that includes P and
S, lends $40x to P for 5 years. L=s loan to P provides for payments of interest on
December 31 of each year at a rate higher than the appropriate applicable Federal rate. P
contributes the $40x borrowed from L to the capital of S, and S uses the contributed funds
in its business. Although the borrowed funds are directly traceable from P to S, they are
2
not directly traceable to the purchase or carry of specific tax-exempt obligations by S.
During its taxable year 2004, S holds an average of $500x of tax-exempt obligations
(valued at their adjusted bases), and an average of $1,000x of total assets (valued at their
adjusted bases). During its taxable year 2004, P holds an average of $10,000xof total
assets (valued at their adjusted bases) and no tax-exempt obligations in the active conduct
of its trade or business, and incurs $2x of interest expense on its $40x loan from L.
Situation 2. - The facts are the same as in Situation 1, except that P and S file a
consolidated return.
Situation 3. - The facts are the same as in Situation 1, except that the funds that P
borrowed from L are not directly traceable to any funds transferred from P to S and there is
no other direct evidence linking the borrowed funds to any funds transferred from P to S.
Situation 4. - The facts are the same as in Situation 1, except that P loans to S the $40x
borrowed from L on the same terms and conditions as the loan from L to P. During its
taxable year 2004, S incurs $2x of interest expense on its $40x loan from P.
LAW AND ANALYSIS
In general, a deduction is allowed under ' 163 of the Code for all interest paid or
accrued on indebtedness. Under ' 265(a)(2), however, no deduction is allowed for
interest on indebtedness incurred or continued to purchase or carry obligations the interest
on which is wholly exempt from Federal income taxes.
Rev. Proc. 72-18,1972-1 C.B. 740, sets forth guidelines for the application of
' 265(a)(2). Section 3.01, which applies to all taxpayers, states that the application of
1
3
265(a)(2) requires a determination of the taxpayers purpose in incurring or continuing
each item of indebtedness, based on all the facts and circumstances. That section further
states that the taxpayer's purpose may be established by either direct or circumstantial
evidence.
Section 3.02 of Rev. Proc. 72-18 provides that direct evidence of a purpose to
purchase tax-exempt obligations exists when the proceeds of indebtedness are used for,
and are directly traceable to, the purchase of tax-exempt obligations. Wvnn v. United
States, 411 F.2d 614 (3d Cir. 1969), cert, denied, 396 U.S. 1008 (1970). Section
265(a)(2) does not apply, however, when proceeds of a bona fide business indebtedness
are temporarily invested in tax-exempt obligations under circumstances similar to those set
forth in Rev. Rul. 55-389, 1955-1 C.B. 276.
Section 3.03 of Rev. Proc. 72-18 provides that direct evidence of a purpose to carry
tax-exempt obligations exists when tax-exempt obligations are used as collateral for
indebtedness. "[One] who borrows to buy tax-exempts and one who borrows against taxexempts already owned are in virtually the same economic position. Section 265(2) [the
predecessor of ' 265(a)(2)] makes no distinction between them." Wisconsin Cheeseman
v. United States, 388 F.2d 420 (7th Cir. 1968), at 422. Section 3.04 of Rev. Proc. 72-18
states that in the absence of direct evidence linking indebtedness with the purchase or
carrying of tax-exempt obligations as illustrated in paragraphs 3.02 and 3.03 of Rev. Proc.
72-18, section 265(a)(2) of the Code will apply only if the totality of facts and circumstances
supports a reasonable inference that the purpose to purchase or carry tax-exempt
4
obligations exists. Stated alternatively, section 265(a)(2) will apply only w h e n the totality of
facts and circumstances establishes a "sufficiently direct relationship" between the
borrowing and the investment in tax-exempt obligations. See Wisconsin Cheeseman, 388
F.2d at 422. The guidelines set forth in sections 4, 5, and 6 of Rev. Proc. 72-18 are used to
determine whether such a relationship exists.
Section 3.05 of Rev. Proc. 72-18 provides that generally, when a taxpayers
investment in tax-exempt obligations is insubstantial, the purpose to purchase or carry taxexempt obligations will ordinarily not be inferred in the absence of direct evidence as set
forth in sections 3.02 and 3.03 of that revenue procedure. Section 3.05 provides further
that in the case of a corporation, an investment in tax-exempt obligations shall be
presumed insubstantial only when during the taxable year the average amount of the taxexempt obligations (valued at their adjusted bases) does not exceed 2 percent of the
average total assets (valued at their adjusted bases) held in the active conduct of the trade
or business. The de minimis rule of paragraph 3.05 does not apply to dealers in taxexempt obligations.
Section 5 of Rev. Proc. 72-18 provides special rules for dealers in tax-exempt
obligations. Specifically, section 5.03 states that if debt is incurred or continued for the
general purpose of carrying on a brokerage business that includes the purchase of both
taxable and tax-exempt obligations, and the use of the borrowed funds cannot be directly
traced, it is reasonable to infer that the borrowed funds were used for all the activities of the
business, including the purchase of tax-exempt obligations. Section 5 of Rev. Proc. 72-18
5
refers to a specific allocation formula in section 7 of Rev. Proc. 72-18, derived from the
formula in Commissioner v. Leslie. 413 F.2d 636 (2d. Cir.1969), cert, denied, 396 U.S.
1007 (1970). The formula is applied to interest on borrowed funds that are not directly
traceable to tax-exempt obligations. The formula consists of a fraction, whose numerator is
the average amount during the taxable year of the taxpayer's tax-exempt obligations
(valued at their adjusted bases), and whose denominator is the average amount during the
taxable year of the taxpayer's total assets (valued at their adjusted bases) minus the
amount of any indebtedness the interest on which is not subject to disallowance to any
extent under Rev. Proc. 72-18.
In H Enterprises International v. Commissioner, 75 T.C.M. 1948 (1998), aff=d, 183
F.3d 907 (8th Cir. 1999), a parent and a subsidiary were members of the same
consolidated group of corporations. The subsidiary declared a dividend and, a few days
later, borrowed funds and immediately used part of those funds to make the dividend
distribution to the parent. A portion of the distributed funds was disbursed to two
investment divisions of the parent, which used the funds to acquire investments including
tax-exempt obligations.
The court held that a portion of the subsidiary=s indebtedness was incurred for the
purpose of purchasing or carrying tax-exempt obligations (held in the parent=s investment
divisions) and, therefore, no deduction was allowed for the interest on this portion of the
indebtedness under ' 265(a)(2). To establish the required purposive connection under
' 265(a)(2), the court reasoned that the activities of the parent corporation were relevant in
6
determining the subsidiary's purpose for borrowing the funds. If the analysis only focused
on the borrower and not the transferee, then the purpose of the borrower corporation would
always be acceptable, frustrating the legislative intent of» 265(a)(2).
In both Situations 1 and 2, following the rationale of H Enterprises, the activities of S
must be taken into account to determine P=s purpose under ' 265(a)(2) for borrowing the
$40x of funds that are directly traceable to P's contribution to the capital of S. In order to
determine the activities of S, however, Rev. Proc. 72-18 must be applied. Because S=s
brokerage business includes the purchase of both taxable and tax-exempt obligations, it is
reasonable to infer under section 5.03 of Rev. Proc. 72-18 that part of P=s debt was
incurred for the purpose of purchasing or carrying tax-exempt obligations. Applying the
allocation formula in section 7 of Rev. Proc. 72-18, the interest expense incurred by P on
the $40x borrowed is subject to partial disallowance. The ratio of S=s average tax-exempt
obligations to S=s total assets is $500x/$1,000x. Therefore, one-half of the $2x interest
expense incurred by P (i.e., $1x) is disallowed as a deduction to P under ' 265(a)(2). P is
not entitled to the 2 percent de minimis rule provided by section 3.05 of Rev. Proc. 72-18
because S is a dealer in tax-exempt obligations.
In Situation 3, there is no direct evidence that P transferred to S any portion of the
$40X P borrowed from L. Without such direct evidence, the activities of S will not be taken
into account to determine P=s purpose under ' 265(a)(2) for borrowing the $40xand it is
not reasonable to infer that part of P=s debt was incurred for the purpose of purchasing or
7
carrying tax-exempt obligations. Therefore, none of the $2x interest expense incurred by P
is disallowed as a deduction under » 265(a)(2).
In Situation 4, the $40x that P borrowed from L is directly traceable to P's loan to S.
Accordingly, the two separate back-to-back loans (i.e., the loan from L to P, followed by
the loan from P to S) must each be examined for the potential application of ' 265(a)(2).
With regard to the loan from L to P, P uses the borrowed funds to make a loan to S, and
separately accounts for the taxable interest income from this loan. P does not have a
purpose of using the borrowed funds to purchase or carry tax- exempt obligations within the
meaning of • 265(a)(2). With regard to the loan from P to S, although the borrowed funds
are not directly traceable to S=s purchase or carry of tax-exempt obligations, • 265(a)(2)
applies to S, a dealer in tax-exempt obligations, to disallow a portion of its interest
expense. The portion of S=s interest deduction that is disallowed is computed by applying
the allocation formula in section 7 of Rev. Proc. 72-18. The ratio of S=s average taxexempt obligations to S=s total assets is $500x/$1,000x. Accordingly, one-half of the $2x
interest expense incurred by S (i.e., $1x) is disallowed to S as a deduction under
1
265(a)(2). S is not entitled to the 2 percent de minimis rule provided by section 3.05 of
Rev. Proc. 72-18 because S is a dealer in tax-exempt obligations.
8
HOLDINGS
If a member of an affiliated group borrows money and contributes the borrowed
funds to another member that is a dealer in tax-exempt obligations such that the funds
contributed to the dealer are directly traceable to the contributors borrowing, but are not
directly traceable to the dealer=s purchase or carry of tax-exempt obligations, ' 265(a)(2)
applies to disallow a portion of the interest expense of the contributor. The portion of the
contributors interest deduction to be disallowed is determined by applying the allocation
formula in section 7 of Rev. Proc. 72-18 to the dealer that uses the borrowed funds in its
business.
If a member of an affiliated group borrows money and there is no direct evidence
linking the borrowed funds to any funds transferred to another member who is a dealer in
tax-exempt obligations, ' 265(a)(2) does not apply to disallow any portion of the interest
expense of the borrowing member based on the dealer member's investment in taxexempt obligations.
If the funds borrowed by a member of an affiliated group are directly traceable to a
loan to another member that is a dealer in tax-exempt obligations, * 265(a)(2) does not
apply to disallow the interest expense of the lending member, but does apply to disallow a
portion of the interest expense of the dealer. The portion of the dealers interest deduction
to be disallowed is determined by applying the allocation formula in section 7 of Rev. Proc.
72-18.
DRAFTING INFORMATION
9
The principal authors of this revenue ruling are David B. Silber and Avital Grunhaus
of the Office of the Associate Chief Counsel (Financial Institutions and Products). For
further information regarding this revenue ruling contact Mr. Silber or Ms. Grunhaus at (202)
622-3930 (not a toll-free call).
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-128572-03]
RIN1545-BC24
Application of sections 265(a)(2) and 246A in Multi-Party Financing Arrangements;
Request for Comments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Advance notice of proposed rulemaking.
SUMMARY: The IRS and Treasury Department are soliciting comments and suggestions
regarding the scope and details of regulations that may be proposed under section 7701 (f)
of the Internal Revenue Code to address the application of sections 265(a)(2) and 246A in
transactions involving related parties, pass-through entities, or other intermediaries.
DATES: Written or electronic comments must be submitted by August 5, 2004.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-128572-03), room 5203,
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-128572-03), Couriers Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC or sent electronically, via the
IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at
www.regulations.gov (IRS and REG-128572-03).
2
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 submissions, LaNita Van Dyke,
(202) 622-7180; concerning the notice, Avital Grunhaus, (202) 622-3930 (not toll-free
numbers).
S U P P L E M E N T A R Y INFORMATION:
Background
Section 163(a) generally allows a deduction for all interest paid or accrued within
the taxable year on indebtedness. Section 265(a)(2), however, provides that no deduction
shall be allowed for interest on indebtedness incurred or continued to purchase or carry
obligations the interest on which is wholly exempt from Federal income taxes.
Generally, section 246A reduces the dividends received deduction under section
243, 244, or 245(a) to the extent that the portfolio stock, with respect to which the dividends
are received, is debt-financed. Stock is treated as debt-financed if there is indebtedness
directly attributable to the stock investment.
Section 7701(f) provides that the Secretary shall prescribe such regulations as m a y
be necessary or appropriate to prevent the avoidance of the provisions of the Internal
Revenue C o d e that deal with (1) the linking of borrowing to investment, or (2) diminishing
risk, through the use of related persons, pass-thru entities, or other intermediaries.
Concurrent with the publication of this advance notice of proposed rulemaking in the
Federal Register, the IRS and Treasury are issuing Rev. Rul. 2004-47 (2004-21 I.R.B.),
which provides guidance on the application of section 265(a)(2) to disallow a portion of
interest incurred by one m e m b e r of an affiliated group when it transfers borrowed funds to
another m e m b e r of the group that is a dealer in tax-exempt bonds. In the circumstances
3
described in Situations 1 and 2 of that ruling, the funds borrowed by one member are
directly traceable to the funds the borrowing member transfers to the dealer member.
Under Rev. Proc. 72-18 (1972-1 C.B. 740), the application of section 265(a)(2) to these
facts requires a determination of the borrowing member's purpose for incurring or
continuing each item of indebtedness. The revenue ruling holds that the purpose of the
borrowing member is determined by reference to the use of the borrowed funds in the
business of the dealer member to whom the funds are made available. This conclusion is
based on H Enterprises International v. Commissioner. 75 T.C.M. 1948 (1998), afrd per
curiam, 183 F.3d 907 (8th Cir. 1999). The result is a disallowance of the borrowing
members interest expense under section 265(a)(2).
In H Enterprises, a parent and a subsidiary were members of the same
consolidated group of corporations. The subsidiary declared a dividend and, a few days
later, borrowed funds and immediately used part of those funds to make the dividend
distribution to the parent. A portion of the distributed funds was disbursed to two
investment divisions of the parent, which used the funds to acquire investments including
tax-exempt obligations and corporate stock. The court held that a portion of the
indebtedness was incurred to purchase and carry tax-exempt obligations for the purpose of
section 265(a)(2) and that a portion of the indebtedness was directly attributable to the
purchase and carry of portfolio stock for the purpose of section 246A.
The transactions described in Situations 1 and 2 of Rev. Rul. 2004^7 and the
transaction before the court in H Enterprises all involve funds borrowed by one member of
an affiliated group that can be directly traced to funds transferred to another member of the
4
group.
In contrast to the transactions described in Situations 1 and 2, in the transaction
described in Situation 3 of Rev. Rul. 2004-47, the borrowed funds are not directly
traceable to the funds transferred to the dealer member, and there is no other direct
evidence linking the borrowed funds to the funds transferred to the dealer member. The
revenue ruling holds that in these circumstances, section 265(a)(2) will not be applied to
disallow interest expense of the borrowing member.
Other situations m a y not be so clear. For example, funds m a y be transferred
a m o n g the m e m b e r s of an affiliated or consolidated return group in a variety of w a y s that
m a k e it difficult to match borrowed funds with particular investments or other uses.
Furthermore, certain taxpayers m a y affirmatively seek to avoid application of the rules of
sections 265(a)(2) and 2 4 6 A by using related parties, pass-thru entities, or other
intermediaries in a manner that obscures the linkage between borrowing outside of the
affiliated group and the purchase or carry of investments within the group.
During the course of developing Rev. Rul. 2004-47, the IRS and Treasury began
preliminary consideration of possible regulations that might be adopted under the authority
granted by section 7701(f) to provide clearer rules for matching borrowings and
investments and for administering more effectively the purposes of section 265(a)(2). For
example, Treasury and IRS are considering a rule that would permit taxpayers to trace
proceeds of borrowings to specific taxable investments or other specific uses but would
apply a pro rata approach to determine the use of proceeds of borrowings that are not
traceable to a specific use. This would differ from a general rule requiring a pro rata
5
allocation of borrowings a m o n g all available uses, such as the rule in section 265(b)
applicable to financial institutions.
The IRS and Treasury also are considering whether to adopt regulations under
section 7701 (f) for purposes of section 246A (dealing with debt financing of portfolio
stock).
The IRS and Treasury are requesting comments on whether regulations should be
adopted under section 7701 (f) for purposes of applying section 265(a)(2) or section 246A
and, if so, the approach that should be taken in such regulations. Specifically, the IRS and
Treasury are inviting comments on the approach of supplementing a specific tracing rule
with a pro rata allocation rule, as well as suggestions for alternative approaches.
C o m m e n t s addressing the possible adoption of regulations for purposes of section 2 4 6 A
should take into account any differences in approach that m a y be required under section
7701(f) because section 246A defines portfolio indebtedness by reference to
indebtedness ?directly attributable to" portfolio stock, while section 265(a)(2) refers to
indebtedness ? incurred or continued to purchase or carry" tax-exempt obligations.
Persons making comments m a y also wish to address the mandate
in section 246A(f) to adopt regulations providing for interest disallowance, rather than
disallowance of the dividends received deduction, w h e n indebtedness is incurred by a
person other than the person receiving dividends.
6
SPECIAL A N A L Y S I S
This advance notice of proposed rulemaking is not a significant regulatory action for
purposes of Executive Order 12866, "Regulatory Planning and Review."
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-128590-03]
RIN1545-BC23
Special Consolidated Return Rules for the Disallowance of Interest Expense Deductions
under Section 265(a)(2)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed regulations under section 265(a)(2) that
affect corporations filing consolidated returns. These regulations provide special rules
for the treatment of certain intercompany transactions involving interest on
intercompany obligations.
DATES: Written or electronic comments and requests for a public hearing must be
received by August 5, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-128590-03), room 5203,
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-128590-03), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers
may submit comments electronically via the IRS Internet site at www.irs.gov/regs or via
the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-
2
128590-03).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Frances L. Kelly, (202) 622-7770; concerning submissions of comments and/or
requests for a public hearing, Guy Traynor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 265(a)(2)
Section 163(a) generally allows a deduction for all interest paid or accrued within
the taxable year on indebtedness. Under section 265(a)(2), however, no deduction is
allowed for interest on indebtedness incurred or continued to purchase or carry
obligations the interest on which is wholly exempt from Federal income taxes.
Rev. Proc. 72-18 (1972-1 C.B. 740) provides guidelines for the application of
section 265(a)(2) to taxpayers holding tax-exempt obligations. Section 3.01 of the
revenue procedure states that the application of section 265(a)(2) requires a
determination, based upon all the facts and circumstances, of the taxpayer's purpose in
incurring or continuing each item of indebtedness. Such purpose may be established
by either direct or circumstantial evidence. Direct evidence includes direct tracing of
borrowed funds to investments in tax-exempt obligations and the pledging of tax-exempt
obligations as security for the indebtedness. To the extent that there is direct eviden
establishing a purpose to purchase or carry tax-exempt obligations, the interest paid o
incurred on such indebtedness may not be deducted. In certain other cases when an
interest deduction is disallowed (for example, when amounts borrowed by a dealer in
tax-exempt obligations are not directly traceable to tax-exempt obligations), section 7
3
Rev. Proc. 72-18 sets forth a formula to calculate the disallowed interest deduction.
That formula provides that the amount of the disallowed interest deduction is
determined by multiplying the total interest on the indebtedness by a fraction, the
numerator of which is the average amount during the taxable year of the taxpayer's taxexempt obligations (valued at their adjusted bases), and the denominator of which is the
average amount during the taxable year of the taxpayer's total assets (valued at their
adjusted bases) minus the amount of any indebtedness the interest deduction on which
is not subject to disallowance to any extent under Rev. Proc. 72-18.
In H Enterprises International, Inc. v. Commissioner, 75 T.C.M. (CCH) 1948
(1998), affd, 183 F.3d 907 (8th Cir. 1999), a parent and a subsidiary were members of
the same consolidated group of corporations. The subsidiary declared a dividend and,
a few days later, borrowed funds and immediately used part of those funds to make the
dividend distribution to the parent. A portion of the distributed funds was disbursed to
two investment divisions of the parent, which used the funds to acquire investments
including tax-exempt obligations.
The court held that a portion of the subsidiary's indebtedness was incurred for
the purpose of purchasing or carrying tax-exempt obligations (held in the parent's
investment divisions) and, therefore, no deduction was allowed for the interest on this
portion of the indebtedness under section 265(a)(2). To establish the required
purposive connection under section 265(a)(2), the court reasoned that the activities of
the parent corporation were relevant in determining the subsidiary's purpose for
borrowing the funds. The court stated that if the analysis only focused on the borrower
and not the transferee, then the purpose of the borrower corporation would always be
4
acceptable, frustrating the legislative intent of section 265(a)(2).
Rev. Rul. 2004-47 (2004-21 I.R.B.) provides guidance on the application of
section 265(a)(2) in a number of situations in which a member of an affiliated group
borrows money from an unrelated party and transfers funds to another member of the
group that is a dealer in tax-exempt obligations. In Situation 4, P and S are members of
the same affiliated group but file separate tax returns. P borrows funds from L, an
unrelated bank, and lends the borrowed funds to S, a dealer in tax-exempt obligations.
S uses the borrowed funds in its business. The ruling examines the obligation from L to
P and the obligation from P to S for the application of section 265(a)(2). With regard to
the loan from L to P, P uses the borrowed funds to make a loan to S, and P separately
accounts for the taxable interest income from the obligation. The ruling concludes that
P does not have a purpose of using the borrowed funds to purchase or carry tax-exempt
obligations within the meaning of section 265(a)(2). With regard to the loan from P to S,
although the borrowed funds are not directly traceable to S's purchase or carry of taxexempt obligations, the ruling concludes that section 265(a)(2) applies to disallow a
deduction for a portion of S's interest expense. The portion of S's interest deduction
that is disallowed is determined pursuant to the formula of section 7 of Rev. Proc. 7218.
The Intercompany Transaction Regulations
Section 1.1502-13 prescribes rules relating to the treatment of transactions
between members of a consolidated group. With respect to intercompany obligations,
the intercompany transaction rules generally operate to match the debtor member's
items with the lending member's items from the intercompany obligation.
5
Under §1.1502-13(c)(6)(i), if section 265(a)(2) permanently and explicitly
disallows a debtor member's interest deduction with respect to a debt to another
member, the lending member's interest income is treated as excluded from gross
income. See §1.1502-13(g)(5), Example 1(d). In cases when a member of the group
borrows from another member to purchase or carry tax-exempt obligations, and the
lending member has not borrowed from sources outside of the group to fund the
intercompany obligation, the result reached under the §1.1502-13(c)(6)(i) exclusion rule
is appropriate in that it reflects that intercompany lending transactions do not alter the
net worth of the group and, thus, should not affect consolidated taxable income.
However, when the lending member borrows from a nonmember, the lending
member lends those funds to the debtor member, and the debtor member uses those
funds to purchase or carry tax-exempt obligations, the application of the §1.150213(c)(6)(i) exclusion rule may produce inappropriate results. For example, assume P
borrows $100 from L, a nonmember, for the purpose of lending the $100 to S under the
same terms, and S's purpose for borrowing $60 of the intercompany loan from P is to
purchase $60 of tax-exempt obligations. Under section 265(a)(2), a deduction would be
disallowed for a portion of S's interest expense on the intercompany obligation and a
portion of P's interest income would be excluded from P's gross income under §1.150213(c)(6)(i). Accordingly, section 265(a)(2) may have no effect on the group's taxable
income, even though the group has borrowed to purchase tax-exempt obligations.
Explanation of Provisions
The IRS and Treasury Department believe that, when a member's indebtedness
to a nonmember is directly traceable to an intercompany obligation and another
6
member of the group uses the funds borrowed from the nonmember to purchase or
carry tax-exempt obligations, the net tax effect of these transactions for the group
should be a disallowance of a deduction for interest under section 265(a)(2).
These proposed regulations reflect that when a member (P) borrows funds from
a nonmember and lends all of those funds to another member (S) that uses those funds
to purchase tax-exempt obligations, section 265(a)(2) will apply to disallow a deduction
for the interest on S's obligation to P, not P's obligation to the nonmember. These
proposed regulations provide that, if a member of a consolidated group incurs or
continues indebtedness to a nonmember, that indebtedness to the nonmember is
directly traceable to all or a portion of an intercompany obligation extended to a member
of the group (the borrowing member) by another member of the group (the lending
member), and section 265(a)(2) applies to disallow a deduction for all or a portion of the
borrowing member's interest expense incurred with respect to the intercompany
obligation, then §1.1502-13(c)(6)(i) will not apply to exclude an amount of the lending
member's interest income with respect to the intercompany obligation that equals the
amount of the borrowing member's disallowed interest deduction. This override of the
exclusion rule is subject, however, to a limitation. In particular, the amount of interest
income not excluded cannot exceed the interest expense on the portion of the
nonmember indebtedness that is directly traceable to the intercompany obligation. This
limitation ensures that applying section 265(a)(2) to disallow an interest deduction with
respect to an intercompany obligation that can be directly traced to nonmember
indebtedness does not result in a worse overall tax position for the group than applying
section 265(a)(2) to disallow a deduction for the interest paid to the nonmember.
7
Therefore, subject to the limitation discussed above, if the proceeds of P's
borrowing from a n o n m e m b e r can be directly traced to a P-S intercompany obligation
and all or a portion of S's interest expense on the P-S intercompany obligation is
disallowed as a deduction under section 265(a)(2), these proposed regulations require
that all or a portion of P's interest income on the intercompany obligation not be
excluded under §1.1502-13(c)(6)(i).
In an Advance Notice of Proposed Rulemaking (REG-128572-03) in this issue of
the Federal Register, the IRS and Treasury Department are soliciting comments
regarding whether regulations under section 7701(f) should address the application of
sections 265(a)(2) and 246A in transactions involving related parties, pass-thru entities,
or other intermediaries, and suggestions as to the approach that should be taken by
those regulations. It is possible that those comments and any regulations proposed
under section 7701(f) will result in amendments to the rules set forth in these proposed
regulations.
Proposed Effective Date
These regulations are proposed to apply to taxable years beginning on or after
the date these regulations are published as final regulations in the Federal Register.
Special Analysis
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities. This certification
is based upon the fact that these regulations will primarily affect affiliated groups of
8
corporations that have elected to file consolidated returns, which tend to be larger
businesses. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight (8) copies) or
electronic comments that are submitted timely to the IRS. The IRS and Treasury
Department request comments on the clarity of the proposed rules and how they can be
made easier to understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by any person that
timely submits written comments. If a public hearing is scheduled, notice of the date,
time, and place for the public hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Frances L. Kelly, Office of
the Associate Chief Counsel (Corporate). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 C F R part 1 is proposed to be amended as follows:
PART 1 - I N C O M E T A X E S
9
Paragraph 1. The authority citation for part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.265-2 also issued under 26 U.S.C. 1502 and 7701(f). * * *
Par. 2. In §1.265-2, paragraph (c) is added to read as follows:
§1.265-2 Interest relating to tax-exempt income.
*****
(c) Special rule for consolidated groups-(1) Treatment of intercompany
obligations-(i) Direct tracing to nonmember indebtedness . If a m e m b e r of a
consolidated group incurs or continues indebtedness to a nonmember, that
indebtedness is directly traceable to all or a portion of an intercompany obligation (as
defined in §1.1502-13(g)(2)(ii)) extended to a m e m b e r of the group (B) by another
m e m b e r of the group (S), and section 265(a)(2) applies to disallow a deduction for all or
a portion of B's interest expense incurred with respect to the intercompany obligation,
then §1.1502-13(c)(6)(i) will not apply to exclude an amount of S's interest income with
respect to the intercompany obligation that equals the amount of B's disallowed interest
deduction.
(ii) Limitation. The amount of interest income to which §1.1502-13(c)(6)(i) will not
apply as a result of the application of paragraph (c)(1)(i) of this section cannot exceed
the interest expense on the portion of the indebtedness to the n o n m e m b e r that is
directly traceable to the intercompany obligation.
(2) Examples. The rules of this paragraph (c) are illustrated by the following
examples. For purposes of these examples, unless otherwise stated, P and S are
10
m e m b e r s of a consolidated group of which P is the c o m m o n parent. P o w n s all of the
outstanding stock of S. The taxable year of the P group is the calendar year and all
members of the P group use the accrual method of accounting. L is a bank unrelated to
any member of the consolidated group. All obligations are on the same terms and
conditions, remain outstanding at the end of the applicable year, and provide for
payments of interest on December 31 of each year that are greater than the appropriate
applicable Federal rate (AFR). The examples are as follows:
Example 1. (i) Facts. On January 1, 2005, P borrows $1 OOx from L and lends the
entire $100x of borrowed proceeds to S. S uses the $100x of borrowed proceeds to
purchase tax-exempt securities. P's indebtedness to L is directly traceable to the
intercompany obligation between P and S. In addition, there is direct evidence that the
proceeds of S's intercompany obligation to P were used to fund S's purchase or
carrying of tax-exempt obligations. During the 2005 taxable year, P incurs $10x of
interest expense on its loan from L, and S incurs $10x of interest expense on its loan
from P. Under section 265(a)(2), the entire $10x of S's interest expense on the
intercompany obligation to P is disallowed as a deduction.
(ii) Analysis. Because section 265(a)(2) permanently and explicitly disallows
$10x of S's interest expense, ordinarily $10x of P's interest income on the intercompany
obligation would be redetermined to be excluded from P's gross income under §1.150213(c)(6)(i). However, under this paragraph (c), §1.1502-13(c)(6)(i) will not apply to
exclude P's interest income with respect to the intercompany obligation in an amount
that equals S's disallowed interest deduction with respect to the intercompany
obligation. Accordingly, §1.1502-13(c)(6)(i) will not apply to exclude P's $10x of interest
income on the intercompany obligation and P must include in income $10x of interest
income from the intercompany obligation.
Example 2. (i) Facts. The facts are the same as in Example 1, except that P
incurs only $8x of interest expense on its loan from L.
(ii) Analysis. Section 1.1502-13(c)(6)(i) will apply to exclude only a portion of P's
$10x of interest income on the intercompany obligation. Under paragraph (c)(1 )(ii) of
this section, the amount of P's interest income that §1.1502-13(c)(6)(i) will not apply to
exclude is $8x, the total interest expense incurred by P on its indebtedness to L.
Consequently, P must include in income $8x of interest income from the intercompany
obligation and §1.1502-13(c)(6)(i) will apply to exclude $2x of interest income from the
intercompany obligation.
(3) Effective date. The provisions of this section shall apply to taxable years
11
beginning on or after the date these regulations are published as final regulations in the
Federal Register.
Par. 3. Section 1.1502-13 is amended by:
1. Adding a sentence immediately after the second sentence of paragraph
(c)(6)(ii)(A).
2. Adding paragraph (c)(6)(iii).
3. Revising the first sentence of Example 1(d) of paragraph (g)(5).
The revisions and additions read as follows:
§1.1502-13 Intercompany transactions.
•k "k ie *
*
(C) * * *
(6) * * *
(ii)***
(A) * * * However, see §1.265-2(c) for special rules related to the application of
paragraph (c)(6)(i) of this section to interest income with respect to certain intercompany
obligations the interest deduction on which is disallowed under section 265(a)(2). * * *
*****
(iii) Effective date. The third sentence of paragraph (c)(6)(ii)(A) of this section
shall apply to taxable years beginning on or after the date these regulations are
published as final regulations in the Federal Register.
* *** *
(g)
(5) * * *
***
12
Example 1 * * *
** * * *
(d) Tax-exempt income. The facts are the s a m e as in paragraph (a) of this
Example 1. except that B's borrowing from S is allocable under section 265 to B's
purchase of state and local bonds to which section 103 applies and §1.265-2(c) does
not apply. * * *
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
JS-1516: Treasury Issues Guidance on Joint Ventures Between Tax Exempt Organization... Page 1 of 1
PRESS ROOM
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®.
May 6, 2004
JS-1516
Treasury Issues Guidance on Joint Ventures Between Tax Exempt
Organizations And For-Profit Entities
The Treasury Department and the Internal Revenue Service today issued guidance
on joint ventures between tax-exempt organizations and for-profit entities.
Revenue Ruling 2004-51 addresses whether an exempt organization that
contributes a portion of its assets to, and conducts a portion of its activities through,
a limited liability company (LLC) formed with a for-profit corporation continues to
qualify for tax exemption. This ruling also addresses whether the exempt
organization is subject to unrelated business income tax on income derived from
the LLC.
"Tax-exempt organizations requested guidance on how to structure joint ventures
when the joint venture represents only an insubstantial part of the exempt
organization's activities," said Acting Assistant Secretary for Tax Policy Greg
Jenner. "This ruling offers practical guidance on how the IRS will analyze whether
the joint venture affects the organization's tax-exempt status or subjects the
organization to unrelated business income tax."
-30REPORTS
• The text of Revenue Ruling 2004-51
//www.treas. eov/oress/releases/j s 1516.htm
5/6/2005
Parti
Section 501 - Exemption from Tax on Corporations, Certain Trusts, Etc.; Section 5 1 3 Unrelated Trade or Business
26 CFR 1.501 (c)(3)-1: Organizations organized and operated for religious, charitable,
scientific, testing for public safety, literary, or educational purposes, or for the prevention
of cruelty to children or animals. (Also Sections 511-513.)
Rev. Rul. 2004-51, 2004-22 I.R.B (June 1, 2004)
ISSUES
1. Whether, under the facts described below, an organization continues to qualify
for exemption from federal income tax as an organization described in § 501(c)(3) of
the Internal Revenue C o d e w h e n it contributes a portion of its assets to and conducts a
portion of its activities through a limited liability company (LLC) formed with a for-profit
corporation.
2. Whether, under the same facts, the organization is subject to unrelated business
income tax under § 511 on its distributive share of the LLC's income.
FACTS
M is a university that has been recognized as exempt from federal income tax
under § 501 (a) as an organization described in § 501 (c)(3). A s a part of its educational
programs, M offers s u m m e r seminars to enhance the skill level of elementary and
secondary school teachers.
To expand the reach of its teacher training seminars, M forms a domestic LLC, L,
with O, a company that specializes in conducting interactive video training programs.
L's Articles of Organization and Operating Agreement ("governing documents") provide
that the sole purpose of L is to offer teacher training seminars at off-campus locations
using interactive video technology. M and O each hold a 50 percent ownership interest
in L, which is proportionate to the value of their respective capital contributions t o L
The governing documents provide that all returns of capital, allocations and distributions
shall be m a d e in proportion to the members' respective ownership interests.
The governing documents provide that L will be managed by a governing board
comprised of three directors chosen by M and three directors chosen by O. Under the
governing documents, L will arrange and conduct all aspects of the video teacher
training seminars, including advertising, enrolling participants, arranging for the
necessary facilities, distributing the course materials and broadcasting the seminars to
various locations. L's teacher training seminars will cover the s a m e content covered in
2
the seminars M conducts on M's campus. However, school teachers will participate
through an interactive video link at various locations rather than in person. The
governing documents grant M the exclusive right to approve the curriculum, training
materials, and instructors, and to determine the standards for successful completion of
the seminars. The governing documents grant O the exclusive right to select the
locations where participants can receive a video link to the seminars and to approve
other personnel (such as camera operators) necessary to conduct the video teacher
training seminars. All other actions require the mutual consent of M and O.
The governing documents require that the terms of all contracts and transactions
entered into by L with M, O and any other parties be at arm's length and that all contract
and transaction prices be at fair market value determined by reference to the prices for
comparable goods or services. The governing documents limit L's activities to
conducting the teacher training seminars and also require that L not engage in any
activities that would jeopardize M's exemption under § 501(c)(3). L does in fact operate
in accordance with the governing documents in all respects.
M's participation in L will be an insubstantial part of M's activities within the
meaning of § 501 (c)(3) and § 1.501 (c)(3)-1 (c)(1) of the Income Tax Regulations.
Because L does not elect under § 301.7701 -3(c) of the Procedure and
Administration Regulations to be classified as an association, L is classified as a
partnership for federal tax purposes pursuant to § 301.7701-3(b).
LAW
Exemption under § 501(c)(3)
Section 501(c)(3) provides, in part, for the exemption from federal income tax of
corporations organized and operated exclusively for charitable, scientific, or educational
purposes, provided no part of the organization's net earnings inures to the benefit of any
private shareholder or i ndividual.
Section 1.501 (c)(3)-1 (c)(1) provides that an organization will be regarded as
operated exclusively for one or more exempt purposes only if it engages primarily in
activities that accomplish one or more of the exempt purposes specified in § 501(c)(3).
Activities that do not further exempt purposes must be an insubstantial part of the
organization's activities. In Better Business Bureau of Washington, D.C. v. United
States, 326 U.S. 279, 283 (1945), the Supreme Court held that "the presence of a single
... [non-exempt] purpose, if substantial in nature, will destroy the exemption regardless
of the number or importance of truly ... [exempt] purposes."
Section 1.501 (c)(3)-1 (d)(1 )(ii) provides that an organization is not organized or
operated exclusively for exempt purposes unless it serves a public rather than a private
interest. T o meet this requirement, an organization must "establish that it is not
organized or operated for the benefit of private interests...."
Section 1.501 (c)(3)-1 (d)(2) defines the term "charitable" as used in § 501(c)(3) as
including the advancement of education.
3
Section 1.501 (c)(3)-1 (d)(3)(i) provides, in part, that the term "educational" as
used in § 501(c)(3) relates to the instruction or training of the individual for the purpose
of improving or developing his capabilities.
Section 1.501(c)(3)-1(d)(3)(ii) provides examples of educational organizations
including a college that has a regularly scheduled curriculum, a regular faculty, and a
regularly enrolled body of students in attendance at a place where the educational
activities are regularly carried on and an organization that presents a course of
instruction by m e a n s of correspondence or through the utilization of television or radio.
Joint Ventures
Rev. Rul. 98-15,1998-1 C.B. 718, provides that for purposes of determining
exemption under § 501 (c)(3), the activities of a partnership, including an L L C treated as
a partnership for federal tax purposes, are considered to be the activities of the
partners. A § 501(c)(3) organization m a y form and participate in a partnership and meet
the operational test if 1) participation in the partnership furthers a charitable purpose,
and 2) the partnership arrangement permits the exempt organization to act exclusively
in furtherance of its exempt purpose and only incidentally for the benefit of the for-profit
partners.
Redlands Surgical Services. 113 T.C. 47, 92-93 (1999), affd 242 F.3d 904
(9th Cir. 2001), provides that a nonprofit organization m a y form partnerships, or enter
into contracts, with private parties to further its charitable purposes on mutually
beneficial terms, "so long as the nonprofit organization does not thereby impermissibly
serve private interests." The Tax Court held that the operational standard is not
satisfied merely by establishing "whatever charitable benefits [the partnership] m a y
produce," finding that the nonprofit partner lacked "formal or informal control sufficient to
ensure furtherance of charitable purposes." Affirming the Tax Court, the Ninth Circuit
held that ceding "effective control" of partnership activities impermissibly serves private
interests. 242 F.3d at 904.
St. David's Health Care System v. United States, 349 F.3d 232, 236-237 (5th Cir.
2003), held that the determination of whether a nonprofit organization that enters into a
partnership operates exclusively for exempt purposes is not limited to "whether the
partnership provides s o m e (or even an extensive amount of) charitable services." T h e
nonprofit partner also must have the "capacity to ensure that the partnership's
operations further charitable purposes." Id. at 243. "[T]he non-profit should lose its taxexempt status if it cedes control to the for-profit entity." Id, at 239.
Tax on Unrelated Business Income
Section 511(a), in part, provides for the imposition of tax on the unrelated
business taxable income (as defined in § 512) of organizations described in § 501(c)(3).
Section 512(a)(1) defines "unrelated business taxable income" as the gross
income derived by any organization from any unrelated trade or business (as defined in
4
§ 513) regularly carried on by it less the deductions allowed, both computed with the
modifications provided in § 512(b).
Section 512(c) provides that, if a trade or business regularly carried on by a
partnership of which an organization is a m e m b e r is an unrelated trade or business with
respect to the organization, in computing its unrelated business taxable income, the
organization shall, subject to the exceptions, additions, and limitations contained in
§ 512(b), include its share (whether or not distributed) of the gross income of the
partnership from the unrelated trade or business and its share of the partnership
deductions directly connected with the gross income.
Section 513(a) defines the term "unrelated trade or business" as any trade or
business the conduct of which is not substantially related (aside from the need of the
organization for income or funds or the use it m a k e s of the profits derived) to the
exercise or performance by the organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under § 501.
Section 1.513-1 (d)(2) provides that a trade or business is "related" to an
organization's exempt purposes only if the conduct of the business activities has a
causal relationship to the achievement of exempt purposes (other than through the
production of income). A trade or business is "substantially related" for purposes of
§ 513, only if the causal relationship is a substantial one. Thus, to be substantially
related, the activity "must contribute importantly to the accomplishment of [exempt]
purposes." Section 1.513-1 (d)(2). Section 513, therefore, focuses on "the manner in
which the exempt organization operates its business" to determine whether it
contributes importantly to the organization's charitable or educational function. United
States v. American College of Physicians, 475 U.S. 834, 849 (1986).
ANALYSIS
L is a partnership for federal tax purposes. Therefore, L's activities are attributed
to M for purposes of determining both whether M operates exclusively for educational
purposes and therefore continues to qualify for exemption under § 501(c)(3) and
whether M has engaged in an unrelated trade or business and therefore m a y be subject
to the unrelated business income tax on its distributive share of L's income.
The activities M is treated as conducting through L are not a substantial part of
M's activities within the meaning of § 501(c)(3) and § 1.501 (c)(3)-1 (c)(1). Therefore,
based on all the facts and circumstances, M's participation in L, taken alone, will not
affect M's continued qualification for exemption as an organization described in
§ 501(c)(3).
Although M continues to qualify as an exempt organization described in
§501 (c)(3), M m a y be subject to unrelated business income tax under § 511 if j_
conducts a trade or business that is not substantially related to the exercise or
performance of M's exempt purposes or functions.
5
The facts establish that M's activities conducted through L constitute a trade or
business that is substantially related to the exercise and performance of M's exempt
purposes and functions. Even though L arranges and conducts all aspects of the
teacher training seminars, M alone approves the curriculum, training materials and
instructors, and determines the standards for successfully completing the seminars. All
contracts and transactions entered into by L are at arm's length and for fair market
value, M's and O's ownership interests in L are proportional to their respective capital
contributions, and all returns of capital, allocations and distributions by L are
proportional to M's and O's ownership interests. The fact that O selects the locations
and approves the other personnel necessary to conduct the seminars does not affect
whether the seminars are substantially related to M's educational purposes. Moreover,
the teacher training seminars L conducts using interactive video technology cover the
s a m e content as the seminars M conducts on M's campus. Finally, L's activities have
expanded the reach of M's teacher training seminars, for example, to individuals w h o
otherwise could not be accommodated at, or conveniently travel to, M's campus.
Therefore, the manner in which L conducts the teacher training seminars contributes
importantly to the accomplishment of M's educational purposes, and the activities of L
are substantially related to M's educational purposes. Section 1.513-1 (d)(2).
Accordingly, based on all the facts and circumstances, M is not subject to unrelated
business income tax under § 511 on its distributive share of L's income.
HOLDINGS
1.
M continues to qualify for exemption under § 501 (c)(3) w h e n it contributes a
portion of its assets to and conducts a portion of its activities through L.
2. M is not subject to unrelated business income tax under § 511 on its distributive
share of L's income.
DRAFTING INFORMATION
The principal author of this revenue ruling is Virginia G. Richardson of Exempt
Organizations, Tax Exempt and Government Entities Division. For further information
regarding this revenue ruling, contact Virginia G. Richardson on (202) 283-8938 (not a
toll-free call).
JS-1517: Treasury Issues Guidance O n Mutual Funds
Page 1 of 1
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
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May 6, 2004
JS-1517
Treasury Issues Guidance On Mutual Funds
The Treasury Department and the Internal Revenue Service today issued guidance
making available to mutual funds a simplifying assumption that is already available
under the securities law.
"Applying the same, common-sense rule for both securities law and tax purposes
will simplify compliance for mutual funds," said Acting Assistant Secretary for Tax
Policy Gregory F. Jenner.
Mutual funds often invest excess cash on a short-term basis by entering repurchase
or "repo" transactions in which the fund simultaneously buys a Treasury security
and agrees to resell the security to the same person for a pre-arranged amount. In
determining whether a fund satisfies the statutory diversification test, the fund's
managers may now treat an investment in a repo of a Treasury security as if the
investment were itself a Government security. Since August 2001, the SEC's
Rule 5b-3 under the Investment Company Act of 1940 has permitted similar
treatment.
-30REPORTS
• Rev. Proc. 2004-28
ttp://www.treas.eov/Dress/releases/js 1517.htm
5/6/2005
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also Part I, ' ' 851, 852; 1.851-2 )
Rev. Proc. 2004-28
SECTION! PURPOSE
This revenue procedure describes conditions under which a taxpayer that has
invested in a repurchase agreement (repo) may treat its position in the repo as a
Government security for purposes of qualifying as a regulated investment company (RIC)
under the asset diversification test of section 851 (b)(3) of the Internal Revenue Code.
SECTION 2. BACKGROUND
.01 A repo is a written agreement that provides for a "sale" and "repurchase" of a
security or securities (the Aunderlying securities,@ or the Acollateral@). The purchaser
agrees to purchase the underlying securities at a specific price and the seller, or
Acounterparty,@ agrees to repurchase the same securities on a specific date for a
specified price, plus an additional amount that reflects the time value of the purchasers
investment from the date of purchase of the underlying securities to the date of their
repurchase by the seller.
.02 RICs purchase securities in repo transactions as a convenient means to invest
idle cash at competitive rates on a secured basis, generally for short periods of time. See
Securities and Exchange Commission (SEC) Release No. IC-25058, 66 FR 36156,
36156-57 (July 11, 2001):
While a repurchase agreement has legal characteristics of both a sale and a
secured transaction, economically it functions as a loan from the fund to the
counterparty, in which the securities purchased by the fund serve as collateral
for the loan and are placed in the possession or under the control of the
fund's custodian during the term of the agreement. ...
A fund investing in a properly structured repurchase agreement looks
primarily to the value and liquidity of the collateral rather than the credit of the
counterparty for satisfaction of the repurchase agreement.
2
Id- at 36157 (footnote omitted).
.03 Section 851 (b) provides that certain requirements must be satisfied for a
domestic corporation to be taxed as a RIC under subchapter M, part I. Section 851 (b)(3)
imposes certain asset diversification requirements with respect to a RICs total assets that
must be satisfied as of the close of each quarter of the RIC=s taxable year.
.04 Section 851 (b)(3)(A) requires that at least 50 percent of the value of a
corporation's total assets be represented by cash and cash items (including receivables),
Government securities, securities of other RICs, and other securities generally limited in
respect of any one issuer to an amount not greater in value than 5 percent of the value of
the total assets of the RIC and to not more than 10 percent of the outstanding voting
securities of such issuer.
.05 Section 851 (b)(3)(B) provides that not more than 25 percent of the RICs total
assets m a y be invested in the securities (other than Government securities and the
securities of other RICs) of any one issuer, or of two or more issuers that the RIC controls
and that are determined, under regulations, to be engaged in the s a m e or similar trades or
businesses or related trades or businesses.
.06 Section 5(b)(1) of the Investment Company Act of 1940,15 U.S.C. 80a-1 et
seg,. (1940 Act) defines a "diversified company" as a management company that has at
least 75 percent of its assets invested in cash and cash items (including receivables),
Government securities, securities of other investment companies, and other securities that,
for the purpose of this calculation, are limited in respect of any one issuer to an amount not
greater in value than 5 percent of the value of the total assets of the management company
and to not more than 10 percent of the outstanding voting securities of the issuer. The
remaining 25 percent of the management company=s assets m a y be invested in any
manner.
.07 Effective August 15, 2001, the SEC adopted Rule 5b-3, which is intended to
adapt the 1940 Act to the economic realities of repos and to reflect recent developments in
bankruptcy law protecting parties to repos. S E C Release No. IC-25058. Subject to
certain conditions, Rule 5b-3 permits a fund to Alook throughe the counterparty to the
collateral in determining whether the fund is in compliance with the investment criteria for
diversified funds set forth in section 5(b)(1) of the 1940 Act and with certain other securities
laws.
.08 The following definition is set forth in Rule 5b-3:
(1) Collateralized Fully in the case of a repurchase agreement
m e a n s that:
3
(i) T h e value of the securities collateralizing the repurchase
agreement (reduced by the transaction costs (including loss of
interest) that the investment company reasonably could expect to incur
if the seller defaults) is, and during the entire term of the repurchase
agreement remains, at least equal to the Resale Price provided for in
the agreement;
(ii) The investment company has perfected its security
interest in the collateral;
(iii) The collateral is maintained in an account of the
investment company with its custodian or a third party that qualifies as
a custodian under the [1940] Act;
(iv) T h e collateral consists entirely of:
(A) Cash items;
(B) Government securities;
(C) Securities that at the time the repurchase
agreement is entered into are rated in the highest rating
category by the requisite nationally recognized statistical rating
organizations [as defined in Rule 5b-3(c)(5)]; or
(D) Unrated Securities that are of comparable quality to
securities that are rated in the highest rating category by the
requisite nationally recognized statistical rating organizations,
as determined by the investment company's board of directors
or its delegate; and
(v) Upon an Event of Insolvency with respect to the seller, the
repurchase agreement would qualify under a provision of applicable
insolvency law providing an exclusion from any automatic stay of
creditors' rights against the seller.
Rule5b-3(c)(1).
.09 The "Collateralized Fully" definition plays a critical role in the application of the
1940 Act diversification rules to repos:
(a) Repurchase Agreements. For purposes of [the 1940 Act investment
criteria for diversified investment companies and prohibition on
registered investment companies from acquiring an interest in a brokerdealer, underwriter, or investment advisor], the acquisition of a
repurchase agreement m a y be d e e m e d to be an acquisition of the
underlying securities, provided the obligation of the seller to repurchase
the securities from the investment company is Collateralized Fully.
4
Rule 5b-3(a).
The effect of this rule is that, for purposes of the definition of a diversified investment
company in section 5 of the1940 Act, if a repo is Collateralized Fully, a fund m a y (but need
not) treat an investment in the repo as an investment in the underlying security or securities.
.10 Section 851 (c)(5) provides that, for purposes of section 851 (b)(3), all terms not
specifically defined in section 851(c) shall have the same meaning as when used in the
1940 Act, as amended. The term AGovemment security@ is not specifically defined in
section 851(c).
.11 Section 2(a)(16) of the 1940 Act defines the term AGovemment security@ for
purposes of the 1940 Act without specific reference to funds investing in repos for which
Government securities serve as collateral.
.12 The RIC diversification rules of subchapter M are substantially similar in
structure and purpose to those of section 5(b)(1) of the 1940 Act. Both sets of rules
impose numerical limitations on the percentages and types of assets that m a y be held by
an investment company. Both sets of rules are intended to protect the investor from the
risks of loss and of illiquidity inherent in the concentration of assets in the securities of a
single or a small number of issuers. See H.R. Rep. No. 2020, 86th Cong., 2 d Sess. 8 2 0 26. In view of the commonality of structure and purpose of both sets of rules and in view of
the need for RICS simultaneously to comply with both, the RIC diversification provisions of
the Code and those of the1940 Act should be interpreted consistently.
SECTION 3. SCOPE
This revenue procedure applies to repos that, within the meaning of Rule 5b3(c)(1), are Collateralized Fully with securities that qualify as Government securities for
purposes of section 851 (b)(3).
SECTION 4. PROCEDURE
If a taxpayer has invested in a repo to which this revenue procedure applies, the
taxpayer m a y treat its position in that repo as a Government security for purposes of
section 851 (b)(3) even if the taxpayer is not treated as the owner of the underlying
securities for federal tax purposes.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for repos held by a RIC on or after August 15,
2001.
5
DRAFTING INFORMATION
The principal author of this revenue procedure is Susan Thompson Baker of the
Office of Assistant Chief Counsel (Financial Institutions and Products). For further
information regarding this revenue procedure, contact her at (202) 622-3940 (not a toll-free
call).
js-1518: Treasury Announces $3.5 Billion T o Help Nation's Low-Income Communities T... Page 1 of 2
F R O M T H E OFFICE O F PUBLIC A F F A I R S
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May 6, 2004
js-1518
Treasury Announces $3.5 Billion To Help Nation's Low-Income Communities
Through N e w Market Tax Credit Program
Secretary John W. Snow today announced that 62 organizations have been
selected by the U.S. Department of the Treasury to receive a total of $3.5 billion in
tax credit allocations through the second round of the N e w Markets Tax Credit
( N M T C ) Program. Secretary Snow highlighted today's awards in Racine,
Wisconsin. S n o w presented the Johnson Community Development Company with
a $52 million N M T C allocation award to fund economic development projects in
low-income areas promoting job growth and wealth creation throughout the state of
Wisconsin and in Maricopa County, Arizona.
"President Bush and his administration are committed to creating opportunity and
growth in every corner of this great country. This year's N e w Market Tax Credit
awards will provide new hope for prosperity in many areas that have been
particularly hard-hit," said Secretary John W . Snow.
Treasury Deputy Secretary Samuel W. Bodman presented NMTC awards today to
five community development entities based in Massachusetts: Affirmative N e w
Markets; Boston Community Capital Inc; Massachusetts Housing Investment
Corporation; MassDevelopment N e w Markets, LLC; and Rockland Trust
Community Development.
Secretary Snow will present certificates to the five NMTC recipients from Illinois at '
an event at the Pablo F. Friere Childcare Center in Chicago, Illinois, on Friday May
7.
The New Market Tax Credit Program attracts private-sector capital investment into
urban and rural low-income areas to help finance community development projects,
stimulate economic opportunity and create jobs in the areas that need it most. The
N M T C Program, established by Congress in December 2000, permits individual
and corporate taxpayers to receive a credit against federal income taxes for making
qualified equity investments in investment vehicles known as Community
Development Entities (CDEs). Substantially all of the taxpayer's investment must in
turn be used by the C D E to make qualified investments supporting certain business
activities in low-income communities. The credit provided to the investor totals 39
percent of the initial value of the investment and is claimed over a seven-year credit
allowance period. The 62 organizations receiving tax credit allocations this year
were selected through a competitive application and rigorous review process.
"From foresting businesses in the communities of north-central Maine, to a start-up
manufacturing business in south-eastern Ohio, to child-care facilities and needed
shopping centers in many of our inner-city low-income neighborhoods, the N e w
Markets Tax Credit Program has already begun to improve the communities in
which these investments are being made," said Secretary Snow, highlighting the
work already underway by organizations that received allocations of tax credits last
year.
REPORTS
http://www.treas.eov/Dress/releases/jsl518.htm
5/6/2005
js-1518: Treasury Announces $3.5 Billion T o Help Nation's Low-Income Communities T... Page 2 of 2
• List of Allocatees
http://www.treas.gov/press/releases/jsl518.htm
5/6/2005
CDFI FUND
US Department of the Treasury
NEW MARKETS TAX
CREDIT PROGRAM:
2003 - 2004 N e w Markets Tax Credit
Allocation Awardees
$12,000,000
Affirmative N e w Markets L L C
Boston, M A
Alaska Growth Capital BIDCO, Inc.
Anchorage, AK
$35,000,000
Banc of America CDE, LLC
Washington, DC
$150,000,000
Boston Community Capital Inc.
Boston,MA
$70,000,000
CBAI Community Development, Inc.
Indianapolis, IN
$50,000,000
CDF Development, LLC
Baltimore, MD
$100,000,000
Charter Facilities Funding, LLC
Phoenix, AZ
$50,000,000
Cincinnati New Markets Fund, LLC
Cincinnati, OH
$50,000,000
Coastal Enterprises, Inc.
Wiscasset, ME
$64,000,000
Commercial Federal Community Development Corporation
Omaha, NE
$23,000,000
Community Development Capital Partners, LLC
Wilmington, DE
$35,000,000
Community Development Funding, LLC
Clarksville, MD
$55,000,000
Community Reinvestment Fund New Markets I LP
Chicago, IL
$5,550,000
Community Revitalization Fund, Inc.
Hoffman Estates, IL
$73,000,000
Consortium America, LLC
Washington, DC
$110,000,000
Corporation for the Development of Community Health Centers Austin, TX
$12,000,000
D.C.C.D. Corporation
Decaturville, TN
$2,250,000
Empowerment Reinvestment Fund, LLC
New York, NY
$25,000,000
ESIC New Markets Partners LP
Columbia, MD
$140,000,000
Florida Community Loan Fund, Inc.
Orlando, FL
$15,000,000
Great Lakes Region Sustainability Funds LLC
Chicago, IL
$15,000,000
GreenPoint New Markets, L.P.
New York, NY
585,000,000
Harbor Bankshares Corporation
Baltimore, MD
$50,000,000
Heartland Renaissance Fund, LLC
Little Rock, AR
$15,000,000
HEDC New Markets
New York, NY
$135,000,000
Helios Capital Opportunity Fund LP
Dallas, TX
$25,000,000
Historic Rehabilitation Fund I
Portland, OR
$24,000,000
Hospitality Fund I
Portland, OR
572,500,000
Independence Community Commercial Reinvestment Corp.
Brooklyn, NY
5113,000,000
Indiana Redevelopment Corporation
Indianapolis, IN
$25,000,000
U S Department of the Treasury
CDFI Fund
Page 1 of 2
N e w Markets Tax Credit Program
2003 2004 Allocation Awardees
Johnson Community Development Company
Racine, W I
$52,000,000
Kitsap County NMTC Facilitators I, LLC
Silverdale, WA
$40,000,000
Louisville Development Bancorp. Inc.
Louisville, KY
$62,500,000
Massachusetts Housing Investment Corporation
Boston, MA
$90,000,000
MassDevelopment New Markets LLC
Boston, MA
$70,000,000
Midwest Minnesota Community Development Corporation
Detroit Lakes, MN
$35,000,000
National Community Investment Fund
Chicago, IL
$38,000,000
National New Markets Tax Credit Fund, Inc
Minneapolis, MN
$150,000,000
NCB Development Corporation
Washington, DC
$75,000,000
New Hampshire New Market Investment Co., LLC
Saint Johnsbury, VT
$2,000,000
New Jersey Community Development Entity, LLC
Trenton, NJ
$125,000,000
Northeast Ohio Development Fund, LLC
Cleveland, OH
$47,000,000
Oak Hill Banks Community Development Corp.
Jackson, OH
$20,000,000
Ohio Community Development Finance Fund, The
Columbus, OH
$15,000,000
Peoples Economic Development Corporation
Fairfield, IL
$7,000,000
Pinnacle Community Development, Inc.
Nashville, TN
$6,000,000
Portland New Markets Fund I, LLC
Portland, OR
$100,000,000
Prestamos, CDFI, LLC
Phoenix, AZ
$15,000,000
Reinvestment Fund, Inc., The
Philadelphia, PA
$38,500,000
Related Community Development Group, LLC
New York, NY
$140,000,000
Rockland Trust Community Development LLC
Rockland, MA
$30,000,000
Rural Development Partners LLC
Hanlontown, IA
$61,700,000
Shorebank Enterprise Pacific
Ilwaco, WA
$8,000,000
Southside Development Enterprises LLC
Portsmouth, VA
$21,000,000
St. Louis Development Corporation
St. Louis, MO
$52,000,000
Stonehenge Community Development, LLC
Baton Rouge, LA
$127,500,000
TCG Community Enterprises, LLC
Rochester, NY
$125,000,000
The Mechanics Bank Community Development Corporation
Richmond, CA
$26,000,000
Urban Development Fund, LLC
Chicago, IL
$57,500,000
Wayne County - Detroit CDE
Detroit, MI
$27,000,000
Wisconsin Community Development Legacy Fund, INc.
Madison, WI
$100,000,000
Zions Community Investment Corp.
Salt Lake City, UT
$100,000,000
US Department of the Treasury
CDFI Fund
Page 2 of 2
New Markets Tax Credit Program
2003 2004 Allocation Awardees
js-1519: Treasury Issues Guidance on Credit Card Fee Income
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
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May 6, 2004
js-1519
Treasury Issues Guidance on Credit Card Fee Income
The Treasury Department and IRS today issued guidance regarding credit card
annual fees and credit card late fees.
"The timing of income recognition for credit card annual fees has been a longstanding issue," said Acting Assistant Secretary for Tax Policy Gregory Jenner.
"The guidance issued today will reduce controversy by addressing not only this
issue, but also by addressing the treatment of credit card late fees
The revenue ruling issued today holds that income from credit card annual fees is
not interest. A related revenue procedure allows credit card issuers to include
income from credit card annual fees ratably over the period to which the fees
relate.A second revenue procedure allows credit card issuers to treat income from
late fees as interest.Both revenue procedures provide the exclusive procedures to
obtain automatic consent from the Commissioner to change to the methods allowed
under the respective revenue procedures.
-30
REPORTS
• Rev. Rul. 2004-52
• Rev. Proc. 2004-32
• Rev. Proc. 2004-33
http://www.treas.gov/press/releases/js 1519.htm
5/6/2005
Parti
Section 45lBGeneral Rule for Taxable Year of Inclusion
26 CFR 1.451 -1: Taxable Year of Inclusion
(Also: §§61,446)
Rev. Rul. 2004-52
ISSUES
(1) Are credit card annual fees interest for federal income tax purposes?
(2) When are credit card annual fees includible in gross income by the card
issuer?
FACTS
X, a taxpayer that uses an overall accrual method of accounting for federal
income tax purposes, issues credit cards. Each card allows the cardholder to access a
revolving line of credit to make purchases of goods and services and, if otherwise
provided for under the applicable cardholder agreement, to obtain cash advances.
Credit card issuers, including X, charge certain cardholders an annual fee.
These credit card issuers make various benefits and services available to their
cardholders during the year, regardless of whether the cardholder actually utilizes them.
Further, although they provide these benefits and services to cardholders, no part of the
annual fee that is charged to any cardholder is for a specific benefit or service provided
by a credit card issuer to that cardholder.
Each cardholder's credit card agreement sets forth the applicable terms and
conditions under which X may charge that cardholder an annual fee. X charges some
cardholders a nonrefundable annual fee. X charges other cardholders an annual fee
that is refundable on a pro rata basis if the cardholder closes the account during the
period covered by the fee.
Under the applicable cardholder agreement, no annual fee becomes due and
payable until X posts an annual fee charge to the cardholder's credit card account. X
reflects this posting in the cardholder's credit card statement. X generally posts the full
amount of the annual fee in a single charge unless the terms of the agreement require X
to post the annual fee charge in installments.
LAW AND ANALYSIS
For federal income tax purposes, interest is an amount that is paid in
compensation for the use or forbearance of money. Deputy v. DuPont, 308 U.S. 488
(1940), 1940-1 C.B. 118: Old Colony Railroad Co. v. Commissioner, 284 U.S. 552
(1932), 1932-1 C.B. 274. Neither the label used for the fee nor a taxpayers treatment
of the fee for financial or regulatory reporting purposes is determinative of the proper
federal income tax characterization of that fee. See Thor Power Tool Co. v.
2
Commissioner, 439 U.S. 522, 542-43 (1979), 1979-1 C.B. 167, 174-75; Rev. Rul. 72315,1972-1 C.B. 49.
The annual fee that credit card issuers, including X, charge any cardholder is not
for a ny specific benefit provided by the credit card issuer to that cardholder. Rather, it is
charged for all of the benefits and services that are available to the cardholder under the
applicable cardholder agreement. Because cardholders pay annual fees to credit card
issuers, including X, in return for all of the benefits and services available under the
applicable credit card agreement, annual fees are not compensation for the use or
forbearance of money. Thus, X's annual fee income is not interest income for federal
income tax purposes.
Under § 451 (a) of the Internal Revenue Code, the amount of any item of gross
income is includible in gross income for the taxable year in which it is received by the
taxpayer, unless that amount is to be properly accounted for in a different period under
the method of accounting used by the taxpayer in computing taxable income.
Under § 1.451-1(a) of the Income Tax Regulations, income is includible in gross
income by a taxpayer that uses an accrual method of accounting when all events have
occurred that fix the taxpayer's right to receive that income and the amount of that
income can be determined with reasonable accuracy. See also § 1.446-1 (c)(1 )(ii)(A).
Generally, all the events that fix the right to receive income occur when either the
required performance takes place, payment is due, or payment is made, whichever
occurs first (the all events test). See Rev. Rul. 2003-10, 2003-3 I.R.B. 288; Rev. Rul.
80-308, 1980-2 C.B. 162.
3
X is required to include these annual fees in gross income under § 1.451-1 (a)
when the fee income becomes due and payable under its agreements, because X's
right to the income is fixed at that point and the amount of the income can be
determined with reasonable accuracy. Thus, the all events test is satisfied when X
posts an annual fee charge to a cardholder's credit card account even if X later is
required to refund a portion of a previously posted refundable annual fee charge
because the cardholder closes the account during the period covered by that fee.
Notwithstanding the holding of this revenue ruling, Rev. Proc. 2004-32, 2004-22
I.R.B. dated June 1, 2004, this bulletin, allows card issuers to account for annual fee
income using the Ratable Inclusion Method for Credit Card Annual Fees, which is
described in section 4 of that revenue procedure. Rev. Proc. 2004-32 also provides
automatic consent for a taxpayer described in this revenue ruling to change its method
of accounting for annual fee income.
HOLDINGS
(1) Credit card annual fees are not interest for federal income tax purposes.
(2) Credit card annual fees are includible in gross income by the card issuer
when they become due and payable by cardholders under the terms of the credit card
agreements.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Rebecca E. Asta, Alexa Dubert,
and Tina Jannotta of the Office of Chief Counsel (Financial Institutions and Products).
4
For further information regarding this revenue ruling contact the principal authors on
(202) 622-3930 (not a toll free call).
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also: § § 4 4 6 , 4 5 1 )
Rev. Proc. 2004-32
SECTION 1. PURPOSE
This revenue procedure allows credit card issuers described in Rev. Rul. 200452, 2004-22 I.R.B. dated June 1, 2004, this Bulletin, to account for annual fee income
using the Ratable Inclusion Method for Credit Card Annual Fees, which is set forth in
section 4 of this revenue procedure. The procedure also provides automatic consent
procedures for a credit card issuer within the scope of this revenue procedure to change
its method of accounting for annual fee income.
SECTION 2. BACKGROUND
.01 Rev. Rul. 2004-52 describes certain taxpayers that issue credit cards. Each
card allows the cardholder to access a revolving line of credit to make purchases of
goods and services and, if otherwise provided by the applicable cardholder agreement,
to obtain cash advances. These taxpayers may charge cardholders a credit card
annual fee. Rev. Rul. 2004-52 holds that credit card annual fees are not interest for
federal income tax purposes and that they are includible in income when the all events
test under § 451 of the Internal Revenue Code is satisfied. Under the facts of Rev. Rul.
2004-52, the all events test is satisfied when the credit card annual fee becomes due
and payable under the taxpayer's cardholder agreements.
.02 Any change in a taxpayer's treatment of income from credit card annual fees,
including a change to conform the taxpayer's method to either Rev. Rul. 2004-52 or to
the Ratable Inclusion Method for Credit Card Annual Fees, which is permitted by
section 4 of this revenue procedure, is a change in method of accounting to which the
provisions of §§ 446 and 481 apply.
.03 Under § 446(e) and § 1.446-1 (e)(2)(i) of the Income Tax Regulations, a
taxpayer generally must secure the consent of the Commissioner before changing a
method of accounting for federal income tax purposes. Section 1.446-1 (e)(3)(ii)
authorizes the Commissioner to prescribe administrative procedures setting forth the
terms and conditions necessary to obtain consent to change a method of accounting.
Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 200217, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696,
and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432), provides
procedures by which a taxpayer may obtain automatic consent to change to the
methods of accounting described in the Appendix of Rev. Proc. 2002-9. Section 5.03 of
Rev. Proc. 2002-9 provides that, unless otherwise provided, a taxpayer making a
2
change in method of accounting under the revenue procedure must take into account a
§ 481(a) adjustment in the manner provided in section 5.04 of Rev. Proc. 2002-9.
SECTION 3. SCOPE
This revenue procedure applies to a taxpayer that uses an overall accrual
method of accounting for federal income tax purposes and that issues credit cards to,
and receives annual fees from, cardholders under agreements that allow each
cardholder to use a credit card to access a revolving line of credit to make purchases of
goods and services and, if so authorized, to obtain cash advances.
SECTION 4. RATABLE INCLUS ION METHOD FOR CREDIT CARD ANNUAL FEES
.01 Permission to use the Ratable Inclusion Method for Credit Card Annual Fees.
The Commissioner in an exercise of his discretion under § 446 permits taxpayers within
the scope of this revenue procedure to account for their income from credit card annual
fees using the Ratable Inclusion Method for Credit Card Annual Fees, which is
described in this section 4.
.02 Description of method. Under the Ratable Inclusion Method for Credit Card
Annual Fees, a credit card annual fee is recognized in income ratably over the period
covered by the fee.
.03 Special rules. A taxpayer's use of the Ratable Inclusion Method for Credit
Card Annual Fees does not clearly reflect its credit card annual fee income (and thus
the Commissioner does not permit its use) unless the taxpayer also complies with the
rules in section 4.03(1) and 4.03(2) of this revenue procedure.
(1) Closed accounts. If a credit card is cancelled or if a cardholder account is
otherwise closed during a taxable year, any remaining unrecognized portion of the
3
credit card annual fee that is allocable to the account must be recognized in income in
that year, unless the remaining portion is refunded.
(2) Fees billed in installments. If a credit card annual fee is d ue and payable in
installments, each installment must be recognized ratably over the period to which the
installment relates.
.04 Aggregation of fees. Taxpayers may account for income from credit card
annual fees in an aggregate manner. A taxpayer that accounts for annual fees in an
aggregate manner must establish that its recognition of credit card annual fee income
satisfies the rules in sections 4.02 and 4.03 of this revenue procedure.
SECTION 5. CHANGE IN METHOD OF ACCOUNTING
A taxpayer within the scope of this revenue procedure that wants to change its
method of accounting for income from credit card annual fees, either to a method that
satisfies the all events test in accordance with Rev. Rul. 2004-52 or to the Ratable
Inclusion Method for Credit Card Annual Fees that is described in section 4 of this
revenue procedure, must follow the provisions of Rev. Proc. 2002-9 (or its successor),
with the following modifications:
.01 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 either its first or second taxable year ending
on or after December 31, 2003; and
.02 The taxpayer must prepare and file a Form 3115 in accordance with section 6
of Rev. Proc. 2002-9 and must enter the designated number for the automatic change in
method in Line 1 a of Form 3115.
4
(1) The designated number for the automatic accounting method change to
include credit card annual fees in income as required by Rev. Rul. 2004-52 is "80".
(2) The designated number for the automatic accounting method change to the
Ratable Inclusion Method for Credit Card Annual Fees is "81".
SECTION 6. AUDIT PROTECTION
If a taxpayer within the scope of this revenue procedure currently uses the
method described in section 4 of this revenue procedure, the method of accounting for
the taxpayer's credit card annual fees will not be raised as an issue by the Service in a
taxable year that ends before December 31, 2003. Also, if a taxpayer currently uses the
method described in section 4 of this revenue procedure, and its use of that method is
an issue under consideration (within the meaning of section 3.09 of Rev. Proc. 2002-9)
in examination, before an appeals office, or before the U.S. Tax Court for any taxable
year that ends before December 31, 2003, that issue will not be further pursued by the
Service.
SECTION 7. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-9 is modified and amplified to include this automatic change in
the APPENDIX.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for taxable years ending on or after
December 31, 2003.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Rebecca E. Asta, Alexa
Dubert and Tina Jannotta of the Office of Associate Chief Counsel (Financial Institutions
5
and Products). For further information regarding this revenue procedure contact the
principal authors on (202) 622-3930 (not a toll free call).
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601,204: Changes in accounting periods and in methods of accounting.
(Also: §§446, 1272)
Rev. Proc. 2004-33
SECTION 1. PURPOSE
This revenue procedure describes conditions under which the Commissioner will
allow a taxpayer to treat its income from credit card late fees as interest income on a
pool of credit card loans. This revenue procedure also provides the exclusive
procedure by which a taxpayer within the scope of this revenue procedure may obtain
the Commissioner's consent to change its method of accounting for income from credit
card late fees to a method that treats these fees as interest that creates or increases the
amount of original issue discount (OID) on the pool of credit card loans to which the
fees relate.
S E C T I O N 2. B A C K G R O U N D
.01 Certain taxpayers issue credit cards that allow a cardholder to access a
revolving line of credit to purchase goods and services. Some of these taxpayers may
also issue credit cards that allow a cardholder to obtain cash advances.
.02 The terms and conditions that govern the cardholder's use of the credit card
are provided in a credit card agreement. Under many credit card agreements, the
cardholder is charged a fee when the cardholder is delinquent with respect to a
payment due (late fee).
.03 For federal income tax purposes, interest is an amount that is paid in
compensation for the use or forbearance of money. Deputy v. DuPont, 308 U.S. 488
(1940), 1940-1 C.B. 118; Old Colony Railroad Co. v. Commissioner, 284 U.S. 552
(1932), 1932-1 C.B. 274. Whether a fee is an interest charge for federal income tax
purposes is determined by reference to all of the relevant facts and circumstances
surrounding the imposition of the charge. Neither the label used for the charge (for
example, a "finance charge") nor a taxpayer's treatment of the item for financial or
regulatory reporting purposes is determinative of the proper federal income tax
characterization of the fee. See Rev. Rul. 72-315,1972-1 C.B. 49; see also Thor Power
Tool Co. v. Commissioner, 439 U.S. 522, 542^3 (1979), 1979-1 C.B. 167.
.04 Rev. Rul. 74-187,1974-1 C.B. 48, holds that late fees on utility bills are
interest absent evidence that the late payment charge assessed by the public utility is
for a specific service performed in connection with the customer's account. Even if a
charge is a one-time charge or is imposed as a flat sum in addition to a stated periodic
2
interest rate, that charge m a y still be interest for federal income tax purposes. S e e Rev.
Rul. 77-417, 1977-2 C.B. 60, and Rev. Rul. 72-2, 1972-1 C.B. 19.
.05 Under § 1273(a)(1) of the Internal Revenue Code, OID is the excess of the
stated redemption price at maturity ( S R P M ) of a debt instrument over the issue price of
that instrument. Under § 1273(a)(2), the S R P M of a debt instrument is the amount fixed
by the last modification of the purchase agreement and includes interest and other
amounts payable at that time, other than qualified stated interest (QSI). Under §
1.1273-1 (b) of the Income Tax Regulations, the S R P M is the s u m of all payments
provided by the debt instrument other than QSI. Under § 1.1273-1 (c), QSI is stated
interest that is unconditionally payable in cash or property (other than debt instruments
of the issuer) or that will be constructively received under § 451 at least annually at a
single fixed rate.
.06 Section 1004 of the Taxpayer Relief Act of 1997, which is effective for taxable
years beginning after August 5, 1997, extended the rules of § 1272(a)(6) to any pool of
debt instruments the yield on which m a y be affected by reason of prepayments. See
H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 522 (1997). Section 1272(a)(6)
provides rules for determining the daily portions of OID if principal is subject to
acceleration.
.07 Any change in the taxpayer's treatment of income from credit card late fees
that affects w h e n those fees are recognized in income is a change in method of
accounting to which the provisions of §§ 446 and 481 apply. Under § 1.446-1 (e)(2)(i), a
taxpayer generally must secure the consent of the Commissioner before changing a
method of accounting for federal income tax purposes. Section 1.446-1 (e)(3)(H)
3
authorizes the Commissioner to prescribe administrative procedures setting forth the
terms and conditions necessary to obtain consent to change a method of accounting.
.08 Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by
Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 200219, 2002-1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002-54,
2002-2 C.B. 432), provides procedures by which taxpayers may obtain automatic
consent to change to the methods of accounting described in the Appendix of Rev.
Proc. 2002-9. Section 5.03 of Rev. Proc. 2002-9 provides that, unless otherwise
provided, a taxpayer making a change in method of accounting under the revenue
procedure must take into account a section 481(a) adjustment in the manner provided in
section 5.04 of Rev. Proc. 2002-9.
SECTION 3. SCOPE
This revenue procedure applies to a taxpayer if—
.01 The taxpayer issues credit cards allowing cardholders to access a revolving
line of credit established by the taxpayer; and
.02 None of the cardholders' credit card transactions with the taxpayer is treated
by the taxpayer for federal income tax purposes as creating either debt that is given in
consideration for the sale or exchange of property (within the meaning of §1274) or debt
that is deferred payment for property (within the meaning of § 483).
SECTION 4. APPLICATION
.01 Subject to subsection .02 of this section 4, if a taxpayer is within the scope of
this revenue procedure, the Commissioner will not challenge either the taxpayer's
treatment of credit card late fees as interest or the taxpayer's treatment of this interest as
4
being part of S R P M and thus as creating or increasing OID on a pool of credit card loans
to which these fees relate.
.02 Subsection .01 of section 4 of this revenue procedure applies only if the
taxpayer follows all of the requirements of section 5 of this revenue procedure and, if the
taxpayer is changing its method of accounting, all of the requirements of section 6 of this
revenue procedure.
SECTION 5. REQUIREMENTS
A taxpayer must be able to demonstrate the following:
.01 The amount of any credit card late fee charged to each cardholder by the
taxpayer is separately stated on the cardholder's account when the late fee is imposed;
and
.02 Under the applicable credit card agreement governing each cardholder's use
of the credit card, no amount identified as a credit card late fee is charged for property
or for specific services performed by the taxpayer for the benefit of the cardholder.
SECTION 6. CHANGE IN METHOD OF ACCOUNTING
If a taxpayer within the scope of this revenue procedure wants to change its
method of accounting for income from credit card late fees and if, under the method to
which the taxpayer is changing, these fees are treated as interest that creates or
increases the amount of OID on a pool of credit card loans to which these fees relate,
the taxpayer must follow the provisions of Rev. Proc. 2002-9 (or its successor), with the
following modifications:
5
.01 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 either its first or second taxable year ending
on or after December 31, 2003; and
.02 The taxpayer must prepare and file a Form 3115 in accordance with section 6
of Rev. Proc. 2002-9 and enter the designated number ("82") for this automatic change
in method in Line 1 a of Form 3115.
SECTION 7. AUDIT PROTECTION
.01 If a taxpayer within the scope of this revenue procedure currently uses a
method of accounting that treats credit card late fees as interest that creates or
increases the amount of OID on a pool of credit card loans to which these fees relate,
the issue of whether the taxpayer is properly treating its credit card late fees as OID on
a pool of credit card loans will not be raised by the Commissioner in a taxable year that
ends before December 31, 2003.
.02 If a taxpayer within the scope of this revenue procedure currently uses a
method of accounting that treats credit card late fees as interest that creates or
increases the amount of OID on a pool of credit card loans to which these fees relate
and its use of that method is an issue under consideration (within the meaning of
section 3.09 of Rev. Proc. 2002-9) in examination, before an appeals office, or before
the U.S. Tax Court for any taxable year that ends before December 31, 2003, that issue
will not be further pursued by the Service.
.03 Neither the audit protection provided in connection with a change in a
taxpayer's method of accounting for credit card late fees that is properly made under
section 6 of this revenue procedure, nor the audit protection provided under sections
6
7.01 and 7.02 of this revenue procedure, is a determination by the Commissioner that
the taxpayer is properly accounting for any OID income on that pool of credit card loans.
Thus, for example, the Service is not precluded from pursuing the issue of whether a
taxpayer is properly accounting for its OID income (including any OID attributable to late
fees) on its pool of credit card loans in accordance with § 1272(a)(6).
SECTION 8. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-9 is modified and amplified to include this automatic change in
the APPENDIX.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for taxable years ending on or after
December 31, 2003.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Rebecca E. Asta, Alexa
Dubert and Tina Jannotta of the Office of Associate Chief Counsel (Financial Institutions
and Products). For further information regarding this revenue procedure contact the
principal authors on (202) 622-3930 (not a toll free call).
7
JS-1520: Deputy Secretary of the Treasury<br> Samuel W . Bodman<br> Remarks to the ... Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 6, 2004
JS-1520
Deputy Secretary of the Treasury
Samuel W . Bodman
Remarks to the N H Business Council Annual Legislative Breakfast
May 6, 2004
I'm very pleased to be here with all of you today. Having spent nearly 40 years in
Boston, it's always a pleasure to be among colleagues from the N e w England
business community.
I'd like to thank Governor Benson, Senator Eaton and Speaker Chandler for being
here and for your support of the New Hampshire business community. And I
especially want to acknowledge the eight legislators who are being honored this
morning. As leaders in the N e w Hampshire State House, you share m y desire and
determination - you share President Bush's desire and determination - to do all w e
can to create the best environment for businesses to grow and flourish here in N e w
Hampshire and across this great nation.
You know that government doesn't create wealth in this country, American business
does. Business is the engine of growth, innovation and prosperity that keeps our
nation moving forward. But government does have a role
and that role is to
create the conditions for economic growth and job creation. Since his very first
days in office, President Bush has consistently proposed and supported policies
that do just that. From decisive action to lower the tax burden on American
consumers and businesses ... to confronting the rising costs of doing business in
this country . to pushing hard to open foreign markets and promote fair
competition.
And, as we survey our economic situation today, it is clear that the President's
policies are having a very real and positive impact. Just last week w e got the first
read-out of G D P for the first quarter of this year. The economy grew at a solid 4.2
percent. The last nine months represent the strongest three-quarter growth rate in
almost 20 years.
Further evidence of the recovery underway: We are starting to see a pick-up in the
manufacturing sector. And, the housing industry remains very strong. Construction
is booming w e just got a very strong construction report for March earlier this
week. H o m e ownership is at an all-time high of nearly 69%, with substantial gains
among minority households. Business confidence is up and business investment
has rebounded.
In addition, we are beginning to see some come-back in the labor markets. The
economy has created over 750,000 jobs in the last seven months, with 300,000
coming in March alone. Layoffs are down, unemployment is down, and help wanted
ads are up. Initial claims for unemployment insurance have fallen substantially down 2 0 % over the last year.
I can assure you that the President and this entire Administration are very focused
on employment
the President will not rest until every American who wants to
work can find a job. By sustaining growth going forward, I a m confident that w e will
see job creation continue in the months ahead.
tp://www.treas.gov/press/releases/js 1520.htm
5/6/2005
JS-1520: Deputy Secretary of the Treasury<br> Samuel W . Bodman<br> Remarks to the ... Page 2 of 3
In light of our economy's momentum, one thing is clear: w e must m a k e the
President's tax cuts permanent. The tax cuts have been the linchpin of the
improving performance of the economy . . . and I believe that if w e m a k e them
permanent, w e will continue to have above-normal growth for the American
economy for a good stretch of years.
Now, some have proposed repealing or significantly scaling back the tax cuts . . .
and, to be sure, what that really means is that they want to raise taxes. S o m e cite
concerns about the deficit. And I can tell you this: the deficit is a great concern for
the President as well. Deficits do matter. But raising taxes is not the answer.
Higher tax rates are a powerful disincentive for growth, and would be the wrong
medicine for our economy and its job-creating potential.
Our budget deficit while unwelcome is understandable and manageable. While
addressing the deficit, w e must remember that it is not historically overwhelming. It
is understandable given the extraordinary circumstances of recent history. The
American people and the American economy have endured a tremendous amount
of strain in recent years - from a recession, which thanks to the President's policies
w a s much milder than it would have been ... to the horrific terrorist attacks of
September 11th, 2001 ... to the uncertainty that surrounded the march to war in
Afghanistan and Iraq. These are not excuses, for sure, but they do put the deficit
situation in context.
Nonetheless, we will bring the deficit down quickly. The President's budget plan
cuts the deficit in half over five years, bringing it to a level that is historically low as
a percentage of G D P (less than 2 % of G D P ) . Economic growth is key to the
prosperity of our citizens . . . and it also it increases Treasury receipts and helps to
reduce deficits. But that isn't enough. W e also have to control government
spending in Washington. W e need to do both - m a k e tax cuts permanent and
control spending - and the President is committed to doing both.
But there is still more to do. To help businesses continue to expand and create
more jobs, the President has called on Congress:
- To take action to reduce frivolous and junk lawsuits;
To m a k e Federal regulations less burdensome on small businesses;
- To enact a national energy policy that ensures a more affordable and reliable
supply of energy, and makes us less dependent on foreign energy sources;
_ To continue to open foreign markets to American products and services - w e will
not isolate America from opportunities;
And w e must m a k e health care more affordable for families and small businesses.
Let me say a bit more on the topic of health care. At a time when health care costs
are rising rapidly and families and employers are struggling to find lower-cost
alternatives, w e need new ideas and innovative solutions. O n e such option - and
one that I believe has real potential to m a k e a big difference is Health Savings
Accounts, or "HSAs."
Health Savings Accounts were created by the Medicare bill signed by President
Bush in December. H S A s are designed with two major goals in mind: first, to help
individuals take control of how their health care dollars are spent; and second, to
help families save for future medical and retiree health expenses on a tax-free
basis.
Let me cover a few basic features of the HSA program. In order to make a
contribution to a Health Savings Account, an individual or family must be covered
by a High Deductible Health Plan and have no other coverage. A High Deductible
Plan is defined as having a minimum deductible of $1,000 for individual coverage or
$2,000 deductible for family coverage ... and it generally only pays for benefits
after the deductible is met.
Both individuals and their employers can contribute to HSAs. And this provides a
lot of options and flexibility for small employers struggling to keep costs reasonable
for their business and for their employees. Individuals, employers, or both can
http://www.treas.eov/press/releases/is 1520.htm
5/6/2005
JS-1520: Deputy Secretary of the Treasury<br> Samuel W . Bodman<br> Remarks to the ... Page 3 of 3
contribute tax-deductible funds each year up to the amount of the policy's annual
deductible, subject to a cap of $2,600 for individuals and $5,150 for families.
Individuals aged 55-64 can m a k e additional contributions. Contributions to an H S A
by an employer are not included in the individual's taxable income . . and
contributions by an individual are completely tax deductible and are not subject to
the itemized deduction limits.
When a family needs the money, if it is used for qualified medical expenses, the
distribution is tax free. A few examples . the money in an H S A can be used to
pay for: medical expenses not covered by the high deductible plan; health
insurance if an individual becomes unemployed; health insurance or medical
expenses after retirement; and long-term care expenses and long-term care
insurance premiums. H S A s will encourage families to save for future medical
expenses and will empower them to make decisions about their own health care.
The flexibility of these accounts is a big draw for employers and employees. Health
Savings Accounts are completely portable if an employee changes jobs, moves to
another state, gets married, becomes unemployed, or changes health plans in the
future. Accounts can grow through investment earnings. Many different investment
options can be pursued based on a family's needs. And the interest and
investment earnings generated by the account are not taxable while in the HSA. In
addition, there are no "use it or lose it rules" like Flexible Spending Arrangements
(FSAs). Unspent balances remain in the account year after year.
I hope, in particular, that HSAs will appeal to the small-business community, which
faces the highest hurdles when it comes to affording coverage for their employees.
By utilizing these flexible accounts and purchasing health insurance plans with a
higher deductible, small businesses should be able to lower health insurance
premiums and expand coverage options for their employees. I a m told that that
recent changes to insurance laws in N e w Hampshire m e a n that H S A products are
already being sold here . . . and w e hope more are on the way.
For more on the technical specifics of HSAs, I encourage you to visit the Treasury
Department's w e b site at www.treasury.gov. There is an extensive section devoted
to H S A s , which includes answers to frequently asked questions as well as details
on implementation guidance. Treasury issued technical guidance in December and
again in March, and w e expect to issue additional guidance in June, so check for
that.
As with any new product, one of the greatest challenges is getting the word out and
helping people understand how it works. That's one of the reasons why I'm so glad
to be here today.
I would also add that we need to continue to work together - the private sector and
those of us in government at the state and federal levels - to explore policy
solutions that m a k e health care more affordable for businesses and families. In this
and other areas, I can assure you that this Administration will remain committed to
making sure federal policies encourage and support economic growth and job
creation throughout our economy.
As everyone in this room well knows, our business enterprises - our nation's
employers are the foundation of the strongest, most vigorous and vibrant free
enterprise system in history. . . a system that allows you to innovate ... to take
risks . . to create wealth ... and sometimes, to fail and start over. I thank you for
the fine work that you do here in N e w Hampshire and across the country . . and I
thank you for being here today and for inviting m e to join you.
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http://www.treas.gov/press/releases/js 1520.htm
5/6/2005
JS-1521: Deputy Secretary of the Treasury Samuel W . Bodman<br>Remarks at N e w Mar... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 6, 2004
JS-1521
Deputy Secretary of the Treasury Samuel W. Bodman
Remarks at N e w Markets Tax Credit Event
Hibernian Hall; Roxbury, Massachusetts
May 6, 2004
I'm very pleased to be back in Boston, and particularly glad to be here to share
such great news. Today w e are announcing allocations of N e w Markets Tax
Credits to five Massachusetts-based Community Development Entities. The
allocations total over $270 million for communities in Massachusetts.
The New Markets Tax Credit program is an important community and economic
development tool. It was created to encourage business investment and job
creation in communities like this one.
The goal is to attract capital from the private sector and to empower the people who
live, work and invest in communities to make decisions about what type of ventures
will create the most jobs and grow the local economy.
The message that this program sends is - this community is a good place to do
business. Today's announcement is a step toward a brighter future for this
neighborhood and many others throughout Massachusetts.
New Markets Tax Credits are available to individual and corporate taxpayers who
make qualified equity investments in privately managed investment vehicles called
Community Development Entities (or CDEs).
CDEs serve or provide investment capital for low-income communities, and they
are certified by the Community Development Financial Institutions (CDFI) Fund of
the U.S. Department of the Treasury. These tax credit allocations are awarded
through a competitive process.
It is now my pleasure to announce the five awardees from Massachusetts. As I
read out the n a m e of each organization, I ask the representatives to come forward.
The first awardee is Affirmative New Markets LLC, headquartered here in Boston.
Affirmative N e w Markets' strategy is to invest in real estate projects to finance the
development of office and community space in low-income communities. They plan
to use this allocation to provide loan and equity capital investments in two real
estate development projects - one in Boston and the other on Cape Cod. These
projects will make the commercial space more affordable to the end users, thereby
allowing non-profits and other community organizations to remain in the low-income
communities that they serve.
Next is Boston Community Capital Inc. (or BCC). BCC will use its New Markets
Tax Credit allocation to provide loans to support businesses and real estate
development in low-income communities. Because of this program, B C C will be
able to significantly increase the volume of its lending activity and provide more
flexible terms to borrowers, such as below market interest rates, lower origination
fees, higher loan-to-value ratios, and longer interest-only loan payment periods.
B C C will also use the equity generated by its allocation to secure financing to
http://www.treas.gov/press/releases/js 1521 .htm
5/6/2005
JS-1521: Deputy Secretary of the Treasury Samuel W . Bodman<br>Remarks at N e w Mar... Page 2 of 2
support another credit facility, separate and apart from its N e w Markets Tax Credit
fund, to provide additional financing to low-income communities.
Our next awardee is the Massachusetts Housing Investment Corporation (MHIC).
Eligible projects to be financed with this allocation include community centers, office
and retail space, theatres and performing arts centers, and studios and gallery
space. The N e w Market Tax Credits will enable M H I C to offer interest-only first
mortgage loans, zero to five percent interest-only subordinate loans, and equity
investments that represent up to 25 percent of total development costs. In fact, this
Hibernian Hall renovation project w a s m a d e possible by an investment from the
Massachusetts Housing Investment Corporation (MHIC). O n c e refurbished, this
building will contain a performance center, retail and office space, and a n e w
computer learning center.
Now I am pleased to call forward MassDevelopment New Markets LLC.
MassDevelopment will utilize its allocation to offer flexible, nontraditional loans for
business investments in low-income communities. It will finance four specific real
estate redevelopment projects that are on Brownfield's sites and are of critical
importance to s o m e of the most deeply distressed communities across the state.
And finally we have Rockland Trust Community Development LLC, headquartered
in Rockland, Massachusetts. Rockland Trust's allocation will support business
lending targeted at low-income communities in the four southeastern
Massachusetts counties of Barnstable, Bristol, Norfolk, and Plymouth. In
conjunction with its lending activities, Rockland Trust will also provide financial
counseling to businesses within low-income communities, both to assist them with
N e w Markets Tax Credits requirements and in obtaining complementary equity and
debt financing from other public and private sources.
Congratulations to a great group of awardees. I'm very pleased to be a part of this
event today.
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http://www.treas.gov/press/releases/js 1521 .htm
5/6/2005
JS-1522: Treasury Issues Guidance O n Advance Payments
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®.
May 6, 2004
JS-1522
Treasury Issues Guidance On Advance Payments
The Treasury Department and IRS issued a revenue procedure that provides
taxpayers that use an accrual method of accounting a limited deferral beyond the
year of receipt for certain types of advance payments. The revenue procedure
finalizes a proposed revenue procedure published in late 2002. An accompanying
announcement discusses the most significant issues considered in connection with
finalizing the revenue procedure.
Although, generally taxpayers must include advance payments for goods or
services in income in the taxable year received, existing regulations allow taxpayers
to defer certain advance payments for goods and prior guidance provided a safe
harbor method for taxpayers to obtain a limited deferral to the following taxable year
for certain advance payments for services.
"The existing rules led to considerable controversy regarding the types of advance
payments that qualified for deferral," stated Acting Treasury Assistant Secretary for
Tax Policy Greg Jenner. "The revenue procedure issued today will reduce
controversy by expanding and clarifying the types of payments that qualify for
deferral."
In addition to allowing deferral of payments for services, the revenue procedure
also allows limited deferral of certain other payments. If only part of a payment
qualifies for deferral, the revenue procedure allows partial deferral. Although
deferrals under the new revenue procedure generally are limited to one taxable
year, the revenue procedure includes a special rule allowing deferral for two taxable
years in the case of certain short taxable years. In addition, the revenue procedure
allows deferral to the following taxable year even if the term of the agreement
extends beyond the end of the following taxable year. Taxpayers m a y also continue
to use the existing regulations to defer advance payments for goods
-30-
REPORTS
• Rev. Proc. 2004-34
• Announcement 2004-38
httn://www trpac anv/nrpWreleases/is 1522.htm
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part I, Sections 446, 451; 1.446-1,1.451-1.)
Rev. Proc. 2004-34
SECTION! PURPOSE
This revenue procedure allows taxpayers a limited deferral beyond the taxable year
of receipt for certain advance payments. Qualifying taxpayers generally m a y defer to the
next succeeding taxable year the inclusion in gross income for federal income tax
purposes of advance payments (as defined in section 4 of this revenue procedure) to the
extent the advance payments are not recognized in revenues (or, in certain cases, are not
earned) in the taxable year of receipt Except as provided in section 5.02(2) of this
revenue procedure for certain short taxable years, this revenue procedure d o e s not permit
deferral to a taxable year later than the next succeeding taxable year. This revenue
procedure neither restricts a taxpayers ability to use the methods provided in ' 1.451-5 of
the Income T a x Regulations regarding advance payments for goods nor limits the period of
deferral available under ' 1.451-5.
This revenue procedure also provides the exclusive administrative procedures
under which a taxpayer within the scope of this revenue procedure m a y obtain consent to
change to a method of accounting provided in section 5 of this revenue procedure.
SECTION 2. BACKGROUND AND CHANGES
.01 In general, ' 451 of the Internal Revenue Code provides that the amount of any
item of gross income is included in gross income for the taxable year in which received by
the taxpayer, unless, under the method of accounting used in computing taxable income,
the a m o u n t is to b e properly accounted for as of a different period. Section 1.451-1 (a)
provides that, under an accrual method of accounting, income is includible in gross income
w h e n all the events have occurred that fix the right to receive the income and the amount
can be determined with reasonable accuracy. All the events that fix the right to receive
income generally occur w h e n (1) the payment is earned through performance, (2) payment
is due to the taxpayer, or (3) payment is received by the taxpayer, whichever happens
earliest. See Rev. Rul. 84-31, 1984-1 C.B. 127.
.02 Section 1.451-5 generally allows accrual method taxpayers to defer the
inclusion in gross income for federal income tax purposes of advance payments for goods
2
until the taxable year in which they are properly accruable under the taxpayers method of
accounting for federal income tax purposes if that method results in the advance payments
being included in gross income no later than when the advance payments are recognized
in revenues under the taxpayers method of accounting for financial reporting purposes.
.03 Rev. Proc. 71-21,1971-2 C.B. 549, was published to implement an
administrative decision of the Commissioner in the exercise of his discretion under ' 446
to allow accrual method taxpayers in certain specified and limited circumstances to defer
the inclusion in gross income for federal income tax purposes of payments received (or
amounts due and payable) in one taxable year for services to be performed by the end of
the next succeeding taxable year. Rev. Proc. 71-21 w a s designed to reconcile the federal
income tax and financial accounting treatment of payments received for services to be
performed by the end of the next succeeding taxable year without permitting extended
deferral of the inclusion of those payments in gross income for federal income tax
purposes.
.04 Considerable controversy exists about the scope of Rev. Proc. 71-21. In
particular, advance payments for non-services (and often, for combinations of services and
non-services) do not qualify for deferral under Rev. Proc. 71-21, and taxpayers and the
Internal Revenue Service frequently disagree about whether advance payments are, in fact,
for "services." In addition to the issue of defining Aservices@ for purposes of Rev. Proc.
71-21, questions also arise about whether advance payments received under a series of
agreements, or under a renewable agreement, are within the scope of Rev. Proc. 71-21. In
the interest of reducing the controversy surrounding these issues, the Service has
determined that it is appropriate to expand the scope of Rev. Proc. 71-21 to include
advance payments for certain non-services and combinations of services and nonservices. Additionally, the Service has determined that it is appropriate to expand the
scope of Rev. Proc. 71-21 to include advance payments received in connection with an
agreement or series of agreements with a term or terms extending beyond the end of the
next succeeding taxable year. The Service has determined, however, that for taxpayers
deferring recognition of income under this revenue procedure it is appropriate to retain the
limited one-year deferral of Rev. Proc. 71-21 (except as provided in section 5.02(2) of this
revenue procedure for certain short taxable years).
SECTION 3. SCOPE
This revenue procedure applies to taxpayers using or changing to an overall accrual
method of accounting that receive advance payments as defined in section 4 of this
revenue procedure.
S E C T I O N 4. DEFINITIONS
3
The following definitions apply solely for purposes of this revenue procedure .01 Advance Payment Except as provided in section 4.02 of this revenue
procedure, a payment received by a taxpayer is an Aadvance paymente if ~
(1) including the payment in gross income for the taxable year of receipt is a
permissible method of accounting for federal income tax purposes (without regard to this
revenue procedure);
(2) the payment is recognized by the taxpayer (in whole or in part) in
revenues in its applicable financial statement (as defined in section 4.06 of this revenue
procedure) for a subsequent taxable year (or, for taxpayers without an applicable financial
statement as defined in section 4.06 of this revenue procedure, the payment is earned by
the taxpayer (in whole or in part) in a subsequent taxable year); and
(3) the payment is for (a) services;
(b) the sale of goods (other than for the sale of goods for which the
taxpayer uses a method of deferral provided in ' 1.451-5(b)(1)(H));
(c) the use (including by license or lease) of intellectual property as
defined in section 4.03 of this revenue procedure;
(d) the occupancy or use of property if the occupancy or use is
ancillary to the provision of services (for example, advance payments for the use of rooms
or other quarters in a hotel, booth space at a trade show, campsite space at a mobile
h o m e park, and recreational or banquet facilities, or other uses of property, so long as the
use is ancillary to the provision of services to the property user);
(e) the sale, lease, or license of computer software;
(f) guaranty or warranty contracts ancillary to an item or items
described in subparagraph (a), (b), (c), (d), or (e) of this section 4.01 (3);
(g) subscriptions (other than subscriptions for which an election under
' 455 is in effect), whether or not provided in a tangible or intangible format;
(h) memberships in an organization (other than memberships for
which an election under • 456 is in effect); or
4
(i) any combination of items described in subparagraphs (a) through
(h) of this section 4.01 (3).
.02 Exclusions From Advance Payment. The term Aadvance payments does not
include -(1) rent (except for amounts paid with respect to an item or items described
in subparagraph (c), (d), or (e) of section 4.01(3));
(2) insurance premiums, to the extent the recognition of those premiums is
governed by Subchapter L;
(3) payments with respect to financial instruments (for example, debt
instruments, deposits, letters of credit, notional principal contracts, options, forward
contracts, futures contracts, foreign currency contracts, credit card agreements, financial
derivatives, etc.), including purported prepayments of interest;
(4) payments with respect to service warranty contracts for which the
taxpayer uses the accounting method provided in Rev. Proc. 97-38,1997-2 C.B. 479;
(5) payments with respect to warranty and guaranty contracts under which a
third party is the primary obligor;
(6) payments subject to § 871 (a), 881,1441, or 1442; and
(7) payments in property to which § 83 applies.
.03 Intellectual Property. The term Aintellectual property@ includes copyrights,
patents, trademarks, service marks, trade names, and similar intangible property rights
(such as franchise rights and arena naming rights).
.04 Received. Income is Areceived@ by the taxpayer if it is actually or constructively
received, or if it is due and payable to the taxpayer.
.05 Next Succeeding Taxable Year. The term Anext succeeding taxable year@
m e a n s the taxable year immediately following the taxable year in which the advance
payment is received by the taxpayer.
.06 Applicable Financial Statement. The taxpayer's applicable financial statement
is the taxpayer's financial statement listed in paragraphs (1) through (3) of this section 4.06
5
that has the highest priority (including within paragraph (2)). A taxpayer that does not have
a financial statement described in paragraphs (1) through
(3) of this section 4.06 does not have an applicable financial statement for purposes of this
revenue procedure. The financial statements are, in descending priority (1) a financial statement required to be filed with the Securities and
Exchange Commission ("SEC") (the 10-K or the Annual Statement to Shareholders);
(2) a certified audited financial statement that is accompanied by the report
of an independent C P A (or in the case of a foreign corporation, by the report of a similarly
qualified independent professional), that is used for(a) credit purposes,
(b) reporting to shareholders, or
(c) any other substantial non-tax purpose; or
(3) a financial statement (other than a tax return) required to be provided to
the federal or a state government or any federal or state agencies (other than the S E C or
the Internal Revenue Service).
SECTION 5. PERMISSIBLE METHODS OF ACCOUNTING FOR ADVANCE
PAYMENTS
.01 Full Inclusion Method. A taxpayer within the scope of this revenue procedure
that includes the full amount of advance payments in gross income for federal income tax
purposes in the taxable year of receipt is using a proper method of accounting under •
1.451 -1, regardless of whether the taxpayer recognizes the full amount of advance
payments in revenues for that taxable year for financial reporting purposes and regardless
of whether the taxpayer earns the full amount of advance payments in that taxable year.
.02 Deferral Method.
(1) In general.
(a) A taxpayer within the scope of this revenue procedure that
chooses to use the Deferral Method described in this section 5.02 is using a proper
method of accounting under ' 1.451-1. Under the Deferral Method, for federal income tax
purposes the taxpayer must (i) include the advance payment in gross income for the
taxable year of receipt (and, if applicable, in gross income for a short taxable year
described in section 5.02(2) of this revenue procedure) to the extent provided in section
5.02(3) of this revenue procedure, and
6
(ii) except as provided in section 5.02(2) of this revenue
procedure, include the remaining amount of the advance payment in gross income for the
next succeeding taxable year.
(b) Except as provided in section 5.02(3)(b) of this revenue
procedure, a taxpayer using the Deferral Method must be able to determine (i) the extent to which advance payments are recognized in
revenues in its applicable financial statement (as defined in section 4.06 of this revenue
procedure) in the taxable year of receipt (and a short taxable year described in section
5.02(2) of this revenue procedure, if applicable), or
(ii) if the taxpayer does not have an applicable financial
statement (as defined in section 4.06 of this revenue procedure), the extent to which
advance payments are earned (as described in section 5.02(3)(b) of this revenue
procedure), in the taxable year of receipt (and a short taxable year described in section
5.02(2) of this revenue procedure, if applicable).
(2) Short taxable years. If the next succeeding taxable year is a taxable year
(other than a taxable year in which the taxpayer dies or ceases to exist in a transaction
other than a transaction to which § 381 (a) applies) of 92 days or less, a taxpayer using the
Deferral Method must include the portion of the advance payment not included in the
taxable year of receipt in gross income for the short taxable year to the extent provided in
section 5.02(3) of this revenue procedure. Any amount of the advance payment not
included in the taxable year of receipt and the short taxable year must be reported in gross
income for the taxable year immediately following the short taxable year.
(3) Inclusion of advance payments in gross income.
(a) Except as provided in paragraph (b) of this section 5.02(3), a
taxpayer using the Deferral Method must (i) include the advance payment in gross income for the
taxable year of receipt (and, if applicable, in gross income for a short taxable year
described in section 5.02(2) of this revenue procedure) to the extent recognized in
revenues in its applicable financial statement (as defined in section 4.06 of this revenue
procedure) for that taxable year, and
(ii) include the remaining amount of the advance payment in
gross income in accordance with section 5.02(1 )(a)(ii) of this revenue procedure.
(b) If the taxpayer does not have an applicable financial
statement (as defined in section 4.06 of this revenue procedure), or if the taxpayer is
unable to determine, as required by section 5.02(1 )(b)(i) of this revenue procedure, the
extent to which advance payments are recognized in revenues in its applicable financial
statements for the taxable year of receipt (and a short taxable year described in section
7
5.02(2) of this revenue procedure, if applicable), a taxpayer using the Deferral Method
must include the advance payment in gross income for the taxable year of receipt (and, if
applicable, in gross income for a short taxable year described in section 5.02(2)) to the
extent earned in that taxable year and include the remaining amount of the advance
payment in gross income in accordance with section 5.02(1 )(a)(ii) of this revenue
procedure. The determination of whether an amount is earned in a taxable year must be
m a d e without regard to whether the taxpayer m a y be required to refund the advance
payment upon the occurrence of a condition subsequent. If the taxpayer is unable to
determine the extent to which a payment (such as a payment for contingent goods or
services) is earned in the taxable year of receipt (and, if applicable, in a short taxable year
described in section 5.02(2)), the taxpayer m a y determine that amount (i) on a statistical basis if adequate data are available to the
taxpayer;
(ii) on a straight line ratable basis over the term of the
agreement if the taxpayer receives advance payments under a fixed term agreement and if
it is not unreasonable to anticipate at the end of the taxable year of receipt that the advance
payment will be earned ratably over the term of the agreement; or
(iii) by the use of any other basis that in the opinion of the
Commissioner results in a clear reflection of income.
(4) Allocable payments.
(a) General rule. A taxpayer that receives a payment that is partially
attributable to an item or items described in section 4.01(3) of this revenue procedure m a y
use the Deferral Method for the portion of the payment allocable to such item or items and,
with respect to the remaining portion of the payment, m a y use any proper method of
accounting (including the Deferral Method if the remaining portion of the advance payment
is for an item or items described in section 4.01(3) of this revenue procedure with a
different deferral period (based on the taxpayer's applicable financial statement or the
earning of the payment, as applicable)), provided that the taxpayer's method for
determining the portion of the payment allocable to such item or items is based on
objective criteria.
(b) Advance payments under section 4.01 (3)(i). An advance
payment under section 4.01 (3)(i) that is wholly attributable to two or more items described
in subparagraphs (a) through (h) of section 4.01 (3) of this revenue procedure that have the
s a m e deferral period (based on the taxpayer's applicable financial statement or the
earning of the payment, as applicable) is not an allocable payment under section 5.02(4)(a)
of this revenue procedure.
(c) Allocation deemed to be based on objective criteria. A
taxpayer's allocation method with respect to an allocable payment described in section
8
5.02(4)(a) of this revenue procedure will be d e e m e d to be based on objective criteria if the
allocation method is based on payments the taxpayer regularly receives for an item or
items it regularly sells or provides separately.
(5) Acceleration of advance payments. Notwithstanding section 5.02(1) of
this revenue procedure, a taxpayer using the Deferral Method must include in gross income
for the taxable year of receipt (or, if applicable, for a short taxable year described in section
5.02(2) of this revenue procedure) all advance payments not previously included in gross
income (a) if, in that taxable year, the taxpayer either dies or ceases to exist in
a transaction other than a transaction to which § 381 (a) applies, or
(b) if, and to the extent that, in that taxable year, the taxpayers
obligation with respect to the advance payments is satisfied or otherwise ends other than
in~
(i) a transaction to which § 381 (a) applies, or
(ii) a § 351(a) transfer in which (a) substantially all assets of the
trade or business (including advance payments) are transferred, (b) the transferee adopts
or uses the Deferral Method in the year of transfer, and (c) the transferee and the transferor
are m e m b e r s of an affiliated group of corporations that file a consolidated return, pursuant
to § § 1 5 0 4 - 1 5 6 4 .
.03 Examples. In each example below, the taxpayer uses an accrual method of
accounting for federal income tax purposes and files its returns on a calendar year basis.
Except as stated otherwise, the taxpayer in each example has an applicable financial
statement as defined in section 4.06 of this revenue procedure.
Example 1. On November 1, 2004, A, in the business of giving dancing
lessons, receives an advance payment for a 1 -year contract commencing on that date and
providing for up to 48 individual, 1 -hour lessons. A provides eight lessons in 2004 and
another 35 lessons in 2005. In its applicable financial statement, A recognizes 1/6 of the
payment in revenues for 2004, and 5/6 of the payment in revenues for 2005. A uses the
Deferral Method. For federal income tax purposes, A must include 1/6 of the payment in
gross income for 2004, and the remaining 5/6 of the payment in gross income for 2005.
Example 2. Assume the same facts as in Example 1, except that the
advance payment is received for a 2-year contract under which up to 96 lessons are
provided. A provides eight lessons in 2004,48 lessons in 2005, and 40 lessons in 2006.
In its applicable financial statement, A recognizes 1/12 of the payment in revenues for
2004, 6/12 of the payment in revenues for 2005, and 5/12 of the payment in gross
9
revenues for 2006. For federal income tax purposes, A must include 1/12 of the payment
in gross income for 2004, and the remaining 11/12 of the payment in gross income for
2005.
Example 3. On June 1, 2004, 8, a landscape architecture firm, receives an
advance payment for goods and services that, under the terms of the agreement, must be
provided by December 2005. O n December 31,2004, B estimates that 3/4 of the work
under the agreement has been completed. In its applicable financial statement, B
recognizes 3/4 of the payment in revenues for 2004 and 1/4 of the payment in revenues for
2005. B uses the Deferral Method. For federal income tax purposes, B must include 3/4
of the payment in gross income for 2004, and the remaining 1/4 of the payment in gross
income for 2005, regardless of whether B completes the job in 2005.
Example 4. On July 1,2004, C, in the business of selling and repairing
television sets, receives an advance payment for a 2-year contract under which C agrees
to repair or replace, or authorizes a representative to repair or replace, certain parts in the
customer's television set if those parts fail to function properly. In its applicable financial
statement, C recognizes 1/4 of the payment in revenues for 2004,1/2 of the payment in
revenues for 2005, and 1/4 of the payment in revenues for 2006. C uses the Deferral
Method. For federal income tax purposes, C must include 1/4 of the payment in gross
income for 2004 and the remaining 3/4 of the payment in gross income for 2005.
Example 5. O n December 2, 2004, D, in the business of selling and
repairing television sets, sells for $200 a television set with a 90-day warranty on parts and
labor (for which D, rather than the manufacturer, is the obligor). D regularly sells televisions
sets without the warranty for $188. In its applicable financial statement, D allocates $188
of the sales price to the television set and $12 to the 90-day warranty, recognizes 1/3 of the
amount allocable to the warranty ($4) in revenues for 2004, and recognizes the remaining
2/3 of the amount allocable to the warranty ($8) in revenues for 2005. D uses the Deferral
Method. For federal income tax purposes, D must include the $4 allocable to the warranty
in gross income for 2004 and the remaining $8 allocable to the warranty in gross income
for 2005.
Example 6. E, in the business of photographic processing, receives
advance payments for mailers and certificates that oblige E to process photographic film,
prints, or other photographic materials returned in the mailer or with the certificate. E tracks
each of the mailers and certificates with unique identifying numbers. O n July 20,2004, E
receives payments for 2 mailers. O n e of the mailers is submitted and processed on
September 1, 2004, and the other is submitted and processed on February 1, 2006. In its
applicable financial statement, E recognizes the payment for the September 1, 2004,
processing in revenues for 2004 and the payment for the February 1, 2006, processing in
revenues for 2006. E uses the Deferral Method. For federal income tax purposes, E must
10
include the payment for the September 1, 2004, processing in gross income for 2004 and
the payment for the February 1, 2006, processing in gross income for 2005.
Example 7. F, a hair styling salon, receives advance payments for gift cards
that m a y later be redeemed at the salon for hair styling services or hair care products at the
face value of the gift card. The gift cards look like standard credit cards, and each gift card
has a magnetic strip that, in connection with F>s computer system, identifies the available
balance. The gift cards m a y not be redeemed for cash, and have no expiration date. In its
applicable financial statement, F recognizes advance payments for gift cards in revenues
when redeemed. F is not able to determine the extent to which advance payments are
recognized in revenues in its applicable financial statement for the taxable year of receipt
and therefore does not meet the requirement of section 5.02(1 )(b)(i) of this revenue
procedure. Further, F does not determine under a basis described in section 5.02(3)(b) of
this revenue procedure the extent to which payments are earned for the taxable year of
receipt. Therefore, F m a y not use the Deferral Method for these advance payments.
Example 8. Assume the same facts as in Example 7, except that the gift
cards have an expiration date 12 months from the date of sale, F does not accept expired
gift cards, and F recognizes unredeemed gift cards in revenues in its applicable financial
statement for the taxable year in which the cards expire. Because F tracks the sale date
and the expiration date of the gift cards for purposes of its applicable financial statement, F
is able to determine the extent to which advance payments are recognized in revenues for
the taxable year of receipt. Therefore, F meets the requirement of section 5.02(1 )(b)(i) of
this revenue procedure and m a y use the Deferral Method for these advance payments.
Example 9. G, a video arcade operator, receives payments in 2004 for
g a m e tokens that are used by customers to play the video g a m e s offered by G. The
tokens cannot be redeemed for cash. The tokens are imprinted with the n a m e of the video
arcade, but they are not individually marked for identification. For purposes of its
applicable financial statement, G completed a study that determined that for payments
received for tokens in the current year, x percent of tokens are expected to be used in the
current year, y percent of tokens are expected to be used in the next year, and z percent of
tokens are expected to never be used. Based on the study, in its applicable financial
statement G recognizes in revenues for 2004 x percent (tokens expected to be used in
2004) and z percent (tokens expected never to be used) of the payments received in 2004
for tokens; G recognizes in revenues for 2005 the remaining y percent of the payments
received in 2004 for tokens. G uses the Deferral Method. Using the study, G determines
the extent to which advance payments are recognized in revenues in its applicable financial
statement for the taxable year of receipt and therefore meets the requirement of section
5.02(1 )(b)(i) of this revenue procedure. Under section 5.02(3)(a) of this revenue
procedure, G must include advance payments in gross income in accordance with its
11
applicable financial statement in the taxable year of receipt, provided that any portion of the
payment not included in income in the taxable year of receipt is included in gross income
for the next succeeding taxable year. Thus, for federal income tax purposes, G must
include x percent and z percent of the advance payments in gross income for 2004, and y
percent of the advance payments in gross income for 2005.
Example 10. Assume the same facts as in Example 9, except that G does
not have an applicable financial statement (as defined in section 4.06 of this revenue
procedure). G completed a study on a statistical basis, based on adequate data available
to G, and concluded that for payments received in the current year, x percent of tokens are
expected to be used in the current year, y percent of tokens are expected to be used in the
next year, and the remaining z percent of tokens are expected to never be used. Based on
the study, G treats as earned for 2004 x percent (for tokens expected to be used in that
year) as well as z percent (for tokens that are expected to never be used). G uses the
Deferral Method. Using the study, G determines the extent to which advance payments are
earned in the taxable year of receipt and therefore meets the requirement of section
5.02(1 )(b)(ii) of this revenue procedure. Because G does not have an applicable financial
statement, G m a y determine the extent to which a payment is earned in the taxable year of
receipt on a statistical basis under section 5.02(3)(b)(i) of this revenue procedure,
provided that any portion that is not included in the taxable year of receipt is included in the
next succeeding taxable year. Thus, for federal income tax purposes, G must include x
percent and z percent of the advance payments in gross income for 2004, and y percent of
the advance payments in gross income for 2005.
Example 11. H is in the business of compiling and providing business
information for a particular industry in an online format accessible over the internet. O n
September 1, 2004, H receives an advance payment from a subscriber for 1 year of
access to its online database, beginning on that date. In its applicable financial statement,
H recognizes 1/3 of the payment in revenues for 2004 and the remaining 2/3 in revenues
for 2005. H uses the Deferral Method. For federal income tax purposes, H must include
1/3 of the payment in gross income for 2004 and the remaining 2/3 of the payment in gross
income for 2005.
Example 12. On December 1, 2004, /, in the business of operating a chain
of Ashopping club@ retail stores, receives advance payments for membership fees. Upon
payment of the fee, a m e m b e r is allowed access for a 1 -year period to /=s stores, which
offer discounted merchandise and services. In its applicable financial statement, /
recognizes 1/12 of the payment in revenues for 2004 and 11/12 of the payment in revenues
for 2005. / uses the Deferral Method. For federal income tax purposes, / must include
1/12 of the payment in gross income for 2004, and the remaining 11/12 of the payment in
gross income for 2005.
12
Example 13. In 2004, J, in the business of operating tours, receives
payments from customers for a 10-day cruise that will take place in April 2005. Under the
agreement, J charters a cruise ship, hires a crew and a tour guide, and arranges for
entertainment and shore trips for the customers. In its applicable financial statement, J
recognizes the payments in revenues for 2005. J uses the Deferral Method. For federal
income tax purposes, J must include the payments in gross income for 2005.
Example 14. On November 1, 2004, K, a travel agent, receives payment
from a customer for an airline flight that will take place in April 2005. K purchases and
delivers the airline ticket to the customer on November 14, 2004. K retains a portion of the
customer's payment (the excess of the customer's payment over the cost of the airline
ticket) as its commission. Because K is not required to provide any services after the
ticket is delivered to the customer, K earns its commission when the airline ticket is
delivered. The customer m a y cancel the flight and receive a refund from K only to the
extent the airline itself provides refunds. K does not have an applicable financial statement
(as defined in section 4.06 of this revenue procedure), but, in its unaudited financial
statements, K recognizes its commission in revenues for 2005. The commission is not an
advance payment as defined in section 4.01 of this revenue procedure because the
payment is not earned by K, in whole or in part, in a subsequent taxable year. Thus, K m a y
not use the Deferral Method for this payment.
Example 15. /., a professional sports franchise, is a member of a sports
league that enters into contracts with television networks for the right to broadcast g a m e s
to be played between teams in the league. The money received by the sports league
under the contracts is divided equally a m o n g the m e m b e r teams. The league entered into
a 3-year broadcasting contract beginning October 1, 2004. L receives three equal
installment payments on October 1 of each contract year, beginning in 2004. In its
applicable financial statement, L recognizes 1/4 of the first installment payment in revenues
for 2004 and 3/4 in revenues for 2005; L recognizes 1/4 of the second installment in
revenues for 2005 and 3/4 in revenues for 2006; L recognizes 1/4 of the third installment in
revenues for 2006 and 3/4 in revenues for 2007. L uses the Deferral Method. Under
section 4 of this revenue procedure, each installment payment constitutes an Aadvance
payment. @ For federal income tax purposes, L must include 1/4 of the first installment
payment in gross income for 2004 and 3/4 in gross income for 2005; 1/4 of the second
installment in gross income for 2005 and 3/4 in gross income for 2006; and 1/4 of the third
installment in gross income for 2006 and 3/4 in gross income for 2007.
Example 16. M\s in the business of negotiating, placing, and servicing
insurance coverage and administering claims for insurance companies. O n December 1,
2004, M enters into a contract with an insurance company to provide property and casualty
13
claims administration services for a 4-year period beginning January 1, 2005. Pursuant to
the contract, the insurance company makes four equal annual payments to M\ each
payment relates to a year of service and is m a d e during the month prior to the service year
(for example, M is paid on December 1, 2004, for the service year beginning January 1,
2005). In its applicable financial statement, M recognizes the first payment in revenues for
2005; the second payment in revenues for 2006; the third payment in revenues for 2007;
and the fourth payment in revenues for 2008. M uses the Deferral Method. Under section
4 of this revenue procedure, each annual payment constitutes an "advance payment." For
federal income tax purposes, M must include the first payment in gross income for 2005;
the second payment in gross income for 2006; the third payment in gross income for 2007;
and the fourth payment in gross income for 2008.
Example 17. N is a cable internet service provider that enters into contracts
with subscribers to provide internet services for a monthly fee (paid prior to the service
month). For those subscribers w h o do not own a compatible m o d e m , N provides a rental
cable m o d e m for an additional monthly charge (also paid prior to the service month).
Pursuant to the contract, N will replace or repair the cable m o d e m if it proves defective
during the contract period. In December 2004, N receives payments from subscribers for
January 2005 internet service and cable m o d e m use. In its applicable financial statement,
N recognizes the entire amount of these payments in revenues for 2005. N uses the
Deferral Method. Because a subscribers use of a cable m o d e m is ancillary to the
provision of internet services by N, and because the cable m o d e m warranty is ancillary to
the use of the cable m o d e m , the payments are advance payments within the meaning of
section 4.01 (3)(i) of this revenue procedure. Further, because the deferral period for each
item is the s a m e in A/'s applicable financial statement, N is not required to allocate the
advance payments (see section 5.02(4)(b) of this revenue procedure). For federal income
tax purposes, N must include the advance payments in gross income for 2005.
Example 18. On January 1, 2005, O enters into, and receives advance
payments pursuant to, a 5-year license agreement for its computer software. Under the
contract, the licensee pays O both the first-year (2005) license fee and the fifth-year (2009)
license fee upon commencement of the agreement. The fees for the second, third, and
fourth years are payable on January 1 of each license year. In its applicable financial
statement, O recognizes the fees in revenues for the respective license year. O uses the
Deferral Method. For federal income tax purposes, O must include the first-year license
fee in gross income for 2005, the second-year and the fifth-year license fee in gross
income for 2006, the third-year license fee in gross income for 2007, and the fourth-year
license fee in gross income for 2008.
Example 19. On July 1,2004, P, in the business of selling and licensing
computer software (off the shelf, fully customized, and semi-customized) and providing
14
customer support, receives an advance payment for a 2-year Asoftware maintenance
contracts under which P will provide software updates if it develops an update within the
contract period, as well as online and telephone customer support. In its applicable
financial statement, P recognizes 1/4 of the payment in revenues for 2004,1/2 in revenues
for 2005, and the remaining 1/4 in revenues for 2006, regardless of when P provides
updates or customer support. P uses the Deferral Method. For federal income tax
purposes, P must include 1/4 of the payment in gross income for 2004 and 3/4 in gross
income for 2005.
Example 20. Assume the same facts as in Example 19, except that P
changes its taxable period to a fiscal year ending March 31 so that P has a short taxable
year beginning January 1, 2005, and ending March 31, 2005. In its applicable financial
statement, P recognizes 1/4 of the payment in revenues for the taxable year ending
December 31, 2004; 1/8 in revenues for the short taxable year ending March 31, 2005; 1/2
in revenues for the taxable year ending March 31, 2006; and 1/8 in revenues for the taxable
year ending March 31, 2007. Because the taxable year ending March 31, 2005, is 92 days
or less, section 5.02(2) of this revenue procedure applies. For federal income tax
purposes, P must include 1/4 of the payment in gross income for the taxable year ending
December 31, 2004,1/8 in gross income for the short taxable year ending March 31,
2005, and the remaining 5/8 in gross income for the taxable year ending March 31, 2006.
Example 21. Assume the same facts as in Example 19, except thatP
ceases to exist on December 1, 2004, in a transaction other than a transaction to which
• 381 (a) applies. For federal income tax purposes, P must include the entire advance
payment in gross income for 2004.
Example 22. On July 1, 2004, Q, in the business of selling and licensing
computer software (off the shelf, fully customized, and semi-customized) and providing
customer support, receives an advance payment of $100 for a 2-year software license
agreement that includes a 1 -year Asoftware maintenance contracts under which Q will
provide software updates if it develops an update within the contract period, as well as
online and telephone customer support. In its applicable financial statement, Q allocates
$20 of the payment to the maintenance contract and $80 to the license agreement, based
on objective criteria. With respect to the $20 allocable to the maintenance contract, Q
recognizes 1/2 ($10) in revenues for 2004 and the remaining 1/2 ($10) in revenues for
2005 regardless of when Q provides updates or customer support. With respect to the
$80 allocable to the license agreement, Q recognizes 1/4 ($20) in revenues for 2004, 1/2
($40) in revenues for 2005, and the remaining 1/4 ($20) in revenues for 2006. Q uses the
Deferral Method. For federal income tax purposes, Q must include $30 in gross income
for 2004 ($10 allocable to the maintenance contract and $20 allocable to the license
agreement) and the remaining $70 in gross income for 2005.
15
S E C T I O N 6. E F F E C T I V E D A T E
.01 In General. Except as provided in section 6.02 of this revenue procedure, this
revenue procedure is effective for taxable years ending on or after M a y 6, 2004.
.02 Automatic Change for 2003. For a change in accounting method under section
8.02 or 8.04(1) of this revenue procedure, this revenue procedure is effective for taxable
years ending on or after December 31, 2003. See section 8.06 of this revenue procedure
for applicable transition rules.
S E C T I O N 7. AUDIT P R O T E C T I O N
If a taxpayer uses the Deferral Method described in section 5.02 of this revenue
procedure for advance payments (as defined in section 4 of this revenue procedure), the
taxpayer's use of the Deferral Method will not be raised as an issue by the Service in a
taxable year that ends before M a y 6, 2004. But see sections 9 and 10 of Rev. Proc. 20029, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1 C.B.
561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified,
clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432); section 11 of Rev. Proc.
97-27,1997-1 C.B. 680 (as modified and amplified by Rev. Proc. 2002-19, as amplified
and clarified by Rev. Proc. 2002-54). If the taxpayer uses the Deferral Method described in
section 5.02 of this revenue procedure, and the treatment of advance payments (as
defined in section 4 of this revenue procedure) under the Deferral Method is an issue under
consideration (within the meaning of section 3.09 of Rev. Proc. 2002-9) in examination, in
appeals, or before the U.S. Tax Court in a taxable year that ends before M a y 6, 2004, that
issue will not be further pursued by the Service.
SECTION 8. CHANGE IN METHOD OF ACCOUNTING
.01 In General. A change in a taxpayers treatment of advance payments to either
of the methods described in section 5 of this revenue procedure is a change in method of
accounting to which the provisions of ' * 446 and 481, and the regulations thereunder,
apply. A taxpayer m a y adopt any permissible method of accounting for advance payments
for the first taxable year in which the taxpayer receives advance payments. A taxpayer that
seeks to change its method of accounting for advance payments must use Form 3115,
Application for Change in Accounting Method, and complete all applicable parts thereof.
See §1.446-1 (e).
16
.02 Automatic Change. Except with respect to a change in method to which
section 8.03 or 8.04(2) of this revenue procedure applies, a taxpayer within the scope of
this revenue procedure that wants to change to one of the methods of accounting provided
in section 5 of this revenue procedure must follow the automatic change in method of
accounting provisions in Rev. Proc. 2002-9 (or its successor) 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 change its method for its first or second taxable year ending on or
after December 31, 2003, provided the taxpayers method of accounting for advance
payments is not an issue under consideration for taxable years under examination, within
the meaning of section 3.09 of Rev. Proc. 2002-9, at the time the copy of the Form 3115 is
filed with the national office;
(2) For purposes of Line 1a of Form 3115, the designated automatic
accounting method change number for the changes in accounting method provided in
section 5 A of the Appendix of Rev. Proc. 2002-9, as added by this revenue procedure, are
83 for changes to the Full Inclusion Method and 84 for changes to the Deferral Method; and
(3) In lieu of providing the information and documentation required by line 1
of Schedule B to Form 3115, a taxpayer changing to the Deferral Method under this
section must (a) state whether the taxpayer uses an applicable financial statement
(as defined in section 4.06 of this revenue procedure) and, if so, identify the type;
(b) describe the basis used for deferral (i.e., the method the taxpayer
uses in its applicable financial statement or h o w the taxpayer determines amounts earned,
as applicable); and
(c) if the taxpayer makes an allocation to which section 5.02(4)(c) of
this revenue procedure applies, include a statement that the allocation method is based on
payments the taxpayer regularly receives for an item or items it regularly provides
separately.
.03 Advance Consent Change.
(1) A taxpayer within the scope of this revenue procedure that wants to use
the Deferral Method for allocable payments described in section 5.02(4)(a) of this revenue
procedure (other than allocable payments described in section 5.02(4)(c) of this revenue
procedure) or for payments for which a method under section 5.02(3)(b)(i) or (iii) of this
17
revenue procedure applies must follow the change in method of accounting provisions in
Rev. Proc. 97-27.
(2) In lieu of providing the information and documentation required by line 1
of Schedule B to Form 3115, a taxpayer changing to the Deferral Method under this
section 8.03 must (a) state whether the taxpayer uses an applicable financial statement
(as defined in section 4.06 of this revenue procedure) and, if so, identify the type;
(b) describe the basis used for deferral (i.e., the method the taxpayer
uses in its applicable financial statement or h o w the taxpayer determines amounts earned,
as applicable);
(c) provide a redacted copy of representative actual contracts or
representative sample contracts relating to the advance payments and indicate the
particular parts of the contract(s) that are relevant to the requested change;
(d) if the taxpayer makes an allocation to which section 5.02(4)(a) of
this revenue procedure applies, include a representation that the claimed allocation is
based on objective criteria and a description of the criteria used for the allocation;
(e) if the taxpayer has advance payments to which the method under
section 5.02(3)(b)(i) applies, describe the statistical basis used to determine when the
advance payments are earned and describe the data and methodology used to develop
the statistical basis; and
(f) if the taxpayer has advance payments to which the method under
section 5.02(3)(b)(iii) applies, provide an explanation of h o w the basis used for deferral
results in a clear reflection of income.
.04 Changes to an Overall Accrual Method and the Deferral Method.
(1) Automatic change.
(a) In general. This section 8.04(1) applies to a taxpayer that
qualifies under section 8.02 of this revenue procedure to change automatically to the
Deferral Method and that either (i) qualifies under Rev. Proc. 2002-9 to change automatically to
an overall accrual method or to an overall accrual method in conjunction with the recurring
item exception of § 461 (h)(3) (see section 5.01(1 )(a)(i) or (ii) of the Appendix of Rev. Proc.
2002-9), or
18
(ii) is required to change to an overall accrual method under §
448 for the first taxable year it is subject to § 448 ("first § 448 year") and otherwise would
be required to m a k e the change under the provisions of § 1.448-1 (h)(3).
(b) Application. A taxpayer described in section 8.04(1 )(a) of this
revenue procedure must follow the automatic change in method of accounting provisions in
Rev. Proc. 2002-9 (or its successor) (including all the requirements of section 5.01 of the
Appendix of Rev. Proc. 2002-9), with the following modifications (i) The taxpayer must file a single Form 3115 for both changes;
(ii) The taxpayer must include both change number 30 and
change number 84 on Line 1 a of Form 3115;
(iii) The taxpayer must complete all parts of Form 3115 that are
applicable to both the change to an overall accrual method and the change to the Deferral
Method (see section 8.02(3) of this revenue procedure);
(iv) For changes under section 8.04(1 )(a)(i) of this revenue
procedure, the taxpayer must complete Schedule A (computation of the § 481(a)
adjustment) of Form 3115, including line 1b (income received or reported before it w a s
earned), and must take the net § 481(a) adjustment into account as provided in section
5.04 of Rev. Proc. 2002-9 or section 2.02 of Rev. Proc. 2002-19, as applicable; and
(v) For changes under section 8.04(1 )(a)(ii) of this revenue
procedure, the taxpayer must complete Schedule A (computation of the § 481(a)
adjustment) of Form 3115, including line 1b (income received or reported before it w a s
earned), and must take the net § 481(a) adjustment into account as provided in § 1.4481(9)(2)(i), (g)(2)(ii), or (g)(3), as applicable.
(2) Advance consent change.
(a) In general. A taxpayer within the scope of this revenue procedure
that wants to change to the Deferral Method under section 8.03 of this revenue procedure,
and also wants to change to an overall accrual method or to an overall accrual method in
conjunction with the recurring item exception, must request to m a k e both changes by filing
one Form 3115, and the taxpayer must follow the change in method of accounting
provisions in Rev. Proc. 97-27. Only one user fee is required for these changes. See
section 5.01 (3) of the Appendix of Rev. Proc. 2002-9. The taxpayer must complete all
parts of Form 3115 that are applicable to both the change to an overall accrual method and
the change to the Deferral Method (see section 8.03(2) of this revenue procedure).
19
(b) First § 448 year and Deferral Method change. A taxpayer within
the scope of this revenue procedure that wants to change to the Deferral Method under
section 8.03 of this revenue procedure and is required to change to an overall accrual
method under § 448 for its first § 448 year must m a k e the change under the provisions of §
1.448-1 (h)(3). Only one user fee is required for these changes and the taxpayer must
complete all parts of Form 3115 that are applicable to both the change to an overall accrual
method and the change to the Deferral Method (see section 8.03(2) of this revenue
procedure).
.05 Previously Filed Forms 3115. If a taxpayer within the scope of this revenue
procedure that qualifies to change its method automatically under section 8.02 or 8.04(1)
of this revenue procedure filed a Form 3115 with the national office for a taxable year
ending on or after December 31, 2003, and the Form 3115 is pending with the national
office on M a y 6, 2004, the taxpayer must notify the national office in writing prior to July 6,
2004, if the taxpayer wants to withdraw its Form 3115 to m a k e the change under section
8.02 or 8.04(1) of this revenue procedure. If the taxpayer notifies the national office within
the time provided in this section 8.05, the taxpayer's Form 3115, and any user fee that w a s
submitted with the Form 3115, will be returned to the taxpayer. A taxpayer whose Form
3115 is returned under this section 8.05 m a y file a n e w Form 3115 under the provisions
prescribed in section 8.02 or 8.04(1) of this revenue procedure. If the taxpayer does not
notify the national office within the time provided in this section 8.05, the national office will
continue to process the taxpayer's Form 3115 in accordance with the administrative
procedures under which it w a s originally filed, using existing authority (such as Rev. Proc.
71-21 or § 1.451-5, as applicable). With regard to changes under section 8.04(1) of this
revenue procedure, this section 8.05 does not waive the generally applicable scope
provisions and other requirements in section 5.01 of the Appendix of Rev. Proc. 2002-9.
.06 Automatic Change Transition Rule. A taxpayer within the scope of this
revenue procedure that qualifies to change its method automatically under section 8.02 or
8.04(1) of this revenue procedure m a y change to the Full Inclusion Method, the Deferral
Method, or an overall accrual method and the Deferral Method, as applicable, for taxable
years ending on or after December 31, 2003. If a taxpayer has timely filed its federal
income tax return for its first taxable year ending on or after December 31, 2003, and has
not attached a Form 3115 to change its method of accounting for that taxable year to a
method provided in this revenue procedure, the taxpayer, as provided in section
6.02(3)(b)(i) of Rev. Proc. 2002-9, is granted an automatic extension of 6 months from the
due date of its federal income tax return for the year of change (excluding extensions) to
obtain the automatic consent provided by this revenue procedure, provided the taxpayer
attaches Form 3115 to an amended return for the year of change and otherwise complies
with section 6.02(3)(b)(i) of Rev. Proc. 2002-9.
SECTION 9. EFFECT ON OTHER DOCUMENTS
20
Rev. Proc. 71-21 is modified and superseded. Rev. Proc. 2002-9 is modified and
amplified to include in section 5 of the Appendix the automatic change provided in section
8.04(1) of this revenue procedure, and to include in section 5 A of the Appendix the
automatic change provided in section 8.02 of this revenue procedure. The Deferral
Method provided in this revenue procedure is available to qualifying taxpayers
notwithstanding revenue rulings, revenue procedures, notices, or announcements
published by the Service that m a y provide different rules for when advance payments must
be included in gross income. See, e.g., Rev. Rul. 70-445, 1970-2 C.B. 101; Rev. Rul. 6844,1968-1 C.B. 191; Rev. Rul. 65-141, 1965-1 C.B. 210; and Rev. Rul. 60-85, 1960-1
C.B. 181.
SECTION 10. DRAFTING INFORMATION
The principal author of this revenue procedure is Edwin B. Cleverdon of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information regarding
this revenue procedure, contact Mr. Cleverdon at (202) 622-7900 (not a toll-free call).
Part IV - Items of General Interest
Issuance of Advance Payment Revenue Procedure
Announcement 2004-48
PURPOSE
The Internal Revenue Service has issued Rev. Proc. 2004-34, page [insert page
number on which the rev. proc. begins] of this Bulletin, which finalizes, with
modifications, the revenue procedure proposed in Notice 2002-79, 2002-2 C.B. 964 (the
proposed revenue procedure). The purpose of this announcement is to discuss some of
the most significant issues raised in connection with finalizing the revenue procedure.
BACKGROUND
Notice 2002-79 proposed a revenue procedure to modify and supersede Rev.
Proc. 71-21,1971-2 C.B. 549. The proposed revenue procedure provided a limited
deferral beyond the taxable year of receipt for certain advance payments for services,
certain non-services, and combinations of services and certain non-services. Notice 200279 requested comments on the proposed revenue procedure and on the following specific
issues:
$ whether the proposed revenue procedure should take into account the cost of
goods sold in deferring advance payments from the sale of goods;
$ whether a taxpayer should be permitted to allocate advance payments between the
deferral provisions in ' 1.451-5 of the Income Tax Regulations and the proposed
revenue procedure;
$ whether advance payments should be accelerated as a result of non-taxable
transfers, such as transfers under • 351 or ' 721 of the Internal Revenue Code, and
the treatment of short tax years resulting from ' 381 (a) transactions; and
$ whether the use of statistical methodologies for tracing advance payments should
be permitted if the taxpayer is unable to determine the extent to which particular
advance payments received in a given taxable year are actually included in gross
receipts for financial reporting purposes in that year.
2
The Service received comments on these and several other issues. The most significant
comments, along with certain other changes to the proposed revenue procedure, are
discussed below.
CHANGES TO THE PROPOSED REVENUE PROCEDURE AND OTHER ISSUES
Allocations
Notice 2002-79 requested comments on allocations of advance payments between
the Deferral Method in the proposed revenue procedure and § 1.451-5. Commentators
suggested various approaches to resolve allocation issues involving § 1.451-5, including
providing deferral rules identical to those provided in the regulations (making the
regulations redundant), or making the revenue procedure and regulations mutually
exclusive. Commentators also suggested that clarifying the types of services that are
integral to a sale of goods for which advance payments m a y be deferred under § 1.451-5
would eliminate confusion about whether an allocation is necessary.
The Service does not believe it is appropriate to conform the deferral provisions of
the revenue procedure to the regulations. Instead, the Service continues to believe it is
appropriate to retain for purposes of the revenue procedure the one-year limited deferral
rather than to use the longer deferral period allowable under the regulations. In addition,
the Service does not believe that the revenue procedure and the regulations should be
mutually exclusive. O n e of the purposes of the revenue procedure is to reduce controversy
by allowing a taxpayer to use the revenue procedure without requiring the taxpayer to
determine whether the payment qualifies for deferral under the regulations.
The Service recognizes that a taxpayer may receive an advance payment that is
partially attributable to an item eligible for the Deferral Method under the revenue
procedure and partially attributable to another item, such as: (1) an item that is not eligible
for the Deferral Method; (2) an item that is eligible for the Deferral Method, but on a
different deferral schedule; or (3) an item that is eligible for deferral under § 1.451-5. In
s o m e of these situations, a taxpayer m a y be able to determine objectively the portion of the
advance payment that is eligible for the Deferral Method. In these cases, the Service
believes it is appropriate to allow a taxpayer to allocate an advance payment and to apply
the Deferral Method to part of the payment and another method of accounting to the rest of
the payment. The final revenue procedure, therefore, allows a taxpayer to m a k e allocations
if the taxpayer uses objective criteria for the allocation.
A taxpayer that wants to allocate advance payments generally must use the advance
consent procedures for a change of accounting method set forth in Rev. Proc. 97-27,19971 C.B. 680, as modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, as
3
amplified and clarified by Rev. Proc. 2002-54, 2002-2 C.B. 432. However, the final
revenue procedure includes a safe harbor allocation for which the taxpayer m a y use the
automatic change of accounting method procedures in Rev. Proc. 2002-9, 2002-1 C.B.
327, as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and
amplified by Rev. Proc. 2002-19, and amplified, clarified, and modified by Rev. Proc.
2002-54. Under the safe harbor, if a taxpayer bases the allocation on payments the
taxpayer regularly receives for an item or items it regularly provides separately, the
allocation will be d e e m e d to be based on objective criteria.
Treatment Of Short Taxable Years
The proposed revenue procedure retained the requirement under Rev. Proc. 71-21
that advance payments be included in gross income by the end of the "next succeeding
taxable year" following the taxable year of receipt. Notice 2002-79 requested comments
concerning the application of this rule when the next succeeding taxable year is a short
taxable year resulting from a § 381 transaction. Commentators suggested various
remedies including disregarding short taxable years or providing a minimum fixed deferral
period to approximate the limited one-year deferral that would be allowed under the
revenue procedure.
The Service agrees that an additional taxable year of deferral should be permitted
in the case of certain short taxable years. Therefore, the final revenue procedure provides
that, w h e n the next succeeding taxable year is a short taxable year (other than a taxable
year in which the taxpayer dies or ceases to exist in a transaction other than a transaction
to which § 381(a) applies) of 92 days or less, a taxpayer using the deferral method must
include in gross income for the short taxable year the portion of the advance payment
recognized for financial reporting purposes (or earned, if applicable) in the short taxable
year. Any remaining amount must be included in gross income for the taxable year
immediately following the short taxable year.
Acceleration Of Income
The proposed revenue procedure retained the requirement in Rev. Proc. 71-21
regarding the acceleration of inclusion in gross income if the taxpayer dies or ceases to
exist (other than in a transaction to which § 381(a) applies) or if the taxpayer's obligation
related to the advance payment otherwise ends. The notice requested comments on
whether acceleration should be required with respect to certain non-taxable transfers.
Several commentators suggested a "step-into-the-shoes" treatment for the transferee,
which the Service believes would create significant complexity. Another commentator
suggested an exception similar to the exception provided in the method change
procedures for § 481 (a) adjustments for transfers under § 351 within a consolidated group.
4
The final revenue procedure incorporates a limited exception for § 351 transfers. A
taxpayer will not be required to include the advance payment in gross income if, in a § 351
transaction, (1) substantially all assets of the trade or business (including advance
payments) are transferred, (2) the transferee adopts or uses the Deferral Method in the
procedure in the year of transfer, and (3) the transferee and the transferor are m e m b e r s of
an affiliated group of corporations that file a consolidated return pursuant to §§ 1504 1564.
Definition Of "Applicable Financial Statement'
The deferral permitted under the proposed revenue procedure was based on the
amount deferred under the taxpayer's method of financial reporting. Commentators
expressed concern that without specific guidelines, taxpayers would adopt financial
reporting methods that would maximize deferrals but that might not accurately reflect the
true nature of the taxpayer's financial condition. S o m e commentators recommended
adopting a standard based on generally accepted accounting principles (GAAP), and
other commentators expressed concern that taxpayers without financial reports would be
excluded from using the Deferral Method.
The final revenue procedure adopts an "applicable financial statement" standard
similar to that set forth in § 1.56-1 (c) regarding the types, and priority, of financial
statements. Under the revenue procedure, a taxpayer's applicable financial statement is
the first listed of the following:
Financial statement required to be filed with Securities and Exchange
Commission ("SEC") (the 10-K or the Annual Statement to Shareholders);
Certified audited financial statement used for (in this priority) credit
purposes, reporting to shareholders, or other substantial non-tax purposes; and
Financial statement provided to a government regulator other than the SEC
or the Internal Revenue Service.
Thus, for example, a taxpayer that both files a 10-K with the SEC and provides financial
statements to a government regulator would be required to use the 10-K as the applicable
financial statement under the revenue procedure. For those taxpayers that do not have an
applicable financial statement described above, the final revenue procedure provides
deferral methodologies based on when the advance payments is earned through
performance.
5
Statistical Sampling
Because the deferral method in the proposed revenue procedure was based
exclusively on the taxpayer's financial reporting method, the proposed revenue procedure
did not provide an independent method for using a statistical or other basis for determining
when an advance payment is earned through performance. Section 3.06 of Rev. Proc. 7121 provided a rule for using a statistical basis, if adequate data are available to the
taxpayer, for determining when services are performed with respect to contingent service
agreements. S o m e commentators were concerned that a similar provision w a s not
included in the proposed revenue procedure.
Because some taxpayers do not have an applicable financial statement as
previously described, and because s o m e taxpayers are unable to trace the recognition of
individual advance payments in their applicable financial statements, section 5.02(3)(b) of
the final revenue procedure w a s added to allow these taxpayers to use certain other
methods, including a statistical basis (if adequate data are available to the taxpayer), to
include advance payments in gross income. If a taxpayer seeks to use a statistical basis
or other methodology (other than a straight line ratable basis) to determine the amount
deferred, the taxpayer must use the advance consent procedures for a change of
accounting method set forth in Rev. Proc. 97-27.
Items Not Eligible For Deferral As Advance Payments
Credit Card Fees
The proposed revenue procedure excluded credit card fees from the definition of
advance payments. Several commentators requested that credit card fees (including
annual fees) be included within the document's scope. The final revenue procedure
continues to exclude payments with respect to credit card agreements because the
Service has addressed credit card fees in separate guidance. See Rev. Rul. 2004-52,
page [insert page n u m b e r where Rev. Rul. 2004-52 begins] of this Bulletin, Rev. Proc.
2004-32, page [insert page n u m b e r where Rev. Proc. 2004-32 begins] of this Bulletin,
and Rev. Proc. 2004-33, page [insert page n u m b e r where Rev. Proc. 2004-33 begins]
of this Bulletin.
Insurance Premiums
The proposed revenue procedure excluded "insurance premiums" from the
definition of "advance payments" to avoid conflicts with accounting rules applicable to
insurance companies. After further consideration, the Service determined that a more
6
focused definition would be appropriate. Therefore, the final revenue procedure excludes
"insurance premiums, to the extent the recognition of those premiums is governed by
Subchapter L." This language is intended to exclude insurance companies as well as other
entities that recognize income from insurance activities under the subchapter L accounting
regime, but not taxpayers that are ineligible for the subchapter L regime (for example,
taxpayers that issue insurance contracts but are not insurance companies within the
meaning of § 816(a) or § 1.801 -3(a)).
Advance Rentals
In conjunction with the final revenue procedure, the Service and Treasury are
amending the regulations at § 1.61-8(b) to allow the Service to provide for the deferral of
advance rentals. These amendments will be effective retroactively to the date the
regulations were proposed in the Federal Register (December 18, 2002). The final
revenue procedure applies to advance payments for the use of computer software and
intellectual property, which m a y otherwise be considered advance rentals. S o m e
commentators requested that the revenue procedure be expanded to include advance
rentals for tangible property. The Service has not adopted this suggestion. The Service
continues to believe that advance rentals for tangible property should be included in gross
income w h e n received unless § 467 requires otherwise.
Other Excluded Items
The proposed revenue procedure included payments for warranties in the list of
items that m a y be eligible to be deferred as advance payments. Commentators stated that
there could be confusion whether a warranty would be excluded as insurance. In addition
to the clarifications m a d e with respect to insurance as discussed above, the Service
determined that it w a s appropriate to exclude warranties and guaranty contracts under
which a third party is the primary obligor.
The proposed revenue procedure did not exclude payments in property to which §
83 applies or payments subject to the withholding rules in § 871, 881,1441, or 1142.
Upon further consideration, the Service has determined that because of the specific
statutory and regulatory income treatment for transactions under § 83, it is appropriate to
exclude payments in property to which § 83 applies from the deferral provisions of the
revenue procedure. Additionally, the final revenue procedure excludes payments subject
to the specific withholding rules in § 871, 881,1441, or 1142 from the deferral provisions.
Method Change Issues
The proposed revenue procedure provided that taxpayers would use the automatic
7
change in accounting method procedures in Rev. Proc. 2002-9 to change to either the
Deferral Method or the Full Inclusion Method. The Service believes that certain changes
permitted under the final revenue procedure raise issues that warrant closer scrutiny by the
Service. Therefore, the Service has determined that a taxpayer that wants to change to an
accounting method that involves allocations of payments between the Deferral Method in
the revenue procedure and s o m e other method generally must follow the advance consent
procedures in Rev. Proc. 97-27, rather than the automatic method change procedures.
Similarly, a taxpayer that wants to use the Deferral Method, but either does not have an
applicable financial statement or does not trace individual advance payments for purposes
of its applicable financial statements, must follow the advance consent procedures of Rev.
Proc. 97-27 if it wants to defer advance payments on a basis other a straight line ratable
basis. The final revenue procedure also provides automatic method change procedures
for certain changes to an overall accrual method of accounting combined with a change to
the Deferral Method.
Record Keeping
Section 8 of the proposed revenue procedure set forth record keeping rules for
taxpayers using an accounting method provided by the revenue procedure. However,
because that section did not add to the general record keeping rules applicable to all
taxpayers, it w a s determined that the provision is unnecessary. Thus, although the final
revenue procedure does not include this provision, the record keeping rules in § 6001 and
the regulations thereunder continue to apply to taxpayers that use a method of accounting
provided by the final revenue procedure.
COGS
The proposed revenue procedure did not provide a special rule for cost of goods
sold ( C O G S ) , but requested comments on whether the revenue procedure should take into
account C O G S in deferring advance payments from the sale of goods.
Some commentators suggested that the Service does not have the authority to treat
advance payments for the sale of goods as income when received, on the theory that the
Code and regulations do not allow a tax on gross receipts, and that the Service should
require taxpayers to defer advance payments for the sale of inventoriable goods.
The revenue procedure does not adopt this recommendation. The long-standing
position of the Service has been that advance payments are income when received, unless
the taxpayer elects to defer under an exception to that general rule. The final revenue
procedure is designed to simplify the various issues that have arisen under Rev. Proc. 7121. After careful consideration, the Service has determined that a special C O G S rule is
inconsistent with that simplification. Taxpayers that receive advance payments for goods
8
and qualify to use the deferral method in § 1.451-5 m a y use that method, including the rule
for C O G S included in the regulation. Taxpayers that use the deferral method provided in
the final revenue procedure must use the general rules under § 461 and the regulations
thereunder for determining when a liability (including C O G S ) is incurred.
Effective Date
The revenue procedure is effective for taxable years ending on or after the date of
publication. However, a transition rule allows taxpayers w h o are eligible to use the
automatic change provisions to adopt or change to a method provided in the revenue
procedure for taxable years ending on or after December 31, 2003.
DRAFTING INFORMATION
The principal author of this announcement is Edwin B. Cleverdon of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding this
announcement contact Edwin B. Cleverdon on (202) 622-7900 (not a toll-free call).
JS-1523: Treasury Department Issues Information on M a y G-7 Meetings
I*age 1 ot l
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 6, 2004
JS-1523
Treasury Department Issues Information on May G-7 Meetings
The meeting of the Group of 7 Finance Ministers will take place May 22-23, 2004 at
the Waldorf=Astoria Hotel, 301 Park Avenue, N e w York, NY. The following is a
preliminary schedule of events; a final schedule will be released the week of May
17th:
Saturday, May 22
Dinner, Location TBA
Time, T B A
* Pool photo at top of event with pool reporter
Sunday, May 23
G-7 meetings, group photo, and working lunch, Waldorf=Astoria Hotel
8:00 a m - mid-afternoon
* Pool coverage for meetings and lunch; national photographers as requested by
country
* Group photo is open photo with pool reporter
U.S. press conference, Waldorf-Astoria Hotel
Mid-afternoon
' Open to all media, pre-set time TBA
** There are no bilateral meetings expected at this time.
** The Treasury Department will not issue G-7 accreditation badges to the media.
Members of the media should wear the press credentials issued to them by their
media organization. Members of the media participating in press pools will be given
temporary badges to wear while performing that duty.
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tp://www.treas.gov/press/releases/js 1523 .htm
5 6 2005
5-1524: The Honorable John W . Snow<br> Secretary of the Treasury<br> Prepared Remarks for the Fe... Page 1 of 3
I
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 7, 2004
js-1524
The Honorable John W. Snow
Secretary of the Treasury
Prepared Remarks for the Federal Reserve Bank of Chicago
Friday, May 7, 2004
Thank you so much for having me here today.
The resilience and strength of our economy, particularly when given the proper
stimulus of tax relief and low interest rates, has been proven once again in recent
months.
Our economy has turned the corner, and the path ahead is a long one... a long path
of growth of a non-inflationary type. I believe this economy has plenty of room to
run without creating inflation.
That said, we know that consumers are facing some jarring prices on everyday
purchases. Prices for gasoline, groceries and houses have increased, and they can
be a strain on a household budget.
I'm also concerned about the rapid rise in health care costs. It has an enormous
impact on our nation's financial future, and this administration is dedicated to finding
and implementing ways to control those costs.
Overall, however, I remain extremely optimistic. Prices on some other common
consumer purchases have fallen. And while w e absolutely must remain sensitive to
the daily costs of American's lives, I'm really pleased with our economic health and
outlook.
I'm delighted to report, for example, that we've had the best nine months of growth
in almost 20 years; G D P has been averaging an outstanding annual rate of 5.5
percent over the last three quarters.
Our economy is on very solid footing, our upward trend is strong, and there can be
no doubt that President Bush's leadership on tax cuts made the decisive difference.
There can be no doubt that lower marginal income tax rates work.
Yes, investment and hiring were a little delayed this time, but think of what we had
to contend with: the horror of 9/11, the high tech bubble bursting, high levels of
productivity, as well as the damage done by corporate excesses dating back to the
1990s.
We came back from a low point and with every bit of good economic news, the
spirits of the American people are lifted.
I'd like to add that we can't underestimate how that lifting of spirits positively
impacts the economy as well.
We are unique in the world in terms of our ability to rebound. Think about it: Just
one year ago, there was a very different economic picture, and some forecasters
'www.treas.eov/oress/releases/is 1524.htm
s-1524: The Honorable John W . Snow<br> Secretary of the Treasury<br> Prepared Remarks for the Fe... Page 2 of 3
were pessimistic. You m a y remember that it w a s the specter of deflation that w a s
being raised at that point not-so-long-ago.
State budgets were struggling to achieve balance and even those who saw the
economy in pretty good shape characterized the recovery as at best wobbly, weak
or anemic.
Today, more than half of the states are projecting budget surpluses for this fiscal
year. Our economy is running on all four cylinders, thanks in large part to the fact
that Americans are keeping more of their hard-earned money - after-tax incomes
are up 10 percent since December of 2000 and are substantially above levels
following the last recession.
It's great to see that the manufacturing sector is coming back an important job
creator. Factory orders increased 4.3 percent in March the biggest increase since
July of 2002. The component for durable goods new orders jumped 5 percent in
March and the February gain w a s revised up. A manufacturing activity index
signaled expansion in April for the eleventh straight month, remaining near the 20year high reached in January.
The housing industry remains very strong, with homeownership at an all-time high,
and this is something to be very proud of, as a nation. N e w h o m e sales surged in
March, rising 8.9 percent to reach a new record high. Also worth noting, housing
starts were up in March, as well as building permits, which are a forward-looking
measure of housing activity.
Business spending has rebounded. Business and consumer confidence is up.
Consumer confidence increased 4.4 points in April. This means that American
households sense that the job market is strengthening.
And now I'd like to talk specifically about the job market. Because jobs are the most
important thing any of us w h o have ever looked for work and couldn't find it for any
period of time know this well - and jobs are what follows all of these other indicators
that I've just mentioned.
The news on jobs is good. Our economy has created 759,000 jobs in the last seven
months... 308,000 in March alone. Layoffs are down, unemployment is down. At 5.7
percent, the unemployment rate remains lower than the average of the 1970s, 80s
and 90s, and far below its peak of 6.3 percent in June of 2003. Over the past year,
the unemployment rate has fallen in 45 of the 50 states. Initial claims for
unemployment insurance have fallen substantially: down 2 0 % over the last year.
I anticipate that this economy will be creating a lot more jobs in the coming months.
I'm often asked to m a k e a prediction about how many jobs will be created going
forward. I don't know exactly, of course, and I don't m a k e personal predictions or
estimates. But what I a m confident of, what I do know, is that jobs will follow
economic recovery, and jobs will follow economic growth. History tells us that and
history will repeat itself today.
So, again, I am optimistic, but I also carry a word of caution: if the President's tax
cut's aren't m a d e permanent, the U.S. economy, in our view, will lose its current
m o m e n t u m . The tax relief is the key stimulus for increased capital formation,
entrepreneurship and investment that causes sustained, long-term economic
growth. And people need to be able to plan if w e want them to invest or take risks.
Permanency is essential for planning.
The continuation of growth is important to our country, and it is important to the
world It is government's responsibility to ensure the ability of our free-market
economy to operate unfettered, lifting the weights that slow it down as much as
possible.
We are fortunate to live in a country where freedom allows for great prosperity...
and w e must never take that for granted, in our daily lives or in our policy decisions.
•//www.treas.gov/press/releases/js 1524.htm
5/31/2005
s-1524: The Honorable John W . Snow<br> Secretary of the Treasury<br> Prepared Remarks for the Fe... Page 3 of 3
Thank you for having me here today.
-30-
'://www.treas.gov/press/releases/js 1524.htm
5/31/2005
S-l 2 2 >: Statement of Secretary John S n o w on the April Employment Report
Page 1 of
^fi£SS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 7,2004
JS- 525
Statement of Secretary John S n o w on the April Employment Report
Jntheepr- srs c-: monir of growtr. ire economy created 255. COL jobs in April
bnnging me toia r-crease since Augusttomore than 1 '• million, ^-e
unempov >em rate. *<vch is D D W T subsiantiaBy Tom ns peak last summer, feO in
Apr s-c s DB^rm ~.e average of eacn of the past three decades.
~~e longer Americans and American businesses feel the relief of the Pres cen: s
tax CL^. _~e more ire Tide of our ecor,orryrises.This is apparent in todays jobs
report as weB as in the 'esc rg of G D P growth out last week.
i he go-.-emmen: ~:us: ersjre that our free market sysiern is as strong and
^nreiie'eci as pcss o e. ! ~e ^esice-t's actors io remove weights, like excessive
^ x c o - ha*e o-ovcei for needed economic expansion and job growth. Bui more
reecs to oe co^e to corr^e or r^is upward pan. ~^.e Administration is committed
to *eG-.'3 ~c .avisun ao^se. e^sur'ng sr sttonjable supofy of energy and sierrrrinq
. e -is.r>g cost of heat^ ca^e. Wifri ire President's ieacershio. ire economy w':i
oo-rnue Io s-rengmer and create jobs.
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fc
"**wjieas.gDv.pressreleases jsl525.htm
5 31.2005
JS-1526: Treasury Assistant Secretary for Financial Institutions, W a y n e A . Abernathy<br... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 6, 2004
JS-1526
Treasury Assistant Secretary for Financial Institutions, W a y n e A. Abernathy
Presented Honorary Certificate of Recognition
in Wakefield, Massachusetts
to 1st Educational Savings Branch
for Efforts in Financial Education to High School Students
Treasury Assistant Secretary for Financial Institutions Wayne Abernathy today
presented the 1st Educational Savings Branch (IstESB), Wakefield, M A , with an
honorary certificate of recognition for its efforts in teaching financial education to
high school students. The 1st E S B is a fully operational bank branch of The
Savings Bank operated by students attending Wakefield Memorial High School.
"One of the best ways for students to learn the lessons of financial education is
through hands-on experience," said Abernathy. "The opportunity to work in a
banking environment at such an early age will undoubtedly benefit these students,
both in their careers and in managing their own financial futures."
According to The Savings Bank President/CEO Brian D. McCoubrey, numerous
students participating in the program have gone on to work in finance-related fields.
"Some students enrolled in the program have worked for The Savings Bank during
their senior year and while attending college. Several of the students have been
employed by The Savings Bank upon earning degrees," said McCoubrey.
The Savings Bank established the IstESB in April of 1981, the first of its kind in the
country. Each year, five high school seniors are selected to serve as Student Bank
Officers. The branch is open one hour and twenty minutes a day to offer services
such as checking and savings accounts, certificates of deposit, personal loans,
mortgages, and check cashing for faculty and students.
According to Cindy Lyons, the IstESB Branch Manager, the student officers
contribute to the daily decision making process necessary to run a branch office,
participate in event and conference planning, offer community service when
available, compete in area competitions that include the LifeSmarts Consumer
Challenge(tm) sponsored by the National Consumers League, The Stock Market
G a m e Program(tm) (a trademark of the Foundation for Investor Education), and the
Massachusetts S M S ® Stock Market Simulation. The students also prepare for and
attend the Massachusetts School Bankers Associations (MSBA) annual Spring
Conference held at the Boston Federal Reserve Bank. The M S B A is an association
formed in 1986 to support and advance school banking programs throughout the
Commonwealth. At the present time there are 26 high schools in M A with a bank
branch on site.
The Savings Bank further supports financial literacy in the public schools through
grants from The Donald E. Garrant Foundation, Inc. for projects supporting
education in the areas of saving, investing, borrowing, economics and similar
financial topics. The Savings Bank also sponsors The C L U B (children learning to
understand banking), a bank-at-school program now functioning weekly at eight
schools and 104 classrooms. N o w in its tenth year of operation, The C L U B has
over 1 800 student depositors. The Bank conducts meetings at the bank for C L U B
members to discuss saving and to take a tour of the banking facility in order to be
exposed to the function and purpose of a bank.
http://www.treas.gov/press/releases/js 1526.htm
5/6/2005
JS-1526: Treasury Assistant Secretary for Financial Institutions, W a y n e A . Abernathy<br... Page 2 of 2
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education ("Office") in M a y 2002. The
Office works to promote access to the financial education tools that can help all
Americans m a k e wiser choices in all areas of personal financial management, with
a special emphasis on, saving, credit management, h o m e ownership and retirement
planning. The O F E also coordinates 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. For more information about the Office of Financial
Education visit: www.treas.gov/financialeducation.
30
http://www.treas.gov/press/releases/jsl526.htm
5/6/2005
js-1527: Treasury Designates Bosnian Charities Funneling Dollars to Al Qaida
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 6, 2004
js-1527
Treasury Designates Bosnian Charities Funneling Dollars to Al Qaida
In another step today to halt the flow of terrorist dollars that have tainted the
charitable community, the U.S. Department of the Treasury Department designated
three Bosnian charities under Executive Order 13224. The U.S. is asking the
United Nations' 1267 Sanctions Committee to add these entities to its consolidated
list of terrorists tied to al-Qaida, Usama bin Laden and the Taliban.
"Today's action continues the international drumbeat to expose the terrorist nodes
used to support the infrastructure of hate," said Juan Zarate, the Treasury
Department's Deputy Assistant Secretary for the Executive Office of Terrorist
Financing and Financial Crimes. "Unfortunately, w e have seen the vulnerabilities of
charities in countries like Bosnia, where there is not only a need for charitable
giving but also a susceptibility that such institutions will be co-opted by terrorist
sympathizers."
The United States previously designated Bosnian-operated charities that were
funneling dollars for terrorist-related activities, including the Benevolence
International Foundation (BIF), the Global Relief Foundation (GRF) and the Bosnian
branch of Al-Haramain Foundation (AHF), including its director and Vazir, an alias
for the organization.
Today's action by the Treasury Department designates the following entities:
Al Furqan
Information shows this non-governmental organization had close ties and shared an
office with G R F and was chiefly sponsored by the Bosnian branch of AHF.
Individuals working for Al Furqan have been involved in multiple instances of
suspicious activity, including surveillance of the U.S. Embassy and U.N. buildings in
Sarajevo. Although Al Furqan ostensibly ceased operations in 2002, two successor
organizations, Sirat and Istikamet, continue to act on behalf of Al Furqan in Bosnia.
A.K.A.s
Dzemilijati Furkan; Dzem'ijjetul Furqan; Association for Citizens Rights and
Resistance to Lies; Dzemijetul Furkan; Association of Citizens for the Support of
Truth and Suppression of Lies; Sirat; Association for Education, Culture and
Building Society-Sirat; Association for Education, Cultural and to Create SocietySirat; Istikamet; In Siratel.
Addresses
Put Mladih Muslimana 30a
71 000 Sarajevo, BiH
ul. Strossmajerova 72
Zenica, BiH
Muhameda Hadzijahica 42
Sarajevo, BiH
Al-Haramain & Al Masjed Al-Aqsa Charity Foundation
http://www.treas.gov/press/releases/jsl527.htm 5/6/2005
Page 1 of 3
js-1527: Treasury Designates Bosnian Charities Funneling Dollars to Al Qaida
Page 2 of 3
According to information, the Bosnian branch of this entity has significant financial
ties to al Qaida financier Wa'el H a m z a Julaidan w h o w a s designated by the
Treasury Department on September 6, 2002. Al-Haramain & Al Masjed Al-Aqsa
Charity Foundation also provided financial support to Al Furqan.
A.K.A.S
Al Haramain Al Masjed Al Aqsa; Al Haramayn Al Masjid Al Aqsa; Al-Haramayn and
Al Masjid Al Aqsa Charitable Foundation
Address
Hasiba Brankovica No. 2A
Sarajevo, BiH
Taibah International - Bosnia Branch
Information shows this entity has significant ties to GRF, which initially operated in
Bosnia under the auspices of Taibah. A former employee of Taibah International
w a s a m e m b e r of Ayadi Chafiq Bin M u h a m m a d ' s network, w h o w a s designated by
the Treasury Department on October 12, 2001.
A.K.A.s
Taibah International Aid Agency; Taibah International Aid Association; Al Taibah,
Intl.; Taibah International Aide Association
Addresses
Avde Smajlovic 6
Sarajevo, BiH
26 Tabhanska Street
Visoko, BiH
No. 3 Velika Cilna Ulica
Visoko, BiH
No. 26 Tahbanksa Ulica
Sarajevo, BiH
Executive Order 13224 provides means to disrupt the support network for
terrorism. Under this order, the United States government m a y block the assets of
individuals and entities w h o provide support - financial or otherwise - to designated
terrorists and terrorist organizations, w h o are owned or controlled by designated
terrorists, w h o act for or on the behalf of designated terrorists or w h o are otherwise
associated with designated terrorists. Blocking actions are critical to combating the
financing of terrorism.
When a blocking action is put into place, any assets that exist in the U.S. financial
system at the time of the orders are frozen, and U.S. persons are prohibited from
transacting or dealing with individuals and entities w h o are the subject of the
blocking action. Blocking actions serve additional functions as
well, including serving as a deterrent for non-designated parties w h o might
otherwise be willing to finance terrorist activity; exposing terrorist financing "money
trails" that m a y generate leads to previously unknown terrorist cells and financiers;
disrupting terrorist financing networks by encouraging designated terrorist
supporters to disassociate themselves from terrorist activity and renounce their
affiliation with terrorist groups; terminating terrorist cash flows by shutting down the
pipelines used to m o v e terrorist-related assets; forcing terrorists to use alternative,
more costly and higher-risk m e a n s of financing their activities; and engendering
international cooperation and compliance with obligations under U.N. Security
Council Resolutions.
http://www.treas.gov/press/releases/js 1527.htm
5/6/2005
js-1527: Treasury Designates Bosnian Charities Funneling Dollars to Al Qaida
Page 3 of 3
To date, the U.S. and our international partners have designated 368 individuals
and organizations as terrorists and terrorist supporters and have frozen
approximately $139 million and seized more than $60 million in terrorist-related
assets.
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http://www.treas.gov/press/releases/js 1527.htm
5/6/2005
js-1528: Commission for Assistance to a Free C u b a Releases Initial Report
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
May 6, 2004
js-1528
Commission for Assistance to a Free Cuba Releases Initial Report
Snow Commends President Bush's Vision for
Hastening the Day Cuba is Free and Democratic
President Bush and the Commission for Assistance to a Free Cuba released an
initial report today outlining stepped up measures to choke off dollars funneling into
the Castro regime while accelerating the day when Cuba is free.
"This Administration seeks freedom, democracy and prosperity for the Cuban
people," said U.S. Treasury Secretary John Snow. "These efforts will tighten the
regime's access to capital, hastening the end of Castro's reign and weakening the
iron grip he uses to choke-hold and subjugate his people."
Today's report outlined several key efforts to help expedite the day when Castro's
dictatorship no longer controls the freedom-hungry people of Cuba, prepare the
country for a post-Castro, democratic existence and assist the Cuban people in
establishing a free market economy. This framework includes:
a Hastening Cuba's Transition
a Meeting Basic Human Needs in Health, Education, Housing and Human Services
a Establishing Democratic Institutions, Respect for Human Rights, Rule of Law
and National Justice and Reconciliation
a Establishing the Core Institutions of a Free Economy
a Modernizing Infrastructure
a Identifying and Addressing Environmental Degradation
The complete report will be available at http://state.g0v/p/wha/rt/cuba/.
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http://www.treas.gov/press/releases/js 1528.htm
5/6/2005
s-1529: Deputy Assistant Secretary for Financial Education, D a n Iannicola, Jr. A n d the Missouri Societ...
Page 1 ot l
Si
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 7, 2004
js-1529
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. And
the Missouri Society of Certified Public Accountants To T e a m Teach Financial
Education Class at Gotsch Elementary, Affton School District in St. Louis,
Missouri
Deputy Assistant Secretary for Financial Education Dan Iannicola, Jr. will join the
Missouri Society of Certified Public Accountants to team-teach a financial education
class at Gotsch Elementary, Affton School District in St. Louis, Missouri. While in
St. Louis, Deputy Assistant Secretary Iannicola will also present a Certificate of
Recognition to the International Institute of St. Louis for providing financial
education to refugees and new immigrants.
The Missouri Society of Certified Public Accountants, a statewide association
comprised of more than 8,500 CPAs, works with the American Institute of Certified
Public Accountants (AICPA) on various financial education efforts.
WHO: Deputy Assistant Secretary for Financial Education Dan
Iannicola, Jr.
WHAT: Treasury official to team financial education class to 4th
graders at Gotsch Elementary.
WHEN: Monday, May 10, 2004
8:45 a.m. to 10:00 a.m. (CDT)
Media Availability
WHERE: Gotsch Elementary School, Affton School District
8348 S. Laclede Station Rd.
St. Louis, M O 63123
Contact: Missouri Society of Certified Public Accountants
D a w n Martin (314) 997-7966
tp://www.treas.Pov/nress/releases/is 1529.htm
5/31/2005
JS-1530: Deputy Assistant Secretary D a n Iannicola, Jr.<br>Supports Financial Education ... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 6, 2004
JS-1530
Deputy Assistant Secretary Dan Iannicola, Jr.
Supports Financial Education Efforts in Louisiana
Through Financial Education Roundtable
A n d Debt Management Conference in N e w Orleans
Deputy Assistant Secretary for the Office of Financial Education Dan Iannicola, Jr.
today joined a roundtable discussion in N e w Orleans which focused on financial
education initiatives in Louisiana and Mississippi. Educators, financial education
advocates, and government officials discussed strategies for promoting and
providing financial education to adults and children at the local level. While in N e w
Orleans, Mr. Iannicola also delivered remarks about Treasury's goal of giving all
Americans access to financial education at this year's American Association of Debt
Management ( A A D M O ) Spring Conference.
"Providing reliable and sound financial education information is crucial to improving
people's lives and helping them avoid costly mistakes," said Iannicola. "Thanks to
the President's Jobs and Growth Package Americans get to keep more of their own
hard earned money. Though innovative financial education programs Americans
can learn to manage that money better," Iannicola went on to say.
Various educators and financial education advocates from Louisiana and
Mississippi participated in today's roundtable discussion. Participants included Roy
Franc Bass, University of N e w Orleans; Phyllis Cassidy, Good Work Network;
Yvonne Ferguson, Bancorp South, Mississippi Jump$tart; Neil Goslin, National
Center for the Urban Community, Tulane University; Julie McAdory, Consumer
Credit Counseling Services of Greater N e w Orleans; Nia Richard, Consumer Credit
Counseling Services of Greater N e w Orleans; Diane Puderer, Internal Revenue
Service; Inger Richard, Neighborhood Housing Services of N e w Orleans, Inc.;
Jeannette Tucker, Louisiana State University Cooperative Extension Service; Kirk
Tucker; Ken Uffman, Credit Bureau of Baton Rouge, Louisiana Jump$tart Coalition;
Nancy Montoya, Federal Reserve Bank of Atlanta; and Claire Loupe, Federal
Reserve Bank of Atlanta.
AADMO's is the largest trade association in the credit counseling and debt
management industry with over 140 members. The organization's stated mission is
to provide its members and the public with information about the credit and debt
counseling industry. Conference attendees included government officials and
A A D M O members including, debt management organizations, consumer
counselors, personal finance educators, credit and debt information publishers,
debt pooling organizations, debt negotiators, debt adjusters, credit counselors,
consumer lawyers and more.
The Department of the Treasury is a leader in supporting financial education.
Treasury established the Office of Financial Education ("Office") in May 2002. The
Office works to promote access to the financial education tools that can help
Americans make wiser choices in all areas of personal financial management, with
a special emphasis on, saving, credit management, h o m e ownership and retirement
planning. The O F E also coordinates 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. For more information about the Office of Financial
Education visit: www.treas.gov/financialeducation.
http://www.treas.gov/press/releases/js 1530.htm
5/6/2005
JS-1531: Treasury Secretary John S n o w <br>Prepared Remarks to Independent Communi... Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 10, 2004
JS-1531
Treasury Secretary John Snow
Prepared Remarks to Independent Community Bankers
Washington, D C
Thank you so much for having me here today.
It's great to be with a group of lenders who are doing so much for your communities
and for our country.
We are in the midst of a strengthening economic recovery, and access to capital for
things like homeownership and small business start-ups or expansions is critical.
You are playing such an important role in economic growth, and I want to thank you
for that.
I know that your communities appreciate your work as well. Your longstanding
focus on individual customer relationships and in-depth knowledge of local area
credit needs serve your customers well. Of particular importance in achieving major
goals set for us by President Bush, your expertise in local area relationship lending
enables you to provide financial services to various kinds of small businesses and
hard-to-reach customers that might otherwise be overlooked.
And community banks are doing well - according to a recent FDIC study, there
were over 1,200 new community banks and thrifts established since the beginning
of 1992. After accounting for mergers, acquisitions and only four failures, almost
1,100 of these institutions continue to serve their communities today.
So we see that community banks are thriving, and our economy is thriving, too.
The housing industry is very strong, with homeownership at an all-time high, and
this is something to be very proud of, as a nation. N e w h o m e sales surged in
March, rising 8.9 percent to reach a new record high. Also worth noting, housing
starts were up in March, as well as building permits, which are a forward-looking
measure of housing activity.
I'm really pleased with our overall economic health and outlook.
We had wonderful news on Friday that job growth is very strong. In the eighth
straight month of growth, the economy created 288,000 jobs in April, bringing the
total increase since August to more than 1.1 million. The unemployment rate, which
is down substantially from its peak last summer, fell in April and is below the
average of each of the past three decades.
I'm delighted to report that, over the past nine months, we've seen the best growth
in almost 20 years; G D P has been averaging an outstanding annual rate of 5.5
percent over the past three quarters.
Business spending has rebounded. Business and consumer confidence is up.
Consumer confidence increased 4.4 points in April. This means that American
households sense that the job market is strengthening.
One paper today contains the headline, "Higher-Pay Jobs Make a Comeback." The
story makes the point that as the U.S. economy grows stronger, the labor market is
beginning to create better-paying jobs and that signs point to a turnaround
for professional, service and manufacturing work.
http://www.treas.gov/press/releases/js 1531 .htm 5/6/2005
JS-1531: Treasury Secretary John S n o w <br>Prepared Remarks to Independent Communi... Page I ot 5
It's great to see that the manufacturing sector is coming back, because it's an
important source of jobs... and 37,000 manufacturing jobs have been created since
February. Factory orders increased 4.3 percent in March - the biggest increase
since July of 2002. The component for durable goods new orders jumped 5 percent
in March. A manufacturing activity index signaled expansion in April for the eleventh
straight month, remaining near the 20-year high reached in January.
The tide of our economy continues to rise, and there can be no doubt that the
President's tax cuts m a d e the critical difference.
Another note on jobs: we still need more, and they tend come from the smallbusiness sector... and those are your customers!
That's one of the top reasons why we've got to make the tax cuts permanent... we
can't raise taxes on small business at this critical time. They create three out of four
net new jobs.
We can also promote job creation by reducing the burdens of abusive lawsuits and
rising health-care costs. These stifle growth - again, particularly for small
businesses. We've also got to make sure energy is affordable - for businesses and
families.
I know you're working with us to keep small business strong, and I appreciate how
that helps the economy and every American w h o needs a job.
You're also working with us to protect people from identity theft, and to protect
America from terrorists by identifying and cutting off their blood money.
Last year, we were talking about renewing the Fair Credit Reporting Act... and
today we're celebrating it. The work you did to show Congress the importance of
our nation's credit reporting system w a s invaluable.
Thanks to your help on that legislation last year, information to protect consumers
can m o v e faster than identity thieves.
FCRA makes our credit market more robust and available for more Americans, for
people w h o had never been able to get a mortgage before, for young people to
finance their education, to welcome people into the financial mainstream out of the
reach of the loan sharks... so there is much to celebrate about renewing those
national standards.
You're protecting your customers against identity thieves, and you're also helping
protect America against terrorists. So I want to talk first today about the efforts w e
are making in partnership to protect America from those w h o want to harm us.
Out of the horror of September 11 th, 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 community banks have done everything that the Treasury Department
has asked of you during this fight, and I want to personally thank you for your
efforts.
Your compliance with Section 314 of the Patriot Act - which requires everyone to
share information - has been exemplary.
Under our 314 process, law enforcement provides the names of suspected
terrorists or significant money launderers to Treasury's Financial Crimes
Enforcement Network (FinCEN), which reviews 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 are doing it, and our country is safer because of it.
http://www.treas.gov/press/releases/jsl 531 .htm
5/6/2005
JS-1531: Treasury Secretary John S n o w <br>Prepared Remarks to Independent Communi... Page 3 of 3
We understand that the 314 process is an extraordinary tool... it is one that
provides law enforcement with valuable leads to follow the money 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 works best for you in your communities 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 when we're not clear, or
when 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 are a vital part of two markets that are essential to our continuing economic
growth: housing and small business.
As you know, the increase in homeownership and new home construction have
been central components in our economic recovery.
And the American system of homeownership is a pillar of our economy, symbolic of
our national identity and character, the envy of the world.
That's why it's so very important to have a solid regulatory structure and a credible
regulator for the government sponsored entities: Fannie Mae, Freddie M a c and the
Federal H o m e Loan Banks (FHLBs). With their important role helping to fund our
mortgage markets w e need to be sure that they are operating safely, prudently, and
efficiently. W e also want to ensure that G S E s are living up to the highest standards
of corporate responsibility.
The Senate Banking Committee passed GSE reform legislation this year that was
lacking in one critical respect: it would have tied the hands of the new regulator if it
c a m e to the point where a receivership becomes necessary for a G S E . But,
meaningful reform of the housing G S E s remains an important goal of this
administration because w e want to m a k e sure that your hard work, and your
incredible success, is not at risk. Homeownership is too important to all of us to let
that happen.
Thank you again for your partnership, for all you do to promote the greatest
strengths of the American economy: homeownership and small business.
You are financial heroes, and I appreciate the opportunity to speak with you today.
Thank you - have a great meeting.
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http://www.treas.gov/press/releases/js 1531 .htm
5/6/2005
JS-1532: Treasury's Iannicola to Award N e w Market Tax Credit in St. Louis on<br> Tues... Page 1 of 1
PRLSS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
May 10,2004
JS-1532
Treasury's Iannicola to Award New Market Tax Credit in St. Louis on
Tuesday, May 11, 2004
Deputy Assistant Secretary, Dan Iannicola, Jr. will present a $52 million award to
the St. Louis Development Corporation, one of the 62 organizations selected by the
U.S. Department of the Treasury to receive a total of $3.5 billion in tax credit
allocations through the second round of the New Market Tax Credit Program
(NMTC), as recently announced by Secretary John W. Snow. The N M T C program
attracts private-sector capital investment into urban and rural low-income areas to
help finance community development projects, stimulate economic opportunity and
create jobs in the areas that need it most.
St. Louis Development Corporation is the economic development agency for the
city of St. Louis that has formed partnerships to invest in distressed areas of the bistate St. Louis region.
WHO:
Deputy Assistant Secretary, Dan Iannicola, Jr.
WHAT:
Presenting a New Market Tax Credit award to the St. Louis Development
Corporation.
WHEN:
Tuesday, May 11, 2004
10:30 a.m. to 11:00 a.m. C D T
WHERE:
Center for Emerging Technologies
4041 Forest Park Ave.
St. Louis, M O 63108
**Media interested in covering this event should call
Treasury's Office of Public Affairs at 202/622-2960
http://www.treas.gov/press/releases/js 1532.htm
5/6/2005
JS-1533: M a r k J. Warshawsky Assistant Secretary for Economic Policy U.S. Department... Page 1 of 9
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 6, 2004
JS-1533
Mark J. Warshawsky Assistant Secretary for Economic Policy U.S.
Department Of The Treasury Prepared Remarks National Economists Club
Introduction
With the imminent retirement of the Baby Boom generation and rapidly rising health
care costs, our country faces a set of challenges in providing retirement security for
the coming generation of retirees. I would like to discuss with you today in some
detail the challenges w e face, and how the Administration is confronting them.
HSAs
Americans have had very little incentive to plan for, or economize on, health
spending, yet health care is the biggest financing challenge w e face in the long
term. Employer-sponsored health plans often provide extensive health insurance
coverage. However, employer-sponsored retiree health coverage has been
declining. Plus, the Medicare Hospital Trust Fund is now expected to be insolvent
in 2019. Consequently, health care cost growth needs to be moderated, and it is
more important than ever that individuals play an active role in their own health care
decision-making and purchasing.
To help address this problem, Congress passed, and the President signed, the
Medicare Modernization Act of 2003, which makes available Health Savings
Accounts to a large portion of the population. The legislation allows employers or
employees to put money pre-tax into an account of an employee with a highdeductible health plan. These accounts can accumulate interest, and funds can be
withdrawn tax-free to pay for qualified health expenditures. The advantages of
such an account are many:
• It encourages people to save for periods of unexpectedly high health
expenditures, and it is not tied to any one plan or employer and is therefore
portable.
It moves toward giving covered and uncovered health care equitable tax
treatment, reducing the incentive for overinsurance and the accompanying moral
hazard.
It makes health spending more transparent, giving consumers the incentive to
demand efficiency from providers.
• While health insurance premiums can in general not be paid for with HSA funds,
HSAs can be used to pay for C O B R A continuation coverage, reducing the
likelihood of someone having to drop insurance coverage in the event of job
separation.
The account can be used in retirement to pay for Medicare premiums, out-ofpocket expenses, and employee share of employer-sponsored retirement health
care coverage once an individual becomes eligible for Medicare.
Research using data from the RAND Health Insurance Experiment has shown that
HSAs could reduce health care expenditures by 4 percent to 8 percent over a
traditional indemnity plan.
Now that HSAs are law, both the government and employers have some
http://www.treas.gov/press/releases/jsl533.htm
5/6/2005
JS-1533: M a r k J. Warshawsky Assistant Secretary for Economic Policy U.S. Department... Page 2 of 9
implementation issues to deal with. Our Office of Tax Policy is now sorting through
s o m e of the issues. They released s o m e guidance last month detailing h o w
preventive care benefits m a y be exempted from the deductible of a high deductible
health plan. The guidance also provides transition relief for people to use H S A
funds for qualified medical expenses incurred before the establishment of the H S A .
They expect to offer further guidance very soon on whether contributions m a y be
m a d e to an H S A while an individual has a Health Reimbursement Account, or H R A ,
or a Flexible Spending Account, or FSA, and to what extent prior medical
expenditures m a y be reimbursed by an H S A . And in June, they plan to address a
host of other questions that people have raised about H S A s and high deductible
health plans.
Employers are also confronting implementation issues. For those who offer
employees high deductible health plans, they must decide whether they want to
contribute to HSAs, h o w to set the deductibles, and what kind of copayments they
will expect of their employees. They also must decide if high-deductible health
plans combined with H S A s will compete side-by-side with low-deductible plans
giving employees the choice of plans, or whether they will m o v e to exclusively highdeductible plans.
HSAs are an important new choice to people to help control and manage their
health care expenditures in the short and long term.
Long-Term Care
There is one other use of HSA funds that I have not mentioned; they may be used
to pay long-term care insurance premiums. This is useful, because our society is
not prepared to handle the issue of financing care for the elderly disabled. While
the incidence of disability is declining, the growth of the population where disability
is most prevalent is more than offsetting the decreasing disability rates.
Furthermore, like the rest of the health care sector, costs of long-term care services
have been rising.
Medicaid spends $46.4 billion on long-term care services for the elderly, a number
that has increased by 25 percent since 2000. If per capita L T C cost growth
exceeds real G D P growth by 2.5 percent, in other words, stays on the historical
growth path of nursing h o m e cost inflation, federal and state Medicaid spending on
elderly long-term care will jump from under 0.5 percent of G D P in this year to over
2.5 percent of G D P in 80 years—and that assumes reductions in disability rates
continue indefinitely. If that does not sound like a lot to you, think of it this way: total
Medicare outlays are not even 2.5 percent today. The details of our calculation are
included in an Appendix.
And the recent increase in obesity rates, coupled with many people turning to
Medicaid to finance their long-term care needs, m e a n these projections could
understate the financing problem federal and state governments face.
Furthermore, s o m e have claimed that people are incorporating Medicaid into longterm retirement and health care planning. This w a s certainly not the intention of the
program's creators. It is therefore an open question whether eligibility rules should
be tightened or more strongly enforced, and more generally, how to encourage
appropriate long-term planning for long-term care finance.
The Administration would like to encourage people to plan for possible long-term
care needs by improving incentives to purchase long-term care insurance. Right
now, individuals m a y deduct qualified long-term care insurance premiums up to
certain limits, but only if total medical expenses exceed 7.5 percent of adjusted
gross income. The President's 2005 budget requests that individual L T C insurance
premiums be fully deductible. Long-term care insurance will undoubtedly play an
increasing role in the financial security of Americans, and this policy will help that
happen.
Long-term care insurance has been one of my personal research interests for many
years. Together with research colleagues Chris Murtaugh and Brenda Spillman, I
have been working on developing a concept that would m a k e long-term care
insurance more appealing and affordable by combining it with a life annuity. The
insurance product would work this way: In return for a single premium, an
http://www.treas.gov/press/releases/js 1533 .htm
5/6/2005
JS-1533: M a r k J. Warshawsky Assistant Secretary for Economic Policy U.S. Department... Page 3 or y
insurance company would make steady periodic income payments to a retired
household (individual or couple), and would increase them substantially w h e n a
m e m b e r of the household is disabled to an extent that would typically cause extra
expenses for long-term care to be incurred. Empirical research has shown that,
compared to the two components of life annuity and long-term care insurance sold
separately, an integrated product can be offered somewhat more cheaply to
a larger population that importantly includes people in relatively poor health—
individuals w h o currently cannot purchase any long-term care insurance at any
price because they cannot pass through underwriting. These advantages can
occur because the product combines two different risk pools into one population.
A particular advantage of this approach, which is timed for those nearing retirement
and recently retired, is that it does not demand that households m a k e purchase
decisions regarding long-term care insurance early in their life cycle. Early
purchase is the alternative approach advocated by s o m e to get around the
underwriting problem of long-term care insurance sold at older ages.
It is admitted that the life care annuity cannot serve the needs for long-term care
insurance coverage for all populations, especially low-income retired households.
Nevertheless, its potential scope is quite large, including households with all types
of retirement financial assets, including tax-favored forms, and owner-occupied
housing (through reverse mortgages). This innovation could significantly improve
the economic security of most retired households, substantially reduce dependence
on the public means-tested Medicaid welfare and Medicare insurance programs,
and encourage further product innovations. Several variations are possible in
product design, both in the nature of provision of long-term care benefits and in the
income annuity benefits, and in the level of benefits provided. In particular, the
product can be designed to fit into state Medicaid partnership programs.
But there are still a few steps that need to be taken before this product can become
marketable. With m y colleagues in the Treasury's Office of Tax Policy, I a m
exploring the different tax treatments of the product. There are several open
issues, depending on how such a policy is structured, that is, whether it is
structured as two separate products for tax purposes, or whether it is treated as an
annuity for tax purposes. Legislative and regulatory changes m a y be required to
ensure such a product is legal and taxed appropriately. Furthermore, insurance
companies m a y want more experience or protections, such as participating policies,
before they commit themselves to selling long-term care-related policies in which
the entire premium is paid for upfront.
LSAs and RSAs
The Administration is also examining ways to better encourage saving for
retirement and other long-term needs. The current system of IRAs and Roth IRAs
is very complex, subject to rules regarding eligibility, contributions, tax treatment,
and withdrawal. The list of non-retirement exceptions within IRAs, which is
expanding, weakens the focus on retirement saving. The restrictions on
withdrawals for certain purposes discourage individuals from contributing to these
accounts, afraid that they will not have funds to cover unpredictable expenses. The
President has asked Congress to consolidate the different types of IRAs into one
account dedicated solely for retirement, and to create a new account that would
encourage saving, but could also be used for any expenses a taxpayer wanted.
Retirement Savings Accounts, or RSAs, would be dedicated solely to retirement
savings. Individuals would be able to contribute $5,000 per year, indexed to
inflation. In contrast to the current set of IRAs, there would be no income limits on
contributions. Like Roth IRAs, contributions would not be tax deductible, but
earnings would accumulate tax-free and qualified distributions would be excluded
from gross income. Existing IRAs would be rolled over to R S A s .
Like with RSAs, individuals could also contribute up to $5,000 annually to a Lifetime
Savings Account, or LSA. Contributions to LSAs would also have to be in cash,
they would be nondeductible, yet earnings would accumulate tax-free. But unlike
with R S A s , any distributions would be excluded from gross income, regardless of
the individual's age or use of the distribution. Thus, there are no mandates on use
of funds However, because the L S A accumulates earnings tax-free, individuals
would have a strong incentive to leave funds in the account.
By simplifying and enhancing the tax preferences for savings, people will take
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JS-1533: M a r k J. Warshawsky Assistant Secretary for Economic Policy U.S. Department... Page 4 of 9
advantage of the incentives to plan for short- and long-term needs.
Social Security
Any discussion involving financing retirement must touch on the issue of Social
Security. The recently released Social Security Trustees Report shows once again
that the program, as currently structured, is unsustainable. However, the problem
of financing Social Security is fixable. The President has issued three guiding
principles for reforming Social Security:
The program should protect seniors, meaning that retirees and near-retirees
should not face a cut in benefits.
• Personal retirement accounts should be made available, to give individuals
different options to plan for their retirement.
• Reforms should make the program permanently sustainable, so we do not have
to revisit this topic repeatedly, making generation after generation fear that their
retirement will not be funded as promised.
If we keep these sensible principles in mind as we work through reform proposals,
w e should be able to find a solution that will guarantee many generations a secure
retirement.
Fundamental Pension Reform and Measurement Improvements
1. Introduction
I would like to spend the bulk of my discussion here talking about needed reforms
to the private pension system. W e all want to improve the retirement security for
the nation's workers and retirees by strengthening the financial health of the
voluntary defined benefit system that they rely upon. W e believe that with
improvements, the D B system will continue to be a viable and important part of the
American retirement system.
I will discuss the Administration's proposals and ongoing activities aimed at
strengthening the long-term health of the defined benefit pension system and
thereby improving the retirement security of defined benefit pension participants. I
don't think it will c o m e as a surprise to anyone that I, the Treasury Department and
the Administration all believe the ERISA rules can be improved.
What might surprise some of you is that we are actively engaged in developing a
proposal for comprehensive reform of the system. While w e are not ready to unveil
a fully formed proposal for comprehensive reform of the pension funding rules, I can
discuss s o m e of the areas w e are studying and provide what I believe are important
guiding principles for the process.
2. Facts
Some basic facts about the DB system and PBGC's financial health suggest that
w e need to be concerned about the current set of funding rules:
PBGC's single employer plan ended 2003 with a record deficit of $11.2
billion. This deficit is the result of two consecutive years of staggering net losses.
Net loss for 2002 w a s $11.2 billion. Net loss for 2003 w a s $7.6 billion.
PBGC's multiemployer program reported a year end deficit of $261 million.
This is the first deficit in more than 20 years and the largest ever.
In 2003 PBGC absorbed 152 terminated single-employer plans covering
206,000 participants.
Including multi-employer plans, at year-end, PBGC was responsible for the
pensions of more than 930,000 people.
PBGC's single employer plan continues to face significant exposure from
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troubled companies with underfunded plans, particularly in the air transportation
and steel sectors. P B G C estimates that total underfunding in single-employer plans
exceeded $350 billion as of the fiscal year-end. Underfunding in multi-employer
plans is estimated at $100 billion.
This is not a transitory problem: PBGC uses stochastic modeling to evaluate its
exposure and expected claims. The results of this modeling are quite sobering.
The distribution of PBGC's potential 2013 financial position has a median deficit of
$18.7 billion. There is only a 19 percent probability of a surplus of any amount and an equal probability of deficits exceeding $32 billion.
3. Administration's Proposal to Improve the Accuracy and Transparency
of Pension Information
Before discussing comprehensive reform, I would like to briefly discuss the
proposals that the Administration has already put forward in this area. In July 2003,
w e released the Administration's Proposal to Improve the Accuracy and
Transparency of Pension Information. This proposal w a s designed to strengthen
and secure Americans' pension security by:
• Improving the accuracy of the pension liability discount rate;
• Increasing the transparency of pension plan information; and
Strengthening safeguards against pension underfunding.
We have been disappointed that Congress has not acted on the majority of the
proposals w e put forward.
The proposal that has generated the most discussion and debate is our proposal to
use a yield curve based on high-quality corporate bonds to discount pension
liabilities and smoothed over 90 days for the purpose of computing current liability.
To determine minimum required funding contributions, a plan sponsor must
compute the present value of the plan participants' accrued future benefit
payments, which is known as the plan's current liability. The present value of a
benefit payment due during a particular future year is calculated by applying a
discount factor to the dollar amount of that payment. This discount factor converts
the dollar value of the future payment to today's dollars. Current liability is simply
the s u m of all these discounted future payments.
Pension liabilities must be accurately measured to ensure that pension plans are
adequately funded to protect workers' and retirees' benefits and to ensure that
minimum funding rules do not impose unnecessary financial burdens on plan
sponsors. Liability estimates that are too low will lead to plan underfunding,
potentially undermining benefit security. Pension plan liability estimates that are too
high lead to higher than necessary minimum contributions, reducing the likelihood
that sponsors will continue to operate defined benefit plans.
Choosing the right rate is the key to accurate pension discounting. The wrong rate
leads to inaccurate estimates of liabilities that can be either too high or too low.
Therefore, the primary goal of the Administration's proposal to replace the 30-year
Treasury rate can be s u m m e d up in one word: accuracy.
Each pension plan has a unique schedule of future benefit payments - or cash flow
profile that depends on the characteristics of the work force covered by the plan.
In general, plans with more retirees and older workers, more lump s u m payments,
and shrinking workforces will m a k e a higher percentage of their pension payments
in the near future, while plans with younger workers, fewer retirees, fewer lump
sums, and growing workforces will m a k e a higher percentage of payments in later
years.
Current liability computation rule apply the same discount rate to all future
payments regardless of when they occur. This approach produces inaccurate
liability estimates because it ignores a basic reality of financial markets: that the
rate of interest earned on an investment or paid on a loan varies with the length of
time of the investment on the loan. If a consumer goes to a bank to buy a
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Certificate of Deposit, he will expect to receive a higher rate on a five-year CD than
on a one-year C D . Likewise, that s a m e consumer w h o borrows m o n e y to buy a
house expects to pay a higher interest rate for a 30-year than a 15-year mortgage.
Pension discount rates must recognize this simple financial reality which is the main
thrust of our proposal.
Beyond the discount rate, there were two other reform tasks that the Administration
recommended for immediate attention.
First, the transparency of information pertaining to pension plan funding needs to
be increased.
o We propose requiring that each year sponsors disclose to participants the value
of their defined benefit pension plan assets and liabilities measured on both a
current liability and a termination liability basis.
o In addition, we proposed that certain financial data already collected by the PBGC
from companies sponsoring pension plans with more than $50 million of
underfunding should be m a d e public.
• Second, the Administration proposed to restrict benefit increases for certain
underfunded plans whose sponsors are financially troubled. W h e n firms with below
investment grade credit ratings increase pension benefit promises, the costs of
these added benefits stand a good chance of being passed on to the pension
insurance system, frustrating the benefit expectations of workers and retirees and
penalizing employers w h o have adequately funded their plans.
o Under the Administration's proposal, if a plan sponsored by a firm with a below
investment grade credit rating has a funding ratio below 50 percent of termination
liability, benefit improvements would be prohibited, the plan would be frozen (no
accruals resulting from additional service, age or salary growth), and lump s u m
payments would be prohibited unless the employer contributes cash or provides
security to fully fund these added benefits.
o When a plan sponsor files for bankruptcy the PBGC's guarantee limits would also
be frozen.
We felt this was a constructive, forward looking set of proposals that would have
helped ensure P B G C and plan solvency in the short-term, while setting the table for
more fundamental reforms.
4. Fundamental Reform
Making Americans' pensions more secure is a big job that will require
comprehensive reform of the pension system. Americans have a broadly shared
interest in adequate funding of employer-provided defined benefit pensions.
Without adequate funding, the retirement income of America's workers will be
insecure. This by itself is a powerful reason to pursue improvements in our pension
system. At the s a m e time, w e must always be mindful that the defined benefit
pension system is voluntary. Firms offer defined benefit pensions to their workers
as an employee benefit, as a form of compensation. Our pension rules should thus
be structured in ways that encourage, rather than discourage, employer
participation.
Key aspects of the current system frustrate participating employers while also
failing to produce adequate funding. W e thus have multiple incentives to improve
our pension system, and to thus better ensure both the availability and the viability
of worker pensions. W e have begun the hard work needed to create a system that
more clearly and effectively funds pension benefits. W e will develop a pension
system that will be less complex, more flexible, logically consistent, and will achieve
the goal of improving the security of defined benefit plans.
While the Administration continues to consider comprehensive reform measures, I'd
like to discuss s o m e of the goals for reform/principles that underpin m y thinking
about reform and discuss the major areas of pension law that I believe require our
prompt attention. First s o m e starting principles for a reform proposal that:
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Current regime has failed to ensure adequate plan funding. Current
defined benefit (DB) pension funding rules are needlessly complex and fail to
ensure that many pension plans remain prudently funded. The rules attempt to
ensure adequate funding by micromanaging plan behavior.
Funding rules should focus on outcomes not process. The government
has an interest in defining a minimum prudent funding level and m a x i m u m tax
deductible funding. M a n y other funding decisions are best left to plan sponsors.
Sponsors of adequately funded plans should be given m a x i m u m flexibility.
Sponsors of minimally or underfunded plans should be required to take timely
corrective actions.
A successful proposal will center on the use of real incentives to
motivate desired behavior and frees responsible plans from b u r d e n s o m e
regulation.
It m a y be clear to s o m e of you that I a m suggesting a real overhaul of the ERISA
rules m a y be necessary. Let's discuss s o m e general areas of concern that w e are
studying.
1. Funding Targets
W e will seek to develop better, more economically meaningful, funding targets.
Asset Measurement. Under existing rules, assets can be measured as multi-year
averages rather than current values. Pension funding levels can only be set
appropriately if both asset and liability measures are current and accurate. Failure
to accurately measure assets and liabilities contributes to funding volatility.
Liability Measurement. W e also intend to examine how the application of actuarial
assumptions in the current rules m a y contribute to funding volatility and to
inaccurate measurement of pension liabilities. W e will examine:
a. Retirement Assumptions. Retirement assumptions made by plan actuaries
need to reflect the actual retirement behavior of those covered by the plan.
b. Lump Sums. Liability computations for minimum funding purposes need to
include reasonable estimates of expected future lump s u m withdrawals that are
determined by methodologies that are broadly consistent with other estimates of
plan obligations.
c. Mortality. Treasury is in the process of updating mortality assumptions.
2. Funding Path
The current system of funding rules and asset and liability measurement has been
constructed, in part, to dampen the volatility of firms' funding contributions. Yet
current rules fail to do so. After years of making few or no contributions at all, m a n y
firms are facing precipitous increases in their annual funding requirements. This
outcome is frustrating to business and it has failed to provide adequate funding for
workers and retirees. Improvements to funding rules should mitigate volatility,
provide firms with the ability to m a k e more consistent contributions, and increase
flexibility for firms to fund up their plans in good times. Specific issues in the
funding rules that need to be examined include:
a. Contribution Deductibility. Together, minimum funding rules and limits on
m a x i m u m deductible contributions require sponsors to m a n a g e their funds within a
narrow range. Raising the limits on deductible contributions would allow sponsors
to build larger surpluses to provide a better cushion for bad times.
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b. Credit Balances. If a sponsor makes a contribution in any given year that
exceeds the minimum required contribution, the excess plus interest can be
credited against future required contributions. These credit balances mere
accounting entries - do not fall in value even if the assets that back them lose
value. Credit balances allow seriously underfunded plans to avoid making
contributions, often for years, and contribute to funding volatility.
c. Volatility Caused by the Minimum Funding Backstop. The current minimum
funding backstop, known as the deficit reduction contribution, causes minimum
contributions of underfunded plans to be excessively volatile from year to year.
d. New Benefit Restrictions. The current Administration proposal is to restrict
benefit increases for certain underfunded plans whose sponsors are financially
troubled. W e are looking at areas where it m a y be appropriate to expand this
proposal.
e. Benefit Amortization. The amortization period for new benefits can be up to 30
years long. This m a y be excessive. W e will also look at other statutorily defined
amortization periods.
3. Other Issues
a. Extent of Benefit Coverage. It may be advisable to limit or eliminate guarantees
of certain benefits that typically are not funded, such as shutdown benefits.
b. Multi-employer Plan Problems. Multi-employer plans operate under a different
set of rules than single-employer plans. Despite these regulatory differences, the
s a m e principles of accuracy and transparency should apply to multi-employer
plans, and w e will be reviewing the best ways to accomplish this.
c. PBGC Premiums. PBGC's premium structure should be re-examined to see
whether it can better reflect the risk posed by various plans to the pension system
as a whole.
Conclusion
To briefly conclude, we have mounting challenges facing us with our system of
financing retiree health care, long-term care, and pensions. Waiting to deal with
these problems until they become a crisis will sharply limit our options. Because w e
know these problems will only get worse, it is imperative that w e commit ourselves
to addressing them now. I believe the policies I have mentioned today shows the
Administration is committed to addressing these challenges.
Appendix:
The aging U.S. population will create increasing demand for long-term care
services.
• Medicaid is an important source of financing for both institutional and homebased long-term care. For instance, Medicaid funds 49 percent of aggregate
nursing h o m e expenditures.
The CBO projects that in 2004, Medicaid will spend $46.4 billion on long-term
care for the elderly, an increase of 25 percent since 2000.
Even though incidence of disability is declining, price inflation and demographic
changes are likely to increase the federal burden, through the Medicaid program, of
financing long-term care.
• Assuming a continuation of historical rates of decline in disability, as well as
historical cost inflation of long-term care services, Medicaid financing of long-term
care for the elderly will amount to 2.5 percent of G D P in 2082, up from 0.4 percent
of G D P today. This would m a k e it larger, as a share of the economy, then the
entire Medicare program today.
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This projected growth rate could understate what will actually occur. Actual
growth rates will exceed G D P plus 2.5 percentage points if (1) people increasingly
structure their finances so as to rely on Medicaid for long-term care needs; (2) the
obesity epidemic increases disability incidence; or (3) the reduction in fertility rates
leads to increasing reliance on professional services for long-term care.
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PRLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
May 10, 2004
JS-1534
Treasury Announces the Appointment of Art Garcia to Serve As Director of
the Community Development Financial Institutions Fund
Secretary of the Treasury, John W. Snow today announced the appointment of
Arthur A. Garcia to serve as Director of Treasury's Community Development
Financial Institutions Fund.
As Director of the CDFI Fund, Mr. Garcia will oversee the expansion of access to
capital and financial services in critically under-served urban, rural and Native
American communities, where one of the biggest obstacles to economic
development is a lack of access to mainstream sources of private sector capital.
"The Community Development Financial Institution Fund plays an important role in
the Bush's Administration's efforts to encourage economic growth and job creation
in every corner of this nation. Art Garcia's experience and knowledge will be a great
asset as w e continue to pursue these goals," stated Assistant Secretary for
Financial Institutions, W a y n e A. Abernathy.
Mr. Garcia has served as the Administrator of the Rural Housing Service (RHS) at
the U.S. Department of Agriculture since April 2002. Prior to coming to Washington
D.C., Mr. Garcia served on the faculty of both Webster University and the University
of Phoenix and the College of Santa Fe.
In addition, Mr. Garcia was a Lender Manager with Sunwest Bank, and he also
served as Vice President of retail banking at First State Bank in N e w Mexico. Mr.
Garcia has served as President of the Hispanic Bankers Association.
Mr. Garcia is a graduate of New Mexico State University and the School of Banking
at the University of N e w Mexico. H e also received a Masters Degree in Finance
and a Masters of Business Administration from Webster University.
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JS-1535: Treasury Clarifies Interaction O f Health Savings Accounts With Other Employe... Page 1 of 1
PRLSS ROOM
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® Readers.
May 11, 2004
JS-1535
Treasury Clarifies Interaction Of Health Savings Accounts With Other
Employer-Provided Health Reimbursement Plans
Today Treasury and the IRS issued Revenue Ruling 2004-45 which clarifies how
health Flexible Spending Arrangements (FSAs) and Health Reimbursement
Arrangements (HRAs) interact with Health Savings Accounts (HSAs). The
guidance provides a number of ways that individuals may have access to benefits
from FSAs and HRAs and remain eligible to contribute to an HSA.
"Although the statute does not permit individuals to contribute to an HSA while
being covered by general purpose health FSAs and HRAs, the guidance provides
significant flexibility to employers in structuring health reimbursements for
employees," stated Greg Jenner, Acting Assistant Secretary for Tax Policy. In
particular, the ruling states that eligible individuals (who must be covered by a high
deductible health plan (HDHP)) may continue to contribute to an HSA while also
covered by the following types of employer-provided plans that reimburse employee
medical expenses:
• Limited purpose FSAs and HRAs that restrict reimbursements to certain
permitted benefits such as vision, dental, or preventive care benefits.
• Suspended HRAs where the employee has elected to forgo health
reimbursements for the coverage period.
• Post-deductible FSAs or HRAs that only provide reimbursements after the
minimum annual deductible has been satisfied.
• Retirement HRAs that only provide reimbursements after an employee
retires.
"We believe that the ability of employers to allow employees to temporarily suspend
reimbursements from HRAs so they can contribute to an HSA without forfeiting
accumulated H R A benefits provides important transitional relief for employers
adopting high deductible health plans with HSAs," said Mr. Jenner.
The guidance also provides that combinations of these arrangements may also be
provided without disqualifying an individual from contributing to an HSA. In
addition, the ruling clarifies that individuals with coverage by an FSA and an HRA,
as well as an HSA, may reimburse expenses through the FSA or H R A prior to
taking distributions from the HSA, as long the individual does not seek multiple taxfavored reimbursements for the same expense.
REPORTS
• Revenue Ruling 2004-45
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Section 223 - Health Savings Accounts—Interaction with Other Health
Arrangements
Rev. Rul. 2004-45
ISSUE
In the situations described below, may an individual make contributions to a
Health Savings Account (HSA) under section 223 of the Internal Revenue Code if
the individual is covered by a high deductible health plan ( H D H P ) and also
covered by a health flexible spending arrangement (health FSA) or a health
reimbursement arrangement (HRA)?
FACTS
Situation 1. An individual is covered by an H D H P (as defined under section
223(c)(2)(A)). The H D H P has an 80/20 percent coinsurance feature above the
deductible. The individual is also covered by a health F S A under a section 125
cafeteria plan and an H R A that meets the requirements of Notice 2002-45, 20022 C.B. 93. The health F S A and H R A pay or reimburse all section 213(d) medical
expenses that are not covered by the H D H P (such as co-payments, coinsurance,
expenses not covered due to the deductible and other medical expenses not
1
covered by the H D H P ) . The health F S A and H R A coordinate the payment of
benefits under the ordering rules of Notice 2002-45. The individual is not entitled
to benefits under Medicare and may not be claimed as a dependent on another
person's tax return.
Situation 2. Same facts as Situation 1, except that the health FSA and HRA are
limited-purpose arrangements that pay or reimburse, pursuant to the written plan
document, only vision and dental expenses (whether or not the minimum annual
deductible of the HDHP has been satisfied). In addition, the health FSA and
HRA pay or reimburse preventive care benefits as described in Notice 2004-23,
2004-15 I.R.B. 725.
Situation 3. Same facts as Situation 1, except that the individual is not covered
by a health FSA. Under the employer's HRA, the individual elects, before the
beginning of the HRA coverage period, to forgo the payment or reimbursement of
medical expenses incurred during that coverage period. The decision to forgo
the payment or reimbursement of medical expenses does not apply to permitted
insurance, permitted coverage and preventive care ("excepted medical
expenses"). See section 223(c)(1)(B) and Notice 2004-23. Medical expenses
incurred during the suspended HRA coverage period (other than the excepted
medical expenses if otherwise allowed to be paid or reimbursed by an HRA),
cannot be paid or reimbursed by the HRA currently or later (i.e., after the HRA
suspension ends). However, the employer decides to continue to make
2
employer contributions to the H R A during the suspension period and thus the
maximum available amount under the HRA is not affected by the suspension but
is available for the payment or reimbursement of the excepted medical expenses
incurred during the suspension period as well as medical expenses incurred in
later HRA coverage periods.
Situation 4. Same facts as Situation 1, except that the health FSA and HRA are
post-deductible arrangements that only pay or reimburse medical expenses
(including the individual's 20 percent coinsurance responsibility for expenses
above the deductible) after the minimum annual deductible of the HDHP has
been satisfied.
Situation 5. Same facts as Situation 1, except that the individual is not covered
by a health FSA. The employer's HRA is a retirement HRA that only reimburses
those medical expenses incurred after the individual retires.
LAW AND ANALYSIS
Section 223(a) allows a deduction for contributions to an HSA for an "eligible
individuaf for any month during the taxable year. Section 223(c)(1)(A) provides
that an "eligible individual" means, with respect to any month, any individual who
is covered under an HDHP on the first day of such month and is not, while
covered under an HDHP, "covered under any health plan which is not a high
3
deductible health plan, and which provides coverage for any benefit which is
covered under the high deductible health plan."
Section 223(b) provides a limit on amounts that can be contributed to an HSA.
The maximum annual contribution limit for an eligible individual with self-only
coverage is the amount required by section 223(b)(2)(A). The maximum annual
contribution limit for an eligible individual with family coverage is the amount
required by section 223(b)(2)(B).
Section 223(c)(2)(A) defines an HDHP as a health plan that satisfies certain
requirements with respect to minimum annual deductibles and maximum annual
out-of-pocket expenses. Generally, if substantially all of the coverage in a health
plan that is intended to be an HDHP is provided through a health FSA or HRA,
the health plan is not an HDHP.
In addition to coverage under an HDHP, section 223(c)(1)(B) provides that an
eligible individual may have specifically enumerated coverage that is disregarded
for purposes of the deductible. Coverage that may be disregarded includes
"permitted insurance" and other specified coverage ("permitted coverage").
"Permitted insurance" is coverage under which substantially all of the coverage
provided relates to liabilities incurred under workers' compensation laws, tort
liabilities, liabilities relating to ownership or use of property, insurance for a
specified disease or illness, and insurance that pays a fixed amount per day (or
4
other period) of hospitalization. "Permitted coverage" (whether through insurance
or otherwise) is coverage for accidents, disability, dental care, vision care or
long-term care. Section 223(c)(2)(C) also provides a safe harbor for the
absence of a preventive care deductible. See Notice 2004-23.
The legislative history of section 223 explains these provisions by stating that
"eligible individuals for HSAs are individuals who are covered by a high
deductible health plan and no other health plan that is not a high deductible
health plan." The legislative history also explains that, "[a]n individual with other
coverage in addition to a high deductible health plan is still eligible for an HSA if
such other coverage is certain permitted insurance or permitted coverage." H.R.
Conf. Rep. No. 391, 108th Cong., IstSess. 841 (2003).
Section 125(a) states that no amount will be included in the gross income of a
participant in a cafeteria plan solely because, under the plan, the participant may
choose among the benefits of the plan. Section 125(d) defines a cafeteria plan
as a written plan under which participants may choose among two or more
benefits consisting of cash and qualified benefits.
Section 125(f) defines qualified benefits as any benefit not included in the gross
income of the employee by reason of an express provision in the Code.
Qualified benefits include employer-provided accident and health coverage under
section 106, including health FSAs.
5
Notice 2002-45, 2002-2 C.B. 93, describes the tax treatment of H R A s . The
notice explains that an HRA that receives tax-favored treatment is an
arrangement that is paid for solely by the employer and not pursuant to a salary
reduction election under section 125, reimburses the employee for medical care
expenses incurred by the employee and by the employee's spouse and
dependents, and provides reimbursement up to a maximum dollar amount with
any unused portion of that amount at the end of the coverage period carried
forward to subsequent coverage periods.
Notice 2002-45, Part IV, states that if an employer provides an HRA in
conjunction with another accident or health plan and that other plan is provided
pursuant to a salary reduction election under a cafeteria plan, then all the facts
and circumstances are considered in determining whether the salary reduction is
attributable to the HRA. An accident or health plan funded pursuant to salary
reduction is not an HRA and is subject to the rules under section 125.
Under section 223, an eligible individual cannot be covered by a health plan that
is not an HDHP unless that health plan provides permitted insurance, permitted
coverage or preventive care. A health FSA and an HRA are health plans and
constitute other coverage under section 223(c)(1)(A)(ii). Consequently, an
individual who is covered by an HDHP and a health FSA or HRA that pays or
reimburses section 213(d) medical expenses is generally not an eligible
6
individual for the purpose of making contributions to an H S A . S e e Rev. Rul.
2004-38, 2004-15 I.R.B. 717, which holds that an individual who is covered by an
HDHP that does not provide prescription drug coverage and a separate
prescription drug plan or rider that provides benefits before the minimum annual
deductible of the HDHP has been satisfied is not an eligible individual for HSA
purposes.
However, an individual is an eligible individual for the purpose of making
contributions to an HSA for periods the individual is covered under the following
arrangements:
Limited-Purpose Health FSA or HRA. A limited-purpose health FSA that pays or
reimburses benefits for "permitted coverage" (but not through insurance or for
long-term care services) and a limited-purpose HRA that pays or reimburses
benefits for "permitted insurance" (for a specific disease or illness or that
provides a fixed amount per day (or other period) of hospitalization) or "permitted
coverage" (but not for long-term care services). In addition, the limited-purpose
health FSA or HRA may pay or reimburse preventive care benefits. The
individual is an eligible individual for the purpose of making contributions to an
HSA because these benefits may be provided whether or notthe HDHP
deductible has been satisfied.
7
Suspended HRA. A suspended H R A , pursuant to an election m a d e before the
beginning of the HRA coverage period, that does not pay or reimburse, at any
time, any medical expense incurred during the suspension period except
preventive care, permitted insurance and permitted coverage (if otherwise
allowed to be paid or reimbursed by the HRA). The individual is an eligible
individual for the purpose of making contributions to an HSA. When the
suspension period ends, the individual is no longer an eligible individual because
the individual is again entitled to receive payment or reimbursement of section
213(d) medical expenses from the HRA. An individual who does not forgo the
payment or reimbursement of medical expenses incurred during an HRA
coverage period, is not an eligible individual for HSA purposes during that HRA
coverage period.
If an HSA is funded through salary reduction under a cafeteria plan during the
suspension period, the terms of the salary reduction election must indicate that
the salary reduction is used only to pay for the HSA offered in conjunction with
the HRA and not to pay for the HRA itself. Thus, the mere fact that an individual
participates in an HSA funded pursuant to a salary reduction election does not
necessarily result in attributing the salary reduction to the HRA.
Post-Deductible Health FSA or HRA. A post-deductible health FSA or HRA that
does not pay or reimburse any medical expense incurred before the minimum
annual deductible under section 223(c)(2)(A)(i) is satisfied. The individual is an
8
eligible individual for the purpose of making contributions to the H S A . The
deductible for the HRA or health FSA ("other coverage") need not be the same
as the deductible for the HDHP, but in no event may the HDHP or other coverage
provide benefits before the minimum annual deductible under section
223(c)(2)(A)(i) is satisfied. Where the HDHP and the other coverage do not have
identical deductibles, contributions to the HSA are limited to the lower of the
deductibles. In addition, although the deductibles of the HDHP and the other
coverage may be satisfied independently by separate expenses, no benefits may
be paid before the minimum annual deductible under section 223(c)(2)(A)(i) has
been satisfied.
Retirement HRA. A retirement HRA that pays or reimburses only those medical
expenses incurred after retirement (and no expenses incurred before retirement).
In this case, the individual is an eligible individual for the purpose of making
contributions to the HSA before retirement but loses eligibility for coverage
periods when the retirement HRA may pay or reimburse section 213(d) medical
expenses. Thus, after retirement, the individual is no longer an eligible
individual for the purpose of the HSA.
In the arrangements described, the individual does not fail to be an eligible
individual under section 223 and may contribute to an HSA. In addition,
combinations of these arrangements which are consistent with these
requirements would not disqualify an individual from being an eligible individual.
9
For example, if an employer offers a combined post-deductible health F S A and a
limited-purpose health FSA, this would not disqualify an otherwise eligible
individual from contributing to an HSA.
An individual may not be reimbursed for the same medical expense by more than
one plan or arrangement. However, if the individual has available an HSA, a
health FSA and an HRA that pay or reimburse the same medical expense, the
health FSA or the HRA may pay or reimburse the medical expense, subject to
the ordering rules in Notice 2002-45, Part V, so long as the individual certifies to
the employer that the expense has not been reimbursed and that the individual
will not seek reimbursement under any other plan or arrangement covering that
expense (including the HSA).
HOLDINGS
In Situation 1, the individual is covered by an HDHP and by a health FSA and
HRA that pay or reimburse medical expenses incurred before the minimum
annual deductible under section 223(c)(2)(A)(i) has been satisfied. The health
FSA and HRA pay or reimburse medical expenses that are not limited to the
exceptions for permitted insurance, permitted coverage or preventive care. As a
result, the individual is not an eligible individual for the purpose of making
contributions to an HSA. This result is the same if the individual is covered by a
10
health F S A or H R A sponsored by the employer of the individual's spouse. See,
Rev. Rul. 2004-38.
In Situation 2, the individual is covered by an HDHP and by a health FSA and
HRA that pay or reimburse medical expenses incurred before the minimum
annual deductible under section 223(c)(2)(A)(i) has been satisfied. However, the
medical expenses paid or reimbursed by the health FSA and HRA include only
vision and dental benefits (which are permitted coverage) and preventive care.
All of these benefits may be covered as a separate health plan, as a separate or
optional rider, or as part of the HDHP and whether or not the minimum annual
deductible under section 223(c)(2)(A)(i) has been satisfied. The individual is an
eligible individual for the purpose of making contributions to an HSA.
In Situation 3, the individual elects to forgo the payment or reimbursement of
medical expenses incurred during an HRA coverage period. The suspension of
payments and reimbursements by the HRA does not apply to permitted
insurance, permitted coverage and preventive care (if otherwise allowed to be
paid or reimbursed by the HRA). The individual is an eligible individual for the
purpose of making contributions to an HSA until the suspension period ends and
the individual is again entitled to receive, from the HRA, payments or
reimbursements of section 213(d) medical expenses incurred after the
suspension period.
11
In Situation 4, the health F S A and H R A payor reimburse medical expenses
(including the 20 percent coinsurance not otherwise covered by the HDHP) only
after the HDHP's minimum annual deductible has been satisfied. The individual
is an eligible individual for the purpose of making contributions to an HSA.
In Situation 5, the HRA is a retirement HRA that only pays or reimburses medical
expenses incurred after the individual retires. The individual is an eligible
individual for the purpose of making contributions to an HSA before retirement
because the HRA will pay or reimburse only medical expenses incurred after
retirement.
DRAFTING INFORMATION
The principal author of this notice is Shoshanna Tanner of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this notice contact Ms. Tanner on (202) 622-6080
(not a toll-free call).
12
T
S-1536:I)eput7ASstant Secretary for Financial Education, D a n Iannicola, Jr. Today Pr... Page 1 of 1
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 11,2004
JS-1536
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. Today
Presented $52 Million N e w Market Tax Credit Award to St. Louis Development
Corporation in St. Louis, Missouri
Deputy Assistant Secretary, Dan Iannicola, Jr. today presented a $52 million award
to the St. Louis Development Corporation, one of the 62 organizations selected by
the U.S. Department of the Treasury to receive a total of $3.5 billion in tax credit
allocations through the second round of the N e w Market Tax Credit Program
(NMTC), as recently announced by Secretary John W . Snow. St. Louis
Development Corporation is the economic development agency for the city of St.
Louis that has formed partnerships to invest in distressed areas of the bi-state St.
Louis region.
"President Bush's support of the New Market Tax Credit awards demonstrates a
clear commitment to provide renewed economic opportunity and prosperity,
especially to many hard-hit areas," said Iannicola."
The NMTC program attracts private-sector capital investment into urban and rural
low-income areas to help finance community development projects, stimulate
economic opportunity and create jobs in the areas that need it most. The program
was established by Congress in December 2000, and permits individual and
corporate taxpayers to receive a credit against federal income taxes for making
qualified equity investments in investment vehicles known as Community
Development Entities (CDEs). Substantially all of the taxpayer's investment must in
turn be used by the C D E to make qualified investments supporting certain business
activities in low-income communities. The credit provided to the investor totals 39
percent of the initial value of the investment and is claimed over a seven-year credit
allowance period.
St. Louis Development Center anticipates using the NMTC allocation to attract
capital for business lending, equity investments in emerging business operations,
patient capital for site assembly, gap financing for real estate development, and
major project funding. The N M T C financing will offer nontraditional rates and terms,
which will be targeted to highly distressed areas of the St. Louis region.
The NMTC Program is administered by Treasury's Community Development
Financial Institutions (CDFI) Fund. The CDFI anticipates that applications for the
third round of the N M T C Program will be available during the summer of 2004.
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PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 11, 2004
JS-1537
Remarks Of Treasury Deputy Assistant Secretary Dan Iannicola Jr., To Award
A $52 Million N e w Market Tax Credit Award In St. Louis, Missouri
It is great to be here with all of you
Today is a great day for St. Louis. It is a great day for me, too. Because as a native
St. Louisan I a m just as happy to present these tax credits to Mayor Slay as he is to
receive them.
Having been here for most of the last 30 plus years I've had a chance, like you, to
see the past efforts to redevelop the area. We've seen the struggles and the
triumphs, experienced hopes and the disappointment.
But lately it seems that more projects than usual are coming together and that the
redevelopment efforts are really paying off.
And I believe a big part of this new trend is that is that the entire region has reached
the conclusion that when it comes to the future of this area, the city is not just
important, it's essential.
The St. Louis Metropolitan Area will never be better nor worse than its urban core.
For with it, goes the fate of the region. It is, both literally and figuratively, at the
center of everything.
We've always known that, today we're doing something about it.
So whether you're from Ellisville or Edwardsville or whether you're from St. Peter's
or Arnold today's announcement is good news.
And for those waiting for St. Louis to finally realize its promising future, we have an
announcement to make: the future is now.
With exciting re-development projects taking place along Washington Avenue,
in mid-town, at the new ball park site, and in many historic neighborhoods, St. Louis
is on the move.
No one can deny that momentum is growing or that this city's efforts are reaching
critical mass.
And Secretary Snow and the Department of Treasury are pleased to be part of St.
Louis' urban renewal. The N e w Markets Tax Credit is an important tool for
community and economic development. T w o of the reasons the tax credit program
works is because it brings in private sector funds and because it permits flexibility at
the local level.
Private sector involvement is key. The goal of the tax credit is to attract capital from
these private sources. That's because private sector money can make a strong
impact on a community and can lead to the type of sustainable growth that will
create a positive ripple throughout a neighborhood.
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Allowing flexibility at the local level is also important. Because when it comes to
issues like community development, decisions should be made, not by distant
regulators, but by local decision-makers.
The people in this room today, more than anyone else, know how best to help their
communities.
They know, by name and by need, the projects that will have the biggest impact on
St. Louisans and their region. Tying local control to this local knowledge base is an
essential part of the program.
The main idea behind the New Markets Tax Credit, and President's support of it, is
that private industry working with local community organizations can bring
development, can bring prosperity, can bring hope to every neighborhood, in every
zip code in every city.
The tax credits we present today will encourage job creation and business
investment in communities that need it most. It is part of President Bush's vision for
a vibrant, growing economy that provides opportunity for all w h o seek it.
And that's why I'm here today. To congratulate you on this accomplishment,
To encourage you to continue your aggressive efforts in job creation and
community redevelopment
And to help you tell the world that St. Louis is a great place to live, to work, to invest
and to do business.
Thank you.
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 11,2004
JS-1538
Treasury Designates Commercial Bank of Syria as Financial Institution of
Primary Money Laundering Concern
311 Action Comes on the Heels of President Bush's Declaration of National
Emergency With Respect to Syria
The U.S. Department of the Treasury today designated the Commercial Bank of
Syria (CBS), along with its subsidiary Syrian Lebanese Commercial Bank, as a
financial institution of "primary money laundering concern," pursuant to Section 311
of the USA PATRIOT Act.
"Todaywe areusing the authority granted by Congress under Section 311 of the
PATRIOT Act to help protect theU.S. financial system against rogue financial
institutions," saidJuan Zarate, the Treasury Department's Deputy Assistant
Secretary for the Executive Office for Terrorist Financing and Financial Crimes.
"Thefinancial communityaround the worldis now on notice that thisbankpresents a
risk oftainted financial activity thatmust be addressed."
Information garnered shows CBS had been used by terrorists and their
sympathizers and acted as a conduit for the laundering of proceeds generated from
the illicit sale of Iraqi oil. Specifically more than $1 billion was illegally diverted by
Saddam Hussein's regime from the U.N.'s Oil for Food (OFF) program, and s o m e of
these proceeds flowed through accounts at C B S .
The Government of Syria also has not taken steps to transfer the CBS accounts
containing the proceeds generated from the illicit sale of Iraqi oil to the
Development Fund for Iraq (DFI), as required under U.N. Security Council
Resolution ( U N S C R ) 1483. Finally, numerous transactions that may be indicative of
terrorist financing and money laundering have been transferred through C B S ,
includingtwoaccounts at C B S thatreferencea reputed financier for U s a m a bin
Laden.
In conjunction with this designation, Treasury is sending to the Federal Register a
notice of proposed rulemaking that would prohibit any U.S. bank, broker-dealer,
futures commission merchant, introducing broker or mutual fund from opening or
maintaining a correspondent account for or on behalf of C B S . Correspondent
accounts involving C B S would have to be terminated without exception. This
special measure, which is the most severe measure that can be imposed through
Section 311, m a y be imposed only through the issuance of a regulation.
CBS, based in Damascus, Syria, maintains approximately 50 branches and
employs about 4,500 persons. C B S was established in Syria in 1967 as the single,
government-owned bank specializing in servicing foreign trade and commercial
banking, including foreign exchange transactions. C B S maintains correspondent
accounts with banks in countries all over the world, including the United States.
C B S has one subsidiary, Syrian Lebanese Commercial Bank, located in Beirut,
Lebanon, of which C B S maintains approximately an 84 percent ownership interest.
Syrian Lebanese Commercial Bank has two branches and two offices - its main
branch in Beirut, a branch in Moussaitbeh and representative offices in Aleppo and
Damascus, Syria. Syrian Lebanese Commercial Bank also maintains
correspondent accounts with a few banks in the United States.
Title III of the PATRIOT Act amends the anti-money laundering provisions of the
Bank Secrecy Act (BSA) to promote the prevention, detection and prosecution of
international money laundering and the financing of terrorism. Section 311
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JS-15 3^TTreasuryDesignates Commercial Bank of Syria as Financial Institution of Prim...
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authorizes the Secretary of the Treasury - in consultation with DO J, the State
Department and appropriate Federal financial regulators - to designate a foreign
jurisdiction, institution, class of transactions or type of account to be of "primary
m o n e y laundering concern" and to require U.S. financial institutions to take certain
"special measures" against the designee.
These special measures range from enhanced recordkeeping or reporting
obligations to a requirement to terminate correspondent banking relationships with
the designated entity. The measures are meant to provide Treasury with a range of
options to most effectively target specific money laundering and terrorist financing
In additional action against Syria today, President George W. Bush signed an
Executive Order declaring a national emergency with respect to Syria, authorizing
the Department of the Treasury to block the property of certain persons and
directing other U.S. Government agencies to impose a ban on exports to Syria.
This action is in response to the Syrian government's continued support of
international terrorism, sustained occupation of Lebanon, pursuit of weapons of
m a s s destruction and missile programs and undermining of U.S. and international
efforts in Iraq. Syria's acts threaten the national security, foreign policy and
economy of the United States.
The sanctions are imposed under the International Emergency Economic Powers
Act (IEEPA), the National Emergencies Act, the Syria Accountability and
Sovereignty Restoration Act of 2003 (SAA) and the United States Code.
Lebanese
Today's executive order imposes the following sanctions on Syria:
• Authorizesthe U.S. Department of the Treasury to designateindividuals and
entities contributing totheGovernment of Syria's problematic behavior. This
action would subject designees tosanctions that willblock their property and
property interestsand prohibit U.S. persons fromengaging in financial
transactions withthem.
• Prohibits exports and reexports to Syria of most goods, excluding food and
medicine. The export ban will primarily be implemented by the U.S.
Department of Commerce, which will license the export of limited categories
of goods pursuant to the President's exercising of partial waivers of the
SAA.
• Prohibits commercial air services between the United States and Syria by
Syria-owned and controlled aircraft. Certain non-traffic stops by such aircraft
are also prohibited. The flight ban will be implemented by the U.S.
Department of Transportation.
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JS-1539? Testimony of Daniel L. Glaser Director, Executive Office For Terrorist Financin... Page 1 of 5
m
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 11, 2004
JS-1539
Testimony of Daniel L. Glaser Director, Executive Office For Terrorist
Financing and Financial Crime U.S. Department of the Treasury Before the
House Government Reform Subcommittee on Criminal Justice, Drug Policy
and H u m a n Resources
As you will hear from this panel — and as we and the Department of Justice reaffirmed in our publication of the National Money Laundering Strategy of 2003
{2003 Strategy) last fall — the campaign against terrorist financing and money
laundering forms an essential component of our national security strategy. Since
September 11th, w e have leveraged the relationships, resources, authorities, and
expertise that w e have acquired over the past several years in combating money
laundering to attack terrorist financing. Our efforts in both arenas are
complementary and are effecting the changes required to protect the integrity of our
financial systems by identifying, disrupting and dismantling sources, flows, and
uses of tainted capital within those systems.
I. Treasury's Role in Combating Financial Crime
Sanctions and Administrative Powers: Treasury wields a broad range of powerful
economic sanctions and administrative powers to attack various forms of financial
crime. W e have continued to use these authorities in the campaign against terrorist
financing, drug trafficking, money laundering and other criminal financial activity.
• In combating terrorism financing, the U.S. government's primary and most
public tool is the ability of the Departments of the Treasury and State to
designate terrorist financiers and terrorists under Executive Order (E.O.)
13224, together with Treasury's ability to implement orders that freeze the
assets of terrorists under E.O. 13224.
• In combating drug trafficking, Treasury continues to apply its authorities
under the Foreign Narcotics Kingpin Designation Act and the International
Emergency Economic Powers Act (IEEPA) to administer and enforce the
provisions of law relating to the identification and sanctioning of major
foreign narcotics traffickers.
• In combating money laundering, Treasury has applied its new authority
under Section 311 of the U S A PATRIOT Act ("Patriot Act") to designate and
take action against jurisdictions and financial institutions of primary money
laundering concern.
Financial Regulation and Supervision: The Treasury Department - through
FinCEN's administration of the Bank Secrecy Act as amended by Title III of the
Patriot Act - is responsible for establishing the U.S. AML/CFT regime by issuing the
regulations intended to safeguard U.S. financial institutions from abuse by terrorists,
narcotics traffickers, and other organized criminals. Treasury further maintains
close contact with the federal financial supervisors - including the Treasury
Department's Office of the Comptroller of the Currency and Office of Thrift
Supervision - to ensure that these regulations are being implemented throughout
the financial sectors.
Private Sector Outreach: As a result of our traditional role in safeguarding the
financial system, Treasury has developed a unique partnership with the private
sector that provides us with the benefits of the insights and suggestions of the
financial institutions that are in many ways the front-line in our war against money
laundering and terrorist financing. Through such mechanisms as the Bank Secrecy
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Act Advisory Group, Treasury ensures that the private sector plays an appropriate
role in the development of A M L / C F T regulatory policy and receives appropriate
feedback from the information it provides.
TFI will enhance the Treasury Department's ability to meet our own mission and to
work cooperatively with our partners in the law enforcement and intelligence
communities. The Department of the Treasury is committed to complementing, but
not duplicating, the important work being done by the Department of Justice and
Department of Homeland Security, and by the various intelligence agencies, and
will be fully integrated into already established task forces and processes.
This is why we are committed to "targeting the money" from a systemic approach.
W e believe that resources devoted to fighting money laundering and financial
crimes through a systemic approach reap benefits far beyond merely addressing
the underlying financial crimes they directly target. W h e n applied on a systemic
basis, targeting the money can identify and attack all kinds of activity, including the
financing of terrorism, narcotics trafficking, securities fraud, alien smuggling,
organized crime, and public corruption. Financial investigations lead to those w h o
are committing the underlying financial crimes, as well as to those financial
professionals w h o facilitate the criminal activity.
The terrorism we are fighting generally operates through complex networks. In this
context, a terrorist act, no matter h o w basic and inexpensive, cannot be
accomplished without a sophisticated financial and operational infrastructure.
Terrorist organizations such as al Qaida and H a m a s require a financial and
operational infrastructure. They must pay for the security of "safe havens," financial
support for the families of "martyrs," recruitment, indoctrination, logistical support,
and personnel training. This doesn't even get into the costs of ostensibly
humanitarian efforts - charitable organizations, medical clinics and schools - that
are either created as fronts for terrorism or to win support and recruits. Finally,
there is the cost of weapons. In short, the horrific results of terrorism require the
raising, movement and use of considerable funds. The terrorist leaves identifiable
and traceable footprints in the global financial systems, and these footprints must
be pursued "downstream" to identify future perpetrators and facilitators, and
"upstream" to identify funding sources and to dismantle supporting entities and
individuals.
The U.S. Government has led an international coalition to disrupt, dismantle, and
destroy the sources and pipelines from and through which terrorists receive
money. Under Executive Order 13224, w e have designated a total of 361
individuals and entities, as well as frozen or seized approximately $200 million of
terrorist-related funds worldwide. The impact of these actions goes beyond the
amount of m o n e y frozen. Public designation and asset blocking choke off terrorist
cash flows by cutting off access to the U.S. and other financial systems and also
provide access to further intelligence. Designations under E.O. 13224 in the past
year include the following:
• Ten al Qaida loyalists related to the Armed Islamic Group (GIA) on March 18
• Shaykh Abd Al-Zindani (al Qaida-related) on February 24, 2004
• Four branches of the Al Haramain Islamic Foundation (al Qaida-related) on
January 22, 2004);
• Abu Ghaith (al Qaida-related) on January 16, 2004;
• Dawood Ibrahim (al Qaida-related) on October 17, 2003;
• Al Akhtar Trust International (al Qaida-related) on October 14, 2003;
• Abu Musa'ab Al-Zarqawi (al Qaida-related) on September 24, 2003;
• Yassin Sywal, Mukhlis Yunos, Imam Samudra, Huda bin Abdul Haq,
Parlindungan Siregar, Julkipli Salamuddin, Aris Munandar, Fathur R o h m a n A 1 Ghozi, Agus Dwikarna, and Abdul Hakim Murad (members of Jemaah Islamiyah)
on September 5, 2003;
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• Sheik Ahmed Yassin (Gaza), Imad Khalil Al-Alami (Syria), Usama Hamdan
(Lebanon), Khalid Mishaal (Syria), Musa Abu Marzouk (Syna), and Abdel Aziz
Rantisi (Gaza) (Hamas political leaders) on August 22, 2003;
• Comite de Bienfaisance et de Secours aux Palestiniens (France), Association de
Secours Palestinien (Switzerland), Interpal (UK), Palestinian Association in Austria,
and the Sanibil Association for Relief and Development (Lebanon) (all H a m a s related charities) on August 22, 2003;
• The National Council of Resistance of Iran (including its U.S. representative
office and all other offices worldwide) and the People's Mujahedin Organization of
Iran (including its U.S. press office and all other offices worldwide) on August 15,
2003;
• Shamil Basayev (al Qaida-related) on August 8, 2003; and
• The Al-Aqsa International Foundation (Hamas-related) on May 29, 2003.
Together with the State and Justice Departments and other agencies, we are
following-up on these designations by using our diplomatic resources and regional
and multilateral engagements to ensure international cooperation, collaboration and
capability in designating these and other terrorist-related parties through the United
Nations and around the world.
• Important financial networks - such as those of al Barakaat and parts of the
Al Haramain Islamic Foundation - have been identified and shut down at
h o m e and abroad. The U A E and Somalia-based al Barakaat network had
been used to funnel potentially millions of dollars annually to al Qaida and
its affiliates.
• We have worked with counterparts in important allies such as Saudi Arabia
to ensure that key terrorist financiers and facilitators have had their assets
frozen and/or have been arrested or otherwise addressed through the
international community's concerted law enforcement efforts. Included in
this category are Saudi millionaires Yasin al-Qadi and Wa'el H a m z a
Julaidan, Swift Sword, and Bin Laden's Yemeni spiritual advisor, Shaykh
Abd-Al-Zindani,
• The U.S. has also taken significant actions against non-al Qaida linked
terrorist organizations such as H A M A S and the Basque terrorist group, ETA.
O n December 4, 2001, President Bush issued an order to freeze the assets
of a U.S.-based foundation - The Holy Land Foundation for Relief and
Development - along with two other H A M A S financiers, Beit al Mai and the
Al Aqsa Islamic Bank. Six leaders of H a m a s and six charities in Europe and
the Middle East that support H a m a s were subsequently designated in M a y
and August 2003. In partnership with our E U allies, the U.S. designated 31
E T A operatives and one organization that supports ETA.
• FinCEN has made 342 proactive case referrals to law enforcement
potentially involving terrorism based upon analysis of information in the
Bank Secrecy Act database. The Terror Hotline established by FinCEN has
resulted in 853 tips passed on to law enforcement since 9/11. FinCEN is
also implementing an Electronic Reports program that will further enhance
law enforcement's ability to utilize this information. Additionally, with the
expansion of the Suspicious Activity Report (SAR) regime, as of April 28,
2004, financial institutions nationwide have filed 4,294 S A R s reporting
possible terrorist financing directly to FinCEN, includingl ,866 S A R S in
which terrorist financing represented a primary suspicion. This has further
enhanced our efforts to identify and vigorously investigate terrorist financing
webs and dismantle them.
• We have developed the use of technology to identify possible sources of
terrorist financing, particularly through the pilot counterterrorism project
undertaken by IRS-CI in Garden City, N e w York. The Garden City
Counterterrorism Lead Development Center is dedicated to providing
research and nationwide project support to IRS-CI and the Joint Terrorism
Task Force (JTTF) counterterrorism financing investigations. Relying on
modern technology, the Center is comprised of a staff of IRS Special
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Agents, Intelligence Analysts, and civil components from the Service's Tax
Exempt/Government Entities Operating Division, w h o will research leads
and field office inquiries concerning terrorism investigations. Center
personnel specializing in terrorism issues will develop case knowledge,
identify trends, and provide comprehensive data reports to IRS field agents
assigned to JTTFs or to those conducting CI counterterrorism financing
investigations. The Center m a y also serve to de-conflict related
investigations a m o n g multiple field offices, and will have distinctive
analytical capabilities to include link analysis, data matching, and pro-active
data modeling. Using data from tax-exempt organizations and other taxrelated information that is protected by strict disclosure laws, the Center will
analyze information not available to or captured by other law enforcement
agencies. Thus, a complete analysis of all financial data will be performed
by the Center and disseminated for further investigation. This research,
technology, and intuitive modeling, coupled with CI's financial expertise, are
maximizing IRS-CIs impact against sophisticated terrorist organizations.
• The U.S. has identified 24 countries as priorities for receiving counterterrorist financing technical assistance and training, and w e are working
bilaterally to deliver such assistance to these priority countries. The U.S. is
also working together with its allies in the Counter-Terrorism Action Group
( C T A G ) and the Financial Action Task Force (FATF) to coordinate bilateral
and international technical assistance efforts to additional priority countries
in the campaign against terrorist financing.
• The U.S. has enlisted the active support of international bodies, such as the
G-7, G-10, G-20, the Asia-Pacific Economic Cooperation Forum (APEC),
and others — to m a k e efforts against terrorist financing a priority for their
members. The G 7 , G20, A P E C , Western Hemisphere Finance Ministers
( W H F M ) , A S E A N Regional Forum (ARF), and O S C E have all issued action
plans calling on their members to take a series of concrete measures to
enhance the effectiveness of their counter-terrorist financing regimes.
• Our systemic efforts and targeted designations, together with USG law
enforcement, diplomatic, intelligence and military actions, have deterred
potential terrorist supporters and sympathizers by increasing the cost and
the risk of doing business with terrorists.
B. Drug Trafficking
Treasury, in conjunction with the Departments of Justice, State and Homeland
Security, enforces the IEEPA narcotics sanctions against Colombian drug cartels
under Executive Order 12978. The objectives of the Specially Designated Narcotics
Traffickers ( S D N T ) program are to identify, expose, isolate and incapacitate the
businesses and agents of certain specified Colombian drug cartels and to deny
them access to the U.S. financial system and to the benefits of trade and
transactions involving U.S. businesses and individuals. Targets are identified in
consultation with the Drug Enforcement Administration and the Narcotics and
Dangerous Drug Section of the Department of Justice. Since the inception of the
S D N T program in October 1995, 956 parties have been identified as S D N T s ,
consisting of 14 Colombian drug cartel leaders, 381 businesses and 561 other
individuals.
Treasury also implements the President's sanctions under the Foreign Narcotics
Kingpin Designation Act ("Kingpin Act"). The Kingpin Act, enacted in December
1999, operates on a global scale and authorizes the President to deny significant
foreign narcotics traffickers, and their related businesses and operatives, access to
the U.S. financial system and all trade and transactions involving U.S. companies
and individuals. During 2003, the President named seven new kingpins, including
two designated foreign terrorist organizations - Revolutionary Armed Forces of
Colombia and United Self-Defense Forces of Colombia - and a Burmese narcotrafficking ethnic guerilla army, bringing the total number designated to 38.
Another weapon that the U.S. uses against narco-traffickers and money launderers
is seizure and confiscation. In fiscal year 2003, Treasury's Executive Office for
Asset Forfeiture ( T E O A F ) received over S 234 million in forfeiture revenue from the
combined efforts of the former Bureau of Alcohol, Tobacco Firearms and
Explosives, the U.S. Secret Service (USSS), the Internal Revenue Service (IRS),
and the former U.S. Customs Service (USCS). This represents a significant
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increase over fiscal year 2002, in which TEOAF received over $152 million of
forfeiture revenue. This improvement is particularly impressive w h e n considering
the transition undertaken by three of these law enforcement bureaus in the
government reorganization last year.
III. Enhancing Interagency Coordination
Despite considerable progress achieved, several important challenges remain in
the campaign against terrorist financing and m o n e y laundering. W e have identified
a number of priorities to advance our long-term and short-term goals as described
above and in the 2003 Strategy.
In addition to setting standards, we are facilitating compliance with existing
international standards through terrorist financing technical assistance to priority
countries, both bilaterally and through a coordinated international effort.
Internationally, w e anticipate completing technical needs assessments of priority
countries through the F A T F within the next few months. Thereafter, w e will work
with the State Department in coordinating the delivery of appropriate assistance to
these countries through the C T A G . Bilaterally, w e will continue to work with the
State Department and the interagency community to ensure that those countries
targeted for bilateral assistance receive it as planned.
Another priority is engaging the Middle East as a priority in promoting greater
transparency and understanding of regional financial systems and regional m o n e y
laundering and terrorist financing threats. W e are working with the World Bank,
other organizations and states, and the countries in the region to facilitate
development of a FATF-style regional body for the Middle East and North Africa,
and anticipate the launch of this organization by the end of 2004. In addition, w e
are participating in a number of ongoing training and outreach seminars with
government officials in the region on anti-money laundering and counter-terrorist
financing issues, including in the United Arab Emirates and Lebanon, and are
exploring the continued study of terrorist financing and drug trafficking connections
with countries in that region.
To exploit these existing and developing transparencies, we must also advance our
short-term strategy by enhancing our ability to identify, disrupt and dismantle
terrorist and criminal organizations. W e are pursuing a number of priorities, both
domestically and internationally, to advance this goal.
Internationally, we are focusing our efforts on achieving greater European
cooperation and support for our terrorist financing designations. W e are capitalizing
on our progress in improving and clarifying international standards for freezing
terrorist-related assets under F A T F Special Recommendation III by: (i) pursuing
bilateral and multilateral efforts to reform the E U Clearinghouse process, and (ii)
encouraging national implementation of U N m e m b e r state obligations under United
Nations' Security Council Resolution 1373.
I will be happy to answer any questions you may have.
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js-1540: Treasury Secretary S n o w Statement on <br>Senate Passage of FSC/ETI Legislat... Page
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 11,2004
js-1540
Treasury Secretary Snow Statement on
Senate Passage of FSC/ETI Legislation
I would like to thank the Senate for taking action to move the FSC/ETI process
forward to avoid sanctions. Passing the FSC/ETI legislation is an important step
toward ending the burden of the tariffs currently being imposed on U.S. exports
under the W T O sanctions. W e will continue our efforts to work with Congress to
ensure that legislation is signed into law that will help us comply with our W T O
obligations, is as close to budget neutral as possible, and will strengthen our
economy and help manufacturers and other job creators. W e want to increase the
ability of American companies to succeed in a worldwide economy and lay the
foundation for increased growth and job creation for American workers.
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5/6/2005
js-1541: Treasury Department N a m e s Kimberly Reed <br> as Senior Advisor to the Secretary
Page 1 of 1
iWlllllllIMIIllHMl^BI
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
May 12, 2004
js-1541
Treasury Department Names Kimberly Reed
as Senior Advisor to the Secretary
The Treasury Department today announced that Kimberly A. Reed, Esq. has been
appointed as Senior Advisor to the Secretary. She began her new post this week,
and brings extensive experience to the position.
As the Senior Advisor to the Secretary, Ms. Reed will provide advice to the
Secretary of the Treasury and the Chief of Staff on issues pertaining to both policy
and departmental operations.
Ms. Reed most recently served as Professional Staff for the U.S. House of
Representatives' Committee on W a y s and Means Oversight Subcommittee. She
has worked for the U.S. House for most of her career, also holding positions as
Counsel to the Committee on Government Reform and, prior to that, as Counsel to
the Committee on Education and the Workforce Oversight and Investigations
Subcommittee.
Ms. Reed received a dual Bachelor's degree in Biology and Government from West
Virginia Wesleyan College, and a Juris Doctor's degree from West Virginia
University College of Law. She originally is from Buckhannon, W V .
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•tp://www.treas trnv/nress/releases/is 1541 .htm
5/31/2005
js-1542: Oklahoma Makes Federal Health Coverage Tax Credit Available
Pa
S e *of
PRESS R O O M
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 12, 2004
js-1542
Oklahoma Makes Federal Health Coverage Tax Credit Available
Today, Treasury Secretary John Snow applauded Governor Henry for signing
legislation that allows Oklahoma's high risk pool available to those eligible for the
Health Coverage Tax Credit Program (HCTC). The program will help cover the cost
of health insurance premiums for many Oklahoma residents.
"I would like to thank the Republicans and Democrats in the legislature who voted
for this legislation and Governor Henry for signing it," stated Treasury Secretary
John Snow. "I would also like to thank Insurance Commissioner Carroll Fisher,
Employment Security Commissioner Jon Brock and other interested parties in
Oklahoma w h o have worked so hard to make the Health Coverage Tax Credit
program available to over 3,000 workers and their families. I commend them for
their leadership in enacting legislation that makes the state's high risk pool available
to those eligible for T A A benefits. The H C T C program is a real innovation in tax
policy, one that w e hope will lead the way for other innovations that help real people
obtain the health care coverage that they need in a flexible and reliable way. W e
want to ensure that those w h o qualify for the credit get the help they need as
quickly as possible."
The Trade Adjustment Assistance Act President Bush signed into law in 2002
included the new Health Coverage Tax Credit (HCTC). Recipients can receive the
H C T C either in advance, to help pay qualified health plan premiums as they come
due, or in a lump sum when they file their federal tax returns. The H C T C advance
payments program began nationally in August 2003. This program provides an
advanced payment of 6 5 % of the premium cost for a qualified health plan for
individuals w h o are eligible to receive Trade Adjustment Assistance (TAA) benefits
or certain individuals w h o receive pension benefit payments from the Pension
Benefit Guaranty Corporation (PBGC).
In order to receive the credit, eligible individuals must enroll in qualified health
insurance, such as a C O B R A health plan or State Qualified Health Plan (SQHP).
Thirty-four states and the District of Columbia have S Q H P s that will enable more
than 200,000 of those potentially eligible for the H C T C to purchase health
coverage. Nationwide, there are nearly 250,000 individuals potentially eligible for
the H C T C .
For more information on a particular state and the health insurance programs that
qualify, please visit the H C T C website at www.irs.gov and enter IRS Keyword:
HCTC.'
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JS-1543: Under Secretary of the Treasury John B. Taylor K e y Note Address at the Forum on Islamic Fin... Page 1 of 4
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 8, 2004
JS-1543
Under Secretary of the Treasury John B. Taylor Key Note Address at the
Forum on Islamic Finance Harvard University
Understanding and Supporting Islamic Finance:
Product Differentiation and International Standards
I thank the Islamic Finance Project for inviting m e and for, once again, leading
efforts to organize this excellent conference. I would also extend a warm welcome
to all of you here. I know you will enjoy hearing from m y esteemed colleague, Dr.
A h m a d M o h a m e d Ali from the Islamic Development Bank. Harvard University
continues its fine tradition of providing a strong platform to generate critical thinking
to inform academics and policymakers on Islamic finance through its series of
Islamic Finance Forums and through the Islamic Finance Project here at Harvard
Law School.
I appreciate the opportunity to speak to you today on a topic that is very important
to us in the Bush Administration, and, in particular, the U.S. Treasury. Islamic
finance over the last several years has expanded throughout the world, not just in
the Middle East, but in Asia, Europe and the United States. The global Islamic
finance industry has grown significantly over the last 10 years and today assets are
in the range of $200-$300 billion.
Though small compared to the whole global financial system, Islamic finance is
growing and is already playing a significant role in the financial systems in the
Middle East. W e have seen a growth in product innovation, an increase in the
number of financial institutions offering Islamic finance products, and an expansion
beyond the Islamic countries to the UK, Switzerland, the United States, and
elsewhere. With these developments, w e need to deepen our understanding and
awareness of Islamic finance, to protect its unique role to honor its traditions, and to
ensure sound regulatory frameworks and suitable jurisprudence that allow for
efficient financial intermediation.
The Bush Administration places significant importance on promoting strong vibrant
financial sectors, including Islamic finance, as an integral component of advancing
economic growth in emerging markets. This year, for example, w e in the U.S.
Treasury have been working with our G 7 colleagues and Finance Ministers from the
Middle East and North Africa to advance economic growth and financial sector
development. These are key objectives for the G 8 Summit which the United States
is hosting in Sea Island, Georgia, in June. W e have created a Partnership for
Financial Excellence, which represents a hallmark bilateral initiative with the region
that reinforces financial sector growth. This initiative targets technical assistance
and training on key needs in regional finance ministries, central banks, and
commercial banks. W e are working with the Federal Reserve and other U.S.
financial regulatory bodies and counterparts in the Middle East and North Africa to
design a training program for regional bank supervisors on best practices for bank
regulation and supervision. W e will also be providing targeted technical assistance
to governments in the areas of public finance, debt management, and financial
institution strengthening.
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JS-1543: Under Secretary of the Treasury John B. Taylor K e y Note Address at the Forum on Islamic Fin... Page 2 of 4
W e at the U.S. Treasury have recently deepened our engagement in Islamic
finance in a number of ways.
• In April 2002, inspired by a terrific briefing on Islamic finance at Citibank's
facility in Bahrain, I hosted the "Islamic Finance 101 Conference" in
Washington, D.C., which w a s the first conference on Islamic finance for U.S.
government officials and financial regulators to raise awareness of the
global Islamic finance industry.
• fn September 2003, Randy Quarles, Assistant Secretary of the Treasury of
International Affairs, spoke about our involvement in Islamic finance at the
First International Islamic Finance Conference in Washington, D.C.
• Also in September, Secretary S n o w and I attended the Second International
Islamic Finance Conference in Dubai. W e had a remarkable opportunity to
sit down with Islamic bankers to discuss the real issues they face.
• And today, I a m pleased to announce today that the U.S. Treasury is
launching an Islamic Finance Scholar-in-Residence program to generate
more awareness and catalyze deeper policy discussions on Islamic finance
domestically and internationally. W e will be hiring as our first Scholar-inResidence a noted Islamic finance expert. W e intend for this scholar to
work with us and others in Washington, D.C. on public policy issues related
to the role and importance of Islamic finance. This n e w position will provide
an opportunity to engage with key policymakers from the U.S. regulatory
bodies and m e m b e r s of Congress, on comparing and contrasting Islamic
finance and conventional banking, and promoting international standards.
The first person to occupy this new position will be Dr. M a h m o u d El-Gamal
of Rice University. W e look forward to his arrival in Washington, D.C. later
this month.
In reviewing the agenda for today's conference, I was struck by some very
interesting n e w areas for further research in Islamic finance. As this industry
evolves, a range of n e w Shari'a compliant products are emerging. S o m e examples
are the government and corporate bonds - so-called sukuks - which have seen an
increase in issuances over the last few years, and the development of repo
facilities, which allow for open market operations in Islamic finance banks and help
in the development of a global Islamic money market. The Islamic Development
Bank (IsDB) is also financing infrastructure-development projects using n e w
mechanisms that rely on the depth and innovation in the sukuk market. Islamic
finance securitization has also been growing both in the United States and abroad.
Freddie M a c has been offering mortgage backed-securities as a financing option to
the Muslim community in the United States.
As we all know, however, the process of replication or mimicking conventional
banking instruments certainly does not m e a n that the replicated Islamic products
are identical to their conventional counterparts. Dr. El-Gamal will be discussing this
in his talk tomorrow on the "Limits of Shari'a Arbitrage and the Unrealized Potential
of Islamic Finance". Deposit taking at fixed terms is a highly different business than
taking equity participations, leasing, or profit sharing. And it is simpler and relatively
more straightforward. Because of the transformation costs, complex Islamic
financial products appear to be inherently less transparent and less efficient than
conventional ones. This m a y have the undesirable effect of making Islamic finance
a less attractive practice in the longer run. Dr. El-Gamal's calls for a fundamental
paradigm shift in the development of Islamic finance to reduce complexity and
increase competitiveness are thought-provoking and worthwhile to consider.
The replication and transformation of conventional financial products into their
corresponding Islamic finance analogues have important implications for the
regulation and supervision of Islamic financial institutions.
First, the various lending structures generate different risk and balance sheet
exposures for Islamic banks that need to be carefully monitored and managed. For
example, while only a few Islamic financial products generate different liquidity
profiles from conventional products, the lack of uniformity of standards for "Islamic
banking" practices across Islamic countries makes it difficult to apply the s a m e
prudential regulatory standards (e.g., capital adequacy requirements) across the
board. This calls for more harmonization of Islamic banking practices, which in turn
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calls for harmonization of Shari'a standards at the national and international
levels.
Second, the treatment of profits/losses will have consequences for the balance
sheet structure and will require particular adjustments to meet minimal prudential
requirements. For example, in mudaraba transactions^], the bank bears full
financial responsibility for any losses but shares relative profits with the client. Any
losses stemming from uncollateralized equity financing m a y require higher loan loss
provisioning and additional capital.
Third, disclosure requirements may need to be comprehensive and more frequent
to inform investors of the investment techniques, so they can m a k e decisions based
on their risk preference. Maintaining clear transparency and ensuring adequate
disclosure of financing mechanisms are important steps towards building the
necessary foundation for Islamic finance. And with respect to firms in which
financial institutions take stakes, greater transparency, along with strengthened
corporate governance, are necessary.
As part of the international effort to design a regulatory framework for Islamic
finance, regulators need to factor in the differences in these forms of finance and
have at least minimal standards or benchmarks to gauge compliance and assess
risks. There needs to be s o m e level of consistency in regulatory treatment across
the board, subject to the particular country's legal and regulatory regime. Malaysia
and the G C C countries have been making notable progress on developing Islamic
banking laws. Recognition and enforcement of these laws by the relevant national
regulators would set the stage for making true progress on establishing
internationally-accepted regulatory standards. Equally important is ensuring strong
anti-money laundering oversight for these transactions targeted mainly at
preserving the integrity of and bolstering investor confidence in Islamic finance.
Today's conference will set the stage for a lively exchange on these important
issues. Looking ahead, there is much that remains to be accomplished. W e
welcome the work of the Islamic Financial Services Board (IFSB) in Malaysia and
the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI)
in Bahrain that is looking at formulating standards for Islamic financial institutions,
for example in corporate governance, accounting and capital adequacy. W e look to
see h o w policy makers mainstream their approach to Islamic finance in countries
where this industry has grown significantly. The IMF as part of its overall financial
surveillance work - particularly in the context of its Financial Sector Assessment
Programs (FSAPs) and its Reports on Standards and Codes ( R O S C s ) - should
explore what, if any, systemic implications Islamic finance can have on the overall
financial systems in the relevant countries, and it should also consider h o w its
surveillance instruments can be better aligned with monitoring Islamic Finance.
The World Bank through its financial sector work can enhance the effort to develop
international regulatory frameworks and explore how Islamic finance can have a
positive development impact in communities. International standard-setting bodies,
such as I O S C O and BIS, have a role to play, first in understanding the basic
implications of Islamic finance, and secondly to take into account implications of
Islamic Finance on the implementation of existing standards. I hope that the
international institutions, like the IMF, W B and the IsDB, work closely with national
authorities to factor in a country's monetary policy framework and the capacity of
the country's regulators w h o will eventually have to implement the standards
developed by those bodies. These are but a few examples on the regulatory front.
In conclusion, developments in Islamic finance are of great interest to us at the U.S.
Treasury and w e look forward to the lively discussions on new product development
and differentiation and on recent legal and regulatory issues that have emerged as
the Islamic finance industry grows. A s with conventional financing, Islamic
financing will benefit from transparency, good governance and an internationallyaccepted regulatory framework that will govern this important form of financing. I
hope today's discussions will help inform these debates and contribute to the
overall effort to raise awareness and promote action a m o n g key policy makers.
Thank you.
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: Under Secretary of the Treasury John B. Taylor K e y Note Address at the Forum on Islamic Fin... Page 4 of 4
[1] Mudaraba transactions are essentially investment partnerships in which all the
capital is provided by the financial institution while the business is m a n a g e d by the
entrepreneur/client. Profits are shared in pre-agreed ratios, and losses are borne
by the bank (which is passed on to the depositors).
ty://www.treas.gov/press/releases/js 1543 .htm
5/31/2005
JS-1544TDeputy Assistant Secretary for Financial Education, D a n Iannicola, Jr. to Join Ju... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 11,2004
JS-1544
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. to Join
Junior Achievement in Ribbon-Cutting Ceremony for N e w Dennis and Judy
Jones Free Enterprise Center in Chesterfield, Missouri
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. will deliver
remarks about the federal government's efforts to promote financial education at a
ribbon-cutting ceremony for the new Junior Achievement Dennis and Judy Jones
Free Enterprise Center in Chesterfield, Missouri.
The Center will allow 5th and 8th grade students to see, touch and experience free
enterprise in hands-on activities. Junior Achievement is an organization dedicated
to educating young people about business, economics, and free enterprise and was
founded in 1919.
WHO:
Deputy Assistant Secretary for Financial Education Dan Iannicola, Jr.
WHAT:
Remarks on financial education at Junior Achievement ribbon-cutting ceremony.
WHEN:
Wednesday, May 12, 2004
10:30 a.m. to 12:30 p.m. (CDT) Media Availability
WHERE:
Dennis and Judy Jones / Free Enterprise Center
17337 N. Outer Road
Chesterfield, M O
*** Media interested in covering this event should call:
Treasury's Office of Public Affairs at 202/622-2960 ***
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5/6/2005
(S-1545: Deputy Assistant Secretary for Financial Education, D a n Iannicola, Jr. to Present Certificate of... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 12, 2004
JS-1545
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. to
Present Certificate of Recognition to John Lewis Community Service in
Davenport, Iowa
Deputy Assistant Secretary for Financial Education Dan Iannicola, Jr. will deliver
remarks and present a Certificate of Recognition to the John Lewis Community
Service (JLCS) for its efforts in financial education.
Founded in 1989, JLCS's Financial Literacy program focuses on homeownership,
saving, budgeting, protecting assets and credit management.
WHO:
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr.
WHAT:
Senior Treasury official will present a Certificate of Recognition to John Lewis
Community Service for its efforts in financial education.
WHEN:
Thursday, May 13,2004
1:45 p.m. (CDT) Media Availability
WHERE:
John Lewis Community Service
1016 W . 5th Street
Davenport, Iowa
Media interested in covering this event should call:
Treasury's Office of Public Affairs at 202/622-2960
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3://www.treas aov/nress/releases/is 1545.htm
5/31/2005
fS-1546: Testimony of<br>Wayne A . Abernathy<br>Assistant Secretary for Financial Institutions<br>...
mmmmm
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 12, 2004
JS-1546
Testimony of
W a y n e A. Abernathy
Assistant Secretary for Financial Institutions
Department of the Treasury
Before the
Subcommittee on Financial Institutions and Consumer Credit
of the
Committee on Financial Services
United States House of Representatives
Chairman Bachus, Ranking Member Sanders, and Members of the Financial
Institutions and Consumer Credit Subcommittee, I would like to thank you for this
opportunity to testify on the regulatory burden faced by the nation's community
banking institutions.
Small banks and thrifts provide households and small businesses services that are
greatly valued by the communities in which they are located, particularly for the
continuity of service that they present as well as for their close association with
customers and the local community, what might even be called neighborliness.
Their longstanding focus on individual customer relationships and in-depth
knowledge of local area credit needs serve our nation's communities well. Of
particular importance in achieving major goals set for us by President Bush,
community banks' expertise in local area relationship lending enables them to
provide financial services to various kinds of small businesses and hard-to-reach
customers that might otherwise be overlooked.
Industry Consolidation and Small Banking Institutions
Undeniably, the U.S. banking industry has experienced significant consolidation in
recent years. The 25 largest banking organizations accounted for 58 percent of all
bank and thrift assets at the end of 2003, up from 39 percent 10 years earlier. If w e
chose $1 billion in assets as the dividing line today between small banks and
medium and large banks, the total number of small banks and thrifts—those with
assets under $1 billion—declined from 12,664 at year-end 1993 to 8,601 at yearend 2003, a decline of almost one third over the past 10 years. A substantial
majority of banking acquisitions in the last decade has involved banks with under $1
billion in assets. S o m e have raised concerns about what these trends may mean for
the future of community banking.
And there might be cause for alarm if we looked no further. Fortunately, chartering
activity in recent years demonstrates the vitality and attractiveness of community
banking. According to the Federal Deposit Insurance Corporation (FDIC), there
were over 1,200 new community banks and thrifts established since the beginning
of 1992. After accounting for mergers, acquisitions, and only 4 failures, almost
1,100 of these institutions continue to serve their communities today.
The profitability of small banks and thrifts has been relatively stable over the past
decade, as measured both by return on assets and return on equity. Of some
interest, however, larger banks have expanded their profitability in recent years. In
2003, small banks and thrifts achieved a return on assets averaging 1.14 percent,
while those institutions exceeding $1 billion in assets averaged 1.42 percent.
Similarly, return on "equity was 11.12 percent for small banks, compared to 15.85
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JS-1546: Testimony of<br>Wayne A. Abernathy<br>Assistant Secretary for Financial Institutions<br>...
Page 2 of 4
percent for those exceeding $1 billion in assets. In contrast, for 1993, the measures
of return on assets for small and large institutions were virtually identical, while
large institution return on equity exceeded that of small institutions only by about
half the difference observed in 2003.
A large part of the reason for this difference may be a good news story: the capital
position of small banks is strong. S o it is a matter of math: small depository
institutions have lower returns on equity than larger institutions in part because they
have more equity relative to their assets; that is to say, small banks operate with
larger capital cushions than do larger banks. At year-end 2003, small banks and
thrifts had an average core capital ratio of almost 9.8 percent - almost twice the
amount required for "well-capitalized" status and more than 2 percentage points
higher than the average core capital ratio for larger institutions. Strong capital levels
e m p o w e r small banks to meet the particular—and often unique—credit needs of the
household and small business borrowers in their communities, while at the s a m e
time preserving banking system safety and soundness.
Burden of Regulation on Small Banking Institutions
While we have great confidence in the strength and vitality of small banks and
thrifts, their prosperity should not be taken for granted. They continue to face
challenges from a variety of sources. A significant challenge to small banking
institutions arises from the burden that regulations impose on their ability to
compete effectively with larger bank and nonbank companies. M a n y regulatory
requirements impose s o m e degree of fixed costs, but these can weigh more heavily
upon the comparatively smaller revenue base of community banks.
This is not a new observation. To try to compensate for this imbalance, many of our
laws, regulations, and supervisory practices take into account differences between
smaller and larger banking institutions in ways that help to mitigate potential
competitive disadvantages for smaller institutions. For example:
• The size and complexity of the largest banking organizations require teams
of federal examiners in residence year-round, while examiners visit smaller
institutions only on a periodic basis.
• Smaller and less complex institutions generally have somewhat less
detailed regulatory financial reporting requirements.
• Under current rules, banks and thrifts that have less than $250 million in
assets and are not part of holding companies with banking assets
exceeding $1 billion are subject to a streamlined Community Reinvestment
Act (CRA) test.
• Smaller depository institutions have more liberal access to Federal Home
Loan Bank advances (i.e., with respect to asset portfolio composition and
eligible collateral) than do larger institutions.
• At year-end 2003, 2,019 small banks and thrifts received the benefits of
Subchapter S corporation tax treatment, up from 604 institutions at year-end
1997.
Reducing Regulatory Burden
Still, we believe that more can and should be done to reduce burdensome
regulations on our financial institutions, particularly community banking institutions,
without compromising their prudential operations. A s I mentioned, w e are heartened
by the fact that there continues to be an interest in n e w community bank charters.
Ease of entry is a sign of the competitiveness of markets. W e must be careful that
regulation does not create a significant barrier to the entry of n e w banking firms and
reduce competition a m o n g financial services providers.
In 1996, Congress passed the Economic Growth and Paperwork Reduction Act,
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Page 3 of 4
requiring the banking regulatory agencies to identify statutory provisions and
regulations that are outdated, unnecessary, or unduly burdensome, and seek public
comment as part of this process. The agencies were then to take steps to reduce
such burdens through rulemaking or recommend that Congress enact appropriate
legislative changes.
This directive was reinforced by a recent call by President Bush that we should be
sure that all federal, state, and local regulations are absolutely necessary. A n
interagency task force, under the direction of FDIC Vice Chairman John Reich, has
taken on this important task. To begin, they grouped banking regulations into 12
categories. Last summer, the agencies published the first of a series of notices,
seeking feedback from the public on three of the 12 regulatory groups: applications
and reporting, powers and activities, and international operations. In January of this
year, the second notice w a s published, requesting comment on consumer
protection lending-related regulations. This careful and comprehensive approach to
the review of regulations could prove fruitful in identifying ways to reduce
compliance burdens on banks, especially on small banks, while also relieving
corresponding strains on supervisory resources, without sacrificing important
supervisory objectives.
Earlier this year, the banking agencies also issued a proposed rule that would make
more community banks eligible for a streamlined C R A examination. Institutions with
under $500 million in assets, rather than $250 million under current rules, would be
eligible for the streamlined test. Furthermore, under the proposal, a bank or thrift
meeting the small institution threshold size would no longer be subject to the C R A
large bank retail test (which includes investment and service components) simply
because it is part of a holding company having over $1 billion in banking assets.
The agencies estimate that the proposal would cut in half (to about 11 percent of all
banks and thrifts) the number of institutions subject to the large retail institution test.
Congress has joined this regulatory relief effort as well, moving forward several
items of legislation to improve the competitive position of the community banking
system. For example, the Treasury Department has consistently supported
legislative proposals to repeal the prohibition on paying interest on demand
deposits. The House of Representatives has several times passed legislation that
included this repeal. Repeal of the prohibition on paying interest on demand
deposits would eliminate a needless government price control and increase
economic efficiency. Community banks with fewer m e a n s to maneuver around the
current restrictions would be better able to compete with large banks and nonbank
financial services providers in attracting business depositors. And repeal would
benefit the nation's small businesses by allowing them to earn a positive return on
their transaction balances. Larger businesses and larger banks today have been
able to offset the lack of interest on checking accounts by using sweep accounts to
earn interest or by including price concessions in other bank products.
Conclusion
Few observers would dispute that depository institutions of all sizes face a heavy
regulatory burden, and that this burden falls disproportionately on the nation's small
banks and thrifts. The costs of regulatory compliance are significant, and include
not only burdens directly imposed on the industry, but higher levels of supervisory
expenses that are ultimately passed on to banks, consumers, and taxpayers. W h e n
regulatory burdens are excessive and fail to add net value, they take a toll on the
competitiveness of our financial system and on overall economic efficiency. The
Treasury Department encourages efforts by the banking agencies to reduce
regulatory burdens on banks of all sizes, an effort that is likely to benefit community
banks and their customers in particular, and w e stand ready to work with Congress
to further these objectives.
Many have commented on the tremendous benefits we derive from our great dual
banking system. W h e n they do so, they usually refer to the dual system of state and
national bank charters. But I think that w e should include in that concept, as a sign
of the great health and strength of our financial system, a vibrant, competitive array
of banks of all sizes meeting the financial needs of our businesses and
communities—which also c o m e in all sizes, large and small. That is not only
3://www.treas.gov/press/releases/js 1546.htm
5/31/2005
fS-1546: Testimony of<br>Wayne A. Abernathy<br>Assistant Secretary for Financial Institutions<br>...
Page 4 of 4
something worth preserving—it is something worth promoting.
-30-
tp://www.treas. 20 v/press/releases/jsl 546.htm
5/31/2005
js-1547: Deputy Assistant Secretary for Financial Education, D a n Iannicola, Jr. <br>and t... Page 1 of 2
PRLSS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
May 10,2004
js-1547
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr.
and the Missouri Society of Certified Public Accountants
Team Up to Teach a Financial Education Class at Gotsch Elementary,
Affton School District in St. Louis, Missouri
Deputy Assistant Secretary for Financial Education Dan Iannicola, Jr. today joined
the Missouri Society of Certified Public Accountants to team-teach a financial
education class at Gotsch Elementary, AfftonSchool District in St. Louis, Missouri.
While in St. Louis, Iannicola also presented a Certificate of Recognition to the
International Institute of St. Louis for providing financial education to refugees and
new immigrants.
"It is great to be back in Affton schools again," said Iannicola who served as
president of the Affton Board of Education from 1999-2001. "It is even better when I
can bring with m e a great volunteer like Jerry Nichols who is representing the
Missouri Society of Certified Public Accountants. Today we helped teach Affton 4th
graders some of the basics of personal financial management," Iannicola went on
to say.
The Missouri Society of Certified Public Accountants (MSCPA), a statewide
association comprised of more than 8,500 CPAs, is dedicated to advancing CPAs
and their profession through professional development, government advocacy and
student-education initiatives. M S C P A offers a variety of in-school programs that
teach students about accounting and the accounting profession all across Missouri.
M S C P A also works with the American Institute of Certified Public Accountants
(AICPA), including on national efforts to raise awareness about the crucial role
certified public accountants play in financial education.
Deputy Assistant Secretary Iannicola also today presented a Certificate of
Recognition to the International Institute of St. Louis for providing financial
education to refugees and new immigrants. Through participation in the Individual
Account (IDA) program, refugees have an opportunity to save money toward
purchase of a first home, an automobile, a post-secondary education, or to open a
small business. The International Institute's Personal Finance Workshops about
Banking, Consumer Credit, Budgeting and Consumer Skills are held monthly and
are given by staff and volunteers.
"The International Institute offers a great opportunity for those new to this country to
learn essential skills related to banking, credit management and financing large
purchases," Iannicola added. "It helps them avoid the pitfalls and realize the
benefits of a sophisticated financial services marketplace."
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May 2002. The office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on, saving, credit management, home ownership and retirement
planning. The office also coordinates 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. For more information about the Office of Financial
Education visit: www.treas.gov/financialeducation.
-30-
http://www.treas.gov/press/releases/js 1547.htm
5/6/2005
PRLSS R O O M
F R O M T H E OFFICE OF PUBLIC AFFAIRS
May 12, 2004
2004-5-12-11-22-4-28844
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $81,875 million as of the end of that week, compared to $82,199 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1
April 30, 2004
Mav 7, 2004
82,199
81,875
1. Foreign Currency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
9,204
14,252
23,456
9,326
14,007
23,333
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
12,068
2,864
14,932
11,791
2,814
14,605
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
20,322
20,399
12,445
12,492
11,045
11,045
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
April 30, 2004
Euro
1. Foreign currency loans and securities
Yen
Mav 7, 2004
TOTAL
Euro
0
Yen
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2. a. Short positions
0
2.b. Long positions
3. Other
0
0
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 30, 2004
Euro
Yen
M a v 7. 2004
TOTAL
1. Contingent liabilities in foreign currency
Euro
Yen
TOTAL
n
0
1.a. Collateral guarantees on debt due within 1 year
1 .b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
0
0
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits'reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
js-1548: Treasury Clarifies Interaction of Health Savings Accounts <br> With Other Emp... Page 1 of 1
PRESS ROOM
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®.
May 11,2004
js-1548
Treasury Clarifies Interaction of Health Savings Accounts
With Other Employer-Provided Health Reimbursement Plans
Today Treasury and the IRS issued Revenue Ruling 2004-45 which clarifies how
health Flexible Spending Arrangements (FSAs) and Health Reimbursement
Arrangements (HRAs) interact with Health Savings Accounts (HSAs). The
guidance provides a number of ways that individuals may have access to benefits
from FSAs and HRAs and remain eligible to contribute to an HSA.
"Although the statute does not permit individuals to contribute to an HSA while
being covered by general purpose health FSAs and HRAs, the guidance provides
significant flexibility to employers in structuring health reimbursements for
employees," stated Greg Jenner, Acting Assistant Secretary for Tax Policy.
In particular, the ruling states that eligible individuals (who must be covered by a
high deductible health plan (HDHP)) may continue to contribute to an HSA while
also covered by the following types of employer-provided plans that reimburse
employee medical expenses:
• Limited purpose FSAs and HRAs that restrict reimbursements to certain
permitted benefits such as vision, dental, or preventive care benefits.
• Suspended HRAs where the employee has elected to forgo health
reimbursements for the coverage period.
• Post-deductible FSAs or HRAs that only provide reimbursements after the
minimum annual deductible has been satisfied.
• Retirement HRAs that only provide reimbursements after an employee
retires.
"We believe that the ability of employers to allow employees to temporarily suspend
reimbursements from HRAs so they can contribute to an HSA without forfeiting
accumulated H R A benefits provides important transitional relief for employers
adopting high deductible health plans with HSAs," said Mr. Jenner.
The guidance also provides that combinations of these arrangements may also be
provided without disqualifying an individual from contributing to an HSA. In
addition, the ruling clarifies that individuals with coverage by an FSA and an HRA,
as well as an HSA, may reimburse expenses through the FSA or H R A prior to
taking distributions from the HSA, as long the individual does not seek multiple taxfavored reimbursements for the same expense.
The text of Rev. Rul. 2004-45 is attached.
-30REPORTS
• Rev. Rul. 2004-45
http://www.treas.gov/press/releases/js 1548.htm
Section 223 - Health Savings Accounts—Interaction with Other Health
Arrangements
Rev. Rul. 2004-45
ISSUE
In the situations described below, may an individual make contributions to a
Health Savings Account (HSA) under section 223 of the Internal Revenue Code if
the individual is covered by a high deductible health plan (HDHP) and also
covered by a health flexible spending arrangement (health FSA) or a health
reimbursement arrangement (HRA)?
FACTS
Situation 1. An individual is covered by an HDHP (as defined under section
223(c)(2)(A)). The HDHP has an 80/20 percent coinsurance feature above the
deductible. The individual is also covered by a health FSA under a section 125
cafeteria plan and an HRA that meets the requirements of Notice 2002-45, 20022 C.B. 93. The health FSA and HRA pay or reimburse all section 213(d) medical
expenses that are not covered by the HDHP (such as co-payments, coinsurance,
expenses not covered due to the deductible and other medical expenses not
1
covered by the H D H P ) . The health F S A and H R A coordinate the payment of
benefits under the ordering rules of Notice 2002-45. The individual is not entitled
to benefits under Medicare and may not be claimed as a dependent on another
person's tax return.
Situation 2. Same facts as Situation 1, except that the health FSA and HRA are
limited-purpose arrangements that pay or reimburse, pursuant to the written plan
document, only vision and dental expenses (whether or not the minimum annual
deductible of the HDHP has been satisfied). In addition, the health FSA and
HRA pay or reimburse preventive care benefits as described in Notice 2004-23,
2004-15 I.R.B. 725.
Situation 3. Same facts as Situation 1, except that the individual is not covered
by a health FSA. Under the employer's HRA, the individual elects, before the
beginning of the HRA coverage period, to forgo the payment or reimbursement of
medical expenses incurred during that coverage period. The decision to forgo
the payment or reimbursement of medical expenses does not apply to permitted
insurance, permitted coverage and preventive care ("excepted medical
expenses"). See section 223(c)(1)(B) and Notice 2004-23. Medical expenses
incurred during the suspended HRA coverage period (other than the excepted
medical expenses if otherwise allowed to be paid or reimbursed by an HRA),
cannot be paid or reimbursed by the HRA currently or later (i.e., after the HRA
suspension ends). However, the employer decides to continue to make
2
employer contributions to the H R A during the suspension period and thus the
maximum available amount under the HRA is not affected by the suspension but
is available for the payment or reimbursement of the excepted medical expenses
incurred during the suspension period as well as medical expenses incurred in
later HRA coverage periods.
Situation 4. Same facts as Situation 1, except that the health FSA and HRA are
post-deductible arrangements that only pay or reimburse medical expenses
(including the individual's 20 percent coinsurance responsibility for expenses
above the deductible) after the minimum annual deductible of the HDHP has
been satisfied.
Situation 5. Same facts as Situation 1, except that the individual is not covered
by a health FSA. The employer's HRA is a retirement HRA that only reimburses
those medical expenses incurred after the individual retires.
LAW AND ANALYSIS
Section 223(a) allows a deduction for contributions to an HSA for an "eligible
individuaf for any month during the taxable year. Section 223(c)(1)(A) provides
that an "eligible individual" means, with respect to any month, any individual who
is covered under an HDHP on the first day of such month and is not, while
covered under an HDHP, "covered under any health plan which is not a high
3
deductible health plan, and which provides coverage for any benefit which is
covered under the high deductible health plan."
Section 223(b) provides a limit on amounts that can be contributed to an HSA.
The maximum annual contribution limit for an eligible individual with self-only
coverage is the amount required by section 223(b)(2)(A). The maximum annual
contribution limit for an eligible individual with family coverage is the amount
required by section 223(b)(2)(B).
Section 223(c)(2)(A) defines an HDHP as a health plan that satisfies certain
requirements with respect to minimum annual deductibles and maximum annual
out-of-pocket expenses. Generally, if substantially all of the coverage in a health
plan that is intended to be an HDHP is provided through a health FSA or HRA,
the health plan is not an HDHP.
In addition to coverage under an HDHP, section 223(c)(1)(B) provides that an
eligible individual may have specifically enumerated coverage that is disregarded
for purposes of the deductible. Coverage that may be disregarded includes
"permitted insurance" and other specified coverage ("permitted coverage").
"Permitted insurance" is coverage under which substantially all of the coverage
provided relates to liabilities incurred under workers' compensation laws, tort
liabilities, liabilities relating to ownership or use of property, insurance for a
specified disease or illness, and insurance that pays a fixed amount per day (or
4
other period) of hospitalization. "Permitted coverage" (whether through insurance
or otherwise) is coverage for accidents, disability, dental care, vision care or
long-term care. Section 223(c)(2)(C) also provides a safe harbor for the
absence of a preventive care deductible. See Notice 2004-23.
The legislative history of section 223 explains these provisions by stating that
"eligible individuals for HSAs are individuals who are covered by a high
deductible health plan and no other health plan that is not a high deductible
health plan." The legislative history also explains that, "[a]n individual with other
coverage in addition to a high deductible health plan is still eligible for an HSA if
such other coverage is certain permitted insurance or permitted coverage." H.R.
Conf. Rep. No. 391, 108th Cong., IstSess. 841 (2003).
Section 125(a) states that no amount will be included in the gross income of a
participant in a cafeteria plan solely because, under the plan, the participant may
choose among the benefits of the plan. Section 125(d) defines a cafeteria plan
as a written plan under which participants may choose among two or more
benefits consisting of cash and qualified benefits.
Section 125(f) defines qualified benefits as any benefit not included in the gross
income of the employee by reason of an express provision in the Code.
Qualified benefits include employer-provided accident and health coverage under
section 106, including health FSAs.
5
Notice 2002-45, 2002-2 C.B. 93, describes the tax treatment of H R A s . The
notice explains that an HRA that receives tax-favored treatment is an
arrangement that is paid for solely by the employer and not pursuant to a salary
reduction election under section 125, reimburses the employee for medical care
expenses incurred by the employee and by the employee's spouse and
dependents, and provides reimbursement up to a maximum dollar amount with
any unused portion of that amount at the end of the coverage period carried
forward to subsequent coverage periods.
Notice 2002-45, Part IV, states that if an employer provides an HRA in
conjunction with another accident or health plan and that other plan is provided
pursuant to a salary reduction election under a cafeteria plan, then all the facts
and circumstances are considered in determining whether the salary reduction is
attributable to the HRA. An accident or health plan funded pursuant to salary
reduction is not an HRA and is subject to the rules under section 125.
Under section 223, an eligible individual cannot be covered by a health plan that
is not an HDHP unless that health plan provides permitted insurance, permitted
coverage or preventive care. A health FSA and an HRA are health plans and
constitute other coverage under section 223(c)(1)(A)(ii). Consequently, an
individual who is covered by an HDHP and a health FSA or HRA that pays or
reimburses section 213(d) medical expenses is generally not an eligible
6
individual for the purpose of making contributions to an H S A . S e e Rev. Rul.
2004-38, 2004-15 I.R.B. 717, which holds that an individual who is covered by an
HDHP that does not provide prescription drug coverage and a separate
prescription drug plan or rider that provides benefits before the minimum annual
deductible of the HDHP has been satisfied is not an eligible individual for HSA
purposes.
However, an individual is an eligible individual for the purpose of making
contributions to an HSA for periods the individual is covered under the following
arrangements:
Limited-Purpose Health FSA or HRA. A limited-purpose health FSA that pays or
reimburses benefits for "permitted coverage" (but not through insurance or for
long-term care services) and a limited-purpose HRA that pays or reimburses
benefits for "permitted insurance" (for a specific disease or illness or that
provides a fixed amount per day (or other period) of hospitalization) or "permitted
coverage" (but not for long-term care services). In addition, the limited-purpose
health FSA or HRA may pay or reimburse preventive care benefits. The
individual is an eligible individual for the purpose of making contributions to an
HSA because these benefits may be provided whether or notthe HDHP
deductible has been satisfied.
7
Suspended
HRA. A suspended H R A , pursuant to an election m a d e before the
beginning of the HRA coverage period, that does not pay or reimburse, at any
time, any medical expense incurred during the suspension period except
preventive care, permitted insurance and permitted coverage (if otherwise
allowed to be paid or reimbursed by the HRA). The individual is an eligible
individual for the purpose of making contributions to an HSA. When the
suspension period ends, the individual is no longer an eligible individual because
the individual is again entitled to receive payment or reimbursement of section
213(d) medical expenses from the HRA. An individual who does not forgo the
payment or reimbursement of medical expenses incurred during an HRA
coverage period, is not an eligible individual for HSA purposes during that HRA
coverage period.
If an HSA is funded through salary reduction under a cafeteria plan during the
suspension period, the terms of the salary reduction election must indicate that
the salary reduction is used only to pay for the HSA offered in conjunction with
the HRA and not to pay for the HRA itself. Thus, the mere fact that an individual
participates in an HSA funded pursuant to a salary reduction election does not
necessarily result in attributing the salary reduction to the HRA.
Post-Deductible Health FSA or HRA. A post-deductible health FSA or HRA that
does not pay or reimburse any medical expense incurred before the minimum
annual deductible under section 223(c)(2)(A)(i) is satisfied. The individual is an
8
For example, if an employer offers a combined post-deductible health F S A and a
limited-purpose health FSA, this would not disqualify an otherwise eligible
individual from contributing to an HSA.
An individual may not be reimbursed for the same medical expense by more than
one plan or arrangement. However, if the individual has available an HSA, a
health FSA and an HRA that pay or reimburse the same medical expense, the
health FSA or the HRA may pay or reimburse the medical expense, subject to
the ordering rules in Notice 2002-45, Part V, so long as the individual certifies to
the employer that the expense has not been reimbursed and that the individual
will not seek reimbursement under any other plan or arrangement covering that
expense (including the HSA).
HOLDINGS
In Situation 1, the individual is covered by an HDHP and by a health FSA and
HRA that pay or reimburse medical expenses incurred before the minimum
annual deductible under section 223(c)(2)(A)(i) has been satisfied. The health
FSA and HRA pay or reimburse medical expenses that are not limited to the
exceptions for permitted insurance, permitted coverage or preventive care. As a
result, the individual is not an eligible individual for the purpose of making
contributions to an HSA. This result is the same if the individual is covered by a
10
health F S A or H R A sponsored by the employer of the individual's spouse. See,
Rev. Rul. 2004-38.
In Situation 2, the individual is covered by an HDHP and by a health FSA and
HRA that pay or reimburse medical expenses incurred before the minimum
annual deductible under section 223(c)(2)(A)(i) has been satisfied. However, the
medical expenses paid or reimbursed by the health FSA and HRA include only
vision and dental benefits (which are permitted coverage) and preventive care.
All of these benefits may be covered as a separate health plan, as a separate or
optional rider, or as part of the HDHP and whether or not the minimum annual
deductible under section 223(c)(2)(A)(i) has been satisfied. The individual is an
eligible individual for the purpose of making contributions to an HSA.
In Situation 3, the individual elects to forgo the payment or reimbursement of
medical expenses incurred during an HRA coverage period. The suspension of
payments and reimbursements by the HRA does not apply to permitted
insurance, permitted coverage and preventive care (if otherwise allowed to be
paid or reimbursed by the HRA). The individual is an eligible individual for the
purpose of making contributions to an HSA until the suspension period ends and
the individual is again entitled to receive, from the HRA, payments or
reimbursements of section 213(d) medical expenses incurred after the
suspension period.
11
In Situation 4, the health F S A and H R A payor reimburse medical expenses
(including the 20 percent coinsurance not otherwise covered by the HDHP) only
after the HDHP's minimum annual deductible has been satisfied. The individual
is an eligible individual for the purpose of making contributions to an HSA.
In Situation 5, the HRA is a retirement HRA that only pays or reimburses medical
expenses incurred after the individual retires. The individual is an eligible
individual for the purpose of making contributions to an HSA before retirement
because the HRA will pay or reimburse only medical expenses incurred after
retirement.
DRAFTING INFORMATION
The principal author of this notice is Shoshanna Tanner of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this notice contact Ms. Tanner on (202) 622-6080
(not a toll-free call).
12
[ectorMorales Acting United States Executive Director to the Inter-American ... Page 1 of 4
PRLSS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
May 13,2004
JS-1549
Hector Morales Acting United States Executive Director to the Inter-American
Development Bank
Testimony before the Senate Foreign Relations Committee
May 13, 2004
Anti-Corruption Efforts of the MDBs
Mr. Chairman, members of the Committee, I am extremely pleased to be here today
to discuss efforts of the Inter-American Development Bank to address corruption
and increase transparency .Although I have not been in my current position for very
long, I hope I can answer the Committee's questions and shed light on how the IDB
operates.
One of my primary concerns is development effectiveness; by effectiveness I mean
that the development efforts of the IDB can only have their intended impact if
projects and policies are implemented transparently and free of corruption from
inception to completion.When the bank provides loans and technical assistance
grants to the most vulnerable populations of the Western Hemisphere,
guaranteeing.the efficacy of those resources is critical. While multilateral
development banks are accountable to all shareholders, they can be important
vehicles to transmit U S policy interests.
I would like to focus my remarks today on three levels of anti-corruption efforts by
the IDB: within the institution, by project, and by country, and provide you with a
U.S. view of the Bank's progress in each of these areas. The IDB has accelerated
its progress in these areas recently, but still has much work to do.The Office of the
U S Executive Director has been, and will continue to be, a strong advocate for
reform at the IDB.I am aware of the considerable challenges facing the IDB in the
area of anti-corruption.My focus in the US Executive Director's Office will continue
to be on critical areas that impact the Bank's core development mandates.Among
my current priorities are: an overhaul of the IDB's corporate and country project
procurement systems, creation of a separate audit committee of the Board and
adoption and implementation of an internationally recognized framework of internal
controls, and further work on disclosure and transparency in IDB projects and
policies.
Institutional Efforts
The IDB has made significant strides with respect to institutional anti-corruption
issues.Progress is being made on creating an institutional culture which promotes
transparency.The new Information Disclosure policy, adopted late last year,
contains a strong statement on the presumption of disclosure.As a result of strong
U.S. advocacy, the policy, including release of the Minutes of Executive Board
meetings, advances the IDB beyond many of the standards in other M D B s and
includes several of the objectives of the transparency language in Section 581 of
the FY 2004 Appropriations Legislation on which the Treasury Department worked
closely with this Committee.As part of the IDB policy, an annual review of
implementation will be conducted.I will use this opportunity to advocate for
additional measures to enhance disclosure.
As you may know, President Iglesias has made a strong commitment to fight
against corruption within the Bank and in the Bank's member countries.To
strengthen his pledge to fight corruption at the IDB, the Office of Institutional
Inteqrity was created in 2003, and is now responsible for pursuing allegations of
impropriety through three different Bank committees -the Oversight Committee on
Fraud and Corruption, the Conduct Review Committee and the Ethics
>://www.treas.gov/press/releases/js 1549.htm 5/6/2005
JS-1549: Hector Morales Acting United States Executive Director to the Inter-American ... Page 2 of 4
Committee.Allegations may be reported anonymously, via a toll-free hotline, with
full whistleblower protections afforded as the result of a n e w policy in 2003.
Semimonthly reports on the activities of the Oversight Committee on Fraud and
Corruption are available on the IDB's public website.Since its inception in April 2002
through April of this year, 183 allegations have been received, averaging 7 per
month. The OCFC/OII has opened 92 investigations during the past two years.
Also in 2003, the Board of Executive Directors adopted for the first time its o w n
C o d e of Ethics as distinct from the Code of Ethics for Bank Management.
These are important steps, but they need to be strengthened by encouraging
participants in IDB projects to c o m e forward with allegations, and for those
allegations to be vigorously prosecuted.
There are two additional transparency-enhancing mechanisms at the IDB which I
would like to highlight: the inspection panel and the Office of Oversight and
Evaluation.
The IDB's independent inspection mechanism was established in 1994 as part of
the implementation of the Eighth General Increases in Resources of the
Bank.During the negotiations for the Eighth Replenishment, the Governors of the
Bank expressed a desire to increase the transparency, accountability and
effectiveness of the Bank's performance by the introduction of an inspection
function, to be performed independently of Management, which would investigate
allegations by affected parties that the Bank had failed to apply correctly its o w n
operational policies.To date there have been five requests for inspections and
information on the activities of the inspection mechanism are available on the
Bank's website.
The Office of Evaluation and Oversight reports directly to the Board of Directors and
is independent of Bank management.The office undertakes independent and
systematic evaluations of the Bank's strategies, policies, programs, activities,
delivery support functions and systems.The evaluation office provides the Board of
Directors with a vehicle for obtaining independent views of the effectiveness of the
Bank's operations, policies, and programs.The Auditor General performs audits,
reviews, and investigations designed to help assure management of the adequacy,
effectiveness and efficiency of the Bank's internal controls and resource utilization.
The US Chair has been a strong advocate for reform of the IDB's corporate and
project procurement systems.We pushed for a review of both systems by external
consultants and management is expected to recommend concrete reforms in the
near future.The U S will continue to drive the agenda on this issue with the objective
of creating a best-practice, transparent and accountable project procurement
system at the IDB which is fully harmonized with that of the other M D B s .
Going forward, in addition to Section 581 reforms, I see three areas of focus to
improve institutional transparency efforts at the IDB: mandatory disclosure of
financial information for IDB employees, creation of an audit committee of the
Board, and adoption and implementation of an internationally recognized framework
of internal controls.To avoid conflicts of interest at the staff level, financial
disclosure is a key component.The establishment of an audit committee and the
adoption of a formal internal controls framework are consistent with U S policy.
IDB Financed- Projects
To address corruption in the execution of bank-financed projects, the IDB has a
supervision system of reviews and evaluations during the project cycle.The IDB's
independent evaluation office recently completed a study of this system and found it
to be deficient. Bank-wide, not all supervision requirements are met on a consistent
basis, and there is no centralized authority in the Bank responsible for monitoring
compliance on all of the supervision instruments.The U S Chair w a s supportive of
the evaluation's recommendations for reform, and has urged the Management to
immediately address flaws in the current system.By reducing the number of
reporting requirements to key reports at the beginning, mid-term, and end of a
project's implementation and at the s a m e time strengthening the consistency and
quality of reporting, w e expect to see improved project supervision.! intend to hold
IDB m a n a g e m e n t accountable for addressing the weaknesses identified by the
evaluation.
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Another fundamental area where the IDB can play a role in improving governance
at the project level is through reform of the project procurement system.This Chair
has urged the IDB to work with the other M D B s to agree on a best-practice set of
procurement and consultant guidelines, standard documents and
processes.Updated project procurement and consultants policies must be available
to the public and referenced in all IDB investment loan agreements with Borrowers
and must mandate the use of appropriate standard documents.
With respect to the private sector, the IDB Group's new private sector development
strategy will promote best practices for corporate governance and social
responsibility.The U S has been a strong advocate of the M D B s working exclusively
with those private sector firms committed to corporate governance.We have also
encouraged the IDB to promote capacity building and best-practice awareness
a m o n g smaller firms so that they might improve competitiveness along with
governance and safeguards.
The IDB representation in each of the borrowing member countries is a key factor in
improving project performance.The IDB needs to focus additional energy and
resources, if necessary, on properly staffing and training the country offices so that
they are capable of providing project supervision, exercising fiduciary oversight over
procurement processes, and reporting back to the Bank when participants in local
projects are unsatisfied with any of the fiduciary or governance aspects of IDB
projects.
Anti- Corruption Efforts at the Country Level
I would like to highlight to the Committee that the Treasury Department prepares an
annual report on the anti-corruption efforts of all of the Multilateral Development
Banks.The report focuses on the country impact of M D B actions to improve
governance.
The IDB's institutional strategy explicitly prioritizes modernization of the state as an
area of Bank action.Before projects are developed, the country strategy which
defines IDB's engagement will consider anti-corruption, governance, and
institutional strengthening in the strategy.Public sector reform and modernization of
public administration are key components in virtually every country strategy paper
the IDB adopts.
In 2003, the IDB financed 19 projects for a total of $772 million for public sector
reform and modernization T h e s e projects ranged from strengthening internal
controls in Brazil's Federal Court of Accounts to promoting fiscal reform in Bolivia
and Peru.In 2004, the IDB has financed several projects of note: $7.8 million for
capacity building of municipal governments in Panama; $25 million in concessional
finance to Honduras to improve bank supervision; and a grant of $150,000 to
Paraguay to improve management between the Executive and Legislative
branches.
Through the Multilateral Investment Fund, the IDB also makes extensive use of
grant financing for demonstration projects to show the benefits of politically difficult
commitments that benefit the private sector, such as strengthening auditing and
accounting standards in the Caribbean, and developing benchmarks to combat
m o n e y laundering across the region.The MIF focuses on innovative private sector
projects with large demonstration effects.Recent areas of activity include:
accounting and auditing standards, financial sector reform and supervision, and
improving regulatory frameworks.
To encourage market forces to provide a strong positive demonstration effect, the
IDB has created its Business Climate Initiative, which will draw on the work of the
World Bank and other multilateral institutions.The initiative will fund a diagnostic
assessment of the weaknesses in country business climates, and then propose a
program to target these weaknesses.
Results from early governance and anti-corruption elements of larger loans have
shown that conditions for disbursement related to anti-corruption efforts such as
sub-national financial reporting and investigation of financial crimes have largely
been met.We need to capitalize on these incentive mechanisms and enhance the
Bank's ability to achieve improvements in anti-corruption activities.
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In my view, a critical area for further reform at the country level is building the
capacity of project executing agencies in the country, usually Ministries or
coordinating bodies of the executive branch.Executing agencies are subject to
tremendous political pressures and a governing culture which often does not lend
itself to full transparency.The IDB, through its long relationship with countries, is
well-placed to dig deeper into the institutional culture and improve the government's
use of IDB resources for the benefit of civil society.
Conclusion
In conclusion, while the pace of institutional reforms to combat corruption has
accelerated recently, I recognize that the IDB still has m u c h work to do.Because the
bank is a leader in the region, a strong signal of the importance of anti-corruption
and transparency initiatives in the Bank's institutional culture will have exponential
effects in the countries of the region.This is an aggressive agenda, but as the
largest shareholder in the Bank, the U S is working aggressively on the need for
further reform.
In his address to the IDB Board of Executive Directors last July, Secretary Snow
remarked on the critical need to improve the investment climate in Latin America,
saying that "capital is a coward" and only goes to places where it feels adequately
protected.lt is our job to enhance anti-corruption and transparency activities at the
IDB to create the conditions for capital to flourish and for our development
assistance to be effective.
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 13, 2004
JS-1550
Carole Brookins
United States Executive Director to the World Bank
Testimony before the Senate Foreign Relations Committee
May 13, 2004
Anti-Corruption Efforts of the MDBs
Mr. Chairman, Members of the Committee, I welcome your invitation to come and
speak with the Committee today on a subject which is fundamental to economic
development and poverty reduction. Improving governance, increasing
transparency and combating corruption are a major focus of President Bush and
our agenda at the World Bank (the Bank). As the President said when he
announced the Millennium Challenge Account (MCA) on March 14, 2002: "Money
that is not accompanied by legal and economic reform are often times wasted. In
many poor nations, corruption runs deep...When nations refuse to enact sound
policies, progress against poverty is nearly impossible."
Our Administration's view is well supported by the Bank. In fact, combating
corruption and building good governance have been major ongoing priorities of the
World Bank since 1996. At the most recent Annual Meeting in Dubai of the World
Bank and International Monetary Fund (September 23, 2003), Bank President
Wolfensohn said: "There is still too much cronyism and corruption (in the
developing countries). In nearly every country, it is a matter of c o m m o n knowledge
where the problems are and who is responsible. Frankly, there is not enough bold
and consistent action against corruption, particularly at the higher levels of
influence."
During my tenure as Executive Director representing the United States on the
Bank's Board, I have seen up front the real impact of the World Bank on people's
lives and opportunities to emerge out of poverty that good governance supported by
the World Bank can make in delivering textbooks to children in Nairobi, Kenya or
building a needed rural road to a village in Malang, Indonesia. Notwithstanding the
compelling nature of these personal experiences, the question before us today is:
H o w effective is the Bank in its anti-corruption efforts, thereby ensuring that its
assistance can be delivered effectively and efficiently to promote economic growth
and reduce poverty?
The World Bank continues to be the leader among international development
institutions in a broad range of country-based initiatives to strengthen governance,
build effective local institutions and increase transparency. These three
components are the infrastructure for fighting corruption—both its systemic causes
and in specific cases where it appears. The Bank has built a comprehensive
structure that includes international advocacy, internal controls,
analytical/diagnostic tools, education and training, and country operations. A m o n g
the M D B s , the Bank provides the largest amount of finance to support good
governance programs, lending over $5 billion per year for reforms to strengthen
public sector institutions.
The Bank's anti-corruption infrastructure has performed effectively in many aspects
and in managing many challenges. However, there is more that could be done to
strengthen the system. Our Administration is directly pursuing ways to get the
desired results both internally and on the ground in countries where the Bank
operates This Committee's 2003 legislation, Section 581 of the FY2004
Consolidated Appropriations Act, which the Committee (working with Treasury)
crafted, is an important tool for our efforts to enhance accountability and
transparency.
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The Bank's mandate is to end poverty in member countries by strengthening their
investment climates in support of jobs and growth, and by creating local capacity to
deliver services to the poor. In m a n y cases, the Bank's services are in great
demand in countries where governance standards and institutional capacities are
lacking. By the very nature of its mandate, the Bank needs to be involved in these
countries to help improve their governance structures. The challenge is to establish
procedures that successfully mitigate the risks posed by corruption and effectively
deliver on the Bank's mandate. The U.S. is fully committed to meeting this
challenge.
My office has an ambitious agenda with respect to anti-corruption and transparency
efforts. It approaches this issue at three levels. At the institutional level, w e focus on
improving the functioning of the Bank's internal control processes for preventing
and responding to corruption and fraud. At the project level, w e focus on
encouraging the Bank to conduct analysis and design projects and lending policies
that help to reduce opportunities for corruption and ensure that Bank funds will be
well spent. At the country level, m y office is a driving force to increase transparency
and disclosure of Bank operations and anaylsis.
Institutional Efforts
As a major provider of development expertise and funding, the Bank recognizes
that it must lead by example. Therefore, the World Bank has established systems to
ensure institutional integrity, accountability and the rigorous investigation and
resolution of cases involving fraud and corruption.
In November 2000, the World Bank created the Department of Institutional Integrity
(INT) out of two preexisting offices tasked with combating corruption. The INT has
played an important role in investigating allegations of misconduct by firms,
individuals, and Bank staff. INT also supports training for Bank staff to identify ways
to detect and deter fraud and corruption in Bank operations. In order to be
proactive, anti-fraud and corruption training is provided by INT to all n e w Bank
operations staff as part of their introductory training. The Bank has a hotline (1-800831-0463) where the public or staff can report incidents of corruption or other
inappropriate practices. Whistleblower protection is ensured and complaints m a y be
m a d e annonomously or confidentially.
The Bank has instituted several reforms that attempt to eliminate conflicts of
interests and any possible corrupt practices a m o n g its staff. In 2003, the Bank
announced the strengthening of its financial disclosure obligations for senior staff.
All of the Bank's senior managers and Board members are n o w required to provide
an annual statement listing their financial interests and those of their immediate
families.
The Bank's Internal Auditing Department (IAD) guides World Bank management in
establishing and maintaining strong internal controls and risk management
procedures. IAD performs audits of the internal controls of business processes to
assess their integrity, and provides advice on the design, implementation, and
operation of internal control systems. In 1997, a special unit within IAD w a s created
specifically to review all allegations and guard against fraud or corruption within the
World Bank Group. This group works with an Oversight Committee Against Fraud
and Corruption.
The Bank has taken formal steps to review its internal controls. Beginning in 1995,
the Bank adopted the internationally recognized internal control framework known
as C O S O (Committee on Sponsoring Organizations). More recently, as part of
Bank management's annual assessment of internal controls, management and the
independent auditor provide letters regarding the adequacy of internal controls over
external financial reporting. The two letters are published with the financial
statements in the Bank's annual report.
In the area of accountability the World Bank has two key institutions, the Operations
and Evaluation Department ( O E D ) and its equivalents at the IFC and M I G A ( O E G
and O E U ) and the Quality Assessment Group (QAG). Established in 1973, the
Operations Evaluation Department ( O E D ) is independent of management and
reports directly to the Bank's Board of Executive Directors. O E D evaluates the
effectiveness of the Bank's operations at the project, sector, and country level, and
assesses its lasting contribution to a country's overall development. Quality
Assurance Group ( Q A G ) w a s created in 1996 with the express purpose of
improving the quality of Bank output within the broad context of alleviating poverty
and achieving development impacts. Q A G ' s mandate is to increase management
and staff accountability by conducting real-time assessments of the quality of the
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Bank's portfolio under implementation as well as the quality of the initial formulation
of projects and programs.
A related unit, The Quality Assurance and Compliance Unit (QACU) was
established in 2001 as part of the World Bank's Environmentally and Socially
Sustainable Development Vice Presidency. Q A C U ensures that safeguard policies
are implemented consistently across the regions, and gives advice on compliance
with the safeguard policies in projects. Safeguard coordinators, with dedicated
funding, are appointed in each region to oversee project compliance with the
policies and assure that the proper steps have been taken to avoid or mitigate
negative impacts.
Project-Level Efforts
The World Bank utilizes a number of effective tools to mitigate the risk of corruption
in designing projects, as well as mechanisms to address instances w h e n it finds
that corrupt practices have occurred in the course of project implementation.
First, the Bank has procurement and consultant guidelines that govern the
purchase of goods, civil works and consulting services financed in whole or in part
from Bank loans for investment projects. The guidelines emphasize the need for
economy and efficiency in the implementation of the project, the importance of
transparency in the procurement process, and state that open competition is the
basis for efficient public procurement. The guidelines include anti-fraud and
corruption provisions and provide for debarment or other remedies if the Bank
determines that firms have engaged in corrupt or fraudulent practices. If World
Bank procurement guidelines have not been followed, then the Bank could declare
a misprocurement and the borrowing government will lose the relevant funding.
Related to this, the Bank has actively enforced its administrative sanctions policy.
Under this policy, the Bank debars firms and individuals from participating in any
further Bank, or Bank-financed, projects if they are determined to have engaged in
corrupt, fraudulent, collusive, or coercive practices in competing for, or in executing,
a Bank contract. More than 180 companies and individuals have been debarred
from doing business with the Bank, either temporarily or permanently. In addition,
the World Bank refers matters to national justice officials for prosecution in cases
w h e n its internal compliance unit uncovers evidence that laws have been broken.
The Bank makes the list of the debarred firms and individuals publicly available on
its website. This illustrates the strong commitment the Bank has to eliminating
corruption at the project-level, as well as the financial and reputational costs to the
private sector of engaging in corrupt or non-compliant activities.
In 1993, the World Bank created the Inspection Panel as an independent forum to
private citizens w h o believe that they have been or could be directly harmed by a
project financed by the World Bank. Twenty-seven formal requests have been
received since Inspection Panel operations began in September 1994. Panel
reports are publicly available on the Bank's website. The IFC, the Bank's private
sector institution, and M I G A have a Compliance Advisor/Ombudsman whose role is
three fold: (1) T o advise and assist IFC/MIGA to address complaints by people
directly impacted by projects in a manner that is fair, objective and constructive, (2)
To oversee compliance audits of IFC/MIGA, overall environmental and social
performance, and specific projects, and (3) To provide independent advice to the
President and management on specific projects as well as broader environmental
and social policies, guidelines, procedures and resources.
The IFC has also been crucial in developing the Equator Principles that were
adopted by ten leading banks from seven countries announced on June 4, 2003.
The Equator Principles are a voluntary set of guidelines for managing social and
environmental issues related to the financing of development projects that are
based on the policies and guidelines of the World Bank and the IFC. Together,
these banks represent approximately 7 0 % of the project loan syndication market
globally. In adopting the Equator Principles, a bank undertakes to provide loans
only to those projects whose sponsors can demonstrate, to the satisfaction of the
bank, their ability and willingness to comply with comprehensive processes aimed
at ensuring that projects are developed in a socially responsible manner and
according to sound environmental management practices.
However, more work is needed to address project-level concerns. Currently, the
U S is pushing for the Bank to adopt a more systematic approach to measuring
project results. This will facilitate a proactive examination early and regularly in the
project life-cycle of whether Bank projects are meeting their objectives. Such
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examination can be a useful tool in identifying if corruption is playing a role.
Anti- Corruption Efforts at the Country Level
As mentioned above, the World Bank provides over $5 billion per year to help
countries reform and strengthen governance measures that prevent and punish
corruption. Numerous examples of these programs can be found in the annual
report that the U.S. Treasury provides to Congress on anti-corruption actions taken
by countries as a result of M D B assistance. They include programs that promote a
wide range of judicial, fiscal, procurement and regulatory reform.
The World Bank and other IFIs have intensified efforts to assist countries to
improve the quality of public expenditures. The Bank has increased assessment of
the content and overall efficiency of public expenditures with the help of Public
Expenditure Reviews (PERs), Country Financial Accountability Assessments
(CFAAs), and Country Procurement Assessment Reports (CPARs). Expenditure
Tracking Assessments for Highly Indebted Poor Countries (HIPCs) have also been
used to evaluate budget formulation, execution and reporting jn twenty-four HIPCs
over the last several years. M y office is pushing hard to get the Bank to conduct
P E R s , C P A R s , and C F A A s in all borrowing countries and follow up these
assessments with technical assistance and projects that address the weaknesses
identified. This is particularly necessary in countries that will be receiving
adjustment lending funds or direct budget support.
Another important Bank diagnostic is the Investment Climate Assessment (ICAs),
which attempts to systematically analyze conditions for private investment and
enterprise development in World Bank countries. These assessments examine the
factors constraining market activity, in particular, the weaknesses in a country's
legal, regulatory, and institutional framework. A s a result, ICAs are a useful tool in
identifying those areas where country reforms could have the greatest impact in
stimulating private sector activity and reducing official corruption.
The World Bank has also been a leader in the research and analysis of corruption.
Particularly notable is the work of the World Bank Institute (WBI) which has
developed n e w approaches to measuring corruption and assessing its monetary
and developmental impact. The World Bank has joined with s o m e of the very civil
society groups represented on one of today's panels - Transparency International to co-host an anti-corruption workshop highlighting the challenges in overcoming
vested interests against reform. Through this and similar conferences the Bank is
creating a frank dialogue about the roots of corruption in the hope of building a
stronger social consensus on values and ethics in borrowing m e m b e r countries.
The Bank's commitment to governance and fighting corruption is further illustrated
by the w a y in which International Development Association (IDA) resources are
allocated to the seventy-seven recipient countries, which include the world's
poorest nations. Governance is a major factor in the IDA performance-based
allocation system, which the Bank utilizes on an annual basis to determine the
amount of resources countries are eligible to receive. Consequently, countries that
improve governance and efforts to combat corruption are rewarded with additional
IDA resources, while those whose governance scores decline receive fewer
resources. A s a result, the Bank has had many requests from countries for advice
and assistance in addressing issues that would improve their governance scores.
Another key element in the battle against corruption is transparency, where the
Bank has been at the forefront in terms of disclosure of documents and consultation
with civil society. The Bank has frequently updated its information disclosure policy
to establish and institute best practices a m o n g the M D B s . M y office continues to
work with the Board and Management to ensure that further transparency is
achieved in the context of additional improvements to the B a n k s disclosure policy,
consistent with legislation from Congress in the FY04 appropriations process as
well as international commitments by the G-8 at last year's summit in Evian,
France.
Conclusion:
The Bank has made considerable progress in establishing the foundation required
to address governance and corruption in its operations and in the countries where it
works. The Bank also has the leadership of senior management at the forefront on
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this critical issue. We cannot afford complacency however; continued effort and
vigilance are required, both institutionally and in countries receiving assistance.
A m o n g the challenges going forward will be to achieve greater coherence across
international institutions on issues like debarment, procurement and consultant
guidelines, fiduciary standards and transparency. Most important to building a
sustainable anti-corruption culture is building ownership in borrowing countries. The
goal must be to increase their d e m a n d for good governance, so that they are
accountable to their o w n citizens, w h o will then be better able to benefit directly
from their o w n country's development. Mr. Chairman, the U.S. is committed to the
full scope of this effort and w e will continue to exercise our leadership and influence
in this vital cause.
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
May 13, 2004
JS-1551
Treasury Secretary S n o w Statement
O n House Passage To Make The Expanded 1 0 % Bracket Permanent
Today the House of Representatives acted on a measure that is solid common
sense for America's working families. I applaud their vote to prevent a tax increase
on the nearly 94 million people w h o benefit from the lowest 1 0 % bracket. The
Senate should quickly follow suit. Preventing a tax increase is essential for
taxpayers at all income levels, especially those in the lower 1 0 % bracket. The
President is committed to allowing hard-working individuals and families keep more
of their own money to help pay for their children's education, invest for retirement,
and spend as they see fit. This action will bring greater fairness and simplicity to
the tax code.
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PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 13, 2004
JS-1552
Treasury Secretary Snow Hails Passage Of Health Care Initiatives That
Address Affordability And Help Uninsured
I applaud the House for their efforts to make it easier for millions of Americans to
afford and save for their health care costs. They passed legislation that will allow up
to $500 of unused Flexible Spending Account funds to be carried forward or
contributed to a Health Savings Account. They also passed the Medical Malpractice
reform bill which will help control health care costs by encouraging alternative
dispute resolution, requiring clear and convincing evidence for punitive awards, and
controlling punitive and non-economic damages.
We will continue our efforts to make sure that all Americans have access to health
care coverage, and employers help to provide affordable health insurance to their
employees. The President's plan to make health care more affordable includes
Association Health Plans, which will give America's working families greater access
to affordable health insurance by allowing small businesses to band together
through trade groups and negotiate on behalf of their employees and their families.
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F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 13, 2004
JS-1553
Treasury Names New Private Sector Coordinator For Critical Financial
Infrastructure Protection
Secretary John W. Snow today designated Donald F. Donahue as the new Sector
Coordinator in the national effort to protect the U.S.'s critical financial infrastructure.
As Sector Coordinator, Donahue will work with Treasury to respond to President
Bush's call to develop strategies to strengthen and protect our critical financial
infrastructure. Donahue will play a key role in ensuring that the private sector and
the government work cooperatively to enhance the resilience of our financial
infrastructure.
By being named Sector Coordinator, Donahue will also chair the financial industry's
Financial Services Sector Coordinating Council (FSSCC). The F S S C C works
closely with the Department of the Treasury and other regulators to coordinate the
private sector's preparation for events that could disrupt the normal business of the
financial services sector, such as cyber attacks, natural disasters and terrorist
attacks.
"Our financial critical infrastructure is the lifeblood of the American economy, and
since the attacks of September 11, 2001, the Bush Administration has m a d e
working together with the private sector to protect it a top priority. As the Sector
Coordinator and Chairman of the Financial Services Sector Coordinating Council,
Don Donahue will provide valuable leadership as w e continue to enhance our
security," said Secretary Snow.
In accepting this position, Donahue stated: "I look forward to working with the
Department of the Treasury and others to further strengthen the resiliency of
America's financial services sector. While much has been accomplished, w e still
have more to do."
Donahue is currently the President of the Depository Trust Corporation and Chief
Operating Officer of the D T C C , where he has served since 1986. Since the
integration of the Depository Trust Company and the National Securities Clearing
Corporation, Mr. Donahue has been managing director for the Customer Marketing
and Development Group, responsible for developing and marketing the service
lines offered by DTCC's subsidiaries. This role includes strategic planning, product
development, IT applications development, and technology infrastructure support
and telecommunications.
During today's meeting, the contributions of outgoing Sector Coordinator and
F S S C C chairwoman, Rhonda E. MacLean, were recognized. "By leading the effort
to create the Financial Services Sector Coordinating Council, Rhonda MacLean
achieved sector-wide participation and coordination on vital critical infrastructure
protection initiatives. The financial services sector is better prepared today because
of the accomplishments of the Council under Mrs. MacLean's leadership," said
Snow.
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s-1554: Asset Forfeiture Event Stresses Importance of International L a w Enforcement Cooperation
Page 1 of 2
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 14, 2004
js-1554
Asset Forfeiture Event Stresses Importance of International Law Enforcement
Cooperation
Australia, Canada, Switzerland Receive Forfeited Assets for Assisting
Investigations
The U.S. Department of the Treasury today joined with officials from the Australian,
Canadian and Swiss embassies to share assets forfeited through cooperative lawenforcement actions.
U.S. law enforcement works closely with our international partners to combat crime
worldwide. The U.S., pursuant to statutory authority, shares the proceeds of
successful forfeiture actions with countries that made possible or substantially
facilitated the forfeiture of assets.
"As we all know too well, financial crimes do not confine themselves to one
country's borders. As terrorists and other criminals attempt to move and hide illicit
financial assets around the world, one country's forfeiture efforts, however effective
and comprehensive, may not be enough to take the profit out of transnational
crime," said Treasury Deputy Secretary S a m Bodman. "International cooperation is
needed, and today w e recognize and thank the Canadian, Australian, and Swiss
governments for their support and assistance in several important asset forfeiture
cases."
Joint law enforcement efforts among the U.S. and the Governments of Australia
and Canada led to the arrest of Charles Hermanowski, who used his company
Americable to defraud cable television networks of funds owed to them for providing
programming to Americable customers. Hermanowski ultimately siphoned over $8
million dollars into his personal bank accounts. W h e n he fled the U.S., the Royal
Canadian Mounted Police ( R C M P ) provided surveillance and interviewed
witnesses. Most significantly, the R C M P disseminated information through the
fugitive alert system, which ultimately led to Hermanowski's arrest in Australia
The Australian Federal Police (AFP) provided assistance in locating and arresting
Mr. Hermanowski. Notably, the A F P assisted the U.S. in its extradition proceedings
by attending various court appearances.
The efforts of the Canadians and Australians led to today's sharing of over $1.2
million with each country.
The Government of Switzerland provided assistance in two separate cases, which
resulted in asset forfeiture sharing of over $500,000. Investigations into the illegal
activities of Michael'Norton and his company Kona Kai Farms showed he imported
inexpensive Central American Coffee and sold it as expensive Kona Coffee. During
the course of the investigation, two Swiss bank accounts were discovered and
linked to the illegal scheme. This forfeiture occurred as a result of the Government
of Switzerland permitting Norton to voluntarily repatriate to the U.S. the illegal
proceeds, in lieu of commencing its own forfeiture action.
The Swiss also played an important role in the IRS criminal investigation of drug
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trafficker Gary Waldon, which led to the forfeiture of proceeds from Mr.
Waldon's illegal activity.
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FROM THE OFFICE OF PUBLIC AFFAIRS
May 14, 2004
js-1555
Secretary Snow Visits New York on Monday to Present New Market Tax Credit
Awards to Seven Local Organizations
Secretary John W. Snow will travel to New York City on Monday, May 17 to present
N e w Market Tax Credit ( N M T C ) awards totaling $748 million to seven local
organizations for business and economic development in low-income communities.
The presentation of the awards will take place at Federal Hall, 26 Wall Street at
10:30 a m EDT. Media must arrive by 9:30 a m and must wear their official media
credentials.
The seven organizations selected to receive awards are: Empowerment
Reinvestment Fund, LLC ($25 million), GreenPoint N e w Markets, L.P. ($85 million),
H E D C N e w Markets, Inc. ($135 million), Independence Community Commercial
Reinvestment Corporation ($113 million), N e w Jersey Community Development
Entity, LLC ($125 million), Related Community Development Group, LLC ($140
million), and T C G Community Enterprises, LLC ($125 million).
The New Market Tax Credit program attracts private-sector capital investment into
urban and rural low-income areas to help finance community development projects,
stimulate economic opportunity and create jobs in the areas that need it most. The
N M T C Program, established by Congress in December 2000, permits individual
and corporate taxpayers to receive a credit against federal income taxes for making
qualified equity investments in investment vehicles known as Community
Development Entities (CDEs). Substantially all of the taxpayer's investment must in
turn be used by the C D E to make qualified investments supporting certain business
activities in low-income communities. The credit provided to the investor totals 39
percent of the initial value of the investment and is claimed over a seven-year credit
allowance period. The 62 organizations receiving tax credit allocations this year
were selected through a competitive application and rigorous review process.
More information on the N M T C program can be found at www.cdfifund.gov.
-30-
i://www.treas.eov/press/releases/js 1555.htm
5/31/2005
JS-1556: Treasury Deputy Secretary B o d m a n T o Address The Inter-American Development Bank O n M... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 17, 2004
JS-1556
Treasury Deputy Secretary Bodman To Address The Inter-American
Development Bank O n Monday, May 17
Media Advisory
Deputy Secretary of the Treasury Sam Bodman will address the Inter-American
Development Bank (IDB) on Monday, May 17. Secretary Bodman will make the
keynote address at the IDB's Multilateral Investment Fund (MIF) Remittances
Seminar.
The seminar will coincide with the MIF's release of the first state-by-state survey of
remittances sent to Latin America by millions of migrants in the United States.
WHO:
Deputy Secretary of the Treasury, Samuel W . Bodman
WHAT:
Keynote Address at the IDB's Multilateral Investment Fund Remittances Seminar
WHEN:
Monday, May 17, 2004
10:15 am EDT
WHERE:
IDB Headquarters
1300 N e w York Avenue
9th Floor - Andres Bello Auditorium
Washington, D.C.
-30-
)://www.treas.gov/nress/releases/is 1556.htm
5/31/2005
js-1557: Treasury Secretary John S n o w Presents $748 Million in Economic <BR>Development Tax Cre... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 17,2004
js-1557
Treasury Secretary John Snow Presents $748 Million in Economic
Development Tax Credits in N e w York City to Help Low-Income
Communities
through N e w Market Tax Credit Program
Secretary John W. Snow today presented New Markets Tax Credits Awards totaling
$748 million to seven N e w York area economic development organizations that
promote business and economic development in low-income communities.
The presentation of the awards took place at Federal Hall in New York City.
The seven organizations receiving awards are: Empowerment Reinvestment Fund,
LLC ($25 million), GreenPoint N e w Markets, L.P. ($85 million), H E D C N e w
Markets, Inc. ($135 million), Independence Community Commercial Reinvestment
Corporation ($113 million), N e w Jersey Community Development Entity, LLC ($125
million), Related Community Development Group, LLC ($140 million), and T C G
Community Enterprises, LLC ($125 million).
"The spirit and resilience of the New York area has been unwavering since the
attacks of September 11. The N e w Market Tax Credits awards w e are presenting
to seven N e w York area community development organizations are another sign of
support for the rebuilding effort that continues today. These awards will bring new
hope for prosperity and growth in communities in the N e w York area that have been
particularly hard hit," said Secretary of the Treasury, John W . S n o w
The Department of the Treasury announced on May 6, that 62 organizations have
been selected to receive a total of $3.5 billion in tax credit allocations through the
second round of the N e w Markets Tax Credit (NMTC) Program.
The New Market Tax Credit Program attracts private-sector capital investment into
urban and rural low-income areas to help finance community development projects,
stimulate economic opportunity and create jobs in the areas that need it most. The
N M T C Program, established by Congress in December 2000, permits individual
and corporate taxpayers to receive a credit against federal income taxes for making
qualified equity investments in investment vehicles known as Community
Development Entities (CDEs).
Substantially all of the taxpayer's investment must in turn be used by the CDE to
make qualified investments supporting certain business activities in low-income
communities. The credit provided to the investor totals 39 percent of the initial
value of the investment and is claimed over a seven-year credit allowance period.
The 62 organizations receiving tax credit allocations this year were selected
through a competitive application and rigorous review process.
"From foresting businesses in the communities of north-central Maine, to a start-up
manufacturing business in south-eastern Ohio, to child-care facilities and needed
shopping centers in many of our inner-city low-income neighborhoods, the N e w
Markets Tax Credit Program has already begun to improve the communities in
which these investments are being made," said Secretary Snow, highlighting the
work already underway by organizations that received allocations of tax credits last
year.
p://www.treas.eov/Dress/releases/is 1557.htm
5/31/2005
js-1557: Treasury Secretary John Snow Presents $748 Million in Economic <BR>Development Tax Cre... Page 2 of 2
The N M T C Program is administered by Treasury's Community Development
Financial Institutions (CDFI) Fund. The CDFI Fund anticipates that applications for
the third round of the N M T C Program will be available during the summer of 2004.
A complete list of 2004 N e w Markets recipients and additional information can be
found on the CDFI Fund's W e b site: www.cdfifund.gov/
K / / W W W trpnc fT™77™-Qoo/t-c»1^aeAc/ie1 S 5 7 h t m
V^1/?nfK
Page 1 of3
JS-1558: Treasury International Capital Data For March
mma
PRCSS 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®.
May 17, 2004
JS-1558
Treasury International Capital Data For March
Treasury International Capital (TIC) data for March 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 April, is scheduled for June 15, 2004.
Domestic Securities
Gross purchases of domestic securities by foreigners were $1,773.9 billion in
March, exceeding gross sales of domestic securities by foreigners of $1,691.6
billion during the same month.
Foreign purchases of domestic securities reached $82.3 billion on a net basis in
March, relative to $85.0 billion during the previous month. Private net flows reached
$44.2 billion in March. Net private purchases of Treasury Bonds and Notes
increased to $27.6 billion from $20.9 billion the preceding month. Net private
purchases of Government Agency Bonds were $1.1 billion, down from $18.4 billion
the previous month. Net private purchases of Corporate Bonds rose to $29.1 billion
from $21.1 billion the previous month. Net private purchases of Equities declined to
minus $13.5 billion from a positive $2.3 billion.
Official net purchases of U.S. securities were $38.1 billion in March, relative to
$22.3 billion in February. Official net purchases of Treasury Bonds and Notes of
$33.9 billion accounted for the bulk of official inflows in March, up from $16.1 billion
the previous month.
Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $486.2 billion
in March, relative to gross sales of foreign securities to U.S. residents of $489.9
billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $3.7
billion, highlighting a net U.S. acquisition of $4.0 billion in Foreign Equities and net
U.S. sales of $0.3 billion in Foreign Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S.
residents were $78.6 billion in March compared with $83.3 billion in February. Net
foreign purchases of long-term securities were $820.8 billion in the 12-months
through March 2004 as compared to $583.4 billion during the twelve months
through March 2003.
The full March data set, including adjustments for repayments of principal on assetbacked securities, as well as historical series, can be found on the TIC web site,
www.treas.gov/tic
p://www.treas. ?ov/nress/releases/i s 15 5 8 .htm
5/31/2005
Page 2 of3
JS-1558: Treasury International Capital Data For March
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
12 Months
Through
2002
2003
Mar-03 Mar-04 Dec-03 Jan-04 Feb-04 Mar-04
Gross
Purchases
1
13,022.9 15,726.4 13,319.3 17,061.4 1,198.8 1,385.6 1,439.4 1,773.9
of Domestic
Securities
Gross
Sales of
2
Domestic
Securities
12,475.4 14,981.4 12,745.9 16,188.2 1,118.0 1,285.3 1,354.4 1,691.6
Domestic
Securities
3 Purchased, 547.6
net (line 1
less line
2)/1
745.0
573.4
873.2
80.8
100.3
85.0
82.3
4 Private,
508.3
605.6
517.5
662.1
64.5
69.4
62.7
44.2
Treasury
5 Bonds &
112.8
Notes, net
163.7
114.9
213.5
18.4
20.0
20.9
27.6
Gov't
6 Agency
166.6
Bonds, net
137.9
178.4
141.3
12.9
23.4
18.4
1.1
7
Corporate
176.7
Bonds, net
266.1
193.0
265.1
19.7
12.5
21.1
29.1
8
Equities,
net
52.2
37.9
31.2
42.2
13.5
13.4
2.3
-13.5
39.3
139.4
55.9
211.2
16.3
31.0
22.3
38.1
Treasury
71
10 Bonds &
Notes, net
109.3
19.5
177.5
11.3
26.9
16.1
33.9
Gov't
28.6
11 Agency
Bonds, net
24.9
32.2
28.3
4.4
4.2
5.9
2.9
net/2
9
Official,
net
12
Corporate
5.6
Bonds, net
5.5
4.8
6.2
0.7
0.5
0.2
1.2
13
Equities,
net
-0.4
-0.7
-0.9
-0.1
-0.6
0.1
0.0
-2.0
Gross
Purchases
14
of Foreign
Securities
2,640.0 3,532.9 2,718.5 4,122.7
310.4
390.7
401.9
486.2
Gross
Sales of
15 Foreign
Securities
2,613.0 3,577 4 2,708.5 4,175.2
315.5
399.3
403.6
489.9
Foreign
Securities
Purchased,
27.0
16
net (line 14
less line
15)/3
-44.6
10.0
-52.5
-5.0
-8.5
-1.7
-3.7
26.6
34.8
21.8
0.1
4.7
0.7
0.3
Foreign
17 Bonds
28.5
Purchased,
3://www.treas anv/nrftss/raleases/is 1558.htm
5/31/2005
Page 3 of3
[S-1558: Treasury International Capital Data For March
net
Foreign
-1.5
18 Equities
Purchased,
net
Net LongTerm
19 Flows (line 574.6
3 plus line
16)
-71.1
-24.8
-74.3
-5.2
-13.2
-2.4
-4.0
700.4
583.4
820.8
75.8
91.8
83.3
78.6
/1 Net foreign purchases of U.S. securities (+)
12 Includes International and Regional Organizations
/3 Net U.S. acquisitions of foreign securities (-)
Source: U.S. Department of the Treasury
REPORTS
• Foreigners' Transactions in Long-Term Securities with U.S. Residents
(PDF)
tp://www.treas.Pov/nress/releases/is 1558.htm
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js-1559: Remarks of Deputy Secretary of the Treasury, Samuel W . Bodman<br>To Inter-American Dev... Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 17. 2004
js-1559
Remarks of Deputy Secretary of the Treasury, Samuel W. Bodman
To Inter-American Development Bank Conference on Remittances
Thank you, Hector for that kind introduction, and for the terrific work that you and
your colleagues are doing here at the IDB.
I would also like to thank the staff of the IDB's Multilateral Investment Fund (MIF)
for organizing today's conference and for inviting m e to join you today.
As I hope you know, the Treasury Department has been very supportive of the MIF,
not only for its work in the area of remittances, but also for its support of
microfinance and providing grants for private sector development. Your work is
encouraging the growth of a small business sector throughout Latin America and
the Caribbean.
Reaching out to small businesses is central to the Bush Administration's economic
growth agenda in the region. As in this country, w e know that small businesses do
and will provide the majority of the employment opportunities in Latin America. I
would also argue that a growing and vibrant small business sector fosters
entrepreneurship and innovation, strengthens local financial systems, and builds
grass-roots support for improvements in the business climate and democratic ideals
in developing nations.
In addition to its efforts to promote small business growth, the IDB continues to do
important work in the area of remittances. W e know that remittances are an
integral part of the American immigrant experience. For generations, families have
been sending money h o m e around the world: to Ireland and Poland ... the
Philippines and India
and El Salvador and Mexico.
But this phenomenon, once hidden in plain view, is now bigger than ever.
Technological advances in communication and data transfer- and a surge in labor
mobility - have fueled enormous growth in remittances. Since 1995, annual
remittances from the United States have nearly doubled. This dramatic growth is
testimony to the hard work and commitment of workers from abroad seeking better
lives for themselves and their families.
The IDB, and the MIF in particular, have made remittances part of the public
discussion and policy consideration. This work has enabled us to better
comprehend the impact remittances have on the United States as well as Latin
America and the Caribbean.
The MIF has played a critical role in strengthening the delivery of financial services,
and encouraging private sector entry into the remittance market. And the MIF
continues its work in the field by improving the capacity of financial institutions that
deliver these services and streamlining the remittance process. The result has
been an increase in monetary flows to families in Latin America and increased
productivity growth in the United States and in the region.
And this contribution goes well beyond the Americas. The pioneering work of the
IDB and the MIF has created a model for global work on remittances, including
P.V/www.rreas <xnv/nm<is/re.leases/is 1 5 5 9 . h t m
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current efforts through the A P E C (Asian Pacific Economic Cooperation) process
and by the G 7 countries.
I thought I might spend a few minutes discussing our efforts in this area at the G7.
In recognition of the importance of remittances around the world, the G 7 is
committed to facilitating remittance transfers and increasing options available to
recipients to help them improve their o w n economic livelihood. This is a top priority
issue for this year's G 8 Summit to be held in Sea Island, Georgia, next month.
The G7 Global Remittance Initiative is focused on identifying and examining the
barriers that impede the flow of remittances to the end-recipient. These obstacles
include a lack of awareness of, trust in, or access to financial institutions that offer
remittance services, limited competition in the provision of remittance services,
w e a k technological infrastructure, and excessive regulatory barriers that deter
innovation and restrict entry into this market.
The goal here is two-fold: first, to increase overall awareness of the range of
services that are available; and secondly, to foster more competition, which in turn
will result in affordable and accessible remittance services. Much of what the G 7 is
planning to accomplish this year reflects research the MIF has sponsored on the
remittance market, and I thank you for that important contribution.
We hope to see our cooperative work in this area continue. Just three weeks ago,
Secretary S n o w spoke to the Council of the Americas and reiterated U.S. support
for facilitating access to remittances from workers in the United States to their
families back home. T o achieve this, w e are committed to working with the MIF and
its donor countries to achieve the Summit of the Americas goal of cutting in half the
average cost of remittance transfers in the region by 2008. This goal -announced
earlier this year - will generate more competition a m o n g the providers of these
services . . . eliminate regulatory obstacles and other restrictive measures that
increase costs . . and encourage the use of n e w technologies while maintaining
effective financial oversight.
The MIF has been a good partner in this effort: working to improve the collection
and reporting of remittance data, encouraging the reduction of transaction costs,
and identifying ways to "bank the unbanked."
The MIF has correctly focused on increasing the options senders and recipients
have to save and spend their o w n money. This year, for example, I'm told the MIF
will present two projects to help remittances sent to Mexico be used to finance
housing. I think that is a very innovative example of the future directions w e can
take with remittances.
Remittances have become a significant force in the economies of Latin America
and the Caribbean. In recent years these flows have been over five times the
volume of Official Development Assistance.
I know you'll being hearing more details about remittances and their impact from
Mr. Bendixen, but let m e highlight a few findings of the MIF study.
This survey and report that you will discuss today presents detailed analysis of
remittances from the United States, and provides particular insight into the n e w
patterns of migration into this country.
According to the survey, remittances from the U.S. to Latin America and the
Caribbean total about $30 billion annually [2002 data]. While precise numbers are
very difficult to obtain, based on what this survey has found, the total income of
these immigrants living in the United States is estimated to be around $450 billion.
This state-by-state analysis will assist policymakers here in the U.S. and around the
world A s a former Deputy Secretary of C o m m e r c e , and n o w serving at the
Treasury Department, I can tell you that w e have an interest in these analyses
throughout the U.S. government. These data highlight important and significant
tt)://www trp-ac orr»A//r»rpcc/rp1pp«Ps/is 1 5 5 9 . h t m
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js-1559: Remarks of Deputy Secretary of the Treasury, Samuel W . Bodman<br>To Inter-American Dev... Page 3 of 3
impacts on the U.S. economy, as well as on Latin American and Caribbean
economies.
All of us have an interest in learning more about this under-studied area. This
report deserves to be read and discussed, and w e look forward to continue working
with the Bank and the MIF.
Again, I'm happy to be here. Thank you.
tp://www.treas <rnv/nress/re1eases/is 1559.htm
5/31/2005
JS-1560: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>A... Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 16, 2004
JS-1560
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Asian Development Bank Annual Meeting
Jeju Island, Korea
May 16, 2004
It is an honor for me to be here in Jeju Island for the 37th Annual Meeting of the
Asian Development Bank, and I extend m y deepest thanks to our Korean hosts for
their gracious arrangements in this beautiful place. I would also like to welcome
ADB's newest members, Luxembourg and Palau, to the meeting. I would like to
congratulate donors and A D B management on a successful conclusion to the ADF9 replenishment.
Economic Development Agenda of the United States
Since the beginning of President Bush's time in office, he has stressed four core
principles in U.S. development policy. Financial assistance for the poorest countries
should be increased. More assistance should be provided in the form of grants.
Development assistance should be subject to rigorous measurable results. And
support should be targeted to countries that pursue pro-growth policies.
Implementation at the ADB
At the international financial institutions, including the ADB, we have worked
together with many other countries to implement these principles. And w e are very
pleased that this cooperative effort has been a success at the A D B . Over the past
several years, the Bank has demonstrated a willingness and ability to change that is
impressive. W e are cautiously optimistic that these changes will be sustained. Let
m e be specific.
Increasing Financial Assistance for the Region's Poorest Countries
The United States increased its contribution to ADF-9 by 12 percent from the
previous replenishment, in line with commitments w e made to IDA-13 and AfDF-9.
W e will consider the possibility of additional support to the A D B contingent upon the
achievement of critical benchmarks for reform. Our expanded support for the Asian
Bank is congruent with this administration's dramatic increase in support for
HIV/AIDS and expansion in bilateral U.S. assistance to the best performing poorest
countries through the Millennium Challenge Account.
Increased Grant Assistance
We particularly applaud the decision of donors, with strong support from Bank
management, to devote 21 percent of A D F assistance for grants in the region's
poorest and most-vulnerable countries starting in 2005. The money will fund
schools, health care, sanitation, and other basic human needs where demand is
greatest and resources are most scarce. Afghanistan, Laos, Cambodia, Kyrgyz
Republic and Nepal will receive up to 50 percent of their assistance in the form of
grants. Other vulnerable countries will also receive substantial grant allocations.
D://WWW TTPQC rrrnr/rrt-Acc/r^lpflCPs/is 1 5 6 0 . h t m
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The poorest countries will be eligible for 1 0 0 % grants for technical assistance and
prevention and treatment of HIV/AIDS. W e would like to see the flexibility and
country-focus of this model adopted by other financial institutions and look forward
to reviewing the ADB's progress as the first grants projects are rolled out in
January.
Rigorous Measurable Results
Results measurement is no longer a slogan but a growing and essential part of the
way the A D B does business. By the end of the year, the Bank has committed to put
in place a n e w h u m a n resources policy that remunerates staff for development
outputs, not lending targets. The Bank has established a dedicated office to guide
implementation of results measurement at the country, sector, and project level.
These results indicators will measure quantifiable outputs in infrastructure,
agriculture, health and education. W e look forward to reviewing the first resultsbased Country Strategy and Programs by the end of the year.
We would now like to see the Bank's commitments translated into more concrete
actions. Results are a part of s o m e Bank-funded projects but not all. In Afghanistan,
the Bank put in place a time-bound framework for the completion of a critical
Kandahar to Spin Boldak road linking Afghanistan and Pakistan to economies in
Central Asia. In Cambodia, the Bank provided a critical health sector project that
has improved the availability and quality of health services of more than 5 million
people, including 2 million of the country's most poor, and improved pre-natal care
for 2.5 million w o m e n . W e would like to see this type of results measurement
adopted at all levels of the A D B and in all projects and programs, public or private
sector. To be effective, results management must become an integral part of the
culture of the institution and be communicated by A D B top-level management to
those inside and outside the institution.
Encouraging Pro-Growth Policies
The ADB should support countries that pursue good policies. It has already taken
steps to strengthen its performance-based allocation system by increasing the
focus on good governance and strong economic growth. These indicators should
be comparable to those used by other institutions, place a premium on
performance, and be transparent. In support of these objectives, w e believe the
A D B should place greater emphasis on providing resources directed to high-impact,
productivity-enhancing activities.
There is a growing consensus that a robust private sector is critical to growth and
poverty reduction. Support for small enterprises is particularly important. N o country
has achieved sustainable growth without a robust small business sector and no
country can hope to foster innovation and generate jobs without small business
growth. A s an example, the Bank is providing support to small- and medium-sized
enterprises in Pakistan. Nearly 30,000 small businesses will benefit from access to
financial services and 8,000 from the operations of the private sector-managed
Business Support Fund, which will enhance the productivity and competitiveness of
these businesses. W e would like to see this type of assistance substantially
increased across the region. In order to do so, the Bank must marshal resources
internally and continue to pursue innovative mechanisms to support private sector
growth including through equity investments, guarantees, and local currency
financing.
Remittance flows can also benefit from novel financing services. Nearly $30 billion
in remittances flowed to Asia in 2002, representing a significant flow of income to
poor families. The A D B has an important role to play in catalyzing remittance flows
and increasing their cost effectiveness. A pilot remittance program has already
been rolled out in the Philippines and will be discussed with A P E C economies in
Tokyo in June. W e hope the Bank will continue to resource these important
initiatives and apply lessons learned to other countries in the region.
Conclusion
D://WWW ttV>ao (Tr>if/«faPo/^o1<iacAc/ic 1 S 6 0 h t m
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JS-1560: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>A... Page 3 of 3
The A D B has m a d e substantial progress to become a more results-oriented and
transparent institution. The key n o w is to implement these impressive reform
policies quickly and to m a k e this an irreversible part of the Bank's institutional
culture. Private sector lending should become an increasing part of A D B
operations. W e will monitor progress on this reform agenda with great interest and
consider the possibility of additional support to the A D B based on the achievement
of critical benchmarks for reform. W e hope to strengthen our partnership for reform
with the A D B to address the evolving needs of the region.
ww.treas.eov/Dress/releases/is 1560.htm
5/31/2005
JS-1561: Economic Relations Between the United States and Japan <br>John B. Taylor<... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 13,2004
JS-1561
Economic Relations Between the United States and Japan
John B. Taylor
Under Secretary of the U.S. Treasury
Remarks at the Kyoto-Stanford Center
Kyoto, Japan
May 13, 2004
Today I would like to discuss the economic component of our foreign policy
engagement with Japan. I believe that there have been important changes in this
engagement during the Bush Administration, and that these changes are already
beginning to show tangible results.
I am very impressed with how the Kyoto-Stanford Center has created new
substantive person-to-person, business-to-business engagements between the
United States and Japan. The internships of Stanford engineering and computer
science students at Japanese high-tech firms and the small candid seminars given
by Japanese professors here at the Center are examples of these engagements.
The recent improvements in economic relations between the governments of the
United States and Japan are based on similar substantive, candid engagements,
from the very top political level - meetings between President Bush and Prime
Minister Koizumi - to the technical expert level - such as the roundtable meeting I
had yesterday at the Bank of Japan.
Let me begin with the economic situation in Japan at the start of the Bush
Administration, three and a half years ago. Growth in Japan was near zero, even
negative, much as it had been for the previous ten years - a period many
economists had called the "lost decade" in Japan. Even worse, Japan was plagued
by a corroding deflation that had persisted for more than six years. The deflation
was holding back economic growth because both consumers and businesses
curtailed their spending plans, anticipating even lower prices in the future. This
deflation and lack of growth made it difficult for people to service their loans and, as
a result, bad loans (nonperforming loans) at banks began to grow and threaten the
banking system.
A Japan in economic stagnation was clearly not in the interests of the United
States. Japan is an important ally. Its growth would benefit the United States and
the world economy. Its growth would provide the resources to help Japan play a
key role with the United States and other allies in providing security and
development assistance for emerging and developing economies. So, the lagging
economy in Japan was a problem that President Bush and his Administration
wanted to help the Japanese solve. After ten years of stagnation, a new approach
was needed.
Opportunity for the U.S. to a change its approach was presented by two
developments. First, Prime Minister Koizumi was elected to the top leadership
position in Japan. Second, a much less notable event, at least for those outside of
financial and economic circles, was the announcement by the Bank of Japan that it
would follow a new quantitative easing policy to end deflation. This announcement
showed a willingness in Japan to take a fresh approach to the economic stagnation
problem. (It was an announcement I was particularly pleased to hear as I had been
discussing it with Bank of Japan officials even before I came into the Bush
Administration.)
Presented with these opportunities, President Bush and his team developed a new
approach for our economic relations with Japan. It was based on three principles.
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JS-1561 fEconomic Relations Between the United States and Japan <br>John B. Taylor<... Page 2 of 2
First, the new approach was to have no "Japan bashing." President Bush provided
a clear vision on this point; he wanted our relationship with Japan to be based on
friendship. Good friends talk candidly, but they talk as equals. O n e side doesn't
talk down to the other. S o m e in Japan and elsewhere were concerned that our
relationship with Japan - especially in the economic area - w a s too antagonistic
and too anachronistic. This had to change.
Second, the new approach was to focus more on monetary issues and less on
fiscal issues. From a technical economic view, one could say it w a s less
Keynesian, though there w a s nothing doctrinaire here. In our view - and the recent
B O J announcement confirmed this - the excessive government spending and
deficit creation (one Keynesian stimulus package after another) were not helping
the deflation situation. Instead of fiscal stimulus based on government spending,
monetary stimulus based on higher growth of the money supply was needed. For
monetary policy to be effective in ending the deflation and starting growth it w a s
necessary for the nonperforming loan problem to be addressed, so this became
part of our focus on monetary policy.
Third, we focused more on long run sustainability of economic growth rather than
short-term fixes. The zero-growth and deflation in Japan were a multiyear problem,
not a multi-month problem. A healthy Japanese economy would be one where the
next ten years would reverse the last ten years.
With these three principles in hand, we began our work on implementation. When
President Bush met with Prime Minister Koizumi, they talked about these economic
issues - including the nonperforming loan problem in Japan. I recall the first senior
official meeting in m y Washington office with our counterparts from Japan in
October 2001. W e discussed these issues as well as what actions the U.S. w a s
taking to raise growth, in particular President Bush's then recently enacted tax
cuts. There were m a n y other meetings in the months and years that followed,
including several here in Japan with Treasury Secretaries O'Neill and Snow. In
each of these meetings and in public speeches, w e stressed the three principles
underlying our new approach.
I am very happy to say that this new approach is working. We have tangible
results. Economic growth in Japan has returned. Experts say it is more
sustainable than they have seen in a dozen years. Deflation is receding. And all
these successes have followed the needed policy changes: increased growth of the
money supply and reduction of nonperforming loans. And our Ambassador to
Japan says relations between the United States and Japan have never been better!
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5/6/2005
js-1600: U d a y Saddam Hussein's Inner Circle Designated by Treasury<br>U.S. Submitti... Page 1 of 3
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 18, 2004
js-1600
Uday Saddam Hussein's Inner Circle Designated by Treasury
U.S. Submitting N a m e s to U.N. 1518 Committee for
M e m b e r State Freeze
The U.S. Department of the Treasury today designated a group of six individuals
and two associated companies that acted for or on behalf of Uday Saddam
Hussein. Today's action is the third tranche of designations against the former Iraqi
regime in recent weeks. The Treasury Department has now identified or
designated 228 Iraqi-related entities and individuals, comprised of 191 parastatals,
27 individuals and 10 front companies.
"The U.S. will not tire in exposing the sordid underworld of the Hussein family's
finances - including the agents of the regime who greased the wheels that allowed
the regime's plunder," said Juan Zarate, the Treasury Department's Deputy
Assistant Secretary for Terrorist Financing and Financial Crimes.
"Like father, like son. Uday, Saddam Hussein's eldest son and commander of the
paramilitary Fedayeen Saddam ("Men of Sacrifice'), presided over an illicit
commercial empire founded on a variety of smuggling, racketeering and
embezzlement schemes that facilitated him to use his position of power and
privilege to profit himself and his cronies on the backs of the Iraqi people," Zarate
continued.
Information available to the U.S. government indicates that these individuals served
as key financial lieutenants to Uday and were responsible for the day-to-day
operation of many of his businesses. Several of these individuals also held senior
positions in the Uday-controlled Iraqi Olympic Committee which, under the former
Iraqi regime, allegedly acted as a front for a variety of smuggling activities in
violation of United Nations (U.N.) sanctions. One of the designated individuals
served as director of the two companies being designated today, both which
managed many of Uday's illegal enterprises.
Today's action is taken pursuant to Executive Order 13315 which blocks property
and interests in property of the former Iraqi regime that comes within the
possession or control of U.S. persons. The United States is also submitting the
names of these individuals and associated companies to the U.N. with the
recommendation they be listed by the 1518 Committee under U.N. Security Council
Resolution ( U N S C R ) 1483. U N S C R 1483 requires U.N. member states to identify,
freeze and transfer to the Development Fund for Iraq (DFI) assets of senior officials
of the former Iraqi regime and their immediate family members, including entities
owned or controlled by them or by persons acting on their behalf.
The Department of the Treasury is taking these steps to help the international
community identify Iraqi assets connected to the designated individuals and
entities. Treasury is also encouraging other countries to undertake independent
investigations to identify other Iraqi-related assets, publish similar listings and return
identified funds to the DFI.
The Treasury Department took action today against:
Asil Sami Mohammad Madhi Tabrah
Asil Tabrah served as a key assistant to Uday at the Iraqi Olympic Committee and
was responsible for handling many of Uday's domestic and international financial
transactions.
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js-1600: U d a y Saddam Hussein's Inner Circle Designated by Treasury<br>U.S. Submitti... Page 2 of 3
a.k.a. Asil Tabra
D O B : June 6, 1964
Nationality: Iraqi
Adib Shaban Al-Ani
Adib Shaban served as Uday's chief of staff and worked at the Iraqi Olympic
Committee.
a.k.a. Dr. Adib Sha'ban
a.k.a. Adib Shaban
D O B : 1952
Nationality: Iraqi
Dr. Sahir Berhan
Dr. Sahir Burhan was a board member on three Iraqi companies controlled by Uday
and was a member of the Iraqi Olympic Committee's executive office.
a.k.a. Dr. Sahir Barhan
a.k.a. Saher Burhan Al-Deen
a.k.a. Sahir Burhan
D O B : 1967
Address: Baghdad, Iraq
Address: United Arab Emirates
Nationality: Iraqi
General Maki Mustafa Hamudat
Maki Hamudat served as a deputy to Uday on the Iraqi Olympic Committee and
was the general finance officer in charge of the budget of the Fedayeen Saddam, a
paramilitary organization headed by Uday.
a.k.a. Maki Hamudat
a.k.a. Mackie Hmodat
a.k.a. General Maki Al-Hamadat
a.k.a. Macki Hamoudat Mustafa
D O B : circa 1934
Address: Mosul, Iraq
Roodi Slewa
In addition to serving as Uday's partner in an Iraqi consumer goods company,
Roodi
Slewa played a key role in Uday's illicit alcohol and cigarette distribution
monopolies.
In order to conduct business under the former regime, Iraqi cigarette and alcohol
vendors were required to make extortion payments to Slewa, who paid Uday
approximately $1.5 million U S D per month from the proceeds of this racketeering
scheme.
a.k.a. Rudi Slaiwah
a.k.a. Rudi Untaywan Slaywah
a.k.a. Rudi Saliwa
Nationality: Iraqi
Nabil Victor Karam
Nabil Karam played a key role in Uday's cigarette smuggling and racketeering
activities in addition to serving as the director of Trading and Transport Services
and Alfa Company Limited for International Trading and Marketing, two companies
that managed many of Uday's illegal enterprises.
DOB: 1954
Address: c/o Trading and Transport Services
Al-Razi Medical Complex
Jabal Al-Hussein, A m m a n , Jordan
P.O. Box 212953
A m m a n 11121, Jordan
P.O. Box 910606
A m m a n 11191, Jordan
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js-1600TUday Saddam Hussein's Inner Circle Designated by Treasury<br>U.S. Submitti... Page 3 of 3
Address: c/o Alfa Company Limited for International Trading and Marketing
P.O. Box 910606
A m m a n 11191, Jordan
Nationality: Lebanese
Trading and Transport Services Company, Ltd
Address: Al-Razi Medical Complex, Jabal Al-Hussein, A m m a n , Jordan
Address: P.O. Box 212953, A m m a n 11121, Jordan
Address: P.O. Box 910606, A m m a n 11191, Jordan
Alfa Company Limited For International Trading and Marketing
a.k.a. Alfa Trading Company
a.k.a. Alfa Investment and International Trading Company
Address: P.O. Box 910606, A m m a n 11191, Jordan
http://www.treas.gov/press/releases/js 1600.htm
5/6/2005
PRLSS R O O M
F R O M THE OFFICE O F PUBLIC AFFAIRS
May 18, 2004
2004-5-18-14-7-46-14932
U.S. International Reserve Position
^e,T,re<?oS!J^eP?,rtment t(?day r6leaSed U"S-reserve assets data for the latest week- As indicated in this table, U.S. reserve assets
totaled $81,037 million as of the end of that week, compared to $81,875 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
Mav 7, 200^
I
Mav 14, 2004
81,875
81,037
1. Foreign Currency Reserves1
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
9,326
14,007
23,333
9,411
13,762
23,173
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,791
2,814
14,605
11,676
2,765
14,441
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 Position2
20,399
20,081
3. Special Drawing Rights (SDRs) 2
12,492
12,297
4. Gold Stock3
11,045
11,045
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
Mav 7, 2004
Euro
1. Foreign currency loans and securities
Yen
May 14, 2004
TOTAL
Euro
0
Yen
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
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
M a v 7, 2004
Euro
1. Contingent liabilities in foreign currency
Yen
M a v 14, 2004
TOTAL
0
Euro
Yen
TOTAL
0
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
0
0
4. a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1661: Statement by John B. Taylor, Under Secretary of the <br>Treasury for International Affairs, in ... Page 1 of 2
H — M l I T — " ' - """"" I I H l — " — ^ f
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 11,2004
JS-1661
Statement by John B. Taylor, Under Secretary of the
Treasury for International Affairs, in Beijing, China
This has been a very productive visit to China and I'd like to thank Ambassador
Randt for the excellent assistance of Embassy Beijing and also express m y
appreciation for the hospitality extended to m y delegation from our Chinese hosts.
We have had in depth discussions with China's economic officials, with private
economists, and with members of the financial community. I was also pleased to
be joined in these meetings by Ambassador Paul Speltz, who was recently named
by Treasury Secretary Snow as his personal emissary to Beijing on financial and
foreign exchange issues.
This visit to Beijing is actually the first leg of a trip that will take us to three countries
in Asia. Later this afternoon w e will travel to Tokyo to discuss the return of
economic growth there, and later this week w e will travel to Korea for meetings of
the Asian Development Bank where I will be discussing economic issues with
finance ministers from several countries in the region. W h e n discussing China, I
think it's helpful to emphasize that China is rapidly becoming a more important
trading partner of the United States, a significant engine of growth in Asia, and has
a greater impact on the global economy than ever before.
The global economy is performing extraordinarily well. Thanks to good monetary
and fiscal policy, the U.S. economy has recovered and is now demonstrating very
strong, non-inflationary growth. Asia, of course, is growing rapidly. Japan, after
many years of slow growth, has returned to solid, sustainable growth. W e also see
signs of growth returning to Latin America, and emerging market economies like
Russia and Turkey are doing well. While growth in Europe is mixed, some
countries are performing very well. And Germany and France are working to put in
place policies that will lead to a return to growth.
Economic growth in China is helping to drive growth throughout Asia. There is
some concern that China is "overheating." In our meetings w e tried to gauge the
degree of their overheating, whether there are inflationary concerns, and to
understand the ways in which policymakers are dealing with these issues.
We had extensive discussions on the issue of China's exchange rate regime. That
China intends to move toward greater flexibility in its exchange rate regime is very
welcome and will be helpful to the world economy. W e had very useful discussions
as to how China intends to implement this policy and the implications this will bring
for China, and for the global trading system.
I expressed my view that greater flexibility in China's exchange rate would allow for
smooth adjustments and prevent the kinds of "hard landings" or "boom-bust" cycles
that concern traders and investors and are so costly to any country. It's important
that currency flexibility is combined with the appropriate use of monetary policy
instruments and continued structural reforms in financial services.
I come away from these meetings encouraged that policymakers in China are
making progress on all fronts. Our level of engagement with Chinese authorities is
helping to lead to progress. President Bush and Vice-President Cheney have
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JS-1661: Statement by John B. Taylor, Under Secretary of the <br>Treasury for International Affairs, in ... Page 2 of 2
visited China, as has Treasury Secretary Snow, C o m m e r c e Secretary Evans and
U.S. Trade Representative Zoellick. Labor Secretary Chao also plans to visit soon.
In addition to these high-level meetings, in-depth discussions of key financial and
economic issues continue at all levels. W e recently began a Technical Cooperation
Program with China to discuss financial and foreign exchange issues and expect
additional meetings in June.
Our continued dialogue and cooperation on economic issues at all levels is
important to ensure sustained economic growth in our own economies, in the region
and in the global economy.
W W treas anv/nrpec/rpJ>ases/is 1 6 6 1 .htm
5/31/2005
JS-1662! TEe Bush Administration's Reform Agenda<br>At the Bretton W o o d s Institutio... Page 1 of 6
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 19, 2004
JS-1662
The Bush Administration's Reform Agenda
At the Bretton W o o d s Institutions:
A Progress Report and Next Steps
John B. Taylor
Under Secretary of Treasury for International Affairs
Testimony Before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
May 19, 2004
Chairman Shelby, Senator Sarbanes, other members of the Committee, thank you
very much for inviting m e to discuss the Administration's reform agenda at the
International Monetary Fund and the World Bank. Reform of these institutionsfounded 60 years ago at the now famous Bretton W o o d s Conference—has been a
high priority since the start of the Bush Administration.
During the first year of the Administration we presented our reform agenda for the
next few years. President Bush put forth key proposals in an important speech at
the World Bank in the summer of 2001 just before going to his first G 8 Economic
Summit. Then, in testimony before Congress, in speeches at universities, think
tanks, and in the financial community,[1][1] w e discussed the technical details and
the economic and political rationale for the reforms. W e worked together with our
fellow shareholders and with the staffs of the Bretton W o o d s Institutions. The
importance of the reforms was stressed in statements by the Secretary of the
Treasury at the IMF/World Bank meetings, by the U. S. Executive Directors at the
Board meetings, and by our representatives at the replenishment negotiations of
the multilateral development banks. A path-breaking international agreement on
reform implementation was put forth in the form of a G 7 Action Plan in April 2002.
1 Examples include testimony before the Joint Economic Committee, February 4,
2002, a speech at Harvard on November 29, 2001, a speech before the Bankers
Association for Finance and Trade on February 7, 2002, and most recently a
speech at the IMF on April 16, from which this testimony draws.
I am happy to report that an enormous amount of rapid progress on this reform
agenda has been made, especially in the last year and a half. The key reforms that
have been implemented are:
• collective action clauses in external sovereign bonds;
• creation of clear limits and criteria for exceptional borrowing from the IMF;
• use of grants in partial replacement of loans from the World Bank;
• introduction of a system for measuring results at the World Bank;
• a focus on core expertise at the IMF and World Bank with division of labor.
As is true of many reform movements, people have discussed and recommended
such reforms for years. The work of the Senate Banking Committee has added
greatly to the discussion and debate. But in the last few years w e have gone well
beyond discussion and debate. What is different now is that the reforms have
actually been adopted. Taken as a whole and assuming they are locked-in,
internalized, and expanded as described here, these reforms, in m y view, represent
a fundamental policy shift for the international financial institutions.
Goals, the Evolution of Markets, and the Rationale for Reform
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Simply put, the goals of the international financial institutions are (1) to increase
economic and financial stability and (2) to raise economic growth, thereby reducing
poverty. These are good goals. There is no reason to change them. But the world
economy and financial markets in which the institutions operate has changed
dramatically since they were founded, and to achieve these s a m e goals the
institutions must reform. Consider s o m e of the changes in the world's financial
markets in just the past fifteen years.
One important change is that securities represent a much bigger percentage of
cross-border financial flows than in earlier years when bank loans were a larger
percentage. An important implication of this change is that restructuring sovereign
bonds—with literally hundreds of thousands of bondholders in m a n y different
countries—is perceived to be more difficult and uncertain than w h e n debt w a s in the
form of bank loans by a few banks or syndicates.
A second change is the increase in the volume of private capital flows. Private debt
and equity flows grew to be much larger than official lending from the international
financial institutions. Cross-border transfer payments are n o w predominantly private
with remittances alone much larger than transfers of resources from the
international financial institutions and other aid agencies.
A third change is that financial markets are more interconnected than in the past,
which is one of the reasons for the concerns about contagion. The cross-border
capital flows seemed to be more volatile as well.
I believe that these changes in the cross-border environment led the emerging
markets to become more crisis-prone. In fact, both the number and severity of
financial market crises increased in the 1990s compared with the 1980s. By the late
1990s, the emerging markets were perceived by investors as so crisis-prone that
net private capital flows to emerging markets as a whole fell sharply.
The initial responses to these crises by the official community in the 1990s were
understandable. A s in the case of Mexico, the responses had to be developed from
scratch in a very short period of time, and they had to be implemented
immediately. In a number of cases, and in the Mexican case in particular, s o m e
argued that there should have been no special response by the international
community, or that the response w a s wrong. But the point I would emphasize is
that these crises were providing clearer and clearer evidence that the systemic
changes in the world's financial markets required systematic changes in the policy
framework underlying the international financial system.
However, the responses of the international community to crises in the 1990s
continued in roughly the s a m e fashion as the response to Mexico. They tended to
concentrate on short term tactics rather than strategy. They were designed around
discretionary changes in the policy instruments rather than systematic changes in
the policy regime. They tended to be government-focused rather than marketfocused, emphasizing large loans by the official sector and later governmentinduced bail-ins by the private sector. Many observers became concerned that the
increasing use of very large financial packages and the bail-ins were having
adverse effects on expectations or incentives.
A related problem was that loans from the official sector—including from the IMF
and the World Bank—to the very poor developing countries in Latin America, Africa,
and Asia were building up to clearly unsustainable levels. This led to
understandable calls for debt relief. Again the responses, in m y view, were more
tactical than strategic. They dealt with the current serious need for debt relief, but
not with the expectations effects and the incentive problems that would continue to
cause the international institutions to lend too much and the poor countries to
borrow too much, leading to future debt sustainability problems.
In sum, something important was missing from the international financial policy
framework, namely more predictability, more accountability, and more systematic
behavior on the part of the official sector. More focus needed to be placed on what
public sector actions were likely to be in a given circumstance, on what
accountability there would be for those actions, and on what the strategy and the
principles behind the actions were.
Collective Action Clauses
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The very essence of these new clauses is to provide greater predictability and order
to the resolution of sovereign debt. They do this by providing a n e w option for
sovereigns to restructure their debt without having to obtain the unanimous consent
of bondholders. 75 percent has become the n e w threshold for amending key
payment terms in sovereign bonds. I emphasize that the aim is not to m a k e
restructurings more desirable, but rather to m a k e them more predictable and less
vulnerable to 'holdouts' in cases w h e n a country has no real alternative. In the
absence of such clauses, fears and uncertainties about what would happen if a
country had to begin a restructuring of its debt can interfere with effective decisionmaking, especially in a charged political environment. Such clauses are a
decentralized, market-based approach with a minimum of direction or discretion by
the official sector. In this way too, the clauses reduce the uncertainty that
accompanies a non-sustainable debt situation.
Importantly, the clauses also help the official sector to be more credible about the
both the likelihood and likely size of its o w n response, and this in turn has favorable
effects on market expectations, which can reduce the need for large responses by
the official sector.
The Bush Administration has actively promoted these clauses. After intensive legal
and economic research at the U.S. Treasury in late 2001 and early 2002, w e
concluded that these were the most promising and feasible way to introduce more
predictability into the system. The official sector facilitated the development of
proposals, but w e emphasized that the market should work out the details and,
ultimately, choose what language to adopt for the clauses. The clauses then
became part of the April 2002 G 7 Action Plan.
We are very pleased with the dramatic progress that has been made in
implementing these proposals in a very short period. Mexico included clauses for
the first time in its N e w York law-governed bonds just about a year ago. And n o w
clauses are well on their way to becoming standard in internationally-issued
sovereign bonds. A range of countries, including the early clause-issuers Mexico,
Brazil, Korea, South Africa and Turkey, have demonstrated that including these
clauses in their issues has had no adverse impact on pricing. Just since January,
the Philippines, Panama, Colombia, Costa Rica, Indonesia and Israel have all
included these clauses for the first time in their N e w York-issued bonds. Work
continues to educate potential issuers about the benefits of these clauses, as w e
advance this important trend in strengthening market practices. The n e w clauses
are n o w the market standard in N e w York.
Some argue that these clauses do not solve all the problems about the uncertainty
surrounding debt restructurings, and they are right. Future crises m a y not be as
closely associated with debt problems as past crises have been. But the clauses
and the debate surrounding them last year have helped to change perceptions
about emerging market debt. The debt is now being held by a more diverse class
of investors as an important part of their portfolios. Moreover, I believe that
because the reform w a s implemented so successfully it has bolstered confidence in
the reform process. People see that financial reform is possible even if it is very
complex and involves changes in the policies for scores of countries and thousands
of lawyers, advisors, investors, and financial institutions. For example, private
creditors and borrowing countries now are working on a code of conduct, which
could add more predictability and order into the system.
Clarifying Limits and Criteria for Large-Scale Official Sector Lending
There are several components of this reform.
First is the presumption—based on recent practice since the resolution of the
Turkish financial crises of 2000-2001 and in particular the assistance package of
early 2001—that the IMF rather than the official creditor governments is responsible
for providing large scale loan financing. This provides an overall budget constraint
and thereby an overall limit on loan assistance, recognizing that IMF resources are
limited.
Second, within the context of this overall limit there has been an endeavor by IMF
shareholders and management to signal in advance of a decision not to provide
additional IMF loans w h e n it appears that the limits of sustainability m a y be reached
in the near future. Signaling policy changes in advance—even in broad outlinecan lead to smoother adjustments and provide investors with time to obtain
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information about fundamentals. This reduces greatly the chances of contagion,
because surprise increases or decreases in official financing can lead to runs for
the exits and sudden stops. Also part of the principle of limiting funding w h e n
countries continue to follow unsustainable policies is to assist countries that are
following good policies but m a y be hit by a crisis in the nearby country that is not
following good policies. This too will help to reduce contagion in the event that the
near-crisis country does in fact go into financial crisis. The clearest example of this
is the case of Argentina where additional IMF resources were not suddenly stopped
in 2001, but rather continued with signals—including restructuring funds built into
the August 2001 program—that additional funding in the face of the ongoing debt
sustainability problem would not continue. In addition a financial assistance
package w a s provided to Uruguay—which had been following good policies—to
deal with the monetary crisis brought on by the bank runs of its close neighbor in
2002.
The third component of this reform adds specificity and accountability to the first
two components. This is the agreement by the IMF Board in 2002 and 2003 on four
specific criteria that should be met before large scale lending above certain limits
can take place. The criteria are (1) balance of payments pressures on capital
account, (2) high probability of debt sustainability, (3) good prospects of regaining
access to private markets so that IMF financing provides a bridge, and (4) good
economic policies in place. In addition the IMF Board has adopted as a standard
that, in cases of exceptional access, a new exceptional access report be prepared
by the IMF management and published. The aim of the exceptional access report
is to provide accountability in the s a m e way that monetary policy reports or inflation
reports provide s o m e accountability at central banks.
Because these criteria must be interpreted in each case, it is clear that the limits
themselves are not rigid. The reality of the market and policy environment is that
the IMF management and the IMF m e m b e r governments should use the criteria
judiciously rather than rigidly. O n e cannot plan for all contingencies and so the
criteria are closer to policy principles or guidelines. Nevertheless, the specific
criteria represent a marked change in the direction of a more systematic and
predictable policy regime.
The purpose is to reduce the uncertainty and the perverse disincentives in the
markets due to lack of clarity about how much funding will be provided from the IMF
and under what circumstances. The clearer limits help define the policy regime
under which market participants and borrowing countries can operate. A s part of
the policy framework defined by the clearer access limits, the general presumption
is that the official sector will avoid arm-twisting the private sector to do bail-ins,
because this can lead to uncertainty about future applications and encourage early
runs for the exits.
With these criteria in place, the question is frequently asked about how they were
applied last year in the cases of Argentina and Brazil. In both of these cases,
however, the countries were already in exceptional access territory and the goal is
to exit from this exceptional access over time. The Argentina program is n o w
focused on a complex debt restructuring. And a goal of the Brazil program is to exit
from the exceptional access.
Grants Rather Than Loans to Very Poor Countries
Providing more grants to heavily indebted poor countries (HIPC) is necessary to
deal with their long run debt sustainability problems. Debt forgiveness through the
H I P C process in a w a y that deals with their debts to the international financial
institutions is essential for the countries with unsustainable debt situations. But if
the international financial institutions return to their heavy emphasis on lending,
then there are perverse incentives for these countries to get into an unsustainable
situation again, which will lead to the debt relief cycle all over again.
This is more than a simple financial issue. Unsustainable sovereign debt not only
requires a government to use n e w resources for repayment of such debt, it reduces
private sector investment needed for economic growth and poverty reduction. Using
grants rather than loans, therefore, avoids leading these countries d o w n the path of
heavy indebtedness.
Of course, this is a fundamental and difficult reform. Since their founding 60 years
ago, the managements and shareholders of the Bretton W o o d s Institutions have
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thought of them primarily as lending institutions. Nevertheless, remarkably good
progress has been m a d e in implementing this reform. In 2002 an international
agreement w a s reached to use up to 21 percent of the World Banks' International
Development Association (IDA) window for grants. This allows substantially larger
percentages in the heavily indebted IDA countries.
The grants have proved very popular in the countries that have received them thus
far, but work needs to be done to further increase grant funding for the very poorest
and heavily indebted countries and to integrate this more systematically into the
debt relief process.
Measurable Results Systems with Accountability and Incentives
Another change in the world economy since the founding of the Bretton Woods
institutions is the mainstreaming of modern management techniques into private
firms and the public sector. Effectiveness at these institutions requires that they
also adopt such changes, including managing for results with clear accountability
and incentives. Good progress has been m a d e at the World Bank during 2003 in
establishing a measurable results system for outcomes in countries as part of the
new "measurable results incentive program" established in 2002 in the last
replenishment IDA - 13.
Nevertheless, there is a need to expand to more outcome indicators in the next
replenishment IDA-14 and have more shareholders use such approaches. There is
also a need to develop better systems for measuring outputs at the project level
and include measurable outputs with timelines in loan/grant documents and in
country assistance strategies for Board approval. There is also a need to develop a
similar approach at the IMF.
Focus IMF and World Bank on Core Responsibilities Allowing for Division of
Labor
The core responsibilities of the IMF are monetary policy, fiscal policy, financial
markets, and exchange rates. Many IMF employees comparative advantage is in
these highly technical areas. Focusing on these core issues makes IMF
surveillance and crisis prevention more effective. In contrast, the World Bank's
core responsibilities are structural policies that raise productivity growth, such as
infrastructure, business climate, education, health, and governance.
As part of the focus on the core responsibilities the IMF should concentrate its
programs on a small number of core issues and leave the other issues to the World
Bank, thereby creating a useful division of labor. Good progress is being m a d e here
too, but m a n y programs, especially in very poor countries, still have IMF structural
conditions that should be left to the World Bank.
Strategic Review and New Directions.
I think it is clear from this brief review that progress has been substantial. But it is
also clear that more work can be done to lock-in and expand the reforms. N o w
s e e m s to be an opportune time to m o v e ahead. First, the recent progress has
g e n e r a ted a n e w enthusiasm and m o m e n t u m for reform—a positive feeling that by
working together the international community can make progress in fundamentally
reforming the international institutions, a goal that has been on people's minds
since their 50th anniversary. Second, w e are currently in a period not preoccupied
with an immediate and emerging financial crises, which gives the relevant
participants time to consider longer-term reforms. And, third, there is the occasion
of the 60th anniversary.
For these reasons Secretary John Snow, as this year's Chairman of the Group of 7
Finance Ministers and Central Bank Governors, has called for strategic review with
the aim of defining new directions that build on recent reforms and, if necessary,
expand them There has already been a very positive response to Secretary
Snow's initiative from developed countries, emerging market countries, and
developing countries. Broad consultation is under way, so it is still too early to tell
what the n e w directions will be, but s o m e examples of ideas that have already been
well received are:
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A new non-borrowing program facility at the IMF with emphasis on strong country
ownership in program design.
A n e w surveillance system including a reorganization that ensures that debt
sustainability analysis and other vulnerability analyses relevant to IMF
lending is pursued independently from IMF lending decisions, publication of
all IMF country reports, explicit allowance and encouragement of countryled development and presentation of policies for IMF assessment, and
explicit focus on contagion by looking at connections between countries and
assisting countries with good policies that are hit by crises in other
countries.
• A further increase in the amount of grants going to poor countries from the
World Bank and the other multilateral development banks in conjunction
with additional debt relief in order to further improve debt sustainability,
economic growth, and poverty reduction.
Conclusion
The reforms I have discussed in this testimony are technical, and may seem arcane
to some. But they are deeply important for world economic growth and stability—the
goal of the international financial institutions.
Thanks to the very successful implementation of reforms during the past two years
as well as actual improvements in economic stability and growth in the world
economy, I believe there is a willingness to consider further reform and to spend the
time needed to get the technical details right as Secretary S n o w has urged in his
G 7 "'strategic review and new directions" initiative.
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 19, 2004
JS-1663
Statement of Juan C. Zarate
Nominee to be Assistant Secretary for Terrorist Financing
U.S. Department of the Treasury
Before the Senate Finance Committee
Chairman Grassley, Ranking Member Baucus, and distinguished Members of this
Committee, it is an honor for m e to be before you today. It is a privilege to have
been nominated by the President for the position of Assistant Secretary of the
Treasury for Terrorist Financing, and I thank him, Secretary Snow, and Deputy
Secretary Bodman for their confidence in nominating m e for this important position.
Mr. Chairman, the positions for which Mr. Levey and I have been nominated form
an important part of our country's long-term strategy in the war on terror. This
Administration has waged an unprecedented campaign against terrorism and the
financing that fuels horrendous acts of violence and hatred around the world. This
is not just an American problem born on September 11th From the railway
bombings of Madrid and Moscow to the commercial center attacks in Istanbul and
Casablanca, w e have seen that terrorism does not discriminate among race,
religion, or national origin.
When I came to Washington as a federal prosecutor, Mr. Chairman, I was
immersed quickly into the reality of the threat that al Qaida posed to our country.
O n e of m y first assignments was to assist in the prosecution of those responsible
for the American Embassy bombings in East Africa. I further confronted the
unabated viciousness of al Qaida as a prosecutor in the investigation of the
murders of 17 of our countrymen and w o m e n on the U S S Cole.
Just days after I began work at the Treasury Department on August 27, 2001, our
world and our collective mission changed forever.
Since September 11th, I have been privileged to form part of the U.S government
effort, along with Mr. Levey, to attack the financial underpinnings of terrorism.
We have achieved important successes in the mission to bankrupt terrorism. It is
now harder, costlier, and riskier for al Qaida and other like-minded terror groups to
raise and move money around the world. W e have frozen and seized terrorist
assets, exposed and dismantled known channels of funding, deterred donors,
arrested key facilitators, and built higher hurdles in the international financial system
to prevent abuse by terrorists.
We have forged an international coalition to combat terrorist financing, and have
focused the world's attention on previously unregulated, high risk sectors like
charities and hawalas. In this effort, w e have also enlisted the private sector
worldwide - the banks, money service businesses, broker-dealers, and the
charitable sector - to serve as the front-line in this battle. These efforts have
tightened the financial noose around al Qaida's neck.
The drumbeat of our drive to disrupt and dismantle terrorist financing has been
constant and will continue.
Mr Chairman, I am very proud that this work has been undertaken while our other
efforts to combat money laundering, financial crimes, and enforce sanctions have
also intensified. I would like to share with you a few of our actions over the past
several days, which serve as good examples of the steady and important work that
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the Treasury continues to produce:
• Yesterday, in furtherance of our efforts to expose Saddam Hussein's
financial web, w e announced the designation by the Office of Foreign
Assets Control of an additional six individuals and two companies that
served as agents and fronts for Uday Hussein. W e submitted these n a m e s
to the United Nations, adding to the already 220 Iraqi-related entities listed
at the U.N. Since March 2003, when Secretary S n o w launched our
campaign to find, freeze, and repatriate the Iraqi assets stolen by the
Hussein regime, w e have worked with our international partners to freeze
approximately $6 billion around the world and return over $2.6 billion to the
Iraqi people.
• O n Friday, Treasury shared, through our Asset Forfeiture Office, over $2.5
million with the governments of Australia, Canada, and Switzerland for their
assistance in money laundering investigations led by the IRS and the
Bureau of Immigration and Customs Enforcement.
• Last Thursday, the Treasury's Financial Crimes Enforcement Network
(FinCEN), along with the Office of Comptroller of Currency, levied a fine of
$25 million against Riggs Banks for failure to comply with provisions of the
Bank Secrecy Act.
• Last Tuesday, as part of the President's announcement of the sanctions to
be imposed against Syria, the Secretary of the Treasury designated the
Commercial Bank of Syria as a "primary money laundering concern" under
Section 311 of the U S A P A T R I O T Act. As a result, the Secretary ordered
the closing of their correspondent accounts because of that bank's
complicity in dealing with the Hussein regime, its weak money laundering
practices, and suspicions of terrorist financing through the institution.
This is but a mere snapshot of the important work the Treasury accomplishes every
day. These efforts are critical not only to preserve the integrity of our financial
system, but also to promote the national security interests of our country.
The need for this type of intensive and consolidated work in the long-term is why
this Administration, in concert with Congress, decided to create the n e w Office of
Terrorism and Financial Intelligence. TFI, as it will be called, brings under one
umbrella the intelligence, enforcement, diplomatic, policy, and regulatory resources
of the Treasury. It will allow us to consolidate our information and analysis to best
utilize Treasury authorities to advance our national security interests and protect
our financial systems. TFI will allow us to sustain these and additional efforts for
the long term.
This is important, Mr. Chairman, because we know that we are in the midst of a real
and protracted struggle against terrorism. W e will not tire in our mission to find and
incapacitate those w h o underwrite terror. W e will continue to strengthen the
financial net to protect our institutions from tainted capital flows and will continue to
use all of our authorities, relationships, and expertise to attack sources, conduits
and proceeds of financial crime.
Finally, Mr. Chairman, I am pleased to have with me my wife, Cindy, my parents,
m y brother, and friends w h o have supported m e professionally and personally. It
has been both a dream and an expectation of m y parents - w h o immigrated from
Mexico and Cuba in the 1950s in search of freedom and opportunity that m y
siblings and I serve this country. If confirmed, I hope to continue to serve this
President and Secretary S n o w with an unwavering commitment and a deep passion
for these issues, and to work with this Committee and other Committees of
Congress to advance our national interests.
Thank you.
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JS-1664: Statement of Stuart A. Levey<br>Nominee to be Under Secretary for Enforcem... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 19, 2004
JS-1664
Statement of Stuart A. Levey
Nominee to be Under Secretary for Enforcement
U.S. Department of the Treasury
Chairman Grassley, Ranking Member Baucus, and Members of the Committee,
thank you for the opportunity to appear before you today. It is truly an honor to be
the nominee to serve as Under Secretary for Enforcement and as the head of the
new Office of Terrorism and Financial Intelligence at the Department of the
Treasury. I want to thank the President and Secretary Snow for the confidence they
have shown in m e by selecting m e for this position.
Above all, I want to thank my wife Annette, who is the best thing in my life, for the
sacrifices she has m a d e to allow m e to pursue opportunities in public service. She
is the perfect wife, m y best friend, a fabulous mother to our two baby daughters,
and, on top of all that, a dedicated public servant at the National Institutes of Health.
I would also like to thank m y parents for the opportunities and support they have
given m e throughout m y life. I a m happy that m y mother and stepfather, Karen and
Manuel Nackes, are here with m e today.
I am also grateful to Attorney General Ashcroft for the opportunity he has given me
to serve at the Department of Justice. I came to the Justice Department to work for
Deputy Attorney General Larry Thompson, and I have continued to serve there
under Jim Comey. I have handled a variety of issues in the Deputy Attorney
General's office, focusing most recently on national security and counterterrorism
matters, including the Department's terrorist financing portfolio. In m y current role
as Principal Associate Deputy Attorney General, I serve as the Justice
Department's representative to the Policy Coordinating Committee on Terrorist
Financing and to the NSC's Counterterrorism Security Group. In these roles, I have
established close working relationships with officials within the Department of
Justice as well as in the FBI, the CIA, the State Department and elsewhere that will
be valuable to m e in m y new position if I a m confirmed.
My experience at the Justice Department makes me very mindful of the enormous
responsibility that will be before m e if I a m confirmed. I begin almost every morning
by meeting with the Attorney General, the Deputy Attorney General, the FBI
Director and other senior staff to go over the most important terrorist threats that w e
are facing that day, both within the United States and abroad. Even after so many
months, it is still chilling to hear every morning about people who are scheming to
kill as many innocent people as they possibly can. Chilling, but, in a sense,
motivating too. I never question why I go to work in the morning. There is so much
at stake.
The financial war on terror is critical to our overall mission to defeat terrorism.
Terrorists need money to operate - to recruit, to train, to travel, to communicate,
and, of course, to carry out attacks. Whenever w e cut off their money supply, w e
reduce their present abilities and force them to adopt new funding methods that are
more cumbersome or risky. O n another level, the audit trail that money leaves is
one of our best sources of intelligence to find and disrupt terrorists. There are times
when watching where the money comes from and where it goes is more valuable
than taking immediate public action to stop it. W e must adapt our strategy in each
circumstance to do whatever is best for the overall counterterrorism mission. That is
one reason why a coordinated, interagency effort is vital to our success.
Within that coordinated effort, the Treasury Department has a unique leadership
role to play in the financial war on terror. The Treasury Department, working with
other agencies around the government, and with the support of the Congress, has
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Page 2 of 2
made significant progress in the fight against terrorist financing since September
11. The people w h o have been doing that work in the Department, including Juan
Zarate, are a m o n g the most dedicated and talented public servants you will find. If I
a m confirmed, I will be joining a fantastic team.
I think that team would agree that there is much more work that needs to be done. If
I a m confirmed, I hope to bring a heightened sense of urgency to the terrorist
financing mission at the Treasury Department. W e must re-energize our efforts
because our enemies remain committed to killing innocent people and, as this
Committee has noted, our work grows more difficult as terrorists m o v e away from
known funding channels and organizations. The overarching mission for the n e w
Office of Terrorism and Financial Intelligence will be to ensure that the Treasury
Department is fully exploiting all of its authorities, capabilities and all of the
government's information to combat terrorist financing and financial crime. A m o n g
other things, if I a m confirmed, I would strive to m a k e better use of the tools the
Congress provided in the P A T R I O T Act and of Treasury s other enforcement
powers. I also would build a n e w Office of Intelligence and Analysis that will exploit
Treasury's o w n information and integrate the Department more fully into the
intelligence community. And, I would press terrorist financing issues as a priority
with other nations around the world whose cooperation w e need if w e are to
succeed.
I am aware that there are substantial challenges before us. Still, I am optimistic
because of the steadfast support that Secretary S n o w and Deputy Secretary
B o d m a n have already shown to the cause of fighting the financial war on terror. I
a m also heartened by the support for this mission demonstrated by the Congress
and this Committee in particular. If I a m confirmed, I look forward to working with
you on these important issues. I a m happy to answer any questions you m a y have.
ittp://www.treas.gov/oress/releases/js 1664.htm
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JS-16651 Hearing Testimony<br>The Honorable John W . Snow<br>Secretary of the Trea... Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 19, 2004
JS-1665
Hearing Testimony
The Honorable John W . S n o w
Secretary of the Treasury
O n the Benefits of Health Savings Accounts (HSAs)
Before the Special Committee on Aging
United States Senate
May 19, 2004
Chairman Craig, Ranking Member Breaux and distinguished members of the
Committee, thank you for the opportunity to testify before you today on the benefits
of Health Savings Accounts (HSAs).
On March 16th, the President joined several small business owners to discuss
health care costs and what the federal government can do about them. Dan
Schmidt was one of those participants. He owns Mercury Office Supply, a
Minnesota office supply retailer with 13 employees. For 2004, Mercury's annual
health care premiums were set to increase to $36,000. Dan says he considered
dropping coverage for his employees.
Instead, he was the first to sign up for the group HSA plan provided by Prime
Health Care. The plan became effective on January 1, 2004. With the HSA, Dan's
new premiums were just $24,500, saving Mercury approximately $11,500 this year.
Dan is using the savings to help fund his employees H S A accounts. Dan's
employees now have the coverage that they need and more control over their
health care spending.
Mr. Chairman, there are thousands of employers like Dan across this country who
have signed up for Health Savings Accounts in the few months they have been
available. H S A s were part of the Medicare bill passed by Congress and signed by
President Bush on December 8th of last year.
As Dan's example demonstrates, these accounts signal a historic change in the
way w e look at health care. The themes you hear from Dan and other H S A
participants are consistent - they talk about lower costs, increased control, and the
ability to plan for the future. H S A s reduce insurance costs, enabling more
employers to begin or retain health insurance benefits for their employees. They
give people more control over who they see for health care services. And they
encourage saving for future medical expenses, including retiree health expenses.
The advantages of HSAs are numerous:
•
H S A s encourage savings for future health care needs.
Earnings from H S A balances accumulate tax free. Distributions are tax free
as well, as long as they are used to pay for qualified medical expenses.
•
H S A s provide people the resources they need to access health
care. Individuals and their employers both can contribute pre-tax dollars
into the accounts. Contributions are limited to the insurance policy's annual
deductible, subject to a cap of $2,600 for individuals and $5,150 for families.
Individuals aged 55-64 can make additional catch-up contributions.
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JS-1665T Hearing Testimony<br>The Honorable John W . Snow<br>Secretary of the Trea... Page 2 of 3
H S A s are flexible. The accounts can pay for health insurance
deductibles and co-payments for medical services, products, and
prescriptions. They can pay for over-the-counter drugs, long-term care
insurance, and health insurance premiums during any period of
unemployment. They can also pay for out-of-pocket expenses under
Medicare, including premiums for Part B and the new drug benefit (Part D).
•
H S A s improve upon Archer Medical Savings Accounts
(MSAs). H S A are available to everyone, not just the employees of small
business and the self-employed, and there is no limit on the total number of
policies.
•
H S A s are portable. Workers w h o move from job to job take the
account with them, just like an Individual Retirement Account. The H S A is
also owned by the individual, not the employer, and goes with the individual
in the event of a job change.
HSAs put individuals in charge of their health care purchasing decisions.
Consumers often find traditional health insurance plans frustrating because it
sometimes feels like decisions about their health are being m a d e by other parties...
not themselves. With an HSA, health care decisions are m a d e by the individual
and their health care provider nobody else. H S A s increase the ability of
individuals to m a k e decisions that are in their own best interest.
HSAs also give consumers the opportunity to budget for their health expenses over
many years. H S A balances roll over from year to year, allowing consumers to build
up money in their accounts when they have low health care needs, leaving them
with more money to cover out-of-pocket expenditures when the need arises.
The President's budget would further expand the availability of HSAs by allowing
taxpayers an above-the-line deduction for insurance premiums associated with
HSAs. This proposal would give individuals the s a m e tax advantage that
employers and the self-employed enjoy today when purchasing health insurance.
This would be an important step in ensuring that the advantages of H S A s are not
limited only to employer-provided health insurance.
One of our greatest challenges with HSAs is getting the word out and helping
people understand how they work. A m o n g other efforts, w e have a page on our
website dedicated to H S A s that includes "Frequently Asked Questions." W e also
set up an e-mail address hsainfo@do.treas.gov - as well as a voice mailbox: 202622-4HSA, where individuals can submit questions.
For those in the insurance and financial community, the Treasury Department is
engaged in offering a series of guidance from the IRS on s o m e of the more
pressing questions. W e issued our first guidance in December, just a few weeks
after the enactment. At that point w e asked the public to comment and help us
resolve any outstanding issues.
On March 30th of this year, we issued guidance covering the definition of
"preventive care" and detailing how prescription drugs fit within the definition of the
high-deductible health plan that must accompany an HSA. And just last week, w e
issued guidance that outlined how an employer could successfully integrate an H S A
program with flexible spending arrangements and health reimbursement
arrangements.
There are still issues outstanding, and we want to make sure both communities
those w h o offer and those w h o use H S A s have all the guidance they need. In
June, w e hope to issue the next set of major guidance to further clarify how these
accounts will work.
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It should also be noted, Treasury is working extensively with others in the
Administration to promote the availability of HSAs. The Small Business
Administration, for example, has participated in the release of our previous
guidance and is helping to spread the word among small business owners
throughout the country by use of roundtables and other events. The Office of
Personnel Management has asked health insurance carriers participating in the
Federal Employees Health Benefits Program (FEHBP) to develop H S A plans for the
2005 benefit season. The Department of Labor recently issued guidance making
clear that H S A s generally will not constitute an employee benefit plan under ERISA.
We will continue to work closely with those who, like we at the Treasury, are
interested in making sure H S A s are available to individuals and employers across
the country. For this reason, it is encouraging to see a wide variety of business and
consumer interest groups - from the Hispanic Business Roundtable to the National
Federation of Independent Business and the 60 Plus Association -- take a strong
and active interest in HSAs.
I truly believe we will look back on the creation of Health Savings Accounts as a
giant step forward in our efforts to ensure Americans have increased access to the
health care services they need.
Again, thank you for the opportunity to be here today. I look forward to answering
any questions you m a y have.
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5/6/2005
tew Media Strategies - Buzz - United States and United Kingdom to Hold Entrepreneur Summit in New... Page 1 of 3
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DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
May 19, 2004
Contact:
Rob Nichols (U.S.) 202-622-2920
Damian McBride (U.K.) 011-44-20-7270-5252
Leslie Slocum (U.K) 212-745-0258
Media Advisory
United States and United Kingdom to Hold Entrepreneur Summit in New York
Secretary of the Treasury John Snow and Chancellor of the Exchequer Gordon Brown will
hold a conference with new and established entrepreneurs and business leaders from the
United States and the United Kingdom on May 24th in N e w York, NY, focusing on the
critical role that enterprise and innovation plays in economic progress.
Discussions at the summit will explore the lessons aspiring entrepreneurs can learn from
each other in order to succeed in business, the impediments to enterprise, and how
business and government can work together to address those impediments. The summit
will focus on key issues such as access to capital, regulatory burdens, necessary skills,
transatlantic business opportunities, research and development, and the path of innovation
in the 21st Century.
"Both the U.S. and the U.K. place a high value on the contributions of entrepreneurship and
small business to our economies, and our way of lire," Snow said. "From entrepreneurship
comes innovation and job creation; it is the foundation of any free-market system and ib
critical to both our national and global economies. Our hope: is thai this meeting will yive
greater impetus to entrepreneurship and enterprise on both sides of the Atlantic."
Snow also said: "The summit will provide an opportunity to compare entrepreneurial and
business experiences from our two countries and to learn from eacn other It should help
to illustrate the connection between entrepreneurship, enterprise ana economic progress as
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lew Media Strategies - Buzz - United States and United Kingdom to Hold Entrepreneur Summit in New... Page 2 of 3
well as a better understanding of what it takes for governments to build a successful
entrepreneurial climate."
Brown said: "We will use this gathering of leaders and pioneers to strengthen the proAtlantic consensus and work together to break down the barriers to enterprise and growth,
and build a shared commitment to wealth creation stretching across all communities and
every country."
US/UK ENTREPRENEUR SUMMIT
Who:
Secretary of the Treasury John Snow and Chancellor of the Exchequer Gordon Brown.
(Below is a list of entrepreneurs and business leaders participating in the summit.)
What:
Roundtable discussion with entrepreneurs and business leaders from the United States and
the United Kingdom
When:
Monday, May 24, 2004
Summit begins at 10:00 a m EDT
** Media should arrive no later than 9:00 am EDT, with media credentials.
** Media must RSVP no later than Friday, May 21 at 5:00 p m EDT to Pietra Jones
pjones8@bloomberg.net (212-893-4476). When responding, please include information on
the equipment you plan to bring.
** There will be a brief press availability following the event featuring the entrepreneurs
and business leaders involved in the summit. Secretary Snow and Chancellor Brown will not
participate in the press availability.
Where:
Bloomberg News Studios
499 Park Avenue at 59th Street
New York, NY
Participants in Entrepreneur Summit:
Renee Amoore, The Amoore Group
Neal Aronson, Roark Capital Group
Jeff Bleustein, Harley-Davidson, Inc.
Richard Branson, Virgin Group of Companies
Nancy Brinker, The Susan G. Komen Breast Cancer Foundation
Gordon Brown, Chancellor of the Exchequer
George Cox, The Institute of Directors
Leeanna Fournier, Providence Pediatric Medical Day Care
Barbara Franklin, Barbara Franklin Enterprises
Jerry Greenberg, Sapient
Andres Lebaudy, Fairmount Automation, Inc.
Tom Musser, The Tri-M Group, LLC
Caroline Plumb, FreshMinds Ltd.
Richard Reed, Innocent
Charlie Rose, Journalist & Event Moderator
Robin Saxby, A R M
Rick Sharp, Carmax, Inc.
John Snow, Secretary of the U.S. Treasury Department
Pete Snyder, N e w Media Strategies, Inc.
Michael Song, Visure Corp.
###
^/www.newmediastrategies.net/buzz^reasury.htm
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New Media Strategies - Buzz - United States and United Kingdom to Hold Entrepreneur Summit in New... Page 3 of 3
m
N e w Media Strategies
& New Media Strategies, Inc., 2003
THE INDUSTRY PIONEER & GLOBAL LEADER IN ONLINE B R A N D P R O M O T I O N & PROTECTION
://www.newmediastrategies.net/buzz treasury.htm
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Mil I
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 19,2004
JS-1667
Treasury Department Issues Information on Finance Ministers'
Pre-Summit Meetings
The meeting of the Finance Ministers preceding the Group of 8 Summit will take
place May 22-23, 2004 at the Waldorf-Astoria Hotel, 301 Park Avenue, N e w York,
N Y The following is a final schedule of events:
Saturday, May 22
Finance Ministers' Dinner
Mayor Michael Bloomberg's Residence
17 East 79th Street
N e w York, N Y
7:30 p m E D T
Pool photo at top of event with pool reporter
Sunday, May 23
Meetings
Waldorf-Astoria Hotel
9:00 a m E D T
Pool coverage; national photographers as requested by country
Group Photo
Waldorf-Astoria Hotel
12:00 p m E D T
Group photo is open photo with pool reporter; participating cameras
should meet outside Promenade Suite A, ground level at Park Ave. entrance,
at 11:00 a m
U.S. Press Conference Held by U.S. Treasury Secretary John Snow WaldorfAstoria Hotel, Astor Salon 2:15 pm E D T
Open to all media with appropriate media identification
Will include release of communique and Secretary Snow's written statement
All media equipment (including tape recorders) must be pre-set for security
sweeps by 1:15 p m
** There are no bilateral meetings expected at this time.
** The Treasury Department will not issue event-specific accreditation badges
to the media. Members of the media should wear the press credentials issued
to them by their media organization. Members of the media participating in
press pools will be given temporary badges to wear while performing that
duty.
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PRESS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
May 19, 2004
js-1668
Treasury Secretary Snow Statement on House Passage of
the Budget Resolution
Provides Protection to Extend Expiring Tax Cuts
Today the House of Representatives acted on a measure that is both sound fiscal
policy and solid common sense. Their vote provides the legislative protections
needed to extend the current child tax credit of $1,000, the current marriage penalty
relief, and the current 1 0 % bracket-all of which are set to expire at the end of the
year. Preventing a tax increase on millions of married couples, families with
children, and those in the lower income brackets is a top priority. Returning the
peoples' money to them in the form of tax cuts should not be put on equal footing
with budget rules that hold Congress accountable for their spending appetites. I
hope Senators recognize the importance of helping our nation's families and urge
them to act quickly to make sure millions of taxpayers don't get hit with a tax hike.
The President is committed to allowing hard-working individuals and families keep
more of their own money to help pay for their children's education, invest for
retirement, and spend as they see fit.
-30-
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S-1669: John B. Taylor<BR>Under Secretary of the Treasury for International Affairs<BR>Testimony ... Page 1 of 4
^ • • • • 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 20, 2004
JS-1669
John B. Taylor
Under Secretary of the Treasury for International Affairs
Testimony Before the House Appropriations
Subcommittee on Foreign Operations, Export Financing, and Related
Programs
FY2005 Budget Request for Treasury International Programs
Chairman Kolbe, Ranking Member Lowey, Members of the Subcommittee, thank
you for the opportunity to testify this morning on President Bush's FY2005 budget
request for Treasury's international programs.
Treasury's international programs - which include the multilateral development
banks (MDBs), debt reduction, and technical assistance - are critical instruments in
promoting the Administration's international economic agenda. The M D B s promote
global economic growth and poverty reduction, thereby helping to create stronger
markets for U.S. goods and services. They also support specific U.S. foreign policy
priorities, such as combating money laundering and terrorist financing, and
rebuilding conflict-torn economies. Similarly, debt reduction can help poor countries
remove debt overhang which inhibits growth and move to a sustainable level of
debt. Our technical assistance helps countries institute the sound budget and
financial systems needed for economic growth.
The FY2005 request for Treasury's international programs totals $1.71 billion. It
includes $1.43 billion to fully fund our annual U.S. commitments to the M D B s , $58.7
million toward clearing a portion of U.S. arrears to these institutions, $200 million
towards debt reduction, and $17.5 million for technical assistance.
The Economic Growth Agenda at the MDBs
The essential goal of the MDBs is to increase economic growth and thereby reduce
poverty. The M D B s achieve this goal by providing financial assistance and policy
advice. The productivity growth that spurs income growth depends on economic
policy and governance frameworks in recipient countries.
The key elements of such policies were stated by President Bush in 2002 - to
govern justly, to promote economic freedom, and to invest in people.
The MDBs also support key U.S. foreign policy priorities, such as economic
reconstruction in Iraq and Afghanistan, combating money laundering and terrorist
financing and fighting HIV/AIDS, especially in Africa.
Upon assuming office, the Bush Administration made it clear that the MDBs'
needed to reform in order to improve their effectiveness in promoting growth and
reducing poverty. Implementing such reforms were one of the highest priorities of
U.S. international economic policy.
The Bush Administration has linked its financial commitment to the MDBs to the
implementation of such reforms. Significant progress has been m a d e in two key
reforms: implementing a rigorous measurable results management system and
providing greater grant assistance.
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I a m pleased to report that all the institutions are currently in the process of
establishing results management systems that set measurable results with
timelines at the project, sector, country, and institution level. To provide a catalyst
for this effort, the U.S. introduced an incentive contribution scheme as part of our
contribution to the World B a n k s International Development Association (IDA) last
replenishment, IDA-13, pledging an additional $300 million that is conditioned on
IDA meeting specific performance and outcome targets. IDA has achieved the
initial targets set for last spring, and is working to accomplish its set of outcome
objectives in the areas of private sector development, health and education for this
spring. A n outside independent evaluation will be undertaken this spring to verify
whether the targets have been met.
I am also am pleased to report that we have increased the use of grants by the
M D B s to improve outcomes and avoid unsustainable debt levels in the poorest
countries. Grants programs are well-established in IDA, the African Development
Fund (AfDF) and the International Fund for Agricultural Development (IFAD), and
the U.S. just concluded negotiating a n e w grant program in the Asian Development
Fund (AsDF). Currently, the U.S. is seeking a significant expansion in the IDA and
AfDF grant programs through the n e w replenishment negotiations this year. Grants
have proven particularly useful in addressing the needs of those countries that have
serious debt sustainability problems or are emerging from destructive conflicts, and
for such critical needs as fighting the international HIV/AIDS epidemic. I recently
went on a "grants" tour of Africa to assess how the new grants were working. In
every country, I heard tremendous praise for the n e w grant programs. A particularly
good grant program for education in Kenya incorporates an excellent measurable
results framework.
To reinforce these reforms and strengthen the accountability of the MDBs, Treasury
working closely with the Congress, has set out ambitious goals to increase the
transparency of the M D B s ' decision-making processes.
In particular, the United States has advocated greater availability of information on
M D B projects, policies, Board meetings, fraud and corruption cases, and results
indicators.
We have also asked that the MDBs make public the details of their internal systems
for allocating assistance and establish a plan to conduct regular, independent
audits of internal management controls.
The private sector plays a critical role in increasing growth and creating jobs in
developing countries. For the last several years, the United States has urged
greater emphasis on loan programs and technical assistance to small- and
medium-sized enterprises (SMEs), along the lines of the IDA/lntemational Finance
Corporation (IFC) initiative to promote small business in Africa that w a s approved
this past year. This year at the special Summit of the Americas, our Hemisphere's
leaders committed to tripling the amount of bank loans available to small
businesses in Latin America and the Caribbean. Because small business plays a
critical role in generating jobs in most developing countries, w e believe that more
attention needs to be given to this critical sector by both multilateral and bilateral
donors.
We are urging the MDBs to scale up their private sector development assistance, in
the areas of policy advice, technical assistance and financial assistance. W e have
asked them to develop action plans to enact investment climate reforms. This will
be a theme of the G-8 Sea Island Summit in June.
The U.S. is the largest cumulative donor to the multilateral development banks, and
thus has significant influence in these institutions. Our participation in the M D B s
mobilizes greater resources and generates greater impact than is available through
bilateral programs alone. Our commitment to the M D B s reflects not only this
resource-leveraging power, but also the enormity of the economic challenges facing
developing and emerging-market countries around the world.
The FY2005 Request
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JS-1669: John B. Taylor<BR>Under Secretary of the Treasury for International Affairs<BR>Testimony ... Page 3 of 4
There are four basic components of our FY2005 request: (1) annual funding for the
M D B s , (2) arrears clearance for the M D B s , (3) debt relief, and (4) technical
assistance.
(1) Annual Funding for the MDBs: $1.43 billion
The Administration's request of $1.43 billion for the MDBs includes the final regular
payment of our proposed contributions to the current replenishments of IDA ($1.05
billion), the AfDF ($118 million), and the A s D F ($103 million). The request also
includes the third of four payments ($107.5 million) under the current Global
Environment Facility (GEF) replenishment. The $1.05 billion request for IDA
includes $200 million for this year's portion of the results-based Incentive
Contribution which is contingent on IDA's meeting certain performance goals. A n
outside independent audit, paid for by the World Bank, will review and verify the
accomplishment of these goals before these additional funds are released.
(2) Arrears Clearance for the MDBs: $58.7 million
The $58.7 million request for arrears clearance is part of an effort to pay down U.S.
arrears to the institutions, which totaled $472.7 million after passage of the FY2004
Appropriations Act. It is critical that the U.S. meet its international commitments,
thus helping to ensure U.S. leadership and credibility on issues of vital importance
to the United States.
(3) Debt Relief: $200 million
The $200 million request for debt relief includes: $75 million to complete the U.S.
share of our Kananaskis Summit pledge of $150 million in additional contributions
to the Heavily Indebted Poor Countries (HIPC) Trust Fund and $105 million will
allow the United States to begin the process of 100 percent HIPC forgiveness on
U.S. bilateral debt for the Democratic Republic of the Congo. The D R C has already
qualified for HIPC treatment, and other creditors have already provided their share
of debt reduction. The request also includes $20 million for debt relief under the
Tropical Forest Conservation Act (TFCA) which provides debt relief to developing
countries that commit to use the savings to protect their tropical forests.
Iraq's International Debt
Iraq is among the most highly indebted countries in the world with a debt to GDP
ratio currently estimated at 484 percent (higher if war reparations are also
included). Last September, the G-7 Finance Ministers committed to resolving this
issue by the end of 2004. W e have m a d e significant progress toward this goal.
Given the importance of addressing Iraq's debt overhang, the President asked the
former Secretary of the Treasury and Secretary of State, James Baker, to serve as
Special Presidential Envoy to work with the world's governments at the highest
levels in seeking to reduce Iraq's debt burden. Since late last year, Secretary
Baker has 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. The Administration looks forward to
working constructively with Congress to support this initiative.
(4) Technical Assistance: $17.5 million
The request also includes $17.5 million for Treasury's technical assistance
programs, which form an important part of our effort to support countries facing
economic developments or financial security issues, and whose governments are
committed to fundamental reforms. The FY2005 request will allow us to continue
current programs in the Middle East, Africa, Asia, and Central and South America,
as well as allow us to expand into new countries committed to sound economic
reform policies. W e expect to use $8.5 million of the appropriated funds on
programs that focus on anti-terrorist initiatives, to be spent in coordination with
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JS-1669: John B. Taylor<BR>Under Secretary of the Treasury for International Affairs<BR>Testimony ... Page 4 of 4
other U.S. Government agencies.
Technical Assistance in Iraq and Afghanistan
Our Office of Technical Assistance (OTA) is actively engaged in post-conflict
economic restructuring activities in Afghanistan and Iraq. In both countries, the
focus of the work is on the creation of sound economic frameworks upon which
future growth can be built. In Afghanistan, this has involved the initiation of a
streamlined government budget process, an improvement of the payment system
for government salaries, and the creation of a Debt Management Unit within the
Ministry of Finance which manages outstanding debts and guarantees.
In Iraq, Treasury-led effort within the Coalition Provisional Authority (CPA) has
aided in the payment of Iraqi government workers and pensioners after the fall of
S a d a a m and the introduction of n e w currency. Our team also led the development
of a central budget, a revitalization of its banking system, an introduction of sound
management practices and transparency at the Central Bank and Ministry of
Finance, the creation of a trade bank, and a strengthening of efforts aimed at
combating financial crimes and terrorist financing. In addition, advice is being
rendered on internal and external debt issues, including reconciling of Iraq's debt.
Authorization Requests
As part of the FY2005 budget, the Administration is seeking authorization for
additional commitments to the HIPC Trust Fund in relation to President Bush's
pledge at the G-7 Kananaskis Summit, for extension of authority for HIPC bilateral
debt relief, and for re-authorization of the Tropical Forest Conservation Act (TFCA).
I believe that it is critical that Congress pass authorization legislation for these
programs, and I look forward to working with you and other Members of Congress
to achieve this.
Conclusion
We will continue to work with the MDBs to make progress on implementing the
strong reform agenda. I ask for your support as w e strengthen these institutions in
ways that increase their effectiveness in utilizing financing m a d e possible by the
taxpayers of the U.S. in serving vital U.S. economic and security interests around
the world.
Our debt reduction and technical assistance programs also serve key U.S. reform
and growth objectives in very important ways.
Although it is not part of the Treasury request, I cannot close without strongly urging
your support for this year's Millennium Challenge Account ( M C A ) request, a vital
component of the President's international economic agenda. As you know, the
Millennium Challenge Corporation's Board, on which Secretary S n o w serves,
recently announced the 16 countries eligible for M C A assistance, and w e are
moving forward aggressively with this program. W e need your support to realize
the President's vision for this groundbreaking initiative.
Thank you very much. I look forward to working with you on funding this request,
and I would be happy to respond to your questions.
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JS-16707 Testimony of R. Richard N e w c o m b , Director <br>Office of Foreign Assets Con... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
May 20, 2004
JS-1670
Testimony of R. Richard Newcomb, Director
Office of Foreign Assets Control
U.S. Department of the Treasury
Before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
Introduction
Mr. Chairman, members of the Committee, thank you for inviting me to testify today
about the Extended Custodial Inventory Program. It's a pleasure to be here again
to discuss the Office of Foreign Assets Control and its relationship with the Federal
Reserve Bank.
OFAC'S CORE MISSION
The primary mission of the Office of Foreign Assets Control ("OFAC") of the U.S.
Department of the Treasury is to administer and enforce economic sanctions
against targeted foreign countries, and groups and individuals, including terrorists
and terrorist organizations and narcotic traffickers, which pose a threat to the
national security, foreign policy or economy of the United States. W e act under
general Presidential wartime and national emergency powers, as well as specific
legislation, to prohibit transactions and freeze (or "block") assets subject to U.S.
jurisdiction. Economic sanctions are intended to deprive the target of the use of its
assets and deny the target access to the U.S. financial system and the benefits of
trade, transactions and services involving U.S. markets. These same authorities
have also been used to protect assets within U.S. jurisdiction of countries subject to
foreign occupation and to further important U.S. nonproliferation goals.
OFAC currently administers and enforces 28 economic sanctions programs
pursuant to Presidential and Congressional mandates. These programs are a
crucial element in preserving and advancing the foreign policy and national security
objectives of the Untied States, and are usually taken in conjunction with diplomatic,
law enforcement, and occasionally military action.
The enforcement of these programs is defined by our jurisdiction, which extends to
all U.S. citizens and permanent resident aliens regardless of where they are
located, all persons and entities within the United States and all U.S. incorporated
entities and their foreign branches. In the case of Cuba, w e also have jurisdiction
with regard to foreign subsidiaries owned or controlled by U.S. companies. For the
purposes of our discussion here, w e will call them "U.S. persons."
OFAC has always had an outstanding relationship with the Federal Reserve,
especially with the Federal Reserve Bank of N e w York. Because of this
outstanding relationship, in early July 2003, the Federal Reserve Bank of N e w York
contacted O F A C to indicate that it had learned that U.S. dollar banknotes held by
Union Bank of Switzerland - Zurich ("UBS") may have been illegally bought from or
sold to sanctioned countries by U B S in violation of its Extended Custodial Inventory
("ECI") agreement with the Federal Reserve Bank. I understand that The Federal
Reserve Bank of N e w York had not previously been aware of the situation because
officers and employees of U B S in Zurich had submitted deliberately falsified
statistical reporting data.
OFAC kept in touch with the Federal Reserve Bank of New York while UBS, at the
Fed's insistence, and under the oversight of Swiss banking authorities, initiated an
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JS-16701 Testimony of R. Richard N e w c o m b , Director <br>Office of Foreign Assets Con... Page
internal investigation into the matter. UBS issued an initial report of findings, dated
December 1, 2003, and a supplemental report, dated January 26, 2004. The initial
report was provided to the Federal Reserve Bank with a request that it be shared
with O F A C ; O F A C received it electronically on January 20, 2004; the supplemental
report was received electronically on January 29. O F A C immediately reviewed the
material and initiated an enforcement investigation into any possible activities on
the part of "U.S. persons" over w h o m O F A C would have jurisdiction.
The UBS/Zurich ECI contract was terminated for breach on October 28, 2003 and
U B S , as you know, has paid a significant fine to the Federal Reserve Bank of N e w
York for deception. O F A C has met with all of the key players at the Federal
Reserve Bank of N e w York and understands that the Federal Reserve Bank,
through new contracts m a d e effective in February 2004, has taken very substantial
steps to enhance controls over all remaining ECls with respect to sanctions
compliance. O F A C applauds the Federal Reserve Bank for those efforts.
I would like to thank you and the Committee for the opportunity to speak with you,
Mr. Chairman, and would be happy to answer any questions.
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
May 20, 2004
JS-1671
Treasury Secretary John Snow
Testimony before the
House Appropriations Committee
Subcommittee on Transportation, Treasury
and Independent Agencies
Chairman Istook, Congressman Olver, and Members of the Committee, I appreciate
the opportunity to appear before you today to discuss President Bush's F Y 2005
proposed budget for the Department of the Treasury.
The President's request for FY 2005 of $11.7 billion for Treasury provides funding
w e need to support the core missions as identified in our new strategic plan - in
promoting national prosperity through economic growth and job creation;
maintaining public trust and confidence in our economic and financial systems; and
ensuring the Treasury organization has the workforce, technology, and business
practices to meet the nation's needs effectively and efficiently. T w o key strategic
objectives are to collect federal tax revenue when due through a fair and uniform
application of the law and to disrupt and dismantle the financial infrastructure of
terrorists, drug traffickers, and other criminals and isolate their support networks.
One historic change at Treasury in the past year has been the movement of most of
the Department's law enforcement divisions - affecting some 30,000 employees to the Department of Homeland Security and the Department of Justice. This
change has provided an opportunity for Treasury to refocus on its core missions as
the Federal Government's economic policymaker, financial manager, and revenue
collector. This puts us in a better position to fulfill our critical role in fighting the war
on terrorist financing. In addition, the Department revised and completed a new
strategic plan in September 2003. To complement this strategic planning initiative,
the Department and many of the bureaus underwent a restructuring of their budget
activities and programs - discontinuing enforcement programs which no longer fit
into the Treasury strategic vision and developing new performance goals and
measures focused on getting value for taxpayers. As a result of these efforts, our
F Y 2005 request reflects significant reengineering and reprogramming to ensure
efficient and effective use of our resources.
Mr. Chairman, we provided the Committee with a detailed breakdown and
justification for President's FY 2005 budget request for Treasury. I would like to
take the opportunity today to point out some highlights of our request and then I'd
be happy to take whatever questions you may have.
Promoting Prosperous and Stable U.S. and World Economies
The aim of these strategic goals is to ensure that the United States and world
economies perform at full economic potential. In order to perform at its full
potential, the U.S. economy must increase its rate of growth and create new, high
quality jobs for all Americans. Additionally, the legal and regulatory framework must
support this growth by providing an environment where businesses and individuals
can grow and prosper without being limited by unnecessary or obsolete rules and
regulations. The Treasury Department and three of its bureaus, the Community
Development Financial Institutions Fund, the Office of the Comptroller of Currency
and the Office of Thrift Supervision play diverse roles in the domestic economy.
From serving as the President's principal economic advisor to issuing tax refunds to
millions of Americans, the Treasury has a significant influence on creating the
conditions for economic prosperity in the U.S. A prosperous world economy serves
the United States in many ways. It creates markets for U.S. goods and services,
and it promotes stability and cooperation among nations. For these reasons, the
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JS-1671: Treasury Secretary John Snow<BR>Testimony before the<BR>House Appropri... Page 2 of 7
Department of the Treasury will work with other federal agencies and offices to
promote international economic growth and raise international standards of living
through interaction with foreign governments and international financial institutions.
Our budget requests $158.9 million to support these strategic goals.
Maintaining Public Trust and Confidence in our Economic and Financial
Systems
Treasury's mission of managing the U.S. Government's finances effectively is the
bulk of the President's F Y 2005 request for the Department. The budget request of
$11 billion - the majority of which is for the Internal Revenue Service -- will provide
funds to ensure that the tax system is fair for all while maintaining high quality
service to our taxpayers and ensuring compliance with the tax laws.
In past years, IRS's focus has been on improving customer service. We believe
that w e have been successful in that effort and are committed to further enhancing
customer service for the vast majority of American taxpayers w h o do their best to
pay their fair share. For those w h o do not, fundamental fairness requires that our
enforcement efforts in F Y 2005 continue moving us towards a tax system in which
everyone is complying with the tax laws. Our F Y 2005 request, which includes a net
increase of $300 million, will focus our resources toward enforcement initiatives
designed to curb abusive tax practices, end the proliferation of abusive tax shelters,
improve methods of identifying tax fraud, identify and stop promoters of illegal tax
schemes and scams, and increase the number and effectiveness of audits to
ensure compliance with the tax laws. This request will allow the IRS to apply
resources to areas where non-compliance proliferates: promotions of tax schemes,
misuse of offshore accounts and trusts to hide income, abusive tax shelters,
underreporting of income, and failure to file and pay large amounts of employment
taxes.
The President's request also provides $285 million to continue our effort in
modernizing the nation's tax system through investments in technology. During the
fall of 2003, the IRS performed comprehensive studies to review its modernization
efforts. From these studies, the IRS has resized its modernization efforts to allow
greater management focus and capacity on the most critical projects and initiatives.
The IRS is also responding to these studies by increasing the business unit
ownership of the projects and revising its relationships with the contractor and
ensuring joint accountability. While the IRS has thus far failed to deliver several
important projects with which taxpayers are not directly involved, it is important to
note they have had s o m e notable successes. The IRS has m a d e progress on
applications such as improved telephone service and a suite of e-services to tax
practitioners. For the first time, large businesses and corporations can
electronically file. In addition, taxpayers can access refund and Advance Child Tax
Credit information from the irs.gov website. The IRS's business systems
modernization expenditure plan provides more detail on this request.
In addition, IRS will work to improve customer service by making filing easier;
providing top quality service to taxpayers needing help with their return or account;
and providing prompt, professional, improved taxpayer access and helpful
treatment to taxpayers in cases where additional taxes m a y be due.
The provisions of the Trade Act of 2002 (P.L. 107-210) chartered the Treasury
Department (through the IRS) with establishing and implementing a n e w health
coverage tax credit program in 2003. This program provides a refundable tax credit
to eligible individuals for the cost of qualified health insurance for both the individual
and qualifying family members. The request provides $35 million to continue
implementation and operation of the Health Insurance Tax Credit Program.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) was created when the
Homeland Security Act of 2002 divided the Bureau of Alcohol, Tobacco and
Firearms into two agencies. Our F Y 2005 request includes $81.9 million for T T B :
$58.3 million to support the Collect the Revenue function, and $23.5 million to
Protect the Public, both of which will facilitate their efforts in collecting $14.6 billion
in revenue from the alcohol and tobacco industries and monitor alcohol beverages
in the marketplace to detect contamination and adulterated products. Their focus
this coming fiscal year is to promote voluntary compliance of existing regulations
and to protect the consumer through efficient and effective service.
Key to the U.S. Government's management of financial systems is the Financial
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Management Service (FMS), whose mission is to provide central payment services
to Federal program agencies, operate the Federal government's collection and
deposit systems, provide Government-wide accounting and reporting services, and
m a n a g e the collection of delinquent debt. The F Y 2005 request of $231 million for
F M S includes legislative proposals to improve and enhance opportunities to collect
delinquent debt through F M S ' debt collection program. The proposals would:
eliminate the 10-year limitations period applicable to the offset of federal non-tax
payments to collect debt owed to federal agencies; increase amounts levied from
vendor payments (from 15 percent to 100 percent) to collect outstanding tax
obligations; allow the Secretary of the Treasury to match information about persons
owing delinquent debt to the federal government with information contained in the
Department of Health and H u m a n Service's National Directory of N e w Hires; and
allow the offset of federal tax refunds to collect delinquent state unemployment
compensation overpayments.
The Bureau of the Public Debt (BPD) continues its management and improvement
of federal borrowing and debt accounting processes. B P D will provide vital support
to the processing of applications and the operation of systems used for re-enforcing
its mission of providing quality debt management services to financial institutions,
individuals, foreign governments, and over 200 government trust funds.
The activities of the United States Mint and the Bureau of Engraving and Printing
(BEP) are vital to the health of our Nation's economy. These agencies share the
responsibility for ensuring that sufficient volumes of coin and currency are
consistently available to carry out financial transactions in our economy. Treasury,
Mint and B E P will deliver a study to Congress regarding options to merge and/or
streamline operations by consolidating certain functions and sharing costs between
the Mint and the B E P .
Fighting the War on Terror and Safeguarding our Financial Systems
Our goals in preserving the integrity of U.S. financial systems include ensuring that
the U.S. financial system and access to U.S. goods and services are closed to
individuals, groups and nations that threaten U.S. vital interests, ensuring that these
systems are kept free and open to legitimate users while excluding those w h o wish
to use the system for illegal purposes, and ensuring that the financial systems will
continue to operate without disruption from either natural disaster or m a n m a d e
attacks. To support such efforts, the President has requested $250.9 million for F Y
2005.
The Administration announced the creation of the Office of Terrorism and Financial
Intelligence (TFI) within the Department of the Treasury on March 8, 2004, and,
while the office w a s in the early planning stages, w e were not able to specifically
include it w h e n the President's Budget w a s submitted to Congress. TFI will lead
Treasury's efforts to sever the lines of financial support to international terrorists
and will serve as a critical component of the Administration's overall and long-term
effort to keep America safe from terrorist machinations.
TFI will consolidate in one office financial intelligence expertise and Treasury's
Executive Office for Terrorist Financing and Financial Crime (EOTF/FC). The
Executive Office for Terrorist Financing and Financial Crime (EOTF/FC) w a s
established by Treasury in March of 2003 and charged with policy oversight of
FinCEN and O F A C as well as providing guidance to the IRS-Criminal Investigation
Division (IRS-CI). The creation of the Executive Office for Terrorist Financing and
Financial Crime resulted in a single lead office in Treasury for fighting the financial
war on terror and combating financial crime, enforcing economic sanctions against
rogue nations, and assisting in the ongoing hunt for Iraqi assets. Combining the
functions of E O T F / F C and its strategic goals to combat terrorist financing, rogue
regimes and other illicit financial activities with a robust intelligence analysis
component will improve the ability of Treasury to meet the U.S. government's needs
to identify, act, and enforce its policy initiatives.
The new office will be staffed by current and recently authorized Treasury
employees and will integrate employees from the component offices, as well as
drawing from other Departmental staff. If approved by Congress, Treasury will also
be able to hire additional employees for these functions in F Y 2005. In addition, the
Administration recently sent up an amendment to the President's Budget that
proposes to eliminate the staffing and funding floor for the Office of Foreign Assets
Control to allow the President and m e to have full discretion in allocating
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Departmental Office resources in the critical effort to disrupt terrorist financing. This
flexibility is even more important in the context of the n e w TFI office. Barring
unforeseen circumstances, the Department has no plans to request additional funds
for this office during either the F Y 2004 or F Y 2005 appropriations process. That
said, w e believe that through a combination of prudent and targeted use of
resources, Treasury will be able to spend up to an additional $2 million on staffing
and other start-up needs of TFI during the rest of the current fiscal year. W e
anticipate that w e will be able to bring on board up to 15 n e w personnel during the
remainder of the fiscal year. The Department is committed to working with
Congress as w e m o v e through the process of setting up this n e w office, in full
agreement with the guidelines that accompany the funding flexibilities that the
Congress has generously provided us.
Looking forward to the next fiscal year, we have not made firm decisions about how
m u c h money w e will devote to the new office. W e will evaluate our needs, and w e
are prepared to m a k e the hard decisions about h o w to allocate our limited
resources. Fighting the war on terror is a priority of the President and of this
Department - and w e will spend whatever w e need to carry out our duties in a
responsible manner. And, of course, w e will work with the Congress in making
those decisions.
The Executive Office for Terrorist Financing and Financial Crime develops and
implements U.S. government strategies to combat terrorist financing domestically
and internationally and develops and implements the National Money Laundering
Strategy as well as other policies and programs to fight financial crimes. The office
is also responsible for representing the Treasury and the U.S. government
internationally in fora related to terrorist financing and money laundering as well as
participating in the Department's development and implementation of U.S.
government policies and regulations in support of the Bank Secrecy Act and the
U S A P A T R I O T Act. The President's budget request for F Y 2005 provides additional
funds to support this mission, including a 14 percent funding increase and a 36
percent staffing boost.
The Office of Foreign Assets Control (OFAC) also plays a central role in the
Treasury Department's efforts to disrupt financing of terrorist activities. Only days
after September 11, 2001, Treasury helped draft and implement Executive Order
13224, which invoked Presidential authority contained in the International
Emergency Economic Powers Act and froze the assets of 29 entities and
individuals linked to O s a m a bin Laden and his al Qaeda network. Since then,
O F A C research and investigation helped identify between 200 and 300 additional
entities and individuals as Specially Designated Global Terrorists under the Order.
Since September 2001, Treasury, through O F A C , and our allies have frozen over
$139 million in terrorist assets and vested and returned more than $2.6 billion of
frozen Iraqi assets.
The President's FY 2005 request also includes $64.5 million for the Financial
Crimes Enforcement Network (FinCEN) to enhance its ability to fight the war on
terror and combat financial crimes such as money laundering. Its mission to
safeguard the U.S. financial systems from the abuses imposed by criminals and
terrorists and to assist law enforcement in the detection, investigation, disruption
and prosecution of such illicit activity is accomplished through its statutory role as
the administrator of the Bank Secrecy Act (31 C.F.R.) FinCEN issues and enforces
regulations that require a wide gamut of financial institutions to implement antim o n e y laundering programs and report transactions that are indicative of m o n e y
laundering, terrorist financing and other financial crimes, thus providing a wealth of
information to assist law enforcement, both domestic and international, in pursuing
such crimes. FinCEN also ensures that the information collected under these
regulations is m a d e fully accessible to law enforcement and the regulatory
community in a secure manner and provides both tactical and strategic analysis to
a variety of customers. In addition, FinCEN is the Financial Intelligence Unit (FIU)
for the United States and has been central in the development of a consortium of
FlUs around the globe that permits fast and effective sharing of financial
intelligence on an international scale.
The IRS's Criminal Investigative Division (IRS-CI) also plays a key role in
investigating financial crimes. The request supports the unique skills and expertise
of IRS-CI agents in investigating tax fraud and financial crimes not only support tax
compliance, but also benefit the war on terror and our efforts to root out financial
crimes.
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In addition, the Office of Critical Infrastructure Protection and Compliance Policy
leads our efforts to safeguard the financial infrastructure. This Office works closely
with the Department of Homeland Security, other federal agencies, and the private
sector to safeguard our infrastructure. That is essential, given that the majority of
the critical financial infrastructure of the United States is owned and operated by the
private sector. The financial system is the lifeblood of our economy, and this Office
leads our efforts to keep it safe.
Ensuring Professionalism, Excellence, Integrity and Accountability in
Management
of Treasury
The President has requested $229.6 million for ensuring proper stewardship of the
Department. Included in this request is $14.2 million for the Department's Office of
Inspector General (OIG) and $129.1 million for the Inspector General for Tax
Administration (TIGTA).
The 1988 amendments to the Inspector General Act of 1978 created the OIG to
conduct audits and investigations relating to Treasury programs and operations; to
promote economy and efficiency, and detect and prevent fraud and abuse, in such
programs and operations; and to notify the Secretary and Congress of problems
and deficiencies in such programs and operations.
The Internal Revenue Service Restructuring and Reform Act of 1998 created the
Inspector General for Tax Administration (TIGTA) to oversee operations at the
Internal Revenue Service (IRS). TIGTA promotes the public's confidence in the tax
system by assisting the IRS in achieving its strategic goals, identifying and
addressing its material weaknesses, and implementing the President's
Management Agenda. Further, TIGTA undertakes investigative initiatives to protect
the IRS against threats to systems and/or employees.
To maximize efficiencies and effectiveness, the Administration has proposed to
merge the Treasury Inspector General and the Treasury Inspector General for Tax
Administration into a new Inspector General office, called the Inspector General for
Treasury. The new organization will have all of the s a m e powers and authorities as
its predecessors have under current law. W e will work with the Congress to m o v e
this legislation forward.
Also included in this request is an increase of $10.8 million for a host of
modernization activities of our systems including IT Governance, E-Govemment,
operational security, and Treasury enterprise architecture.
Foundation for Success - The President's Management Agenda
As mentioned earlier, following the movement of the law enforcement bureaus to
the Departments of Homeland Security and Justice, Treasury restructured and
refocused its strategic goals and objectives based on the five initiatives of the
President's Management Agenda (PMA). Treasury developed and issued its n e w
Strategic Plan, which linked intricately with each of the five initiatives of the P M A .
This n e w strategic vision, coupled with the efforts underway in the P M A , provides
the mechanism and focus for continuous improvement throughout Treasury and its
bureaus.
In FY 2003, Treasury achieved many significant milestones in implementing the
President's Management Agenda. Specific accomplishments included:
• Over the past 18 months, Treasury has worked to draft the first-ever
Department-wide H u m a n Capital Strategic Plan, which addresses the
Standards for Success as issued by the Office of Personnel Management
( O P M ) and the Office of Management and Budget (OMB). Treasury
incorporated h u m a n capital into its strategic planning and budget
formulation and execution processes, and the plan will guide future efforts in
areas such as workforce and succession planning, diversity, performance
management, and managerial accountability.
• In competitive sourcing, Treasury completed 3 full competitions, over 20
streamlined competitions, and currently has studies involving approximately
4,500 positions in various phases of completion.
• In budget and performance integration, Treasury revised the performance
reporting requirement to facilitate review and assessment of bureaus' key
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performance data. Treasury also restructured some of the bureaus' budget
activities to reflect alignment with the new strategic plan and the full cost of
achieving results.
Treasury also maintained its government-wide lead in accelerated financial
reporting. The Department implemented a three-day monthly close and
successfully issued its F Y 2003 Performance and Accountability Report on
November 14, 2003, two and one-half months ahead of the official deadline.
Treasury will continue to work closely with O M B and other stakeholders to m a k e
improvements in implementing the initiatives set forth in the President's
Management Agenda.
The President's Six Point Economic Growth Plan
At the beginning of my testimony I talked about what the Treasury Department does
to support our strategic goal of encouraging a prosperous and stable U.S.
economy. I would also like to talk about our efforts across the Administration to
promote economic growth as embodied by President's six-point plan for growth.
That includes making health care more affordable with 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 Congress pass legislation based
on the President's energy plan.
Streamlining regulations and reporting requirements are another critical reform
element that benefits small businesses, which represent the majority of n e w 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 w h y President Bush recently signed into law new free trade
agreements with Chile and Singapore tha
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