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Treas.
HJ
10
.A13
P4
v.420

Department of the Treasury

PRESS RELEASES

The following numbers were not used:
JS-2141, 2160 and 2169

Page 1 of2

'22 - Treasury Intematienal Capital Data For July

:PRESSROOM
"

.-.. ---.

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

November 16, 2004
js-2101

Treasury International Capital (TIC) Data For September

We recommend printing this release using the PDF file below.
Treasury International Capital (TIC) data for September are released today and posted on the U.S. Treasury web site (www.treas.gov/tl
will report on data for October, is scheduled for December 15, 2004.

Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,397.7 billion in September, exceeding gross sales of domestic securities
during the same month.
Foreign purchases of domestic securities reached $61.0 billion on a net basis in September, relative to $60.2 billion during the previous
reached $47.7 billion in September. Net private purchases of Treasury Bonds and Notes increased to $9.2 billion from minus $4.4 billiol
private purchases of Government Agency Bonds were minus $1.1 billion, down from $18.6 billion the previous month. Net private purch
$43.5 billion from $25.4 billion the previous month. Net private purchases of Equities declined to minus $3.9 billion from minus $2.1 billil
Official net purchases of U.S. securities were $13.3 billion in September, relative to $22.8 billion in August. Official net purchases of Tre
billion accounted for the bulk of official inflows in September, down from $19.1 billion the previous month.

Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $253.8 billion in September, relative to gross sales of foreign secul
billion during the same month.
Gross sales of foreign securities to U.S. residents fell short of purchases by $2.4 billion, highlighting net U.S. sales of $2.1 billion in Fon
$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 $63.4 billion in September compared
foreign purchases of long-term securities were $833.5 billion in the 12-months through September 2004 as compared to $664.3 billion c
September 2003.
The full data set, including adjustments for repayments of principal on asset-backed securities, as well as historical series, can be foune
http://www.treas.gov/tic/ ..

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
12 Months Through
2002

tp://www.trlZus.gov/press/releases/Js2101.htm

2003

Sep-03

Sep-04

Jun-04 Jul-04

71112005

Page 2 of2

22 - Treasury In.tematioruil Capital Data For July

Gross Purchases of Domestic Securities

13,022.9 14,922.1

14,565.5 16,327.2

1,338.6 1,309.1

Gross Sales of Domestic Securities

12,4 75.4 14,175.0

13,869.7 15,427.8

1,253.3 1,230.0

Domestic Securities Purchased, net (line 1 less
line 2) /1

547.6

747.1

695.8

899.4

85.3

79.2

508.3

607.7

591.6

647.1

66.9

72.8

168.8

161.6

167.3

23.0

18.3

Private, net /2

Treasury Bonds & Notes, net

112.8

Gov't Agency Bonds, net

166.6

136.1

159.2

172.2

15.2

17.7

Corporate Bonds, net

176.7

264.7

240.7

288.2

26.5

27.1

Equities, net

52.2

38.1

30.0

19.4

2.2

9.7

39.3

139.4

104.3

252.2

18.3

6.4

Official, net

Treasury Bonds & Notes, net

7.1

109.3

78.3

213.9

17.5

4.1

28.6

24.9

21.4

30.0

0.6

1.4

Gov't Agency Bonds, net

Corporate Bonds, net

5.6

5.5

4.4

8.9

0.7

0.8

Equities, net

-2.0

-0.4

0.1

-0.6

-0.5

0.1

Gross Purchases of Foreign Securities

2,640.0

3,037.8

2,874.5

3,529.7

291.6

287.0

Gross Sales of Foreign Securities

2,613.0

3,086.4

2,906.1

3,595.6

303.9

303.1

Foreign Securities Purchased, net (line 14 less
line 15) /3

27.0

-48.7

-31.6

-65.9

-12.2

-16.2

Foreign Bonds Purchased, net

28.5

22.3

35.8

-4.0

-7.0

-7.3

Foreign Equities Purchased, net

-1.5

-71.0

-67.4

-61.9

-5.2

-8.9

574.6

698.4

664.3

833.5

73.0

63.0

Net Long-Term Flows (line 3 plus line 16)

REPORTS

•

Treasury International Capital Data For September (PDF)

tp://www.trt.~s.gov/press/releases/Js2HH.htm

7/1/2005

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
November 16, 2004
EMBARGOED UNTIL 9:00 AM

Contact:

Brookly McLaughlin
202-622-1996

TREASURY INTERNA TIONAL CAPITAL DATA FOR SEPTEMBER

Treasury International Capital (TIC) data for September 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
October, is scheduled for December 15,2004.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,397.7 billion in September,
exceeding gross sales of domestic securities by foreigners of $1 ,336.7 billion during the same
month.
Foreign purchases of domestic securities reached $61.0 billion on a net basis in September,
relative to $60.2 billion during the previous month. Private net flows reached $47.7 billion in
September. Net private purchases of Treasury Bonds and Notes increased to $9.2 billion from
minus $4.4 billion the preceding month. Net private purchases of Government Agency Bonds
were minus $1.1 billion, down from $18.6 billion the previous month. Net private purchases of
Corporate Bonds rose to $43.5 billion from $25.4 billion the previous month. Net private
purchases of Equities declined to minus $3.9 billion from minus $2.1 billion.
Official net purchases of U.S. securities were $13.3 billion in September, relative to $22.8 billion
in August. Official net purchases of Treasury Bonds and Notes of$10.1 billion accounted for
the bulk of official inflows in September, down from $19.1 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $253.8 billion in September,
relative to gross sales of foreign securities to U.S. residents of $251.4 billion during the same
month.

Gross sales of foreign securities to U.S. residents fell short of purchases by $2.4 billion,
highlighting net U.S. sales of $2.1 billion in Foreign Equities and net sales of $0.3 billion in
Foreign Bonds.
Net Long-Tenn Securities Flows
Net foreign purchases of both domestic and foreign long-tenn securities from U.S. residents
were $63.4 billion in September compared with $59.9 billion in August. Net foreign purchases
oflong-tenn securities were $833.5 billion in the 12-months through September 2004 as
compared to $664.3 billion during the twelve months through September 2003.
The full data set, including adjustments for repayments of principal on asset-backed securities, as
well as historical series, can be found on the TIC web site, http://www.treas.goy/tic/.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2003

12 Months Through
Sep-03
Sep-04

Jun-04

Jul-04

Aug-04

Sep-04

13,022.9 14,922.1
12,475.4 14,175.0
547.6
747.1

14,565.5 16,327.2
13,869.7 15,427.8
695.8
899.4

1,338.6
1.253.3
85.3

1,309.1
1,230.0
79.2

1,359.4
1,299.1
60.2

1,397.7
1,336.7
61.0

2002
I
2
3

Gross Purchases of Domestic Securities
Gross Sales of Domestic Securities
Domestic Securities Purchased, net (line I less line 2) II

4
5
6
7
8

Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net

508.3
112.8
166.6
176.7
52.2

607.7
168.8
136.1
264.7
38.1

591.6
161.6
159.2
240.7
30.0

647.1
167.3
172.2
288.2
19.4

66.9
23.0
15.2
26.5
2.2

72.8
18.3
17.7
27.1
9.7

37.4
-4.4
18.6
25.4
-2.1

47.7
9.2

9
10
II
12
13

Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net

39.3
7.1
28.6
5.6
-2.0

139.4
109.3
24.9
5.5
-0.4

104.3
78.3
21.4
4.4
0.1

252.2
213.9
30.0
8.9
-0.6

18.3
17.5
0.6
0.7
-0.5

6.4
4.1
1.4
0.8
0.1

22.8
19.1
2.6
1.1
0.1

13.3
10.1
2.0

2,640.0
2,613.0
27.0

3,037.8
3,086.4
-48.7

2,874.5
2,906.1
-31.6

3,529.7
3,595.6
-65.9

291.6
303.9
-12.2

287.0
303.1
-16.2

255.7
256.0
-0.4

253.8
251.4
2.4

28.5
-1.5

22.3
-71.0

35.8
-67.4

-4.0
-61.9

-7.0
-5.2

-7.3
-8.9

-1.7
1.3

0.3
2.1

574.6

698.4

664.3

833.5

73.0

63.0

59.9

63.4

14
15
16
17
18
19

12
13

Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) 13
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
Net Lone-Term Flows (line 3 plus line 16)
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)

Source: U.S. Department of the Treasury

-l.l
43.5
-3.9

l.l
0.0

JS-2102: OFAC Licensing Polic}! fur Three Specially- Designated Businesses in Colo... Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
November 16, 2004
JS-2102

OFAC Licensing Policy for Three SpeciallyDesignated Businesses in Colombia
The U. S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
has adopted a policy to issue specific licenses, on a case by case basis, authorizing
U.S. suppliers to engage in certain transactions with the following Colombian
Government-controlled entities, which have been designated by OFAC as Specially
Designated Narcotics Traffickers (SDNTs) pursuant to 31 CFR Part 536:
•

Cooperativa Multiactiva de Empleados de Distribuidores de Drogas
Copservir Uda. (COPSERVIR), NIT # 830011670-3, which manages the
Drogas La Rebaja establishments in Colombia;
• Cooperativa Multiactiva de Comercializacion y Servicios Farmacoop
(FARMACOOP) NIT # 830010878-3;
• Cooperativa de Cosmeticos y Populares Cosmepop (COSMEPOP) NIT #
800251322-5.

The Government of Colombia took control of these companies in September 2004.
By establishing a licensing policy, OFAC is ensuring that these entities continue to
operate - and do so in a legitimate manner - under the control of the Colombian
government, thereby preserving the jobs of several thousand Colombians who were
unknowingly manipulated by Cali drug cartel leaders Miguel and Gilberto
Rodriguez-Orejuela. OFAC continues to work closely with Colombian officials to
monitor the situation.
U.S. suppliers seeking a license to sell products to COPSERVIR, FARMACOOP or
COSMEPOP should submit a written license application in accordance with 31 CFR
§ 501.801 (b) to the Office of Foreign Assets Control, Licensing Division, U.S.
Department of the Treasury, 1500 Pennsylvania Avenue, NW - Annex,
Washington, DC 20220.
In addition to the information required by 31 CFR § 501.801 (b)(3), the application
must include a detailed description of the proposed transactions, the source and
method of payment and a copy of a signed purchase request from any of the
aforementioned cooperatives. Questions regarding this policy should be directed to
OFAC's Licensing Division at (202) 622-2480.

http://www.treas.gov/preSS/releascs/js2102.htm

113/2005

l03: Joint Statemt::nt oftht:: 2005 US-UK Transatiantic Enterprise Partnership

Page 10f2

:._<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
November 16, 2004
JS-2103
Joint Statement of the 2005 US-UK
Transatlantic Enterprise Partnership
Both the US administration and the UK Government are committed to the economic
reform agenda and to sharing ideas across the Atlantic on how to strengthen
enterprise, productivity and jobs - which are essential for faster growth in the US,
UK and across Europe, and for balanced global growth.
Following the success of the US-UK initiative in 2004, the 2005 US-UK
Transatlantic Enterprise Partnership will build on the earlier initiatives, and will take
the policy dialogue further.
US - UK Enterprise Initiatives
UK-US Enterprise Summit
Following the success of last year's summit and academic seminar held in the US,
we agree to co-chair a second joint government-business enterprise summit in the
UK next year to discuss the contribution of enterprise to productivity, jobs and
growth and the best methods for encouraging entrepreneurship. The summit will
draw on experience from entrepreneurs and policy makers, and share lessons from
areas of national strength in both countries. In conjunction with the summit, we will
convene a group of academic experts to consider the role of government and
education in fostering entrepreneurship, productivity and jobs, to assess progress
over the last year and to propose areas for future policy action.
Enterprise in education
The UK has established the National Council for Graduate Entrepreneurship in
order to encourage students and graduates to consider entrepreneurship as a
viable career option. Lessons have already been learnt from US models of
stimulating interest in enterprise in universities, and the UK is keen to maintain this
momentum. We propose to hold a conference for UK and US leaders of
universities, working with the National Council for Graduate Entrepreneurship and
the Kauffman Foundation.
In June this year, experts, teachers, and enterprise education providers from the
US and the UK exchanged ideas and best practice on all aspects of enterprise
education in schools. We believe that this co-operation should continue and
therefore we propose to continue this dialogue in 2005.
EU-US Economic Cooperation
We reaffirm the importance of enhancing economic cooperation between the EU
and the US for growth and prosperity on both sides of the Atlantic. We welcome
the June EU-US summit declaration calling for a new forward-looking strategy for
eliminating barriers to further economic integration, and the steps taken by the US
administration and the Commission to consult stakeholders.

TJ:llwww.treas.gov/press/reieases/js2103.htm

7/512005

103: Joint Statement of the 2005 US-UK Transatlantic Enterprise Partnership

Page 2 of2

We look to the 2005 Summit to endorse an ambitious strategy injecting new
impetus into the transatlantic economic agenda and including the active
engagement of key policy makers and regulators on both sides of the Atlantic. We
are also pleased that the OEeD is taking forward a study of the potential economic
benefits of closer economic cooperation and look forward to the publication of
results in March.

'.l)://www.treas.~ov/press/releases/js2103.htm

7/5/2005

JS-2104: Media

AdviiQrys"br~Tr~~sury

Official to Discuss Identity Theft

Page 1 of 1

:._<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
November 16, 2004
JS-2104

Media Advisory
Treasury Official to Discuss Identity Theft
Treasury Assistant Secretary for Financial Institutions Wayne A. Abernathy will
speak Thursday at an identity theft briefing sponsored by American Express.
"Holidays are a great time for family, friends, and celebration, but they're also the
time when identity thieves go into overdrive," said Abernathy. "Fortunately, there
are some simple things that Americans can do that will seriously reduce their
chances of becoming financial victims. These simple things are all about being
careful as you shop: know who you are doing business with; empty your purse or
wallet of extra cards, checks, and identifying documents you won't need; don't let
your credit card out of your sight; don't leave receipts behind or lying around and
don't put them into the trash without cutting them up or shredding them; check your
financial statements when they arrive and ask for them if they don't show up at their
usual time."
Additionally, Abernathy reminded consumers that beginning on December 1,
legislation Signed by President Bush last year gives those living in the western U.S.
(and then progressing across the nation through 2005) the right to a free copy of
their credit report each year.
Abernathy will be joined by representatives from the FBI, the Federal Trade
Commission, the Better Business Bureau, and consumer advocacy groups to
discuss the growing problem of identity theft.
This event is open to the media:
WHO:Treasury Assistant Secretary for Financial Institutions Wayne A. Abernathy
WHAT:Remarks at American Express Identity Theft Briefing
WHEN:Thursday, November 18, 2004, Noon (EST)
WHERE:Cafe Gray 10 Columbus Circle
New York, NY
* Media wishing to attend should contact Smita Reddy at (212) 481-7000, ext.
611 or smitar@mbooth.com.

http://www.treas.gov/press/refeases/is2104.htm

1/3/2005

js-2105: The Hononlblelohn W. Snow Prepared Remarks at Chatham House Th...

Page 1 of 5

FROM THE OFFICE OF PUBLIC AFFAIRS
November 17. 2004
js-2105

The Honorable John W. Snow
Prepared Remarks at Chatham House
The Royal Institute of International Affairs
London, England
Good morning. It is a great pleasure to be here in London. and to be here with all of
you. The relationship between our countries is a special one; it is a friendship that is
cherished by leaders and citizens alike. My own friendship with Chancellor Gordon
Brown has been one of the highlights so far of my tenure as Treasury Secretary.
and I believe that our alliance exemplifies international ties that are both genial and
productive.
This is a significant time for me to be visiting Europe. As you know. two weeks ago
the people of the United States voted to return President Bush to office for another
four-year term. His agenda for this second term is already underway. and it is an
agenda that holds great promise for the people of our country and for others as
well. We want to continue our relationship with Europe and believe there are terrific
economic examples to be followed and expanded upon this side of the Atlantic.
For example. I was in Dublin on Sunday and Monday of this week. and had a
chance to talk with financial, business and academic leaders there about the
creation of "Celtic Tiger" economy and the outstanding economic success they
have had in recent years. We talked about the specific economic reforms that have
been so successful in Ireland and how the political consensus that made them
possible came about. I was particularly delighted to visit with so many of the
architects of the new Ireland and get their first-hand sense of how the reforms were
put in place. As one of them said to me. "Developing policy was relatively
straightforward - something any first year grad student in economics could have
done. The hard part was getting the broad based consensus from labor.
management. the public. and politicians to move forward. That took courage.
decisiveness. and planning." That strikes me as the real story of economic reform
- whether it is Ireland. the United States. Asia or Europe - it takes courage. it takes
planning. and it takes action.
In Ireland. thoughtful political leadership carried the day. Good fiscal policies
including income tax rate cuts. government spending restraint and education
reforms led to terrific economic growth in that country. They've had nearly eight
percent growth a year for the past eleven years. They've cut tax rates and reduced
expenditures and deficits.
Some say Ireland benefited from good fortune. I say they benefited from good
policy. I applaud them and believe they ought to be emulated.
Ireland is proof-positive that pro-growth. free-market policies work. The U.S has
traditionally embraced these policies. and I was thrilled to see them implemented so
successfully in Ireland.
Ireland's experience reminded me that economic growth and opportunity is much
more than a by-product of freedom; economic opportunity is freedom's greatest
catalyst as well as its most essential safeguard. Business growth. free trade and
financial reforms lead to a better life for citizens of any country. And with that better
life comes an increased esteem for fairness. liberty and equality. which is good for
the human condition.
I look forward to discussing pro-growth policies like those that worked so well in

http://www.treas.gov/press/releasesijs2105.htm

113/2005

js-2105:

Th~

Honomble jgha W. ~l1ow Prepared Remarks at Chatham House Th...

Page 2 of 5

Ireland with members of the G20 this weekend, and with finance ministers of four
countries that are new members of the European Union: Poland, Hungary, Slovakia
and the Czech Republic. I will be meeting with those ministers in Warsaw tomorrow.
Of course, the purpose of these discussions is to build a broad-based consensus
to develop and implement pro-growth policies.
I know that the G20 ministers and central bank governors and I will also discuss
principles for world trade and the global economy. There is broad agreement today
that the world economy is best served by open, competitive currency markets, free
capital flows and free trade - policies that promote growth and avoid imbalances.
The world today embraces these policies more widely than ever before, and global
growth is at historic levels because of it.
The results are evident: we are seeing the highest global growth rates in 30 years,
with no major recessions or financial crises. What a contrast to the picture of just a
few years ago.
That said, economic expansion is not as balanced as it could be. Where countries
are growing too slowly, they need to adopt pro-growth policies, as Ireland has done,
and their success has demonstrated. In today's interconnected global economy
where products and services, information and capital flow freely, stronger growth
rates in those places are critical if we are to achieve economic prosperity for all.
I am proud to point out that much of the success of the U.S. economy comes from
embracing the principles of growth, free markets and free trade. And we stand as a
beacon of those ideas. But we have our challenges as well, of course. I'd like to
address a few of those challenges here today, and describe to you the Bush
Administration's strategy for tackling them.
Let me start with the U.S fiscal deficit, which from my perspective, is our most
pressing issue. It is too large and needs to be brought down. As a life-long deficit
hawk, I want to make it clear that the budget deficit is unwelcome. I also want to
make it clear that it is being addressed. The President's budget plan will cut the
U.S. fiscal deficit in half over the four years, bringing the deficit to less than 2% of
GOP - well below our historical average.
While unwelcome, the deficit is understandable given the extraordinary
circumstances of recent history: the bursting of the tech bubble, the unthinkable
acts of terror on 9/11, followed by the need to fight and protect ourselves from an
enemy unlike any we've ever known.
When the President took office, government receipts were suffering because of a
weakening economy and the steep stock market declines. Just as invigorating
fiscal policies were being put into place we were then hit with the terrorist assaults
and faced with a need to make unprecedented and necessary expenditures that
increased spending on the other side of the balance sheet. Government revenues
were declining while expenditures were rising - a clear recipe for fiscal imbalance.
At this time, the U.S. suffered a perfect storm of economic blows. The bursting of
the stock market bubble -- combined with the shock of 9/11 -- resulted in a market
loss of $7 trillion in 2001.
Since then, the United States has made important strides, putting our economy on
the right track. We are now experiencing strong economic growth and we have
excellent traction on the road to budget deficit reduction.
The President's tax cuts, combined with sound monetary policy set by our
independent Federal Reserve Board, tapped into the most powerful elements of the
American economy: our small-business owners and entrepreneurs, our outstanding
workforce and the simple fact that we operate as a free market. The policies
stimulated the most open, dynamic, adaptive and resilient economy in the world.
Make no mistake: our economic strength and ongoing growth is the primary key to
reducing our country's budget deficit and keep it low on a sustained basis.
It's a simple truth that is too often overlooked: there are only two sensible ways to
reduce a budget deficit: grow the economy and control spending.

http://www.treas.gov/press/releaseSljs2105.htm

113/2005

js-21 05: The Honofg~la las a W._5.rtow Prepared Remarks at Chatham House Th...

Page 3 of 5

First: growing the economy. An increase in economic growth and activity leads to
an increase in tax revenue. Receipts at the U.S. Treasury are increasing smartly
with our economic growth. U.S. gross domestic product continues to grow above
the average of the 1970s, 80s and 90s, while the unemployment rate remains
below the average for those decades.
In October, for the fourteenth consecutive month, jobs were added in America. With
the addition of 337,000 jobs in October and upward revisions to August and
September jobs numbers, roughly 2.4 million jobs have been created since August
of 2003, with 2 million so far in 2004.
Again, this type of economic growth reduces deficits. The numbers illustrate that
fact: The 2004 deficit is $108 billion lower - that's 20.8 percent lower - than was
projected less than a year ago. And projections for the 2005 deficit bring it below
3% of GOP -- a figure that has special significance for our EU friends.
Good strong growth is the key to deficit reduction. This is a point that is too often
missed in economic discussions and commentary. We have the growth and it is
melting the deficit.
The other essential part of deficit reduction, as I mentioned, is spending restraint,
and it is something that must be adhered to. It is beyond a promise or an idea; fiscal
discipline is necessary, period. That's why President Bush has submitted such a
strict budget to the Congress.
The President's budget calls for an increase of less than one percent on nondefense, non-homeland security, discretionary spending. With government receipts
outpacing spending increases, the budget deficit will be cut in half over the next four
years, bringing it well below historic norms. You will see quite soon, as we get into
the budget process back home, a renewed and intensified effort on this front.
We're extremely serious about this. Deficits matter and we are committed to the
President's plan to bring our budget deficit down
Like so many other countries, the United States is also faced with a serious
demographic problem in the near future. Our "baby boom" generation will begin to
retire, putting our Social Security System under financial stress that demands
reform as soon as possible.
And that is the President's intention. He has shown real leadership on this issue dating back to his election campaign four years ago. In his November 3rd
acceptance speech earlier this month, strengthening Social Security for the next
generation was one of the very first policy issues he pointed to. Along with broadbased tax reform, it is one of the top two domestic policy issues for his second term.
The need to strengthen Social Security is not news. Academics and policy analysts
have been writing about it and designing "fixes" for some time. And although
proposals have differed in details, they are consistent in showing that if we give
workers the opportunity to invest a portion of their wages in personal accounts,
Social Security will be able to offer the opportunity for higher returns than would
otherwise be the case.
That's why the President is committed to offering younger workers a chance to
invest in retirement accounts that they will control and they will own. His plan
speaks to the thing that has always brought economic success to the people
everywhere: increased freedom and independence.
The President's plan to strengthen retirement security includes a number of core
principles including expanding ownership of retirement assets, ensuring freedom of
choice, creating a society of stakeholders, minimizing risk through diversification,
strengthening women's retirement security, and spurring national savings and
economic growth.
We believe this is a fiscally responsible path for the near future as well as for the
long term. Giving Americans more control, more ownership over their own
retirement will make this fix a long-lasting one. Government does its citizens the
greatest service when it empowers the people to determine their own future. The

http://www.treas.gov/press/releasestj52105.htm

1/3/2005

js-21 05: Th~ }oI(ln(lJIQble J,shi\ W. 9now Prepared Remarks at Chatham House Th...

Page 4 of 5

President believes that people make better choices than the government when it
comes to retirement savings, education and health care.
Another economic benefit of what the President calls an "ownership society" is
increased household savings. For example, we now have Health Savings Accounts
(HSAs) which encourage individual savings while putting patients back in charge of
their own health care. The President has also proposed to expand savings
opportunities through the creation of Retirement Savings Accounts (RSAs) and
Lifetime Savings Accounts (LSAs). RSAs would provide an easy, tax-preferred way
to prepare for retirement. LSAs would create an opportunity to save -- tax free -- to
pay for job training, college tuition, a down-payment on a first home, a car to drive
to work, or for retirement.
Encouraging investment and savings through these means will also help America
with another deficit situation -- our current account deficit.
I stated earlier that there are two essential parts to reducing budget deficits growth
and spending restraint.
Similarly, we see three key parts to addressing the issue of the current account
deficit: increasing savings in the United States; increasing growth levels among our
trading partners; and ensuring currency flexibility in large economies that do not
have such flexibility. Each has an important role to play.
The current account deficit is a shared responsibility. I've already discussed our
efforts at home to reduce our budget deficit and increase savings - the first part of
the three-part equation. Part two is where our trading partners playa key role.
Specifically, they need to grow more rapidly.
Let me take a minute to discuss this very important point.
Essentially, the current account deficit is a gap between U.S. investment and US
savings. Today we are in a situation where sound, growth-enhancing policies in the
U.S. have made it an extremely attractive place to invest. Because we are growing
at such a rapid pace, we are generating more investment opportunities than our
trading partners. At the same time, we recognize that investment opportunities in
the U.S. are growing at a rate in excess of our savings, while for Europe the
opposite is true. Those partners need to grow to address this gap, just as United
States needs to save more.
If other countries strengthened their investment environment, their level of
investment, and their economic growth performance, that would go a long way
toward reducing the current account deficit.
The global growth deficit is something Chancellor Brown and I, along with all of the
G7 ministers, have been concerned with and have dedicated our countries to
addressing through our Agenda for Growth. We are each dedicated to pursuing
growth in each individual country, both for the good of our own countries and for the
good of our group of countries.
The G7 is also in agreement on something that is the third element of current
account deficit reduction: more flexible exchange rates in countries that do not have
such flexibility.
The desired policy of exchange values that are set in open, competitive markets are
reflected in the G7 communique. We've also taken this message to China, and they
have agreed. As Governor Zhou of the Central Bank of China said recently,
"building a more market-driven trading system for the renminbi is now a task of top
priority."
The Bush Administration has had an unprecedented level of engagement with the
Chinese government on its exchange rate policy including a technical cooperation
program. We have broadened our diplomatic strategy to include China's major
trading partners through the G7. In early October, G7 Finance Ministers and Central
Bank Governors met for the first time as a group with their Chinese counterparts
and discussed these issues.

http://wwwtreas.gov/press/releases/Js2105.htm

113/2005

js-2105: The Henerable Jehn W. Sftow Prepared Remarks at Chatham House Th...

Page 5 of 5

Additionally, the People's Bank of China's recent moves to increase its one-year
lending and deposit rates are the latest examples of China's more systematic
management of monetary policy. I believe that these actions represent significant
steps consistent with China's move to a flexible and market-based exchange rate _
which is, again, the third key for current account adjustment.
I'm proud of the strides that the U.S. economy has made after significant hardship
We quickly returned to our status as the best place in the world - on a risk-adjusted
basis - for anyone to invest their money We offer high rates of return and we are
committed to keeping it that way, to remaining a great place for people to invest
their money.
I know that I've outlined an ambitious agenda today - for both US. growth and
global growth. I've emphasized the President's absolute dedication to reducing our
budget deficit and fixing Social Security. He's also committed to putting in place a
tax system that ensures high-level, long-term growth without inflation.
These goals are important for the economic prosperity of the United States.
Furthermore, we have a responsibility not just to our own citizens, but also to the
citizens of the world to remain the economic leader. And we are up to the task. Let
me be clear: our policy is for a strong dollar. Our dollar policy remains unchanged
because a strong dollar is in both the national and international interest.
And I'm optimistiC about our ability to overcome the challenges we face today. We
are economically strong, have proved our resiliency in recent years, and are strong
enough to continue to be the preeminent global economy.
In the spirit of continued economic progress, I've come to Europe this week to
embrace our international economic partners. Because today's economy is global;
and the U.S. cannot grow alone. We need our partners, we need you, and I am very
much looking forward to our continued collaboration to bring economic opportunity
and prosperity to this world.
Thank you so much for having me here today.

http://wwwtteas.gov/press/releases/j52105.htm

113/2005

JS-2106: Treasury 'ftt'l ~lKa Aliliiiiii.the Financial Infrastructure of the Cali Drug Cartel... Page I of 2

:_<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader@J.

November 17, 2004
JS-2106

Treasury Further Assails the Financial Infrastructure of the
Cali Drug Cartel by Designating 23 Linked
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today added seven businesses and 16 individuals to its list of Specially Designated
Narcotics Traffickers (SDNTs). These companies and individuals were acting as
fronts for Colombian drug lords Miguel and Gilberto Rodriguez OreJuela and formed
a vital part of the organization's financial network in Colombia and abroad
"We have seen that the notorious Rodriguez Orejuela organization manipulates
people and businesses - both inside Colombia and out - to traffic narcotics and
bankroll their network," said OFAC Director Robert Werner. "We continue to attack
the financial web of the Cali Cartel, and today's action ensures that these sham
companies and operatives are denied access to the U.S. economy and financial
system"
Today's announcement is a follow-up to OFAC sanctions actions in 2003-2004
against the world-wide financial network of the Rodriguez Orejuela organization.
The OFAC action blocks the assets of SDNTs found in US. jurisdiction and
prohibits Americans from doing business with them, thereby further exposing,
isolating, and incapaCitating Colombian drug cartels and their agents.
U.S. fugitive William Rodriguez Abadia, son of Miguel Rodriguez Orejeula and heir
to the organizational throne, is among the shareholders of Alera S.A., a garment
manufacturer located in Cali, Colombia and named in today's action. Also included
among the seven businesses designated today are the Colombian financial front
companies, A G Representaciones Ltda., Inversiones Capital Ltda.,
Representaciones Zatza Ltda., and Valores Corporativos S.A. These businesses
are all affiliated with the money remittance company Internacional de Divisas SA
and the stock brokerage firm Obursatiles SA, both of which were named to the
SDNT list in 2003 because of their links to the Rodriguez OreJuela organization. In
addition, Farfalla Investment SA of Panama and Galaviz Corporation, Ltd. of the
Bahamas were also designated.
The legal representative of Alera is Maria Iragorri Torres, who was named as an
SDNT in March 2003 due to her involvement in Internacional de Divisas and
Obursatiles. Iragorri Torres, who is also involved in Valores Corporativos, was
arrested by Colombian authorities due to allegations of money laundering in
January 2004.
Previously designated SDNT entities from the Cali and North Valle cartels Include
the Colombian airline Intercontinental de Aviacion SA, the paso fino horse farm
Criadera La Luisa FU., the industrial brick company Ladrillera La Candelaria Ltda.,
the mining company Industrial Minera y Pecuaria S.A., the industrial paper
manufacturer Unipapel S.A., the agro-industrial business Viscaya Ltda., and the
America de Cali professional soccer team, as well as other agricultural, aviation,
consulting, construction, distribution, financial, hotel, investment, manufacturing,
mining, offshore, pharmaceutical, real estate and service firms.
This action is part of the ongoing interagency effort of the Treasury, Justice, State,
and Homeland Security Departments to carry out Executive Order 12978, signed on
October 21, 1995, which applies economic sanctions against Colombia's narcotics
traffickers. The assets of a total of 1,147 Colombian businesses and individuals are
now blocked under the 1995 Executive Order. The SDNT list includes 16 kingpins

http://www.treas.gov/press/releases/JUl06.htm

113/2005

JS-2106: TroQ!;ury Ji'Ut..th.:.r A.,ioia..ili the Financial Infrastructure of the Cali Drug Cartel... Page 2 of 2
from the Cali, North Valle, and North Coast drug cartels in Colombia.
A diagram of the businesses named by OFAC today is attached.
For a complete list of the entities designated today, please visit:
http://www.treas.gov/offices/enforcementlofac/actions/
For further information on actions taken against the Cali Cartel, please visit:
http://www.treasury.gov/press/releases/js1915.htm (September 14, 2004)
http://www.treas.gov/pressireleases/js15.htm (February 6, 2003)
http://www.treas.gov/press/releases/js122.htm (March 21, 2003)
http://www.treas.gov/press/releases/js915.htm (October 17, 2003)

http://wwwtteas.gov/press/releasesfjuI06.htm

1/3/2005

Cali Cartel
Financial Network
November 2004

OBURSATILES S.A. NIT# 800012425-0
INTERNACIONAL DE DIVISAS S.A. NIT # 805013989-5
and INTERNACIONAL DE DIVISAS S.A., LLC (USA)
Officers and Shareholders

Name in red text denotes
SDNT previously designated

Claudia Patricia

Efrain Hernan

Maria Consuelo

Jorge Armando

Luis Alejandro

SANCLEMENTE BEDOYA
CC 3199055

SEPULVEDA ZAPATA
CC 16449272

IRAGORRI TORRES
CC 31921847

ARDILA HUYO
CC 16448389

ARDILA HUYO
CC 16670574

Specially Designated
Narcotics Traffickers
(SDNTs)

Department of the Treasury
Office of Foreign Assets Control

......

CCl

......

8.D

Name in black text denotes
SO NT designated November 2004

......

All companies and individuals are
Colombian unless otherwise stated

Ecuadorian Companies

LATINFARMACOS S.A.

Ecuador

!
......
~

Luis Fernando
CARDENAS GONGORA
CC 10105501

RIONAP COMERCIO Y
REPRESENTACIONES S.A.

ESPIBENA S.A.
Ecuador

Ecuador

...
~

Arrested by Colombian
Authorities in January 2004:
Allegations of
Money Laundering

PREMIER SALES S.A.

Panama

INVERSIONES CAPITAL LTDA.
Cali, Colombia
NIT# 800106082-2

Legal
Representative

MONTENEGRO
RUC# 0400778890
Ecuador

GALAVIZ
CORPORATION, LTD.

COD-----

Alberto
ROJAS VARGAS
CC 13922413

Guido
CAMPO RAMIREZ
CC 16218589

......

ROA GUTIERREZ
CC 16752582

ROA MEJIA
CC 2439912

DODD

OREJUELA

......

INVERSIONES ARA LTDA.
NIT# 800084422·7

......

Fernando
GRANDE BENAVIDES
CC 16675553

Isabel Fernanda
GARCIA VASQUEZ
CC 31983848

Alfredo

& [itlberta

......

COD

Maria Ximena
WILSON GARCIA
CC 31985001

Andres Felipe

......

guel

....

William
RODRIGUEZ ABADIA
CC 16716259
COD

Miryam Yaneth
ROJAS GOMEZ
CC 23323121

ALERO S.A.
Cali, Colombia NIT# 800239872-5

~ ......

Alicia
MONDRAGON AVILA
CC 29086016

VALORES CORPORATIVOS S.A.
(a.k.a. VALORCORP S.A.)
Bogota, Colombia
NIT# 830015542-7

COLFARMA
Mario Jesus
PERU S.A.
CARRASCO URQUIZO
Peru
DNI No. 06266307
Peru

US.
Fugitive

~Iermo

Juan
URIVE CADAVID
CC 16628855

REPRESENTACIONES ZATZA LTDA.
Cali, Colombia
NIT# 805011682-0

~
......

FARFALLA
INVESTMENT S.A.

Carmen Rosa
MORALES ESPINAR
DNI No. 10006822
Peru

~ ~«

Officers and Shareholders

SDNT Principal
Individuals

PEREZ RINCON
CC 16636377

~
......
Rene Alejandro

/".,

Carlos Arturo
CARDONA ACEVEDO
CC 4383319

Nassau, Bahamas

Gloria Isabel
MORA ROMERO
Cedula 4-192-157;
alt. Cedula 4-194-157
Panama

Luis Hernando
GUERRERO BRAND
CC 16656929

A G REPRESENTACIONES LTDA.
Cali, Colombia
NIT# 800132578-3

Offshore Companies

......

Related Financial Companies

~
'-'C"

Jaime
MILLAN SALAS
CC 16589582

......

COD
Adriana

Gonzalo

COD
Adriana

OROZCO NINO
CC 31972596

QUINTANA HERNANDEZ
CC 16603939

SANTACOLOMA HOYOS
CC 31919241

......

COD

Humberto

Jaime

Andre Gilberto

Claudia Pilar

Maria Alexandra

RODRIGUEZ MONDRAGON
CC 16688683

RODRIGUEZ MONDRAGON
CC 16637592

RODRIGUEZ RAMIREZ
CC 16798937

RODRIGUEZ RAMIREZ
CC 51741013

RODRIGUEZ MONDRAGON
CC 66810048

federal financing
WASHINGTON, D.C. 20220

bankNEWS

FEDERAL FINANCING BANK

10/04

Brian D. Jackson, Chief Finan,;ial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
September 2004.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $29.3 billion on September 30,
2004, posting an increase of $111.5 million from the level on
August 31, 2004.
This net change was the result of an increase
in holdings of agency debt (U.S. Postal Service) of $1,348.0
million and decreases of agency assets of $1,200.0 million and in
net holdings of government-guaranteed loans of $36.5 million. The
FFB made 51 disbursements and receiveci 12 prepayments during the
month of September. The FFB also extended the maturities of 202
loans guaranteed by the Rural Utilities Service ("RUS") during
the month.
During the fiscal year 2004, the FFB holdings of obligations
issued, sold or guaranteed by other Federal agencies posted a net
decrease of $6,288.2 million from the level on September 30,
2003. This net change was the result of decreases in holdings of
agency debt (U.S. Postal Service) of $5,473.4 million and in
holdings of agency assets of $1,755.0 million, and an increase in
net holdings of government-guaranteed loans of $940.2 million,
representing primarily an increase in RUS loans.
Attached to this release are tables presenting FFB September
loan activity and FFB holdings as of September 30, 2004.

JS-2107

Page 2
FEDERAL FINANCING BANK
SEPTEMBER 2004 ACTIVITY
Final
Maturity

Interest
Rate

$423,3.00,000.00
9/15
$245,800,000.00
9/16
9/17
$59,700,000.00
$378,400,000.00
9/24
$500,000,000.00
9/27
$156,100,000.00
9/27
9/28
$557,400,000.00
$395,000,000.00
9/29
9/30 $1,600,000,000.00
$200,000,000.00
9/30

9/16/04
9/17/04
9/20/04
9/27/04
9/28/04
9/28/04
9/29/04
9/30/04
10/01/04
10/01/04

1.688%
1.668%
1.698%
1. 647%
1.648%
1.698%
1.749%
1.637%
1.749%
1.587%

S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

9/23
9/23
9/24
9/27

$159,087.93
$79,663.94
$3,728,691. 51
$34,480.00

8/01/05
8/01/05
8/01/05
8/01/05

2.194%
2.194%
2.226%
2.262%

S/A
S/A
S/A
S/A

9/01
9/02
9/02
9/02
9/03
9/03
9/03
9/07
9/10
9/13
9/13
9/13
9/14
9/15
9/15
9/15
9/15
9/15
9/16
9/17
9/20
9/20
9/21

$700,000.00
$14,000.00
$4,000,000.00
$1,099,000.00
$300,000.00
$16,918,000.00
$4,646,000.00
$4,514,610.00
$28,949,000.00
$800,000.00
$24,207,000.00
$3,077,000.00
$550,000.00
$665,000.00
$2,437,000.00
$1,800,000.00
$2,000,000.00
$3,000,000.00
$200,000.00
$60,000.00
$1,000,000.00
$500,000.00
$4,820,000.00

12/31/35
9/30/11
1/03/06
12/31/36
12/31/35
12/31/25
1/03/34
1/03/05
12/31/35
1/03/39
10/01/07
1/03/34
1/02/35
12/31/36
1/03/05
12/31/36
12/31/37
1/03/39
1/02/35
12/31/36
1/03/39
12/31/36
9/30/09

4.778%
3.715%
2.129%
4.794%
4.841%
4.542%
4.805%
1.863%
4.844%
4.869%
2.841%
4.790%
4.775%
4.798%
1.701%
4.798%
4.813%
4.829%
4.794%
4.735%
4.810%
4.780%
3.277%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Date

Borrower

Amount
of Advance

GENCY DEBT

u.s.

POSTAL SERVICE

u.s.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

S/1-';.

JVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San
San
San
San

Francisco
Francisco
Francisco
Francisco

OB
OB
Bldg Lease
Bldg Lease

RURAL UTILITIES SERVICE
St. Croix Electric Coop. #801
Farmers' Elec. #2122
Owen Electric #2097
Vernon Electric Coop. #2008
Mid-Yellowstone Elec. #745
Tri-State #757
Tri-State #2052
Farmers Telephone #476
Sawnee Electric #766
D.S. & 0 Rural Elec. #2149
La Plata Electric #2140
South Miss. Elec. #2109
Washington Electric #655
Dunn Electric Coop. #861
Fleming-Mason Energy #644
Hancock-Wood Elec. #842
Tennessee Valley Elec. #2079
Tipmont Rural Electric #2150
Burt County Public #669
Deep East Texas Electric #872
Cental Virginia Elec. #2126
Pemiscot-Dunklin Elec. #853
Endless Mtns. Wireless #2103

Page 3
FEDERAL FINANCING BANK
SEPTEMBER 2004 ACTIVITY
Borrower
Hamilton County Elec. #2129
Amicalola Electric #664
Eastern Maine Coop. #795
Rock County Electric #2029
Consolidated Elec. #2070
Dakota Central Telecomm. #2164
Sand Mountain Electric #2130
Duo County Telephone #2161
Midstate Communications #780
Red River Rural Tel. #2113
W. Farmers Elec. Coop. #701
~. Farmers Elec. Coop. #2116
Adams Rural Electric #706
Adams Rural Electric #706
Adams Rural Electric #706
Amicalola Electric #664
Amicalola Electric #664
Atlantic Telephone Mem. #805
Bailey County Elec. #856
Bailey County Elec. #856
Basin Electric #425
Basin Electric #425
Basin Electric #425
Basin Electric #2005
Big Sand Elec. #540
Big Sand Elec. #540
Big Sand Elec. #540
Big Sand Elec. #540
Big Sand Elec. #540
Blue Grass Energy #674
Blue Grass Energy #674
Blue Grass Energy #674
Blue Grass Energy #674
Blue Grass Energy #674
Brazos Electric #561
Brown County Elec. #687
Brown County Elec. #687
Brown County Elec. #687
Brown County Elec. #687
2entral Iowa Power Coop. #2093
2entral Texas Elec. #520
2entral Texas Elec. #520
2itizens Tel (VA) #680
2lark Energy Coop. #611
2lark Energy Coop. #611
2lark Energy Coop. #611
2lark Energy Coop. #611
Clark Energy Coop. #611
Clark Energy Coop. #2087
Cumberland Valley #668

Date

Amount
of Advance

Final
Maturity

Interest
Rate

9/22
9/23
9/23
9/23
9/24
9/27
9/27
9/28
9/29
9/29
9/29
9/29
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/3G
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30

$1,300,000.00
$3,000,000.00
$906,000.00
$529,000.00
$305,000.00
$11,767,391.38
$6,254,000.00
$13,247,286.71
$362,169.00
$608,000.00
$347,000.00
$4,212,000.00
$486,421.70
$486,630.20
$630,937.20
$4,743,764.77
$6,588,633.91
$5,541,758.99
$1,860,022.89
$603,330.22
$12,075,042.94
$14,171,792.42
$9,619,000.00
$3,000,000.00
$737,360.80
$553,020.60
$924,530.35
$2,150,214.00
$2,686,103.23
$4,746,646.21
$1,896,297.43
$4,832,162.61
$4,932,160.67
$2,868,097.34
$9,613,127.76
$235,639.92
$565,535.85
$282,813.50
$443,918.62
$3,900,000.00
$954,564.77
$478,110.65
$1,463,382.22
$2,773,591. 04
$1,843,121.11
$4,113,287.85
$3,439,925.24
$2,491,690.20
$2,500,000.00
$3,958,750.95

12/31/37
1/02/35
12/31/35
12/31/37
12/31/37
1/03/17
1/03/33
12/31/14
1/03/12
1/03/05
12/31/25
12/31/20
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
12/31/20
12/31/20
12/31/20
12/31/20
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/34
1/03/33
1/03/33
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05

4.723%
4.607%
4.626%
4.660%
4.670%
3.776%
4.595%
3.566%
3.541%
1.726%
4.352%
4.058%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
4.260%
4.260%
4.260%
4.134%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
4.558%
4.786%
4.786%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 4
FEDERAL FINANCING BANK
SEPTEMBER 2004 ACTIVITY
Borrower
umber land Valley #668
ooper Valley Tel. #648
'ooper Valley Tel. #648
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
)arien Telephone Co. #719
)arien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
larien Telephone Co. #719
)arien Telephone Co. #719
)arien Telephone Co. #719
East River Power #453
East River Power #453
East River Power #601
East River Power #793
East River Power #793
East River Power #793
Fairfield Elec. #684
Fairfield Elec. #684
Farmer's Rural Elec. #2046
Farmer's Rural Elec. #2046
Farmer's Rural Elec. #2046
Farmer's Telephone #459
Farmer's Telephone #459
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Fleming-Mason Energy #644
Freeborn-Mower Coop. #736
Freeborn-Mower Coop. #736
Farmers Telephone #476
Farmers Telephone #476
Farmers Telephone #476
FTC Communications #709
FTC Communications #709
FTC Communications #709
FTC Communications #709
FTC Communications #2101
Grady Electric #690

Date
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30

Amount
of Advance
$4,754,454.26
$920,069.99
$209,361.16
$1,654,733.69
$381,187.40
$183,725.47
$217,208.14
$157,969.54
$234,378.75
$192,999.50
$1,311,546.57
$244,684.31
$482,825.49
$351,681.74
$435,836.11
$611,915.72
$685,739.72
$734,760.08
$356,621.80
$175,875.01
$3,041,035.67
$607,477.46
$4,556,319.88
$2,754,111. 34
$3,047,991.42
$89,386.76
$5,000,000.00
$1,000,000.00
$1,000,000.00
$19,684.22
$186,671.68
$2,403,778.90
$1,294,342.45
$1,386,795.53
$2,033,966.76
$1,294,342.45
$2,804,618.50
$2,779,401. 01
$2,936,741.16
$711,035.78
$474,037.79
$8,746,015.92
$6,515,157.57
$5,059,373.09
$2,380,301. 31
$3,044,185.81
$1,072,771. 04
$1,278,202.25
$425,179.00
$2,992,468.70

Final
Maturity
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05

Interest
Rate
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.859%
1.859%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.859%
1.859%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.859%
1.859%
1.859%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Otr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 5
FEDERAL FINANCING BANK
SEPTEMBER 2004 ACTIVITY
Borrower
Grady Electric #746
Grayson Rural Elec. #619
Grayson Rural Elec. #619
Grayson Rural Elec. #619
Grayson Rural Elec. #619
Grayson Rural Elec. #619
Grayson Rural Elec. #619
Grayson Rural Elec. #619
Greenbelt Elec. #743
Greenbelt Elec. #743
Greenbelt Elec. #743
Grundy Elec.Coop. #744
Grundy Elec.Coop. #744
Grundy Elec.Coop. #744
Grundy Elec.Coop. #744
Grundy County Elec. #689
Harrison County #532
Harrison County #532
Harrison County #532
Harrison County #532
Harrison County #532
Hart Elec. #885
Hudson Valley Datanet #833
Hudson Valley Datanet #833
Hudson Valley Datanet #833
Inter-County Energy #592
Inter-County Energy #592
Inter-County Energy #592
Inter-County Energy #592
Inter-County Energy #850
Inter-County Energy #850
Inter-County Energy #850
Inter-County Energy #850
Ironton Telephone Co. #888
Ironton Telephone Co. #2051
Jackson Energy #794
Jackson Energy #794
Jackson Energy #794
Jackson Energy #794
Jackson Energy #794
Jackson Energy #794
Jackson Energy #794
Jackson Energy #2133
Johnson County Elec. #482
Kenergy Corp. #2068
Kenergy Corp. #2068
Licking Valley Elec. #522
Licking Valley Elec. #854
Lynches River Elec. #634
Lynches River Elec. #634

Amount
of Advance
$3,104,755.66
$1,109,436.42
$554,718.22
$924,530.35
$1,197,757.52
$946,104.97
$2,396,031.84
$978,913.73
$1,671,657.29
$482,560.06
$707,217.48
$1,194,136.79
$955,438.06
$486,925.43
$493,469.44
$195,930.07
$920,770.57
$828,693.52
$926,982.71
$1,511,594.09
$1,627,415.46
$3,844,601. 23
$4,833,574.15
$3,522,600.00
$1,933,429.66
$1,381,155.84
$1,841,541.14
$2,400,448.86
$204,321.20
$3,924,098.92
$1,962,049.45
$1,962,172.71
$3,481,209.11
$3,148,475.71
$2,956,000.00
$3,845,100.18
$2,883,825.13
$4,517,992.71
$1,922,550.09
$2,403,187.60
$1,922,608.40
$7,157,321. 02
$3,000,000.00
$1,474,984.67
$6,000,000.00
$5,000,000.00
$2,531,198.29
$1,974,859.07
$428,358.81
$574,188.82

Final
Maturity

Interest
Rate

1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
10/01/07
10/01/07

1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.859%
1.734%
1.734%
1.734%
1.734%
2.874%
2.874%

Page 6
FEDERAL FINANCING BANK
SEPTEMBER 2004 ACTIVITY
Borrower
[agnolia Electric #560
[edina Electric #2050
~rth Carolina RSA 3 Tel #2009
~rth Carolina RSA 3 Tel #2009
forth Carolina RSA 3 Tel #2009
~w Horizon Elec. #791
~w Horizon Elec. #791
~w Horizon Elec. #791
~w Horizon Elec. #791
~w Horizon Elec. #791
~w Horizon Elec. #791
rew Horizon Elec. #791
rolin Rural Elec. #528
rolin Rural Elec. #577
rolin Rural Elec. #577
rolin Rural Elec. #840
rolin Rural Elec. #840
rorthstar Technology #811
rorthstar Technology #811
) & A Electric Coop. #379
)range County Elec. #771
~en Electric #525
~en Electric #525
~en Electric #525
~en Electric #525
)wen Electric #525
)wen Electric #525
)ee Dee Elec. #547
)ennyrile Elec. #513
)ennyrile Elec. #513
)eoples Cooperative Svcs #2024
)RTCommunications #798
)RTCommunications #798
)RTCommunications #798
)RTCommunications #798
~ed River Valley Elec. #2095
~unestone Electric Ass. #886
~unestone Electric Ass. #886
,an Miguel Electric #919
,an Miguel Electric #919
,an Miguel Power #492
,awnee Electric #766
,outheastern Indiana #2062
,outheastern Indiana #2062
,outheastern Indiana #2062
lhelby Energy Coop. #758
lurry-Yadkin Elec. #534
lurry-Yadkin Elec. #534
lurry-Yadkin Elec. #534
lurry-Yadkin Elec. #534

Date

Amount
of Advance

Final
Maturity

Interest
Rate

9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30

$4,613,029.78
$2,000,000.00
$9,600,000.00
$4,744,104.00
$5,559,827.00
$1,988,402.16
$1,344,661.64
$1,648,389.94
$1,010,934.27
$984,704.26
$1,477,077.94
$992,904.71
$1,743,018.66
$2,378,350.39
$2,378,350.39
$3,924,098.92
$2,892,060.90
$1,705,195.32
$930,026.05
$764,779.74
$721,515.19
$1,844,112.25
$1,840,388.02
$928,509.14
$1,872,443.68
$1,907,831.90
$3,152,232.09
$2,305,519.06
$5,635,501.16
$5,334,676.28
$1,887,797.41
$4,488,197.46
$1,682,373.06
$747,477.84
$988,888.89
$3,000,000.00
$1,481,144.30
$345,613.24
$6,786,405.07
$7,125,804.73
$2,896,604.08
$17,539,391.53
$2,650,000.00
$2,650,000.00
$3,700,000.00
$1,688,571.54
$902,635.65
$902,635.65
$451,317.82
$902,635.65

1/03/05
1/02/07
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
10/02/06
10/01/07
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
9/30/09
1/03/05
1/03/05
12/31/36
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
10/02/06
9/30/11
1/03/05
1/03/05
1/03/05
9/30/05
1/03/05
1/03/05
1/03/05
1/03/05

1.859%
2.690%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1. 734%
1.734%
1. 734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
2.722%
2.875%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
3.324%
1.859%
1.859%
4.739%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
2.724%
3.696%
1.734%
1.734%
1.734%
2.195%
1.734%
1.734%
1.734%
1.734%

Page 7
FEDERAL FINANCING BANK
SEPTEMBER 2004 ACTIVITY
Borrower
Surry-Yadkin Elec. #534
surry-Yadkin Elec. #534
Surry-Yadkin Elec. #534
Surry-Yadkin Elec. #534
Surry-Yadkin Elec. #852
Surry-Yadkin Elec. #852
surry-Yadkin Elec. #852
Surry-Yadkin Elec. #852
Tri-County Electric Ass. #830
Tri-County Electric Ass. #830
United Elec. Coop. #870
United Elec. Coop. #870
Upsala Coop. Tele. #429
virgin Islands Telephone #2089
webster Electric #705
west Plains Elec. #501

Date

Amount
of Advance

Final
Maturity

9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30

$902,635.65
$917,434.88
$923,407.38
$2,133,155.10
$987,429.53
$1,974,859.07
$493,714.77
$2,000,000.00
$493,969.35
$505,263.46
$11,849,154.38
$2,962,288.60
$89,860.52
$64,655,000.00
$2,085,215.48
$2,167,537.77

1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/03/05
1/02/18
1/03/05
1/03/05
1/03/05

S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
maturity extension or interest rate reset

Interest
Rate
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.734%
1.730%
1.734%
1.734%
1.734%
1.734%
4.035%
1.734%
1.734%
1.859%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 8
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

September 30. 2004

Agency Debt:
U.S. Postal Service

August 31. 2004

Monthly
Net Change
9/1/04- 9130104

Fiscal Year
Net Change
10/1/03- 9130104

Subtotal*

$1.800.0
$1.800.0

$452.0
$452.0

$1,348.0
$1. 348.0

-$5,473.4
-$5.473.4

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

$200.0
$680.0
$4,270.2
$5.150.2

$250.0
$1.830.0
$4,270.2
$6.350.2

-$50.0
-$1.150.0
$0.0
-$1.200.0

-$605.0
-$1.150.0
$0.0
-$1.755.0

Government-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT-Section 511
Subtotal*

$1.464.9
$118.0
$0.4
$1.054.8
$2.141. 4
$7.6
$498.6
$16.961. 0
$56.6
$2.9
$22.306.2

$1.475.8
$118.2
$0.6
$1. 054.8
$2.140.9
$7.6
$498.6
$16.985.0
$58.3
$2.9
$22.342.7

-$10.9
-$0.2
-$0.2
$0.0
$0.5
$0.0
$0.0
-$24.0
-$1. 7
$0.0
-$36.5

-$223.5
$38.7
-$1. 7
-$78.5
-$5.8
-$2.0
-$108.9
$1. 342.8
-$20.7
-$0.2
$940.2

==========

-------------------

====

-----

$29.256.4

$29.144.9

$lL. 5

-$6.288.2

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

federal financing
WASHINGTON, D.C. 20220

bankNEWS

FEDERAL FINANCING BANK

11/04

Brian D. Jackson, Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
October 2004.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $27.8 billion on October 31, 2004,
rosting a decrease of $1,502.2 million from the level on
September 30, 2004.
This net change was the result of a decrease
in holdings of agency debt (U.S. Postal Service) of $1,600.0
milli'on and an increase in net holdings of government-guaranteed
l~ans of $97.8 million. The FFB made 44 disbursements and
received 6 prepayments during the month of October.
Attached to this release are tables presenting FFB October
loan activity and FFB holdings as of October 31, 2004.

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~ [E

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Page 2
FEDERAL FINANCING BANK
OCTOBER 2004 ACTIVITY
Date

Amount
of Advance

Final
Maturity

Interest
Rate

10/01
10/04
10/08
10/12
10/13
10/14
10/22
10/25
10/25
10/26
10/29

$237,800,000.00
$20,900,000.00
$231,600,000.00
$482,900,000.00
$182,000,000.00
$26,300,000.00
$38,700,000.00
$300,000,000.00
$62,200,000.00
$96,800,000.00
$200,000,000.00

10/04/04
10/05/04
10/12/04
10/13/04
10/14/04
10/15/04
10/25/04
10/26/04
10/26/04
10/27/04
11/01/04

1. 637%
1.647%
1. 678%
1. 698%
1. 709%
1.719%
1.759%
1.749%
1. 830%
1.942%
1.851%

S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

10/04
10/12
10/12
10/25

$48,003.40
$7,434.43
$7,261.93
$4,741,951. 39

7/31/25
7/31/25
7/31/25
8/01/05

4.670%
4.619%
4.619%
2.284%

S/A
S/A
S/A
S/A

10/01

$9,553,445.90

4/01/05

1.998% S/A

10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/04
10/04
10/05
~raig-Botetourt #2077
10/05
)tsego Electric #653
10/06
1edina Electric #2050
10/06
Jorth Georgia Elec. #2135
10/14
i & N Electric #868
10/15
Camo Electric #2162
10/18
Cotzebue Electric #2155
10/19
~armersl Elec. #2122
Cauai Island Util. Coop #2166 10/19

$1,953,000.00
$1,675,000.00
$316,000.00
$699,000.00
$640,000.00
$1,000,000.00
$450,000.00
$6,600,000.00
$1,264,000.00
$690,000.00
$370,000.00
$2,000,000.00
$1,111,000.00
$3,859,000.00
$19,885,000.00
$1,098,000.00
$15,000.00
$8,240,000.00

12/31/37
3/31/05
12/31/36
12/31/29
3/31/11
12/31/36
12/31/37
12/31/37
12/31/36
12/31/37
1/03/34
12/31/37
12/31/37
3/31/11
1/03/39
12/31/30
12/31/14
3/31/09

Borrower
mNCY DEBT
J.S. POSTAL SERVICE
J.S.
J.S.
J.S.
J.S.
J.S.
J.S.
J.S.
J.S.
J.S.
J.S.
J.S.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

)VERNMENT-GUARANTEED LOANS
;ENERAL SERVICES ADMINISTRATION
Services Contract
Services Contract
~oley Services Contract
Jan Francisco Bldg Lease
~oley

~oley

)EPARTMENT OF EDUCATION
;haw University
(URAL UTILITIES SERVICE
~otton

Electric Coop #2038
;rayson Rural Elec. #619
1aquoketa Valley #2012
1issoula Elec. #688
)range County Elec. #771
(oanoke Electric Mem. #820
;pringer Electric Coop. #2141
Jemez Mountains Elec. #2107
Jorth Central Elec Coop #2015

4.777%
1.992%
4.764%
4.614%
3.624%
4.764%
4.779%
4.800%
4.834%
4.830%
4.759%
4.829%
4.831%
3.593%
4.725%
4.594%
4.015%
3.137%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 3
FEDERAL FINANCING BANK
OCTOBER 2004 ACTIVITY
Borrower
auai Island Util. Coop #2166
auai Island Util. Coop #2166
.S. & 0 Rural Elec. #2149
abersham Electric Mem. #2084
ew Horizon Elec. #791
wan's Island Electric #2037
outh Miss. Elec. #2109
ountain Parks Elec. #889
ioux Valley Tel. Co. #2167
bion Electric #783
'lumas-Sierra Elec. #2138

Date

Amount
of Advance

Final
Maturity

Interest
Rate

10/19
10/19
10/20
10/25
10/25
10/25
10/27
10/28
10/28
10/28
10/29

$8,240,000.00
$16,480,000.00
$800,000.00
$4,100,000.00
$2,700,000.00
$45,000.00
$2,711,000.00
$2,000,000.00
$2,878,731. 22
$4,820,000.00
$1,617,000.00

3/31/14
1/02/24
1/03/39
12/31/37
3/31/05
12/31/36
1/03/34
12/31/36
12/31/14
12/31/24
12/31/37

3.876%
4.305%
4.732%
4.655%
2.034%
4.639%
4.586%
4.736%
3.653%
4.388%
4.602%

S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
oi1aturity extension or interest rate reset

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 4
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

October 31. 2004

Agency Debt:
U.S. Postal Service

September 30. 2004

Monthly
Net Change
10/1/04-10/31/04

Fiscal Year
Net Change
10/1/04-10/31/04

Subtotal *

$200.0
$200.0

$1.800.0
$1.800.0

-$1.600.0
-$1.600.0

-$1,600.0
-$1.600.0

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

$200.0
$680.0
$4,270.2
$5.150.2

$0.0
$0.0
$0.0
$0.0

$1. 462.3
$117.8
$0.2
$1. 054. 8
$2.145.5
$7.6
$498.6
$17.059.3
$55.0
$2.9
$22.404.0

$1. 46L1. 9
$118.0
$0.4
$1. 054.8
$2.141.4
$7.6
$498.6
$16.961. 0
$56.6
$2.9
$22.306.2

-$2.7
-$0.1
-$0.2
$0.0
$4.1
$0.0
$0.0
$98.3
-$1. 6
$0.0
$97.8

=========

==========

======

$27.754.2

$29.256.4

-$1. 502.2

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

-$1.502.2

JS-2109: Trea:mT,Y Bt:/lays Announcement of Weekly Bills and 2-Year Note

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
November 18, 2004
JS-2109

Treasury Delays Announcement of Weekly Bills and 2-Year Note
The Treasury Department is postponing announcement of its weekly 13- and 26week bill auctions and its 2-year note auction, scheduled to be announced
November 18, 2004, until further notice. This postponement is due to the statutory
debt limit.

http://www.t~as.gov/press/releases/js2109.htm

113/2005

JS-211O: Sarnaal W. Badma ...~D~i;i1y Secretary of the Treasury Remarks before the ... Page 1 of 4

FROM THE OFFICE OF PUBLIC AFFAIRS
November 18, 2004
JS-2110
Samuel W. Bodman, Deputy Secretary of the Treasury
Remarks before the Tax Foundation Annual Conference
November 18, 2004
Thank you very much, Scott. I'd like to thank you and the Directors of the Tax
Foundation for inviting me to be here today.
For nearly 70 years, the Tax Foundation has committed itself to independent
research on tax policy and has developed a reputation for principled, high quality
analysis. You deserve the thanks of every taxpayer, and Secretary Snow and I look
forward to your continued good work.
As you are no doubt keenly aware, President Bush has made it clear that
fundamental tax reform will be a key priority of his second term. During his
nomination acceptance speech in New York and on several occasions since, the
President has outlined his goals for tax reform, including simplifying the tax code,
increasing long-run economic growth and job creation, and ensuring that taxes are
applied fairly. He has also indicated that reform should be revenue neutral and,
among other things, should recognize the importance of homeownership and
charitable giving in our society.
The President will soon appoint a bipartisan panel to advise the Secretary of the
Treasury on options to fundamentally reform the tax code to achieve these goals.
While it is premature to speculate on who may serve on the panel or what their
product might be, we at the Department are looking forward to the panel's
deliberations and to receiving their guidance.
I will discuss the President's rationale for tax reform in more detail, but first let me
say that we have a solid foundation on which to build this effort. Since coming into
office in 2001, the President has proposed and signed into law a number of tax
revisions that strengthened our economy in the short-term and will encourage more
robust growth in the future.
The tax cut packages in 2001 and 2003 reduced marginal individual income tax
rates by between 3 and 5 percentage points. Lower income tax rates advance one
of the President's key reform principles - increasing long-term economic growth by increasing the after-tax rewards from work, saving, investment, and
entrepreneurial activity. Lower rates also reduce the incentives to engage in
sheltering or tax avoidance activities and increase compliance.
In addition, the 2003 tax cut also took a significant step toward eliminating the
double tax on corporate income. This important tax change reduces a number of
economic distortions that interfere with the productive use of our nation's
resources.
As you will recall, the President proposed complete elimination of the double tax on
corporate profits. While the legislation enacted in 2003 falls short of complete
elimination, the maximum tax rate on dividends and capital gains was cut to 15
percent, which significantly reduces the double tax.
This tax cut reduced the tax bias against investment in the corporate sector of the
economy, improved the neutrality of the system in its treatment of different forms of
business organization and stimulated savings, investment and capital formation,
which in turn will raise output and living standards in the long-term.

http://WWW.trClS.gov/press/releases/]s2110.htm

113/2005

JS-2110: SaMm;l W. Dodman, Deputy Secretary of the Treasury Remarks before the... Page 2 of 4
Importantly, the tax packages in 2002 and 2003 implemented partial expensing for
business plant and equipment. They also increased the amount of investment
small businesses are allowed to expense - from the previous limit of $25,000 to
$100.000. These temporary provisions addressed a weak spot in the economic
recovery - low corporate investment - at a key point in time, and helped keep the
economy on the road to recovery.
Other important changes, enacted in 2001, included significantly expanding
retirement saving incentives by raising contribution limits and indexing those limits
for inflation. In addition, the 2001 tax cut also implemented a phase-out of the
estate tax. The estate tax adds to the tax burden on investment returns
accumulated over a lifetime. which reduces the incentive to save and invest,
especially in closely held businesses.
The tax cuts adopted during this Administration have also made Important
improvements in fairness and simplification ... by reducing the so-called "marriage
penalty," for example. Married couples have benefited from expansions of the
standard deduction, the 15-percent tax rate bracket, and the Earned Income Tax
Credit. Lowering tax rates also helped reduce marriage penalties. In 2004, the
combined effects of the tax cuts have reduced marriage penalties by over $15
billion. Marriage penalties have been eliminated for about 7 million couples.
Another significant step in tax simplification occurred this year when Congress
passed an Administration proposal that affects over 50 million taxpayers with
children. Taxpayers with children are eligible for five different tax benefits. And,
though it may be hard to believe, each previously had a different definition of an
eligible child. Taxpayers had to carefully check complicated rules for each of the
separate benefits to determine if their child qualified. Not surprisingly, this resulted
in taxpayer confusion and errors. In 2002, the Administration proposed replacing
the diverse definitions of a child with a standard definition. This year, the proposal
was enacted.
A few words about the American Jobs Creation Act, signed by the President last
month, which included important reforms regarding the tax treatment of foreign
earned income and tax administration relating to tax shelters. The Act made
dramatic and much-needed changes that will help ensure that the foreign tax credit
will operate as intended, so fewer U.S. businesses will be subject to double taxation
on their income earned in foreign markets. Other changes better focus the US
rules regarding taxation of passive income earned abroad so those rules do not
impose an inappropriate burden on U.S. businesses - a burden, I should add, that is
not borne by their competitors from our trading partners. These international tax
reforms will help U.S. businesses and American workers to compete on fair terms in
the global marketplace.
The Act also included several provisions that will strengthen the IRS' enforcement
capability with respect to potentially abusive transactions. It provides consistent,
simplified rules for disclosure, registration and list-maintenance. For example, it
requires that the same information about a questionable transaction be provided to
the IRS both by the taxpayers partiCipating in these transactions and by the
promoters and their advisors, who also are required to maintain lists of investors.
The law also imposes meaningful penalties on taxpayers and material advisors who
fail to disclose transactions.
One of the primary goals of these rules is to provide certainty. Clearer disclosure
rules, without exceptions and perceived loopholes, will be easier for taxpayers and
their advisors to apply, harder for taxpayers and their advisors to manipulate, and
easier for the IRS to administer and enforce.
While these tax law changes have made important improvements to our system,
there is much more to be done. One top priority is making the President's tax cuts
permanent. Under current law, the general tax rate cuts and the elimination of the
estate tax expire at the end of 2010. The lower tax rates on dividends and capital
gains expire at the end of 2008. The $100,000 expensing limit for small businesses
expires at the end of 2007. In order to provide a stable tax environment for
American families and American businesses to plan for the future, these tax
changes must be made permanent.
In addition, as I mentioned at the outset, the President has made clear the crucial
need for fundamental reform of the tax system. Our system is widely perceived as

http://www.treas.gov/press/releases/js2!10.htm

113/2005

1S-2110: Samuel W. D6dlllall, ucputy Secretary of the Treasury Remarks before the... Page 3 of 4
complex, unfair, and easily manipulated. The resulting loss of faith in the code
threatens voluntary compliance - a foundation of our system
Complexity in the tax code results from the myriad incentives in the form of targeted
deductions and credits, the tax treatment of capital income, the tax treatment of
business income, and the Alternative Minimum Tax (AMT). The complexity is
growing rapidly, not only because of new and frequent changes to complex
provisions, but also because of the expanding reach of the individual AMT. By
2010, 34 million taxpayers will be affected by the AMT compared to 3.5 million
today.
Both individual and business taxpayers spend enormous amounts of time and
money filling out their tax returns. It is estimated that taxpayers spend 6 billion
hours each year to decipher the tax rules, maintain records, and fill out returns.
One reasonable estimate places the costs of compliance at $120 billion annually.
This is nearly 13 percent of the amount of revenue collected by the tax, which is
much too high. And this figure doesn't include any adjustment to reflect the
frustration and annoyance experienced by taxpayers I Many turn to professionals
for help - about 75 million individual taxpayers, including many with relatively
simple tax returns, use paid preparers to fill out their returns.
The current tax system also imposes large costs on our economy by causing
households and businesses to rearrange their affairs in ways that make poor use of
economic resources, and ultimately lead to lower living standards. Taxpayers and
businesses spend countless hours trying to figure out ways to minimize their taxes,
with some going so far as to purchase tax shelters.
The tax system also influences important economic decisions. When people make
decisions about whether and how much to work, save, or invest because of the tax
system rather than economic fundamentals, resources are allocated inefficiently.
By minimizing these economic inefficiencies, fundamental tax reform potentially
could raise Gross Domestic Product and increase the capital stock substantially.
Understanding the short-comings of our current tax code helps set the stage for
fundamental reform. As I mentioned earlier, the President has set out several
objectives in this area. The first is that the tax system should be simpler. This
means that it should be easier for taxpayers to understand. It means that
complying with the tax system should be less onerous. Tax forms and instructions
should be shorter and less complicated. It also means that the cost of
administering the tax system should be reduced.
Another principle specified by the President is that tax reform should foster
economic growth and job creation. Economic decisions need to be based on
economics rather than the tax code. This also means that the tax system should be
structured to maintain and enhance the international competitiveness of US.
businesses in a rapidly-changing, highly competitive global economy.
The President also has stated that the tax system should be fair. Progressivity is
one attribute that is fundamental to fairness in taxation. As you know, our current
tax system is highly progressive. The top 50 percent of taxpayers (ranked by
income) pay 96 percent of all individual income taxes. I should note that the
President's tax cuts have actually increased the share of income taxes paid by
higher income Americans. The top 1 percent of Americans would have paid 30.5
percent of all individual income taxes without the tax cuts, but now pay over 32
percent. The bottom 50 percent of taxpayers now pays a smaller share - 3.6
percent of all individual income taxes with the tax cuts, instead of 4.1 percent
without the tax cuts.
Fairness also means that the tax system should be transparent. Too many people
perceive the tax system as unfair - believing that their neighbors are able to reduce
their taxes through a maze of loopholes and clever tax planning. The smooth and
efficient functioning of our tax system depends on a high level of voluntary
compliance. But, VOluntary compliance erodes if taxpayers come to believe that
others are getting away with something that they are not.
The President also has said that any reform needs to get the incentives right,
recognizing, for example, the importance of homeownership and charitable giving In
our American society, which receive favorable treatment in our current tax system.

http://www.tr~as.gov/press/releases/js2110.htm

113/2005

JS-211O: Sam~ W. Bodman~ Uwputy Secretary of the Treasury Remarks before the ... Page 4 of 4
We believe that by reforming our tax code along these lines, we will create a better,
fairer, simpler system that will diminish the appetite for future frequent change. As
we all know, frequent changes to multiple provisions make the code even more
difficult to administer and even more confusing for taxpayers to deal with. I
suppose one might imagine (or dream of I) a tax system that is so obviously perfect
and enjoys such widespread support that Congress could not possibly consider
changing a single provision I We are not so confident as to believe that we WIll
achieve such a state of flawlessness, but, we are certainly looking at ways to
improve the stability of the system.
One of the key challenges in approaching tax reform is confronting the
misperceptions that surround our system. A big part of the tax reform discussion in
our country for the past several years has been around whether we should have an
income tax or a consumption tax. Many people approach that issue believing that
we now have an income tax. That may be partly because we call our tax an income
tax. But. in reality, we have a hybrid tax system with some elements of an income
tax, some elements of a consumption tax, and some elements that are neither.
The fundamental difference between an income tax and a consumption tax is that
an income tax taxes the return to saving whereas a consumption tax does not. Our
current so-called income tax includes several vehicles that effectively allow savings
to escape taxation, primarily pensions, 401 (k) accounts, and individual retirement
accounts, or I RAs. Thirty five percent of household financial assets are held in
these tax-favored vehicles, receiving tax treatment consistent with a consumption
tax, not an income tax.
A related point: Some people also believe that our major trading partners depend
substantially on consumption taxes - their value added taxes - and we do not.
While we do not have a value added tax or significant consumption taxes at the
federal level, our states rely heavily on sales taxes. In total, over 12 percent of tax
revenue in the U.S. is derived from consumption taxes. This is lower than our
trading partners - most of which rely on consumption taxes for between 20 to 30
percent of total revenue - but still significant.
One thing we do know is that achieving fundamental reform of the tax system will
not be quick or easy. Nonetheless, this is extremely important work ... and
President Bush is committed to taking it on. The improvements that can be
achieved through tax reform - simplification, reduced compliance burdens and
costs, increased economic growth and output, and increased confidence in the
system - make it well worth the effort and difficulty.
To be sure, there will be many obstacles to overcome. Almost every element of the
current tax system is supported by some influential interest group that will argue
calamity from its elimination or revision. There is an old saying that "an old tax
system is a good tax system." The people who know the current tax system and
have figured out how to cope with it, fear the changes that might come in a new
system. But another statement from a wise tax legislator says: "we ought to have a
tax system that looks like someone might have adopted it on purpose." Our tax
system currently does not come close to passing that test. We can and should do
better.
As we go through this process, I am hopeful that groups like the Tax Foundation will
contribute to and support our efforts. By working together, I believe that we can
improve our tax system in ways that will make our lives easier, make our
businesses more productive, and allow our economy to flourish.
Thank you.

http://www.trcas.gov/press/re1eases/js2 1 10.htm

1/3/2005

js-2111: Tre~t:tFY Appleuds S~Approval of Protocol Amending U.S.-Netherland...

Page I of 1

PHLSS fH)OM

FROM THE OFFICE OF PUBLIC AFFAIRS
November 18, 2004
js-2111

Treasury Applauds Senate Approval of Protocol Amending
U.S.-Netherlands Tax Treaty
The Treasury Department welcomes the Senate's action yesterday to approve the
protocol amending the U.S. income tax treaty with the Netherlands.
"The protocol approved by the Senate last night will improve the long-standing tax
treaty relationship between the United States and the Netherlands," said Secretary
John W. Snow. "These enhancements to the tax treaty will foster still closer
economic ties between our two countries, bringing benefits to both countries by
further reducing tax barriers to real cross-border trade and investment in both
directions."
The protocol amends the existing U.S.-Netherlands tax treaty, which entered into
force in 1993, to take into account developments over the last decade, including
changes in each country's tax laws and tax treaty policies. Key provisions in the
protocol include the modernization of the anti-treaty shopping rules to prevent
inappropriate exploitation of the treaty and the elimination of source-country
withholding taxes on certain cross-border intercompany dividends.
The protocol amending the U.S.-Netherlands tax treaty will enter into force when
the two countries have notified each other that their respective requirements for
ratification have been completed.
The approval of the protocol by the Senate follows a hearing held by the Senate
Committee on Foreign Relations on September 24 on both this protocol and a
protocol amending the U.S.-Barbados tax treaty. The Senate approved the protocol
amending the U.S.-Barbados tax treaty on October 11.
-30-

http://www.treas.gov/press/releases/js2!11.htm

113/2005

1S-2112: Treasury ami iRS issue mdexed Amounts for Health Savings Accounts

Page 10f2

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AdoiJe@ AcroiJat@ Reader®.

November 19, 2004
JS-2112
Treasury and IRS Issue Indexed Amounts for Health Savings Accounts
The Treasury Department and IRS today issued new guidance on the maximum
contribution levels for Health Savings Accounts (HSAs) and out-of-pocket spending
limits for High Deductible Health Plans (HDHPs) that must be used in conjunction
with HSAs. These amounts have been indexed for cost-of-living adjustments for
2005 and are included in Revenue Procedure 2004-71, which announces changes
in several indexed amounts for purposes of the federal income tax. The minimum
deductible required for HDHPs did not change.
"Today's guidance will help consumers and employers who wish to participate in
HSAs in 2005 to plan accordingly," said Treasury's Acting Assistant Secretary for
Tax Policy Greg Jenner. "Knowing the dollar limits for these accounts, and for the
high deductible insurance that goes with them, is critical for those who want to get
the maximum benefit out of this revolutionary health care coverage option - one
that puts health care spending decisions back in the hands of individuals."
The new levels are as follows:
New Annual Contribution Levels for HSAs:
•

•
•
•

For 2005, the maximum annual HSA contribution for an eligible individual
with self-only coverage is $2650. (Note: for any individual, the maximum
contribution is the lesser of the indexed amount or the deductible of the
HDHP.)
For family coverage the maximum annual HSA contribution is $5250.
Catch up contributions for individuals who are 55 or older is increased by
statute from $500 to $600 for 2005.
Both the HSA contribution and catch up contribution apply pro rata based
on the number of the months of the year a taxpayer is an eligible individual,
and, with respect to the catch up contribution, the number of months of the
year that the taxpayer is age 55 and over.

New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs:
•

The maximum annual out-of-pocket amount for HDHP self-coverage
increases to $5,100 and the maximum annual out-of-pocket amount for
HDHP family coverage is twice that, $10,200.

Minimum Deductible Amounts for HSA-Compatible HDHPs:
•

For 2005, the minimum deductible for HDHP is unchanged, remaining at
$1,000 for self-only coverage and $2,000 for family coverage.

REPORTS
•

The guidance containing the indexed amounts

http://www.tr~as.gov/press/re1eases/js2112.htm

113/2005

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.602. Tax forms and instructions.
(Also, Part I, §§ 1,23,24, 25A, 32, 42, 59, 62, 63, 68,132,135,137,146,1.148-5,151,
170, 179,213,220,221,223,512,513,685,877,2032A,2503,2523,4261,6033,
6039F,6323,6334,6601, 7430, 77028)

Rev. Proc. 2004-71

Table of Contents
SECTION 1. PURPOSE
SECTION 2. CHANGES
SECTION 3. 2005 ADJUSTED ITEMS
Code Section
.01 Tax Rate Tables
.02 Unearned Income of Minor Chi Idren Taxed as if Parent's
Income ("Kiddie Tax")

1(a)-(e)
1(g)

.03 Adoption Credit

.04 Child Tax Credit

.05 Hope and Lifetime Learning Credits

25A

.06 Earned Income Credit

.07 Low-Income Housing Credit

42(h)

- 2.08 Alternative Minimum Tax Exemption for a Child Subject to the
"Kiddie Tax"

590)

.09 Transportation Mainline Pipeline Construction Industry Optional
Expense Substantiation Rules for Payments to Employees under
Accountable Plans

62(c)

.10 Standard Deduction

.11 Overall Limitation on Itemized Deductions

.12 Qualified Transportation Fringe

132(f)

.13 Income from United States Savings Bonds for Taxpayers Who
Pay Qualified Higher Education Expenses

135

.14 Adoption Assistance Programs

137

.15 Private Activity Bonds Volume Cap

146(d)

.16 Safe Harbor Rules for Broker Commissions on Guaranteed
Investment Contracts or Investments Purchased for a Yield
Restricted Defeasance Escrow

1.148-5

.17 Personal Exemption

151

.18 Election to Expense Certain Depreciable Assets

179

.19 Eligible Long-Term Care Premiums

213(d)(10)

.20 Medical Savings Accounts

220

.21 Interest on Education Loans

221

.22 Health Savings Accounts

223

.23 Treatment of Dues Paid to Agricultural or Horticultural
Organizations

512(d)

.24 Insubstantial Benefit Limitations for Contributions Associated
with Charitable Fund-Raising Campaigns

513(h)

.25 Funeral Trusts

685

- 3.26 Expatriation to Avoid Tax

877

.27 Valuation of Qualified Real Property in Decedent's Gross Estate

2032A

.28 Annual Exclusion for Gifts

2503 & 2523

.29 Passenger Air Transportation Excise Tax

4261

.30 Reporting Exception for Certain Exempt Organizations with
Nondeductible Lobbying Expenditures

6033(e)(3)

.31 Notice of Large Gifts Received from Foreign Persons

6039F

.32 Persons Against Which a Federal Tax Lien Is Not Valid

6323

.33 Property Exempt from Levy

6334

.34 Interest on a Certain Portion of the Estate Tax Payable
in Installments
.35 Attorney Fee Awards
.36 Periodic Payments Received under Qualified Long-Term Care
Insurance Contracts or under Certain Life Insurance Contracts

66010)

7430
7702B(d)

SECTION 4. EFFECTIVE DATE
SECTION 5. DRAFTING INFORMATION

SECTION 1. PURPOSE
This revenue procedure sets forth inflation adjusted items for 2005.
SECTION 2. CHANGES
.01 The amounts in § 1.148-5(e)(2)(iii)(B)(1) of the Income Tax Regulations used to
determine whether a broker's commission or similar fee with respect to the acquisition
of a guaranteed investment contract or investments purchased for a yield restricted
defeasance escrow is reasonable under § 1.148-5(e)(2)(i) are adjusted for inflation.

-4(Section 3.16) .
.02 The amounts in § 223(b)(2) of the Internal Revenue Code used to determine the
monthly limitation on deductions for health savings accounts under § 223(a) are
adjusted for inflation. The amounts in § 223(c)(2)(A) used to determine whether a
health plan meets the definition of a high deductible health plan are adjusted for
inflation. (Section 3.22) .
.03 The new "net worth" amount in § 877(a)(2)(B) used to determine whether an
individual who ceased to be a U.S. citizen or long-term resident is subject to the special
rules of § 877 is not adjusted for inflation. (Section 3.26).
SECTION 3. 2005 ADJUSTED ITEMS
.01 Tax Rate Tables. For taxable years beginning in 2005, the tax rate tables under

§ 1 are as follows:
TABLE 1 - Section 1(a). - Married Individuals Filing Joint Returns and Surviving
Spouses
If Taxable Income Is:

The Tax Is:

Not over $14,600

10% of the taxable income

Over $14,600 but
not over $59,400

$1 ,460 plus 15% of
the excess over $14,600

Over $59,400 but
not over $119,950

$8,180 plus 25% of
the excess over $59,400

Over $119,950 but
not over $182,800

$23,317.50 plus 28% of
the excess over $119,950

Over $182,800 but
not over $326,450

$40,915.50 plus 33% of
the excess over $182,800

Over $326,450

$88,320 plus 35% of

-5the excess over $326,450
TABLE 2 - Section 1(b). - Heads of Households
If Taxable Income Is:

The Tax Is:

Not over $10,450

10% of the taxable income

Over $10,450 but
not over $39,800

$1,045 plus 15% of
the excess over $10,450

Over $39,800 but
not over $102,800

$5,447.50 plus 25% of
the excess over $39,800

Over $102,800 but
not over $166,450

$21,197.50 plus 28% of
the excess over $102,800

Over $166,450 but
not over $326,450

$39,019.50 plus 33% of
the excess over $166,450

Over $326,450

$91,819.50 plus 35% of
the excess over $326,450

TABLE 3 - Section 1(c). - Unmarried Individuals (other than Surviving Spouse and
Heads of Households).
If Taxable Income Is:

The Tax Is:

Not over $ 7 ,300

10% of the taxable income

Over $7,300 but
not over $29,700

$730 plus 15% of
the excess over $ 7 ,300

Over $29,700 but
not over $71 ,950

$4,090 plus 25% of
the excess over $29,700

Over $71 ,950 but
not over $150,150

$14,652.50 plus 28% of
the excess over $71 ,950

Over$150,150 but
not over $326,450

$36,548.50 plus 33% of
the excess over $150,150

Over $326,450

$94,727.50 plus 35% of
the excess over $326,450

- 6TABLE 4 - Section 1(d). - Married Individuals Filing Separate Returns
If Taxable Income Is:

The Tax Is:

Not over $7,300

10% of the taxable income

Over $7,300 but
not over $29,700

$730 plus 15% of
the excess over $7,300

Over $29,700 but
not over $59,975

$4,090 plus 25% of
the excess over $29,700

Over $59,975 but
not over $91 ,400

$11,658.75 plus 28% of
the excess over $59,975

Over $91 ,400 but
not over $163,225

$20,457.75 plus 33% of
the excess over $91 ,400

Over $163,225

$44,160 plus 35% of
the excess over $163,225

TABLE 5 - Section 1(e). - Estates and Trusts
If Taxable Income Is:

The Tax Is:

Not over $2,000

15% of the taxable income

Over $2,000 but
not over $4,700

$300 plus 25% of
the excess over $2,000

Over $4,700 but
not over $7,150

$975 plus 28% of
the excess over $4,700

Over $7,150 but
not over $9,750

$1,661 plus 33% of
the excess over $7,150

Over $9,750

$2,519 plus 35% of
the excess over $9,750

.02 Unearned Income of Minor Children Taxed as if Parent's Income (the "Kiddie
Tax"). For taxable years beginning in 2005, the amount in § 1(g)(4 )(A)(ii)(I), which is
used to reduce the net unearned income reported on the child's return that is subject to

-7the "kiddie tax," is $800. (This amount is the same as the $800 standard deduction
amount provided in section 3.10(2) of this revenue procedure.) The same $800 amount
is used for purposes of § 1(g)(7) (that is, in determining whether a parent may elect to
include a child's gross income in the parent's gross income and for calculating the
"kiddie tax"). For example, one of the requirements for the parental election is that a
child's gross income is more than the amount referenced in § 1(g)(4 )(A)(ii)(l) but less
than 10 times such amount; thus, a child's gross income for 2005 must be more than
$800 but less than $8,000 to satisfy that requirement.
.03 Adoption Credit. For taxable years beginning in 2005, under § 23(a)(3) the
maximum credit allowed for an adoption of a child with special needs is $10,630. For
taxable years beginning in 2005, under § 23(b)(1) the maximum credit allowed with
regard to other adoptions is the amount of qualified adoption expenses up to $10,630.
The available adoption credit begins to phase out under § 23(b )(2)(A) for taxpayers with
modified adjusted gross income in excess of $159,450 and is completely phased out for
taxpayers with modified adjusted gross income of $199,450. (See section 3.14 of this
revenue procedure for the adjusted items relating to adoption assistance programs.)
.04 Child Tax Credit. For taxable years beginning in 2005, the value used in

§ 24(d)(1 )(8)(i) in determining the amount of credit under § 24 that may be refundable is
$11,000 .
.05 Hope and Lifetime Learning Credits.
(1) For taxable years beginning in 2005, 100 percent of qualified tuition and related
expenses not in excess of $1 ,000 and 50 percent of such expenses in excess of $1 ,000

- 8are taken into account in determining the amount of the Hope Scholarship Credit under

§ 25A(b)(1).
(2) For taxable years beginning in 2005, a taxpayer's modified adjusted gross
income in excess of $43,000 ($87,000 for a joint return) is taken into account in
determining the reduction under § 25A(d)(2)(A)(ii) in the amount of the Hope
Scholarship and Lifetime Learning Credits otherwise allowable under § 25A(a) .
.06 Earned Income Credit.
(1) In general. For taxable years beginning in 2005, the following amounts are used
to determine the earned income credit under § 32(b). The "earned income amount" is
the amount of earned income at or above which the maximum amount of the earned
income credit is allowed. The "threshold phaseout amount" is the amount of adjusted
gross income (or, if greater, earned income) above which the maximum amount of the
credit begins to phase out. The "completed phaseout amount" is the amount of
adjusted gross income (or if greater, earned income) at or above which no credit is
allowed.
Number of Qualifying Children
Item

One

Two or More

None

Earned Income Amount

$ 7,830

$11,000

$ 5,220

Maximum Amount of Credit

$ 2,662

$ 4,400

Threshold Phaseout Amount
(Single, Surviving Spouse, or
Head of Household)

$14,370

$ 6,530

Completed Phaseout Amount
(Single, Surviving Spouse, or

$31,030

$35,263

$11,750

399

-9Head of Household)
Threshold Phaseout Amount
(Married Filing Jointly)

$16,370

$ 8,530

Completed Phaseout Amount
(Married Filing Jointly)

$33,030

$37,263

$13,750

The instructions for the Form 1040 series provide tables showing the amount of the
earned income credit for each type of taxpayer.
(2) Excessive investment income. For taxable years beginning in 2005, the earned
income tax credit is denied under § 32(i) if the aggregate amount of certain investment
income exceeds $2,700 .
.07 Low-Income Housing Credit. For calendar years beginning in 2005, the amounts
used under § 42(h)(3)(C)(ii) to calculate the State housing credit ceiling for the lowincome housing credit is the greater of (i) $1.85 multiplied by the State population, or (ii)
$2,125,000 .
.08 Alternative Minimum Tax Exemption for a Child Subject to the "Kiddie Tax" For
taxable years beginning in 2005, for a child to whom the § 1(g) "kiddie tax" applies, the
exemption amount under §§ 55 and 590) for purposes of the alternative minimum tax
under § 55 may not exceed the sum of (i) such child's earned income for the taxable
year, plus (ii) $5,850 .
.09 Transportation Mainline Pipeline Construction Industry Optional Expense
SUbstantiation Rules for Payments to Employees under Accountable Plans. For
calendar years beginning in 2005, an eligible employer may pay certain welders and
heavy equipment mechanics an amount of up to $13 per hour for rig-related expenses

-10that is deemed substantiated under an accountable plan when paid in accordance with
Rev. Proc. 2002-41. If the employer provides fuel or otherwise reimburses fuel
expenses, up to $8 per hour is deemed substantiated when paid under Rev. Proc.
2002-41 .
.10 Standard Deduction.
(1) In general. For taxable years beginning in 2005, the standard deduction
amounts under § 63(c)(2) are as follows:
Filing Status

Standard Deduction

Married Individuals Filing Joint Returns
and Surviving Spouses (§ 1(a))

$10,000

Heads of Households (§ 1(b))

$7,300

Unmarried Individuals (other than Surviving Spouses
and Heads of Households) (§ 1(c))

$5,000

Married Individuals Filing Separate
Returns (§ 1(d))

$5,000

(2) Dependent. For taxable years beginning in 2005, the standard deduction
amount under § 63(c)(5) for an individual who may be claimed as a dependent by
another taxpayer may not exceed the greater of (i) $800, or (ii) the sum of $250 and the
individual's earned income.
(3) Aged and blind. For taxable years beginning in 2005, the additional standard
deduction amounts under § 63(f) for the aged and for the blind are $1,000 for each.
These amounts are increased to $1,250 if the individual is also unmarried and not a
surviving spouse .
. 11 Overall Limitation on Itemized Deductions. For taxable years beginning in 2005,

- 11 the "applicable amount" of adjusted gross income under § 68(b), above which the
amount of otherwise allowable itemized deductions is reduced under § 68, is $145,950
(or $72,975 for a separate return filed by a married individual) .
.12 Qualified Transportation Fringe. For taxable years beginning in 2005, the monthly
limitation under § 132(f)(2 )(A) (regarding the aggregate fringe benefit exclusion amount
for transportation in a commuter highway vehicle and any transit pass) is $105. The
monthly limitation under § 132(f)(2)(B) (regarding the fringe benefit exclusion amount for
qualified parking) is $200 .
.13 Income from United States Savings Bonds for Taxpayers Who Pay Qualified
Higher Education Expenses. For taxable years beginning in 2005, the exclusion under

§ 135 (regarding income from United States savings bonds for taxpayers who pay
qualified higher education expenses) begins to phase out for modified adjusted gross
income above $91,850 for joint returns and $61,200 for other returns. This exclusion
completely phases out for modified adjusted gross income of $121 ,850 or more for joint
returns and $76,200 or more for other returns .
.14 Adoption Assistance Programs. For taxable years beginning in 2005, under

§ 137(a)(2) the maximum amount that can be excluded from an employee's gross
income in connection with the adoption by the employee of a child with special needs is
$10,630. For taxable years beginning in 2005, under § 137(b)(1) the maximum amount
that can be excluded from an employee's gross income for the amounts paid or
expenses incurred by the employer for qualified adoption expenses furnished pursuant
to an adoption assistance program in connection with other adoptions by the employee

-12is $10,630. The amount excludable from an employee's gross income begins to phase
out under § 137(b)(2)(A) for taxpayers with modified adjusted gross income in excess of
$159,450 and is completely phased out for taxpayers with modified adjusted gross
income of $199,450. (See section 3.03 of this revenue procedure for the adjusted items
relating to the adoption credit.)
.15 Private Activity Bonds Volume Cap. For calendar years beginning in 2005, the
amounts used under § 146(d)(1) to calculate the State ceiling for the volume cap for
private activity bonds is the greater of (i) $80 multiplied by the State population, or (ii)
$239,180,000 .
.16 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts
or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar
year 2005, under § 1.148-5(e)(2)(iii)(B)(1), a broker's commission or similar fee with
respect to the acquisition of a guaranteed investment contract or investments
purchased for a yield restricted defeasance escrow is reasonable to the extent that (i)
the amount of the fee that the issuer treats as a qualified administrative cost does not
exceed the lesser of (A) $31 ,000, or (B) 0.2 percent of the computational base (as
defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $3,000; and (ii) the issuer does not treat
more than $87,000 in brokers' commissions or similar fees as qualified administrative
costs with respect to all guaranteed investment contracts and investments for yield
restricted defeasance escrows purchased with gross proceeds of the issue .
.17 Personal Exemption.
(1) Exemption amount. For taxable years beginning in 2005, the personal

-13exemption amount under § 151 (d) is $3,200.
(2) Phase out. For taxable years beginning in 2005, the personal exemption amount
begins to phase out at, and is completely phased out after, the following adjusted gross
income amounts:
AGI - Beginning
of Phaseout

AGI - ExemQtion
Fully Phased Out

Married Individuals Filing Joint Returns and
Surviving Spouses (§ 1(a))

$218,950

$341,450

Heads of Households (§ 1(b))

$182,450

$304,950

Unmarried Individuals (other than Surviving
Spouses and Heads of Households) (§ 1(c))

$145,950

$268,450

Married Individuals Filing Separate
Returns (§ 1(d))

$109,475

$170,725

Filing Status

.18 Election to EXQense Certain DeQreciable Assets. For taxable years beginning in
2005, under § 179(b)( 1) the aggregate cost of any § 179 property a taxpayer may elect
to treat as an expense shall not exceed $105,000. Under § 179(b)(2) the $105,000
limitation shall be reduced (but not below zero) by the amount by which the cost of

§ 179 property placed in service during the 2005 taxable year exceeds $420,000 .
.19 Eligible Long-Term Care Premiums. For taxable years beginning in 2005, the
limitations under § 213(d)(1 0) (regarding eligible long-term care premiums includible in
the term "medical care") are as follows:
Attained Age Before the Close of the Taxable Year

Limitation on Premiums

40 or less

$ 270

More than 40 but not more than 50

$ 510

-14More than 50 but not more than 60

$1,020

More than 60 but not more than 70

$2,720

More than 70

$3,400

.20 Medical Savings Accounts.
(1) Self-only coverage. For taxable years beginning in 2005, the term "high
deductible health plan" as defined in § 220(c)(2)(A) means, for self-only coverage, a
health plan that has an annual deductible that is not less than $1,750 and not more tha n
$2,650, and under which the annual out-of-pocket expenses required to be paid (other
than for premiums) for covered benefits does not exceed $3,500.
(2) Family coverage. For taxable years beginning in 2005, the term "high deductible
health plan" means, for family coverage, a health plan that has an annual deductible
that is not less than $3,500 and not more than $5,250, and under which the annual outof-pocket expenses required to be paid (other than for premiums) for covered benefits
does not exceed $6,450 .
.21 Interest on Education Loans. For taxable years beginning in 2005, the $2,500
maximum deduction for interest paid on qualified education loans under § 221 is
reduced under § 221 (b)(2)(8) when modified adjusted gross income exceeds $50,000
($105,000 for joint returns), and is completely eliminated when modified adjusted gross
income is $65,000 ($135,000 for joint returns) .
.22 Health Savings Accounts.
(1) Monthly contribution limitation. For calendar year 2005, the monthly limitation on
deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high

- 15deductible plan as of the first day of such month is 1/12 of the lesser of (i) the annual
deductible, or (ii) $2,650. For calendar year 2005, the monthly limitation on deductions
under § 223(b)(2)(B) for an individual with family coverage under a high deductible plan
as of the first day of such month is 1/12 of the lesser of (i) the annual deductible, or (ii)
$5,250.
(2) High deductible health plan. For calendar year 2005, a high deductible health
plan is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is
not less than $1,000 for self-only coverage or $2,000 for family coverage, and the
annual out-of pocket expenses (deductibles, co-payments, and other amounts, but not
premiums) do not exceed $5,100 for self-only coverage or $10,200 for family coverage .
.23 Treatment of Dues Paid to Agricultural or Horticultural Organizations. For taxable
years beginning in 2005, the limitation under § 512(d)(1) (regarding the exemption of
annual dues required to be paid by a member to an agricultural or horticultural
organization) is $127 .
.24 Insubstantial Benefit Limitations for Contributions Associated with Charitable
Fund-Raising Campaigns.
(1) Low cost article. For taxable years beginning in 2005, the unrelated business
income of certain exempt organizations under § 513(h)(2) does not include a "low cost
article" of $8.30 or less.
(2) Other insubstantial benefits. For taxable years beginning in 2005, the $5, $25,
and $50 guidelines in section 3 of Rev. Proc. 90-12,1990-1 C.B. 471 (as amplified and
modified), for disregarding the value of insubstantial benefits received by a donor in

-16return for a fully deductible charitable contribution under § 170, are $8.30, $41.50, and
$83, respectively .
.25 Funeral Trusts. For a contract entered into during calendar year 2005 for a
"qualified funeral trust," as defined in § 685, the trust may not accept aggregate
contributions by or for the benefit of an individual in excess of $8,200 .
.26 Expatriation to Avoid Tax For calendar year 2005, an individual with "average
annual net income tax" of more than $127,000 for the 5 taxable years ending before the
date of the loss of United States citizenship under § 877(a)(2)(A) is subject to tax under

§ 877(b) .
.27 Valuation of Qualified Real Property in Decedent's Gross Estate. For an estate of
a decedent dying in calendar year 2005, if the executor elects to use the special use
valuation method under § 2032A for qualified real property, the aggregate decrease in
the value of qualified real property resulting from electing to use § 2032A that is taken
into account for purposes of the estate tax may not exceed $870,000 .
.28 Annual Exclusion for Gifts.
(1) For calendar year 2005, the first $11,000 of gifts to any person (other than gifts
of future interests in property) are not included in the total amount of taxable gifts under

§ 2503 made during that year.
(2) For calendar year 2005, the first $117,000 of gifts to a spouse who is not a
citizen of the United States (other than gifts of future interests in property) are not
included in the total amount of taxable gifts under §§ 2503 and 2523(i)(2) made during
that year.

- 17 .29 Passenger Air Transportation Excise Tax. For calendar year 2005, the tax under

§ 4261 (b) on the amount paid for each domestic segment of taxable transportation by
air is $3.20. For calendar year 2005, the tax under § 4261 (c) on any amount paid
(whether within or without the United States) for any transportation of any person by air,
if such transportation begins or ends in the United States, generally is $14.10.
However, for a domestic segment beginning or ending in Alaska or Hawaii as described
in § 4261 (c)(3), the tax only applies to departures and is at the rate of $7 .
.30 Reporting Exception for Certain Exempt Organizations with Nondeductible
Lobbying Expenditures. For taxable years beginning in 2005, the annual per person,
family, or entity dues limitation to qualify for the reporting exception under § 6033(e)(3)
(and section 5.05 of Rev. Proc. 98-19,1998-1 C.B. 547), regarding certain exempt
organizations with nondeductible lobbying expenditures, is $88 or less .
.31 Notice of Large Gifts Received from Foreign Persons. For taxable years
beginning in 2005, recipients of gifts from certain foreign persons may be required to
report these gifts under § 6039F if the aggregate value of gifts received in a taxable
year exceeds $12,375 .
.32 Persons Against Which a Federal Tax Lien Is Not Valid. For calendar year 2005,
a federal tax lien is not valid against (i) certain purchasers under § 6323(b)( 4) who
purchased personal property in a casual sale for less than $1,200, or (ii) a mechanic's
lienor under § 6323(b)(7) that repaired or improved certain residential property if the
contract price with the owner is not more than $6,020 .
.33 Property Exempt from Levy. For calendar year 2005, the value of property

-18exempt from levy under § 6334(a)(2) (fuel, provisions, furniture, and other household
personal effects, as well as arms for personal use, livestock, and poultry) may not
exceed $7,200. The value of property exempt from levy under § 6334(a)(3) (books and
tools necessary for the trade, business, or profession of the taxpayer) may not exceed
$3,600 .
.34 Interest on a Certain Portion of the Estate Tax Payable in Installments. For an
estate of a decedent dying in calendar year 2005, the dollar amount used to determine
the "2-percent portion" (for purposes of calculating interest under § 6601 U)) of the estate
tax extended as provided in § 6166 is $1,170,000 .
.35 Attorney Fee Awards. For fees incurred in calendar year 2005, the attorney fee
award limitation under § 7430( c)( 1)(B )(iii) is $150 per hour.
.36 Periodic Payments Received under Qualified Long-Term Care Insurance
Contracts or under Certain Life Insurance Contracts. For calendar year 2005, the
stated dollar amount of the per diem limitation under § 7702B( d)( 4) (regarding periodic
payments received under a qualified long-term care insurance contract or periodic
payments received under a life insurance contract that are treated as paid by reason of
the death of a chronically ill individual) is $240.
SECTION 4. EFFECTIVE DATE
.01 General Rule. Except as provided in section 4.02, this revenue procedure applies
to taxable years beginning in 2005 .
.02 Calendar Year Rule. This revenue procedure applies to transactions or events
occurring in calendar year 2005 for purposes of sections 3.07 (low-income housing

-19credit), 3.09 (pipeline construction industry optional expense substantiation rules), 3.15
(private activity bond volume cap), 3.16 (safe harbor rules for broker commissions on
guaranteed investment contracts or investments purchased for a yield restricted
defeasance escrow), 3.22 (health savings accounts), 3.23 (funeral trusts), 3.24
(expatriation to avoid tax), 3.25 (valuation of qualified real property in decedent's gross
estate), 3.26 (annual exclusion for gifts), 3.27 (passenger air transportation excise tax),
3.30 (persons against which a federal tax lien is not valid), 3.31 (property exempt from
levy), 3.32 (interest on a certain portion of the estate tax payable in installments), 3.33
(attorney fee awards), and 3.34 (periodic payments received under qualified long -term
care insurance contracts or under certain life insurance contracts).
SECTION 5. DRAFTING INFORMATION
The principal author of this revenue procedure is Marnette M. Myers of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this revenue procedure, contact Ms. Myers on (202) 622-4920 (not a toll-free call).

js-2113: The

Honefftel~

J6Im W. Sm:1w Conclusion of Meeting of G-20 Finance Mini...

Page 1 of 2

FROM THE OFFICE OF PUBLIC AFFAIRS
November 21, 2004
js-2113
The Honorable John W. Snow
Conclusion of Meeting of G-20 Finance Ministers
and Central Bank Governors
Berlin, Germany
Sunday, November 21, 2004
I am very pleased to be here in Berlin and to have participated in such a productive
discussion with my fellow Finance Ministers, as well as Central Bank Governors
from the industrial and emerging market economies of the Group of 20. I want to
thank Minister Eichel and Governor
Weber for hosting us and for leading the G-20 over the course of this year. I also
want to thank Minister Eichel for our work together to reduce substantially Iraq's
debt. This will ensure that the Iraqi people will have the opportunity to rebuild their
economy.
This meeting caps a full week that I have spent in Europe, discussing the
importance of economic growth with leaders of government, finance and academia.
Growth was also a major theme of our meeting here. The world economy is growing
faster than it has in nearly thirty years. With interest rates and inflation still low,
conditions are ripe for strong growth to continue. In emerging market and
developing countries, economic growth is expected to top six percent this year.
The United States is leading the global growth surge. Thanks to President Bush's
pro-growth policies and sound monetary policy by the Fed, the economy is on a
solid expansion path. GDP growth is strong. In 2004 alone our economy has
created 2 million new jobs.
Sustaining this strong global growth requires all of us to act. Addressing global
imbalances in particular is a shared challenge. The United States needs to do its
part by raising national saving and reducing its budget deficit. President Bush is
committed to cutting the budget deficit in half over the next four years. We will do
this with spending restraint and continued growth - encouraged by pro-growth
policies - in our economy.
Growth among our trading partners - including those here in Europe - also needs to
increase and that requires addressing structural barriers that stand in the way of
better performance. In Asia, more flexible exchange rates are needed in countries
that do not have such flexibility.
We released today a G-20 Accord for Sustainable Growth, which describes our
shared understanding of the economic policies needed for economic growth. This
Accord reflects broad agreement that the world economy is best served by open,
competitive markets, free capital flows and free trade. As part of the G-20 Accord
we issued a Reform Agenda for Sustained Growth to set out specific policies being
implemented in each of our countries. The G-20 Accord and Reform Agenda for
Sustained Growth build on the path breaking G-7 Agenda for Growth initiative. I am
gratified to see broad endorsement of a stronger focus on the policies that lead to
economic growth.
The G-20 also reviewed the role of strong domestic financial sectors in supporting
economic growth and reducing vulnerabilities. The review highlighted the
importance of promoting financial intermediation and competition, implementing
international standards and codes, and effective financial sector supervision and
regulation. I also want to underscore the vital role remittances playas well in both

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113/2005

js-2113: The H~fftblc John W . .snow Conclusion of Meeting ofG-20 Finance Mini ...

Page 2 of2

sending and receiving countries.
Looking beyond our own domestic policies, we all recognize the importance of
robust and effective international institutions to advance growth. In recognition of
the 60th anniversary of the Bretton Woods institutions, we discussed today the
recent progress made in modernizing these institutions and the need for further
reforms. I was pleased to share with the G-20 some of the conclusions of the G-7
Strategic Review that was conducted under the U.S. chairmanship this year. I
believe that it is particularly worthwhile for members of the G-20, with their diverse
perspectives, to reflect together on how these institutions are working and how they
can do better.
For the international financial system to operate effectively, it is important to have
clarity and predictability. I welcome the results achieved by emerging market
issuers and creditors in their "Principles for Stable Capital Flows and Fair Debt
Restructuring in Emerging Markets." We hope that issuers and creditors will find the
principles useful, and we encourage continued dialogue.
Finally, I want to note that the G-20 has played an important role in the financial
fight against terror. We look forward to this work continuing. We all welcomed the
new FATF standard calling on countries to take measures to prevent terrorists from
transferring cash across borders. We are also delighted by the stepped up role that
the IMF and World Bank have begun playing this year in assessments of the FATF
standards.
Thank you.
-30-

http://www.trt>as.gov/press/releases/js2t 13.htm

113/2005

FROM THE OFFICE OF PUBLIC AFFAIRS
ovember 22,2004
004-11-22-15-57-21-8415
U.S. International Reserve Position
he Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
,taled $85,720 million as of the end of that week, compared to $85,088 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
November 12,2004

November 19, 2004

85,088

85,720

TOTAL

· Foreign Currency Reserves
I.

Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

11,797

14,906

26,703

11,874

15,301

27,175

)f which, issuer headquartered in the US.

'. Total deposits with:
d. Other central banks and BIS

11,598

2,996

14,564

11,679

3,075

14,754

'.ii. Banks headquartered in the US.

.ii. Of which, banks located abroad

'.iii. Banks headquartered outside the US.

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

19,636

13,112

11,043

· IMF Reserve Position

· Special Drawing Rights (SDRs)
· Gold Stock

· Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
November 12, 2004
Euro
· Foreign currency loans and securities

Yen

November 19, 2004

TOTAL

Euro

Yen

TOTAL

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

a. Short positions

b. Long positions

o
o

Other

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
November 12. 2004
Euro
· Contingent liabilities in foreign currency

Yen

November 19, 2004

TOTAL

Euro

Yen

TOTAL

o
o

.a. Collateral guarantees on debt due within 1 year
.b. Other contingent liabilities
· Foreign currency securities with embedded options
· Undrawn, unconditional credit lines
:.a. With other central banks
'.b. With banks and other financial institutions
leadquartered in the U.S.
'.C.

With banks and other financial institutions

leadquartered outside the U. S.

· Aggregate short and long positions of options in
>reign
:urrencies vis-a-vis the U.S. dollar
.a. Short positions

.a.1. Bought puts
.a.2. Written calls
.b. Long positions

.b.1. Bought calls
.b.2. Written puts

Notes:
Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
OMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
posits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
~serves for the prior week are final.
The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
lued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
cessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
Gold stock is valued monthly at $42.2222 per fine troy ounce.

js-2114: Treaswy and lRB C:lariiy Employment Tax Treatment of Payments Made on the ... Page 1 of 1

:_:PRE~.S

R()O M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe@Acrobat(rij Reader®.

November 23, 2004
js-2114
Treasury and IRS Clarify Employment Tax Treatment of Payments Made on
the Signing or Cancellation of an Employment Contract
The Treasury Department and the IRS today published two revenue rulings
clarifying that payments by employers to employees made in connection with
employment contracts are to be treated as wages for purposes of FICA, FUTA and
Federal income tax withholding.
The first ruling, Revenue Ruling 2004-109, clarifies that employment taxes must be
paid - and income taxes withheld - on bonuses paid for signing of an employment
contract. The ruling addresses situations such as signing bonuses paid in
connection with the first contract between a baseball club and a baseball
player and payments made upon ratification of a collective bargaining agreement.
The second ruling, Revenue Ruling 2004-110, concerns payments made in
connection with the cancellation of an employment contract. The ruling clarifies that,
if an employment contract is cancelled before its agreed-upon end and a payment
is made in lieu of the remaining period of employment, the payment is treated as
wages for purposes of employment taxes and income tax withholding.

Because these rulings revoke or modify prior rulings, the new rulings will not apply
to certain payments made before January 12, 2005, such as signing bonuses, signon fees or other amounts paid in connection with an employee's initial employment
or payments made or agreed to on the cancellation of an employment contract. This
relief applies only where the facts and circumstances relating to the payments are
substantially the same as the revoked or modified rulings.

Revenue Rulings 2004-109 and 2004-110 are attached.
REPORTS

•
•

Revenue Rulings 2004-109
Revenue Rulings 2004-110

http://www.tre:1s.gov/press/releases/js2114.htm

113/2005

Part I

Section 3121 .-- Definitions

26CFR31.3121(a)-1: Wages.
(Also: 3306, 3401, 31.3306(b)-1, 31.3401 (a)-1)

Rev. Rul. 2004-109

ISSUE
Whether certain amounts an employer pays as bonuses for signing or ratifying a
contract are wages for purposes of the Federal Insurance Contributions Act (FICA), the
Federal Unemployment Tax Act (FUTA), and the Collection of Income Tax at Source
(Federal income tax withholding)?
FACTS
Situation 1. Baseball Club negotiates an employment contract with an individual
player. It is the first contract between the Club and the player. The contract provides
that the player receives a signing bonus if he reports for spring training at the time and
place directed by the Club. The contract provides that the signing bonus is not
contingent on the player's future performance of services.

Situation 2. An employer negotiates a collective bargaining agreement (CSA)
with a union representing a group of its employees. The CSA will take effect on the
"ratification date," which is the date it is ratified by a majority of the union members
covered by the agreement. The CSA provides that each employee covered by the
terms of the agreement who is employed by the employer as of the ratification date
receives a bonus. Each such employee is paid the same amount regardless of
compensation, seniority, position and whether or not the employee voted for ratification.
In addition, each eligible employee receives the payment even if the employee had not
performed seI"\Aces for the employer before the ratification date. Finally, the CSA
provides that the payment is not contingent on the employee's future performance of
services.
LAW
Sections 3101 and 3111 of the Internal Revenue Code (Code) impose FICA
taxes on "wages," as that term is defined in section 3121(a), with respect to
"employment," as that term is defined in section 3121 (b). FICA taxes consist of the OldAge, Survivors and Disability Insurance tax (social security tax) and the Hospital
Insurance tax (Medicare tax). These taxes are imposed on both the employer and
employee. Sections 3101(a) and 3101(b) impose the employee portions of the social
security tax and the Medicare tax, respectively. Sections 3111 (a) and 3111 (b) impose
the employer portions of the social security tax and the Medicare tax, respectively.

The term "wages" is defined in section 3121 (a) for FICA purposes as all
remuneration for employment, with certain specific exceptions. Section 3121(b) defines
the term "employment" as any service, of whatever nature, performed by an employee
for the person employing him, with certain specific exceptions.

Section 31.3121 (a)-1 (b) of the Employment Tax Regulations provides that the
term "wages" means all remuneration for employment unless specifically excepted
under section 3121(a). Section 31.3121(a)-1(c) provides that the name by which the
remuneration for employment is designated is immaterial. Salaries, fees, and bonuses
are wages, if paid as compensation for employment. Section 31.3121 (a)-1 (d) provides
that generally the basis upon which the remuneration is paid is immaterial in
determining whether the remuneration is wages.

Section 31.3121 (b )-3(b) defines

employment as services performed by an employee for an employer, unless specifically
excepted under section 3121(b).
The FUTA taxation provisions are similar to the FICA provisions, except that only
the employer pays the tax imposed under FUTA. See sections 3301 and 3306(b) and
the regulations thereunder. Although there are differences in the statutory exceptions to
what constitutes wages and employment, the general definitions of the terms "wages"
and "employmenf' for FUTA purposes are similar to the definitions for FICA purposes.
See sections 3306(b) and 3306(c).
Section 3402(a), relating to Federal income tax withholding, generally requires
every employer making a payment of wages to deduct and withhold upon those wages

a tax determined in accordance with prescribed tables or computational procedures.
The term "wages" is defined in section 3401 (a) for Federal income tax withholding
purposes as all remuneration for services performed by an employee for his employer,
with certain specific exceptions. Section 31.3401 (a)-1 (a)(2) provides that the name by
which remuneration for services is designated is immaterial. Thus, salaries, fees and
bonuses are wages if paid as compensation for services performed by the employee for
his employer. Section 31.3401 (a)-1 (a)(3) provides that generally the basis upon which
the remuneration is paid is immaterial in determining whether the remuneration is
wages. Unlike the FICA and the FUTA, the Federal income tax withholding provisions
do not include a definition of employment.
Revenue Ruling 58-145, 1958-1 C.B. 360, in answering four specific questions,
holds that a bonus paid by a baseball club to an individual solely for signing the
individual's first contract and not in any way contingent on the performance of
subsequent services is not remuneration for services and, therefore, is not wages for
purposes of Federal income tax withholding under section 3402. The ruling further
holds that a bonus paid to a baseball player that is contingent upon the performance of
subsequent services is wages subject to Federal income tax withholding.
Revenue Ruling 69-424, 1969-2 C.B. 15, holds that amounts paid by a baseball
club for educational expenses of a minor league baseball player attending college were
not scholarships excluded from income under section 117 because the payments were
"compensation for past, present or future employment services" within the meaning of
section 1.117-4 of the Income Tax Regulations. The contract provided that the club was

not required to make the payments if the player failed to attend the college for two
consecutive years without proper reason, did not report for spring training as directed by
the club, or was placed on the voluntarily retired, disqualified or ineligible list. The ruling
holds that the payments are wages for Federal income tax withholding and FICA
purposes.
Revenue Ruling 71-532,1971-2 C.B. 356, holds that Rev. Rul. 69-424 is to be
applied without retroactive effect with respect to wages paid prior to January 1, 1970.
The ruling makes clear that the amount paid for certain educational expenses under the
employment contract described in Rev. Rul. 69-424 is distinguishable from the bonus
paid solely as consideration for signing a contract described in Rev. Rul. 58-145, but
nonetheless limits the retroactive effect of Rev. Rul. 69-424.
Rev. Rul. 74-108,1974-1 C.B. 248, analyzes whether a sign-on fee paid by a
domestic corporation that operates a professional soccer club to a non-resident alien
player as an inducement not to negotiate with any other team is treated as income from
sources within or without the United States. Rev. Rul. 74-108 cites Rev. Rul. 58-145 as
authority for the conclusion that the sign-on fee is not compensation for labor or
personal services and that, therefore, source is not determined under the rules in
section 861 (a)(3) or 862(a)(3). Instead, Rev. Rul. 74-108 characterized the sign-on fee
as a payment for a covenant not to compete both within and without the United States,
with the result that the sign-on fee was attributable to sources both within and without
the United States.
ANALYSIS

The Code and regulations provide that amounts an employer pays an employee
as remuneration for employment are wages, unless a specific exception applies.
Sections 3121 (a), 3306(b), and 3401 (a) and sections 31.3121 (a)-1(b), 31.3306(b)-1 (b),
and 31.3401 (a)-1 (a)(1) of the regulations. The regulations also provide that the name by
which the remuneration is designated is immaterial. Salaries, fees, and bonuses, for
example, are all wages, if paid as compensation for employment. Sections 31.3121(a)1(c), 31.3306(b)-1 (c), and 31.3401 (a)-1 (a)(2).
The Code and the regulations also provide that any service of whatever nature
performed by an employee for the person employing him is employment, unless a
specific exemption applies. Sections 3121 (b) and 3306(c) and sections 31.3121 (b)-3(b)
and 31.3306(c)-2(b).
Employment encompasses the establishment, maintenance, furtherance,
alteration, or cancellation of the employer-employee relationship or any of the terms and
conditions thereof. If the employee provides clear, separate, and adequate
consideration for the employer's payment that is not dependent upon the employeremployee relationship and its component terms and conditions, the payment is not
wages for purposes of FICA, FUTA, or Federal income tax withholding.
Under the facts presented in Situation 1, the individual receives the signing bonus
in connection with establishing the employer-employee relationship. The individual
does not provide clear, separate, and adequate consideration for the payment that is
not dependent upon the employer-employee relationship and its component terms and
conditions. Thus, the signing bonus is part of the compensation the Baseball Club pays

as remuneration for employment, making it wages regardless of the fact that the
contract provides that the bonus is not contingent on the performance of future services.
Under the facts presented in Situation 2, the employees receive the ratification
bonus payments as part of a bargain that establishes the terms and conditions of the
employment relationship with all of the employees covered by the CBA. The employees
do not provide clear, separate, and adequate consideration for the employer's payments
that is not dependent upon the employer-employee relationship and its component
terms and conditions. The payments are part of the compensation the employer pays
as remuneration for employment. Thus, the ratification bonuses are wages regardless of
the fact that they are uniform in amount, do not vary based on seniority or position or
any other factor, and are not explicitly contingent on the performance of services.
Revenue Ruling 58-145 considered whether Federal income tax withholding
applied to a bonus paid to a baseball player at the time a first contract was signed with a
baseball club. It erred in its analysis by failing to apply the Code and regulations
appropriately to the question of whether the bonus was wages in each of the four
questions presented. Specifically, it failed to apply the correct definition of wages and to
consider whether the bonus was paid in connection with establishing the employeremployee relationship. Accordingly, Rev. Rul. 58-145 is revoked. In addition, Rev. Rul.
Rev. Rul. 74-108 is revoked as its conclusion reies upon Rev. Rul. 58-145.

HOLDING
Amounts an employer pays as bonuses for signing or ratify;ng a contract in
connection with the establishment of the employer-employee relationship are wages for
purposes of FICA, FUTA, and Federal income tax withholding. Accordingly, the
payments in Situations 1 and 2 are wages for purposes of FICA, FUTA, and Federal
income tax withholding.
EFFECT ON OTHER RULINGS
Rev. Rul. 58-145 and Rev. Rul. 74-108 are revoked. Rev. Rul. 69-424 and Rev.
Rul. 71-532 are obsoleted in view of the amendment of section 117 by section 123(a) of
the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1,29. See section 117(c) and Notice
87-31,1987-1 C.B. 475.
APPLICATION
Under the authority of section 7805(b), the Service will not apply the position
adopted in this ruling to any sigring bonus, sign-on fee, or similar amount paid to an
employee in connection with the employee's initial employment with the employer
pursuant to a sign-on agreement or other contract entered into before January 12, 2005,
provided the amount is paid under facts and circumstances that are substantially the
same as in Rev. Rul. 58-145 or Rev. Rul. 74-108.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Marie Cashman and Stephen
Suetterlein of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt &

Government Entities). For further information regarding this revenue ruling, contact Mr.
Suetterlein on (202) 622-6040 (not a toll-free call).

Part I

Section 3121.--Definitions

26 CFR 31.3121(a)-1: Wages.
(Also: 1221, 1222,3306,3401,1.1221-1,1.1222-1, 31.3306(b)-1, 31.3401(a)-1)

Rev. Rul. 2004-110

ISSUE
Whether an amount paid to an employee as consideration for the
cancellation of an employment contract and relinquishment of contract rights is
ordinary income, and wages for purposes of the Federal Insurance Contributions
Act (FICA), the Federal Unemployment Tax Act (FUTA), and the Collection of
Income Tax at Source (Federal income tax withholding)?
FACTS
An employee performs services under a written employment contract
providing for a specified number of years of employment. The contract does not
provide for any payments to be made by either party in the event the contract is
cancelled by mutual agreement. Before the end of the contract period, the
employee and the employer agree to cancel the contract and negotiate a

payment from the employer to the employee in consideration for the employee's
relinquishment of his contract rights to the remaining period of employment.

LAW
Ordinary Income
Section 1(h) of the Internal Revenue Code (Code) provides for maximum
capital gains tax rates on net capital gain.
Section 1222(11) defines "net capital gain" as the excess of net long-term
capital gain over net short-term capital loss. Under section 1222(3), the term
"long-term capital gain" means gain from the sale or exchange of a capital asset
held for more than one year.
Section 1221 provides that the term "capital asset" means property held
by the taxpayer, with certain exclusions listed in section 1221 (a)(1 )-(8).
Section 1231 provides generally for capital gain or loss if there is net gain
from the sale or exchange of property used in a trade or business and from
certain involuntary conversions of business or investment property.
The United States Supreme Court has held that not everything that can be
called "property" in the ordinary sense and that is outside the statutory exclusions
in section 1221 or section 1231 qualifies as a "capital asset" under section 1221
or for purposes of section 1231, and that the term does not include certain claims
or rights, the consideration for which essentially substitutes for ordinary income.
See Commissioner v. Gillette Motor Transport, Inc., 364 U.S. 130, 134-136
(1960), Ct. D. 1853, 1960-2 C.B. 466, 468; Commissioner v. P.G. Lake, Inc., 356
U.S. 260, 265-67 (1958), Ct. D. 1823, 1958-1 C.B. 516, 518-19.

Under this line

of Supreme Court decisions, it is settled that consideration received for the
transfer or termination of a right to receive income for the past or future
performance of services is taxable as ordinary income. See,~, Rothstein v.
Commissioner, 90 T.C. 488, 493-94 (1988).

Wages
Sections 3101 and 3111 impose FICA taxes on "wages," as that term is
defined in section 3121 (a), with respect to "employment," as that term is defined
in section 3121 (b). FICA taxes consist of the Old-Age, Survivors and Disability
Insurance tax (social security tax) and the Hospital Insurance tax (Medicare tax).
These taxes are imposed on both the employer and employee. Sections 3101 (a)
and 3101 (b) impose the employee portions of the social security tax and the
Medicare tax, respectively. Sections 3111 (a) and 3111 (b) impose the employer
portions of the social security tax and the Medicare tax, respectively.
The term "wages" is defined in section 3121(a) for FICA purposes as all
remuneration for employment, with certain specific exceptions. Section 3121 (b)
defines "employment" as any service, of whatever nature, performed by an
employee for the person employing him, with certain specific exceptions.
Section 31.3121 (a)-1 (b) of the Employment Tax Regulations provides that
the term "wages" means all remuneration for employment unless specifically
excepted under section 3121 (a). Section 31.3121 (a)-1 (c) provides that the name
by which the remuneration for employment is designated is immaterial. Section
31.3121 (a)-1 (d) provides that generally the basis upon which the remuneration is
paid is immaterial in determining whether the remuneration is wages. Section

31.3121 (b )-3(b) defines employment as services performed by an employee for
an employer, unless specifically excepted under section 3121 (b).
Section 31.3121(a)-1(i) provides that remuneration, unless specifically
excepted, constitutes wages even though at the time paid the relationship of
employer and employee no longer exists between the person in whose employ
the services were performed and the individual who performed them.
The FUTA taxation provisions are similar to the FICA provisions, except
that only the employer pays the tax imposed under FUTA. See sections 3301
and 3306(b) and the regulations thereunder. Although there are differences in
the statutory exceptions to what constitutes wages and employment, the general
definitions of the terms "wages" and "employment" for FUTA purposes are similar
to the definitions for FICA purposes. See sections 3306(b) and 3306(c).
Section 3402(a), relating to Federal income tax withholding, generally
requires every employer making a payment of wages to deduct and withhold
upon those wages a tax determined in accordance with prescribed tables or
computational procedures. The term "wages" is defined in section 3401 (a) for
Federal income tax withholding purposes as all remuneration for services
performed by an employee for his employer, with certain specific exceptions.
Section 31.3401 (a)-1 (a)(2) provides that the name by which remuneration for
services is designated is immaterial. Section 31.3401 (a)-1 (a)(3) provides that
generally the basis upon which the remuneration is paid is immaterial in
determining whether the remuneration is wages. Unlike the FICA and the FUTA,

the Federal income tax withholding provisions do not include a definition of
employment.
Section 31.3401 (a)-1 (a)(5) provides that remuneration, unless specifically
excepted, constitutes wages even though at the time paid the relationship of
employer and employee no longer exists between the person in whose employ
the services were performed and the individual who performed them.
Revenue Ruling 55-520, 1955-2 C.B. 393, concludes that an amount paid
to an individual as a compromise settlement for the cancellation, before the
normal expiration date, of a two-year employment contract is not wages for FICA
and Federal income tax withholding purposes. The ruling further concludes that
the payment is includible in the employee's gross income for Federal income tax
purposes.
Revenue Ruling 58-301, 1958-1 C.B. 23, concludes that a lump sum
payment received by an employee as consideration for his agreement to cancel
the remaining period of a five-year employment contract during the second year
of the term and to relinquish his contract rights is ordinary income, not capital
gain, and is includible in his gross income in the year of receipt. The ruling
further concludes that the payment is not subject to FICA and Federal income tax
withholding.
Revenue Ruling 74-252,1974-1 C.B. 287, concludes that payments made
by an employer to an employee, following involuntary termination, under the
provisions of a three-year contract are wages for FICA, FUTA, and Federal
income tax withholding purposes. Under the terms of the contract, the employer

could terminate the relationship at any time, provided the employee was paid an
amount equal to an additional six months salary. The ruling distinguishes Rev.
Rul. 58-301 on the basis that these payments are in the nature of dismissal
payments provided for under the terms of the contract, rather than as
consideration for the relinquishment of interests the employee had in the
employment contract.
Revenue Ruling 75-44, 1975-1 C.B. 15, involves an employer's payment
to a railroad employee as consideration for the employee's agreement to perform
a different type of work and refrain from asserting his employment rights acquired
pursuant to his past service under a general contract of employment. The ruling
concludes that the payment received by the employee is ordinary income in the
taxable year of receipt and is "compensation" for purposes of the Railroad
Retirement Tax Act (RRTA) and "wages" for purposes of Federal income tax
withholding. This ruling distinguishes Rev. Rul. 58-301 on the basis that in Rev.
Rul. 58-301 the lump sum payment was primarily in consideration of the
cancellation of the employee's original contract rights rather than primarily in
consideration of the past performance of services through which the relinquished
employment rights were acquired.
ANALYSIS
The Code and regulations provide that amounts an employer pays an
employee as remuneration for employment are wages, unless a specific
exception applies. Sections 3121 (a), 3306(b), and 3401 (a) and sections
31.3121 (a)-1 (b), 31.3306(b}-1 (b), and 31.3401 (a)-1 (a)(1) of the regulations. The

regulations also provide that the name by which the remuneration is designated
is immaterial. Sections 31.3121 (a)-1 (c), 31.3306(b)-1 (c), and 31.3401 (a)-1 (a)(2).
Furthermore, the remuneration is wages even though at the time paid the
relationship of employer and employee no longer exists. Sections 31.3121(a)1(i), 31.3306(b)-1 (i), and 31.3401 (a)-1 (a)(5).
The Code and the regulations also provide that any service of whatever
nature performed by an employee for the person employing him is employment,
unless a specific exemption applies. Sections 3121 (b) and 3306(c) and sections
31.3121 (b)-3(b) and 31.3306(c)-2(b).
Employment encompasses the establishment, maintenance, furtherance,
alteration, or cancellation of the employer-employee relationship or any of the
terms and conditions thereof. If the employee provides clear, separate, and
adequate consideration for the employer's payment that is not dependent upon
the employer-employee relationship and its component terms and conditions, the
payment is not wages for purposes of FICA, FUTA, or Federal income tax
withholding.
Under the facts presented in this ruling, the employee receives the
payment as consideration for canceling the remaining period of his employment
contract and relinquishing his contract rights. As such, the payment is part of the
compensation the employer pays as remuneration for employment. The
employee does not provide clear, separate, and adequate consideration for the
employer's payment that is not dependent upon the employer-employee
relationship and its component terms and conditions. Thus, the payment

provided by the employer to the employee is wages for purposes of FICA, FUTA,
and Federal income tax withholding. This conclusion applies regardless of the
name by which the remuneration is designated or whether the employment
relationship still exists at the time the payment is made.
With respect to the application of FICA and Federal income tax
withholding, Rev. Rul. 55-520 and Rev. Rul. 58-301 erred in their analysis by
failing to apply the Code and regulations appropriately to the question of whether
the payments made in cancellation of the employment contract were wages.
To qualify as capital gain, eligible for the reduced rates in section 1(h), a
payment must be received in connection with a "sale or exchange" of "property,"
as those terms are used in sections 1221,1222, and 1231. Under Gillette Motor,
P.G. Lake, and the settled line of authority applying the Supreme Court's
reasoning to compensation-related rights, consideration received for the transfer
or termination of a right to receive income for the past or future performance of
services is a substitute for ordinary income, taxable as such. The payment
received by the employee in the present situation is a payment of this type, and
for capital gains purposes is not a payment for property. It is therefore taxable to
the employee as ordinary income.
With respect to the ordinary or capital character of a payment, the
payments in Rev. Rul. 55-520, Rev. Rul. 58-301, Rev. Rul. 74-252, and Rev. Rul.
75-44 are ordinary income; in particular, the specific holdings to this effect in
Rev. Rul. 58-301 and Rev. Rul. 75-44 remain correct.

Accordingly, Rev. Rul. 55-520 and Rev. Rul. 58-301 are modified and
superseded. In addition, Rev. Rul. 74-252 and Rev. Rul. 75-44 are modified to
the extent their holdings regarding FICA, FUTA, RRTA, and Federal income tax
withholding rely on distinguishing Rev. Rul. 58-301.
HOLDING
An amount paid to an emplo yee as consideration for cancellation of an
employment contract and relinquishment of contract rights is ordinary income,
and wages for purposes of FICA, FUTA, and Federal income tax withholding.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 55-520 and Rev. Rul. 58-301 are modified and superseded.
Rev. Rul. 74-252 and Rev. Rul. 75-44 are modified.
APPLICATION
Under the authority of section 7805(b), the Service will not apply
the position adopted in this ruling to any payment that an employer made
to an empbyee or former employee before January 12, 2005, provided
that the payment is made under facts and circumstances that are
substantially the same as in Rev. Rul. 55-520 or Rev. Rul. 58-301.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Michael Swim and Elliot
Rogers of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt &
Government Entities). For further information regarding this revenue ruling,
contact Mr. Rogers on (202) 622-6040 (not a toll-free call).

js-2115: Treasury NtlWrbt5 Lea:~s of Mexican Narcotics Cartel

Page 1 of2

:_<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe@ Acrobat@ Reader@.

November 24, 2004
js-2115
Treasury Names Leaders of Mexican Narcotics Cartel
The Treasury Department's Office of Foreign Assets Control (OFAC) today took
another step to stifle the financial networks of drug traffickers by adding the names
of six individuals to its list of persons designated pursuant to the Foreign Narcotics
Kingpin Designation Act (Kingpin Act).
This action targets individuals who represent the top hierarchy of the Arellano Felix
Organization (AFO), which was named as a drug kingpin by President Bush on
June 1, 2004 pursuant to the Kingpin Act.
"The AFO is considered one of the strongest and most violent drug trafficking
organizations operating in the Americas. Today's action underlines the sustained
effort by the U.S. Government to tackle the illicit proceeds harvested by drug
traffickers," said OFAC Director Robert Werner.
The Southern District of California unsealed an indictment in July 2003 that
included these six individuals on charges of conducting the affairs of an illegal
enterprise through a pattern of racketeering activity (RICO), conspiracy to import
and distribute cocaine and marijuana, as well as money laundering.
The six AFO leaders designated by OFAC are Jesus Abraham Labra Aviles,
Gilberto Higuera Guerrero, Efrain Perez Pasuengo, Jorge Aureliano Felix,
Rigoberto Yanez Guerrero and Armando Martinez Duarte. All six individuals are
from Mexico. Today's action prohibits all financial and commercial transactions
between the designated persons and entities and any U.S. person and freezes any
assets found in the United States.
OFAC has also added five addresses in the Mexican state of Baja California that
are controlled by Juan Jose Esparragoza Moreno, named a drug kingpin by the
President on May 29, 2003. Four of the addresses are located in the city of Tijuana,
Mexico and the other is a rural beachfront property along the coast of Baja
California. Juan Jose Esparragoza Moreno was also one of several leaders of
Mexico's first organized drug trafficking group, the Guadalajara Cartel, in the late
1970s and mid-1980s and was a principal member of the Carrillo Fuentes
Organization (CFO) or Juarez Cartel in the 1990s. The CFO was named a drug
kingpin by the President on June 1, 2004 pursuant to the Kingpin Act.
Today's action against AFO leaders and CFO-associated drug kingpin Juan Jose
Esparragoza Moreno is part of the U.S. government's continued efforts to fight both
notorious Mexican drug trafficking organizations.
The six new names bring the total number of Tier I and Tier II designees under the
Kingpin Act to 121: 48 drug kingpins worldwide, 15 companies in Mexico, Peru and
the Caribbean and 58 other individuals in MexIco, Colombia and the Caribbean.
This action is part of the ongoing interagency effort of the Treasury, Justice, State,
Defense and Homeland Security Departments, the Central Intelligence Agency, the
Federal Bureau of Investigation and the Drug Enforcement Administration to carry
out the Kingpin Act, which was signed into law on December 3, 1999, and which
applies economic sanctions against narcotics traffickers on a worldwide basIs. The
Kingpin Act was modeled after Executive Order 12978 which applies economic
sanctions against narcotics traffickers centered in Colombia, and which is also

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administered by OFAC.
For a complete list of the entities designated today, please visit:

www .treas.gov/offices/enforcement/ofac/actions/20041124. shtml
-30-

REPORTS
•

Diagram of the Arellano Felix Organization (AFO)

ttp:llwww.treas.1?;ov/press/releases/js2115.htm

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Foreign Narcotics Kingpin
Designation Act
Tier II Individuals

Department of the Treasury
Office of Foreign Assets Control

ARELLANO FELIX ORGANIZATION
Major Lieutenants

Narne In red text denotes
SDNTK previously designated

Responsible for Security---If

---FinanCial Manager

1"1

Jesus Abraham LABRA AVILES
"Chuy Labra"
1"1
In Mexican Custody

March 2000

Security Operations
Acquired Armored Vehicles
and Weapons
Collected Taxes

Directed Counterintelligence
Assassinations and
Kidnappings

Jorge Aureliano Felix
~

In Mexican Custody

June 2004
1"1

In Mexican Custody
June 2004

~
F~l

Dru~o:r:~~ker - - - - - 4

Rigoberto Yanez Guerrero
~

In Mexican Custody
March 2001

Named a Kingpin 2004

FranCISCO Javier Arellano Felix
Named a Kingpin 2004

1"1

J!.

All 6 individuals have been indicted
by the Southern District of California
Indictment # 97-(R-2520K

In Mexican Custody
April 2002

: Economic Freedom and Georgta·s Rose Revolution<Ii> John B. Taylor Under Sec... Page 1 of 4

:PRESSROOM

FROM THE OFFICE OF PUBLIC AFFAIRS

November 22, 2004
js-2116
Economic Freedom and Georgia's Rose Revolution
John B. Taylor Under Secretary for International Affairs
United States Treasury
Remarks at the Caucasus Business School
Tbilisi, Georgia

It's a pleasure to be back in Georgia. I thank you for this opportunity to speak at the
Caucasus Business School and to discuss economic issues with the future
business leaders of Georgia.
When I last visited Georgia in July 2002, there was real concern about the future of
the country and the economy. Now, at the one year anniversary of the Rose
Revolution, Georgia is a very different country. The Rose Revolution itself stands
as a tribute to the commitment of the Georgian people to peaceful democratic
change. Your actions during that period were an inspiration.
My focus on this visit is on the economic change that has emerged in the year since
the Rose Revolution. I have had the opportunity to meet the economic team of the
Saakashvili government, and I am continuing this engagement during my visit to
Tbilisi. We are very impressed both by the economic leaders and by the agenda
they are pursuing. I believe that the economic reform agenda of the Saakashvili
government represents a fundamentally new direction for the country. The reform
agenda will increase and sustain economic growth and thereby raise living
standards and reduce poverty significantly. I believe the Rose Revolution was not
only a political revolution, it was also an economic revolution.
Today I would like to explain why we are so positive about this economic reform
agenda and describe a novel way that we in the United States can support it.
The Economic Reform Agenda

I think it is useful to think about the economic agenda in four inter-related parts:
improving government finances; cutting tax rates; reducing the size of government;
and fighting corruption.
Improving Government Finances

One of the Saakashvili government's first and most impressive actions has been to
improve government finances and arrest the deterioration of basic government
services. The government of Georgia hadn't been paying its bills or keeping its
commitments to government workers and pensioners. Public infrastructure had
been deteriorating. According to a 2002 business climate survey, Georgian
businesses lost an average of 110 business days a year because of infrastructure
failures, largely in the energy sector.
Much of the problem involved an unwillingness to crack down on tax evasion.
Unfair application of the tax laws meant well-connected individuals and businesses
avoided taxes, often by bribing tax inspectors. Tax collections were very low.

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By taking action on tax evasion, the government has significantly improved tax
collection. In fact, tax revenues have already increased by 4 percent of GOP. As a
result, this year the government has kept its budget commitments for the first time
since 1997. It has cut the stock of budget arrears in half and is on track to eliminate
them completely by the end of 2005. Moreover, it has begun to rebuild the
country's infrastructure and renewed investments in health and education.
We saw that similar improvements in public finances in Russia in 1999-2000 led to
an immediate boost in confidence which supported increased investment and
growth. As wage and pension arrears were cleared, people had the income to
increase consumption. Such economic benefits from higher confidence can be
expected in Georgia.
Cutting Tax Rates
A second part of the reform agenda is tax reform. According to a 2003 business
survey, Georgia businesses cited high tax rates and the unpredictability of the tax
system as the primary obstacle to doing business. To reduce these obstacles the
government is now pushing forward an impressive tax reform package. The reform
would eliminate over 2/3 of existing taxes and significantly lower remaining tax
rates. It would include a 12 percent flat income tax. Through greater simplification
and uniformity. these changes will lower administration burdens and reduce
opportunities for corruption. This gives domestic businesses greater incentives to
operate openly in the formal sector and make investments. It will also lower
barriers to greater foreign direct investment.
The link between lower taxes and higher economic growth is well established. In
Russia and Ukraine, the reduction of personal income and corporate tax rates
boosted formal business activity, increased compliance, and spurred investment.
Another example, frequently cited in Europe, is Ireland where the government
sharply lowered corporate and personal income tax rates. Labor force participation
increased by an amazing 40 per cent in the 1990s as workers were able to take
home a greater share of their pay. Foreign direct investment soared. In the central
European economies, corporate tax reductions have also supported sizeable
foreign investment flows.
Reducing the Size of Government
A third area of reform is the reduction of the size and scope of government. This
makes a great deal of sense because by almost any comparison, the government
sector is too big and the private sector too small in Georgia. The private sector
accounts for only 40 percent of total employment in Georgia compared to 75
percent in Armenia and 80 percent in Estonia.
To begin to rectify the situation, the government has already reduced government
employment by an estimated 50,000. The Economy Minister plans to eliminate his
own ministry by 2007. Such actions will also allow pay increases for remaining civil
servants, reducing the incentive for corruption.
At the same time, Georgia still has too many state-owned enterprises tying up
valuable human capital. The Economy Ministry plans to privatize 1,800 state
enterprises employing 180,000 people by 2007. Such privatizations further support
a market-based allocation of capital and job creation in the economy.
International comparisons show that reducing the size of government has dramatic
positive effects. Considering Ireland again, a reduction in the size of government
was a fundamental part of the Irish success story. The government reduced
expenditures implementing a hiring freeze, accelerating retirements, cutting
subsidies to state enterprises, and imposing a 10 percent across the board cut in all
department budgets. As a result government expenditure as a share of GOP fell by
20 percent by the end of the 1980s.
In transition economies like Georgia, the response to privatization in terms of higher

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growth can be quick. In Hungary, for example, the privatizations of the early 1990s
helped increase growth sharply by the mid 1990s. In Armenia, a renewal of the
privatization process in 2001-2002 was followed by annual economic growth rate
above 13 percent in 2003-2004.
Fighting Corruption
Now let me consider the fourth area: fighting corruption. Georgia ranked 133 out of
145 in Transparency International's Corruption Perceptions Index. That President
Saakashvili was elected on a strong anti-corruption platform has given his
government the opportunity to address this serious problem.
In fact, fighting corruption is fundamental to the whole economic reform agenda.
Public finances can't be improved without fighting corruption among tax inspectors.
A simpler, low rate tax code uniformly applied provides fewer incentives to evade.
Fewer bureaucrats mean fewer bribes. Private ownership of business means
success is determined by the company's bottom line and not its political
connections. Finally, battling corruption requires accountability of the government
to the people. The new government demonstrated its commitment to this principle
by working hard to ensure free and fair elections following the Rose Revolution and
not simply accepting the immediate outcome of the Rose Revolution as the final say
of the people.
United States Support through the Millennium Challenge Account
These recent developments in Georgia show that good economic policy reforms
don't just "happen". You need to understand the problem you are trying to solve,
come up with a proposed solution, and then get the solution implemented. You
need political will perhaps most of all. I think this is what the government has been
doing since the Rose Revolution and it is clearly leading to good results.
The challenge for the international community, which has provided over $3.4 billion
in assistance to Georgia since its independence, is how to support successful
cases like Georgia after the Rose Revolution. To this end, I believe the Millennium
Challenge Account (MCA) represents a revolution of sorts in the way we think about
development assistance.
The MCA was designed to address impediments to economic growth in poor
countries by rewarding governments implementing policies to remove those
impediments. These impediments can be grouped into three areas:
1.

Poor governance, including the lack of rule of law or enforceable contracts
and the prevalence of corruption, raises the cost of doing business and
creates disincentives for the private sector to create high-productivity jobs.
Inadequate investment in the development of human capital. Workers
without adequate education do not build the skills to take on highproductivity jobs or adopt new technologies to increase the productivity of
the jobs they do have. Better health care reduces absenteeism from work,
which improves productivity.
Restrictions on markets prevent labor and capital from flowing to their most
productive use and they restrict consumers' access to low cost goods and
services. Lack of openness to international trade, monopolistic state
marketing boards, and excessive regulations and red tape are all examples
of restrictions that create disincentives for the private sector to invest and
innovate so as to boost productivity.

Hence, the main principle underlying the MCA: focus economic development
assistance on nations that (1) govern justly, (2) invest in people, and (3) encourage
economic freedom. Policies promoting these goals underpin successful growth,
catalyze private investment, and increase the effectiveness of aid. We have
developed 16 indicators that are used to assess countries' performance against
these three goals and then the Board of the Millennium Challenge Corporation
(MCC) selects countries for MCA-eligibility after analyzing their performance.

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In Georgia's case. the country was selected as eligible to receive MCA assistance
in 2004 having surpassed the median in at least half of the indicators in the
"investing in people" and "economic freedom" categories. In the case of the "ruling
justly" category, the MCC Board felt the "Corruption" indicator, which showed
Georgia performing poorly, did not capture the substantial progress made by the
newly elected government. The Board cited as evidence: the creation of an anticorruption bureau; a new bureau to investigate and prosecute corruption cases; a
single treasury account for all government revenue to ensure transparency and
accountability; and the revamping of procurement legislation to ensure an open and
competitive process. I believe the steady progress made by the government since
then shows that the MCC board decision was the correct one.
The MCA indicators are a useful guide for areas of improvement. For Georgia, the
indicators show relatively poor performance on the health and primary education
expenditure indicators in the "investing in people" category. On health
expenditures, Georgia was in the 8th percentile relative to the 74 other countries
used to assess performance. On primary education expenditures, Georgia was in
the 7th percentile. Partially in response to the poor outcomes identified by the MCA
indicators, the government has made increasing social expenditures a priority. In
the case of health, expenditures are expected to increase by almost three times to
1.3 percent of GOP - the exact kind of response that MCA was designed to elicit.
Conclusion
From my discussions with President Saakashvili's economic team, it is clear that
the government of Georgia has a vision of economic freedom that matches their
commitment to democracy. They are endeavoring to implement that vision through
a bold economic reform agenda of improved government finances, low marginal tax
rates, a dramatic reduction in the size of government, and vigorous anti-corruption
efforts.
Economic reforms like these are never easy to implement, and the benefits are not
always are immediate. But as I have indicated in these remarks such a reform
agenda is the proven way to raise incomes and reduce poverty. It is a reform
agenda that warrants our support, and one which we hope to see replicated in
many other parts of the world.

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JS-2117: Remarks ofMuk J.

Witij;hali~ky Assistant

Secretary for Economic Policy...

Page 1 of9

FROM THE OFFICE OF PUBLIC AFFAIRS
November 8, 2004
JS-2117

Remarks of Mark J. Warshawsky
Assistant Secretary for Economic Policy
Keynote Speech for the 14th Annual Investment ActuarySymposium
Boston, Massachusetts
It is a great pleasure to be here this morning and to address a group that shares an
interest in some of the primary issues that occupy my time in Washington. As
Assistant Secretary for Economic Policy, one of my key responsibilities is to advise
the Secretary of the Treasury on appropriate policies for matters of both
macroeconomic and microeconomic significance. Today, I'd like provide you with a
macroeconomic overview with a special focus on interest rates and also tell you a
little about what we have been doing in several areas foremost on our agenda:
Social Security, the defined benefit pension system, and our study of the federal
terror risk insurance program. Finally, I will conclude with a brief discussion of an
insurance product innovation of my own - the life care annuity.

MACROECONOMIC OVERVIEW
Overall, the performance of the economy has been impressive, particularly given
the unusual succession of negative events it has had to withstand over the past
several years. The bursting of the NASDAQ bubble in early 2000 was the
beginning of significant weakness that took hold that year. Real GOP declined in
the third quarter of 2000 and industrial production began to fall. By March 2001, we
had officially entered recession and its effects were compounded by the terrorist
attacks of September 11. The economy appeared to be on a recovery path in early
2002, when growing evidence of widespread corporate malfeasance dating back to
the late 1990s once again undermined business activity. Slow growth abroad
provided an additional headwind and the war with Iraq further raised uncertainty in
the early part of 2003.
Fortunately, the combination of rapid monetary policy accommodation and perhaps
the most well-timed fiscal policy response in our history resulted in the smallest
GOP loss of any recession in the post-World War II era. Additional fiscal policy
measures - especially the passage of the President's Jobs and Growth Plan in
spring of last year - boosted household incomes to support consumption, offered
tax relief on dividends and capital gains for stockholders, and provided large and
small businesses with incentives to undertake investments in equipment.
The response to the Jobs and Growth Plan - also known as JGTRRA in
Washington parlance, standing for the "Jobs and Growth Tax Relief Reconciliation
Act" - was immediate. Real GOP surged at a 7.4 percent annual rate in the third
quarter of 2003, when the full effect of JGTRRA kicked in. Real growth remained
strong in the ensuing quarters and over the past year and a half has risen at a 4.5
percent annual rate - a healthy performance by any standard. JGTRRA also
marked the beginning of solid job creation. Payroll employment began to rise in
September 2003 and by this October we had recorded 14 straight monthly
increases and a total of 2.4 million new jobs. The unemployment rate stands at 5.5
percent - below the average for any of the previous three decades.
The composition of economic growth has transitioned much as we had hoped. The
consumer supported the economy throughout the recession, responding strongly to
generous financing incentives offered by the auto industry. More recently, business
investment has been the key driver. Real investment in equipment and software
has grown at a 13.5 percent annual rate over the last six quarters, supported by
rising profits, low interest rates, and declining risk spreads. Investment in structures
is also making a comeback, rising in four of the last six quarters.

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Along with investment in capital goods, residential investment also continues to be
remarkably strong. Demand has held up very well, as 30-year mortgage interest
rates have remained below 6 percent, generating record-high home sales so far in
2004.
While low longer-term rates evolved naturally as the economy weakened in 2000
and then were assisted by the Federal Reserve's monetary policy accommodation
at the beginning of 2001, continuing low rates are in large measure the response to
another hallmark of the current economy: the relative absence of inflation. In the
third quarter, prices for personal consumption expenditures excluding food and
energy were up at only a 0.7 percent annual rate - the smallest increase in more
than 40 years. Low inflation is consistent with the phenomenal growth of
productivity that we have witnessed throughout the current business cycle. Since
the end of 2000 - a period that includes both recession and recovery - nonfarm
productivity has risen at a 3.9 percent annual rate, much faster than the alreadystrong 2.6 percent pace averaged from 1995 through 2000.
The economy nonetheless faces some headwinds, particularly from oil prices and
the trade deficit. Although the oil intensity of U.S. GDP has fallen by nearly half
since the first oil shock in the early 1970s, the price of oil remains a key variable in
the macro outlook. The Administration authorized the release of oil from the
Strategic Petroleum Reserve in response to the temporary reduction in oil
production from the Gulf of Mexico resulting from the recent run of hurricanes. This
has helped contain prices and illustrated the long-held Administration stance that
the SPR should be used only in the case of a true supply disruption. At the same
time, the still-high price of oil also illustrates the importance for our economic
security of following through on the Administration's proposals to enhance domestic
energy supplies and to adopt technologies to use energy more efficiently.
The U.S. deficit on trade has also exerted a restraint on growth. Over the past six
quarters, the net export deficit has reduced real GDP growth by an average annual
rate of 0.5 percentage point, as imports have been rising faster than exports. The
relatively stronger performance of the U.S. economy than of its major trading
partners continues to be a factor in the widening trade gap.
Despite these difficulties, it is clear that the economy is now enjoying above-trend,
noninflationary growth because of the policies of the past three and a half years.
These policies have helped assure strong growth in the future by improving the
after-tax rewards to work, increasing the returns to innovation and risk taking, and
reducing the cost of equity capital through lower taxes on dividends and capital
gains. A tax system that supports greater risk-taking, saving and investment, and
innovation means greater productivity and capital accumulation and ultimately a
higher standard of living.
Pro-growth policies have yielded a fiscal dividend. Federal revenues have
rebounded and growth of outlays has slowed. As a result, the federal deficit for FY
2004 came in at $413 billion, equivalent to about 3.6 percent of GDP, and much
below the $521 billion expected in the budget forecast made earlier this year.
Overall, the current deficit - though unwelcome - appears manageable compared
to deficits in the 4.5 to 6 percent of GDP range at various times in the 1980s and
1990s. With continued economic growth and job creation, along with spending
restraint, the President has a plan to cut the deficit in half over the next five years to
less than 2 percent of GDP.
The current federal deficit is being interpreted by financial markets, correctly in my
view, as a necessary response to a serious but temporary economic situation.
Thus, prophecies that the swing from surplus to deficit would result in sharply rising
interest rates have failed to materialize. For those who subscribe to the "twindeficit" theory - that the federal deficit is responsible for the current account deficit
which will ultimately lead to high interest rates - there is also an absence of
substantiating evidence. While foreign capital flows are volatile from month to
month, the reality is that they have been more than sufficient to finance the current
trade deficit without higher interest rates.
Financial markets are reflecting the fundamentals of the U.S. economy: strong real
GDP growth, high productivity, low inflation, and a friendly tax environment. As the
economy has strengthened, the Federal Reserve has begun the process of
removing monetary policy accommodation. Starting at mid-year, short term interest
rates have risen about 75 basis points, coming off near 50-year lows. But longer-

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term yields have actually fallen about 50 basis points since short rates started
rising. The spread between rates on 10 year notes and 90 day bills was about 330
basis points in late June; now it is roughly 200 basis points. Across business
cycles, that spread has averaged about 140 basis points since 1959.
Low interest rates have overall been very positive for the economy but they also
represent a challenge for defined-benefit pension funding, because they suggest
lower rates of returns on bonds and less discounting of future cash flows. This
increases plan under-funding and results in a requirement for increased employer
pension contributions; such pro-cyclical funding may have in part been responsible
for recent business caution in investment and hiring actions. It is therefore
extremely important that the issue of pension funding be addressed in a
comprehensive fashion. A bit later in my remarks, I will discuss the Bush
Administration's approach to these issues.

SOCIAL SECURITY REFORM
President Bush has said that "Social Security is one of the greatest achievements
of the American government, and one of the deepest commitments to the American
people." The President supports Social Security reform that increases the power of
the individual, does not increase the tax burden, and provides economic opportunity
for more Americans. Today I want to discuss why reform is needed, why delay is
costly, and the important role for personal retirement accounts in that reform.
At the end of 2003, the Social Security program paid about $470 billion in benefits
to about 47 million beneficiaries, making it the largest federal transfer program in
the United States.
The Social Security system began in the aftermath of the Great Depression with the
passage of the 1935 Social Security Act that established the "Old-Age" portion of
the program. Initially, the program was intended to provide cash benefits to
persons age 65 and over who had made payroll contributions to the system with
benefits based on the value of those contributions. Contributions would begin in
1937 and benefit payments would start about five years later. An accumulating
trust fund would help pay benefits as the number of beneficiaries increased. Even
before the first benefit was paid, however, benefit provisions were expanded in
1939 to include spouses and survivors insurance, the benefit formula was made
more generous, and scheduled tax increases were delayed. Disability benefits
were added in 1956. Before 1972, benefit increases were made on an ad hoc basis
and four double-digit increases occurred between 1968 and 1972 (20 percent in
1972). Though an accumulating Trust Fund was envisioned, the system has
operated primarily on a pay-as-you-go basis with a modest Trust Fund having
developed in recent years. Therefore, tax increases have been steadily
implemented to ensure the continuation of annual benefit payments. But, as I
discuss below, the increases fell well short of what would be needed to pay lifetime
benefits to a growing and longer-living beneficiary population.
In 1950, there were 16 workers to support everyone beneficiary of Social Security.
Today, there are only 3.3 workers supporting every Social Security beneficiary. By
the time our youngest workers and others now entering the workforce turn 65, there
will only be two workers supporting each beneficiary.
Moreover, in 1950, men and women age 65 could expect to live, on average, 12.8
and 15.1 more years, respectively. In the year 2000, life expectancy at age 65 had
increased to 15.7 for men and to 19 for women. By 2030, these conditional life
expectancies are projected to increase to 17.7 for men and 20.6 for women.
Longer lives are clearly a good thing but they do mean a longer period over which
Social Security (and Medicare) benefits must be paid.
As a result of these demographic changes and the generosity of benefit payments
to prior generations, the current system will not be able to afford to pay the benefits
scheduled for our children and grandchildren without enormous payroll tax
increases. The Social Security payroll tax, which was 3 percent in 1950, is now
12.4 percent. The Social Security actuaries calculate that, if the system were to
continue to operate on a pay-as-you-go basis and pay currently-scheduled benefits,
the payroll tax would have to rise gradually, but steadily, to more than 19 percent
before the end of the next 75 years.

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But financial pressure on the federal budget (hence on taxpayers) begins much
earlier. Tax revenue (payroll taxes plus benefit taxes) is expected to fall short of
benefit payments less than 15 years from now (in 2018). Under the current Social
Security financing structure, this growing annual revenue gap will be made up from
federal general revenues for another 24 years (until 2042). After 2042 the
authorization to fill the gap from general revenues ends (the Trust Fund is
exhausted) and, in the absence of legislation, full benefit payments cannot be made
after that time.
The important point is that the Social Security system is significantly under funded future scheduled revenue will be inadequate to fully pay scheduled benefits. The
2004 Report of the Social Security Trustees estimates that, over the next 75 years,
the present value of Social Security's deficit (i.e., the unfunded obligation) is about
$3.7 trillion. For perspective, this deficit could be eliminated if payroll taxes were
raised immediately by 1.9 percentage points (to 14.3 percent) (and a large Trust
Fund would be accumulated) or if all current and future benefits were reduced by 13
percent.
Yet, 75 years, though a seemingly long time, does not capture fully the financial
status of the Social Security program. In fact, no fixed finite period will completely
embody the financial status of the program because people pay into the system
when they are young and receive benefits when they are older and an arbitrary
cutoff will miss some taxes and, especially, benefits to be paid. So estimates even
over the long period of 75 years include a lot of payroll revenue from future workers
who will not begin to receive benefits until after the 75-year horizon. The omission
of future benefits is especially critical in an underfunded program facing the
retirement of the baby boom generation. In order to get a complete picture of
Social Security's permanent financial problem, the time horizon for calculating
income and outgo must be extended to the indefinite future. I will note for this
audience that Robert Myers, a former chief actuary of Social Security, in his classic
book on the program stated that the infinite horizon was the appropriate period of
analysis for the program. I am proud that we have been able to add such a
measure to the Trustees Report during my tenure at Treasury. Such a calculation
is provided in the 2004 Trustees Report which estimates that, for the entire past
and future of the program, the present value of scheduled benefits exceeds the
present value of scheduled tax income by $10.4 trillion. This is the financing gap
that program reforms must ultimately close. To put this in perspective, eliminating
the permanent deficit would require an immediate and permanent increase in the
payroll tax rate of 3.5 percentage points (to 15.9 percent) (and the accumulation of
a massive Trust Fund). Alternatively, all current and future benefits would have to
be reduced immediately by 22 percent.
These results make clear that the Social Security system is not financially viable
over the long term - it must be fixed - so doing nothing is not an option. How to
close the permanent financing gap raises difficult questions over how the burden
should be shared across generations. In this context, it is important to recognize
that the large unfunded obligations In the system ($10.4 trillion) are in large part the
consequence of the past system generosity. From the beginning, the Social
Security program made benefit promises to generations that far exceeded the taxes
they would pay over their lifetimes. Of course, past generations are past - they
cannot contribute to reducing the unfunded obligations. As a consequence, closing
the financing gap falls to future generations and this leads to the obvious but very
important point that the longer reform is delayed the greater the number of future
generations that also become past generations that cannot contribute - that is,
delay means a greater burden on current and future generations.
Fortunately, this situation is fixable. The President has issued guiding principles for
reforming Social Security. One very important principle is that seniors at or near
retirement should be protected from benefit cuts, and that payroll taxes should not
be increased.
Another principle is that personal retirement accounts (PRAs) should be made
available for younger workers to build a nest egg for retirement that they own and
control, and which they can pass on to their children and grandchildren.
Additionally, we must pursue the goal of a permanently sustainable system,
eschewing reforms that treat only symptoms and halfway measures. As I noted
above, halfway reform simply means a greater burden on future generations.

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I would like to focus on the advantages of PRAs. PRAs provide individual control,
ownership. and are important vehicles for pre-funding more of our Social Security
benefits without encouraging more government spending. PRAs also offer
individuals the opportunity to receive the benefits of investing in private-sector
markets. Individual control and ownership means that people would be free to pass
the value of accounts to their heirs.
Perhaps most importantly, the retirement security of our current young and future
workers depends on PRAs. They will allow individuals to save now to help fund
their retirement incomes. In principle. that could be done with reforms that save tax
revenues in the Social Security Trust Fund. But such "saving" would almost
certainly be undone by political pressures to increase government spending and
hence produce larger deficits outside of Social Security. The only way to truly save
for our retirement and give our children and grandchildren a fair deal is with
personal accounts.
The appeal that PRAs have for individuals also serves as an impetus for Social
Security reform. Because most people like the idea of ownership and control over
their savings accounts, as voters they are more likely to support a reform of this
type.
Setting up a new system of personal retirement accounts will require careful
planning and the policy options that are chosen could have a significant affect on
administrative costs. However, the challenges of reform are outweighed by the
need for reform, and the potential benefits are great.

DEFINED BENEFIT PENSION REFORM
I will next discuss private sector defined benefit pension issues, why reform is
needed, and provide an overview of what we have identified as important principles
for this reform.
Before I discuss these proposals, let me briefly give you some background on the
state of the regulatory structure of the defined benefit system.
Defined benefit plan sponsors today are subject to the "ERISA" funding
requirements. Under current ERISA funding rules, adequate funding is defined in
terms of the actuarial liability based on a specific actuarial funding method. An
exception to this general rule occurs if the market value of pension fund assets is
less than 90 percent of the current liability. Plans whose funding falls below this
threshold are subject to the Deficit Reduction Contribution (ORC) rules which
increase required annual contributions.
In addition to providing funding rules, ERISA created the Pension Benefit Guaranty
Corporation (PBGC). The PBGC collects insurance premiums from employers
that sponsor defined benefit pension plans and it pays monthly retirement benefits
to participants of failed plans. Currently, PBGC insures the pensions of 44 million
workers and retirees and pays benefits to over 930,000 people from failed plans.
PBGC's financial health suggests that we need to be concerned about the current
set of funding rules for plan sponsors, the PBGC premium structure, and the longterm solvency of both PBGC and the defined benefit system.
The PBGC's single employer plan program ended 2003 with a record deficit of
$11.2 billion. This deficit is the result of two consecutive years of staggering net
losses. While I can't yet discuss 2004 results, it is fair to say that it is likely that the
deficit will be higher.
The PBGC deficit will be increasing significantly for this fiscal year as a result of
problems with airline company pensions. While the PBGC does have sufficient
resources to pay benefits for a number of years, this Administration recognizes we
must act now to ensure the longer-term solvency of the pension insurance program.
As I mentioned above, the ERISA funding requirements include a deficit reduction
contribution or ORC. The role of the ORC is to act as a minimum threshold for plan
funding. Plan funding experience prior to the introduction of the ORC showed that
basic system was not effectively leading to funded pension plans. The ORC is a

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backstop system. Plans that are persistently under funded based on the current
liability measure employed by the ORC must make mandatory catch-up
contributions. In particular, firms that fall into this category must make up the
amount of the obligation that is unfunded over three to seven years
Thus, the current ERISA system is a balance between a system that has proven to
ineffective in inducing firms to fund their pensions because it is effectively riddled
with loopholes and a minimum funding backstop which causes contributions of
under funded plans to be excessively volatile from year to year. This is certainly not
a healthy situation.
Add to this mix a pension benefit insurance system that does not adequately reflect
risk in setting premiums and you have a recipe for a significant long-term problem.
A properly designed Insurance system has various mechanisms for encouraging
responsible behavior - dealing with moral hazard - that will lessen the likelihood of
incurring a loss and discouraging risky behavior that heightens the prospects of
claims. However, the current pension insurance system can be gamed. A weak
company will have incentives to make generous pension promises rather than
increase wages. Employees may go along because of the federal guarantee. If the
company recovers, it may be able to afford the Increased benefits. If not, the costs
of the increased benefits are shifted to the insurance fund. Similarly, a company
may increase asset risk when it is under funded to try to make up the gap, with all
the upside gain benefiting shareholders and the downside risk being shifted to other
premium payers.
Finally, it is important to note that pension practitioners and CFOs have been
preaching for years that limits on maximum deductible contributions are requiring
sponsors to manage their funds within a narrow range and that raising the limits on
deductible contributions would allow sponsors to build larger surpluses to provide a
better cushion for bad times.
Both the current funding rules and pension insurance program lack basic checks
and balances. There is too little opportunity for plan sponsors to act responsibly
and too little consequence when plan sponsors act irresponsibly.
The goals of pension reform are twofold -- corporate responsibility and retirement
security. Simply put, companies should be held accountable to make good on the
pension promises they have made to their workers and retirees. The
consequences of not honoring these commitments are unacceptable--the
retirement security of millions of current and future retirees is put at risk.
Before discussing comprehensive reform, I would like to briefly discuss one
important aspect of the proposals that the Administration had already put forward in
July of 2003.
As part of the Administration's proposal to improve the accuracy and transparency
of pension information we would have required that pension liabilities be measured
more accurately. Accurate measurement helps ensure that pension plans are
adequately funded to protect workers' and retirees' benefits and also that minimum
funding rules do not impose unnecessary financial burdens on plan sponsors.
Liability estimates that are too low will lead to plan under funding, 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. We therefore proposed that
a corporate bond yield curve be used to measure pension liabilities. This proposal
has garnered quite a bit of attention in the pension and actuarial communities.
Unfortunately this proposal was not enacted, but I still believe it is an important
component of pension reform. In my office at Treasury, we have spent time over
the past year developing yield curves based on high quality corporate bonds.
At this point, I'd like to discuss fundamental pension reform. Clearly, I think the
current pension funding and insurance systems need to be overhauled. We are
developing a plan for 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. The Administration strongly believes that a reform plan must have
several characteristics:
•

The proposal will center on the use of real incentives to motivate desired

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JS-2117: Remarks of Mal'k J. W~l!Wsky Assistant Secretary for Economic Policy...
•

•

•
•

Page 7 of9

behavior and frees responsible plans from burdensome regulation.
The proposal will include improvements in pension asset and liability
measurement, economically meaningful funding targets, and enhanced
disclosure.
The proposal will provide greater opportunity and incentive for employers
to fund up in good times to ensure against economic shocks, and reduce
the volatility of minimum required sponsor contributions.
The proposal will improve the PBGC's ability to deal with firms that fail to
make contributions while in bankruptcy; and
The proposal must include a premium structure for the PBGC that meets
its long-term revenue needs and reflects the risks that it covers.

When under funded pension plans terminate, three groups can lose: workers face
the prospect of benefit reductions; other companies, including those that are
healthy and have well funded plans, may face higher PBGC premiums; and,
ultimately, taxpayers may be called upon by Congress to bailout the pension
insurance fund, just as was the case more than a decade ago with the savings and
loan bailout. This is the unfortunate result of a system that allows - and, one might
even argue, sometimes encourages - companies to avoid paying for the promises
they have made. This Administration wants to move towards a system that
emphasizes employers' responsibility for their pension promises and the
empowerment of employees through better information.
TRIA SURVEY

The Terrorism Risk Insurance Program (TRIP) was established by Congress
through the Terrorism Risk Insurance Act of 2002 (TRIA). The TRIP is a temporary
federal system of shared public and private compensation for insured losses
resulting from foreign acts of terrorism. The objectives of the TRIP are:
•
•

to ensure continued widespread availability of property and casualty
insurance for terrorism risk; and
to provide a transition period for private markets to stabilize, resume
pricing, and build capacity while preserving state insurance regulation and
consumer protection.

I am involved in this issue because my office is conducting a series of nationally
representative surveys on TRIA. These surveys will provide data that we will use in
preparing a congressionally mandated report on the program that is due next June.
As I am sure many of you are aware, TRIA is scheduled to sunset at the end of
2005. While there has been a great deal of discussion about whether TRIA should
or should not be extended, the Treasury Department believes it is premature to
engage in such discussions until we evaluate the data and issue our report in June
of 2005.
Today, after providing a bit of background on the program, I am going to discuss
our surveys and why we believe they will be a unique source of information about
TRIA.
Insurer participation in the TRIP for covered lines of business is mandatory.
Insurers must make TRIA-eligible terrorism coverage available in commercial
property, workers compensation, and other liability lines under terms and conditions
comparable to coverage for non-terrorism events. It is important to note that does
not mean insurers are required to provide such coverage, just to make an offer.
There are no federal restrictions on rates or policyholder purchase decisions.
However states do not permit the exclusion of terrorism insurance from workers
compensation coverage.
In the event of a TRIA certified terrorist event, an insurer's exposure consists of a
deductible that is a percentage of the prior year direct earned premiums across all
applicable lines (not just terrorism) and a co-payment equal to 10 percent of insured
losses above the deductible. Under certain conditions, insurers are also subject to
post-event "mandatory recoupment" fees. In 2003 insurer deductibles for TRIAeligible coverage were 7 percent of total 2002 directly earned premiums. They are
now 10 percent of total 2003 directly earned premiums, and in 2005 they will be 15
percent of 2004 directly earned premiums. Total annual liability for the federal
government and for insurers jOintly is capped at $100 billion.

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JS-2117: Remarks of ivlack. J. w~~wsky Assistant Secretary for Economic Policy... Page 8 of 9
The Congressionally mandated study has three basic objectives
•
•
•

to assess the effectiveness of the Terrorism Risk Insurance Program:
to evaluate the availability and affordability of terrorism risk insurance for
various policyholders, including railroads, trucking and public transit; and
to assess the capacity of the property and casualty insurance industry to
offer terrorism risk insurance after the program sunsets, by law, on
December 31,2005.

To assess the program's effectiveness in addressing insurance market disruptions
and ensuring widespread availability and affordability of terrorism coverage,
Treasury must consider changes in TRIA-eligible insurance coverage purchased
and premiums for terrorism risk covered by TRIA during the existence of the
program, and immediately prior to its establishment. We are conducting panel
surveys: that is, we are collecting data repeatedly from the same set of survey
respondents, in order to measure year-over-year changes. There are three
surveys. The largest is the survey of policyholders. We are also surveying insurers
in TRIA-eligible lines. And to learn about the availability of reinsurance for terrorism
coverage, for which the temporary federal program substitutes, we are surveying
reinsurers. Our general strategy is to observe how policyholders, insurers, and
reinsurers' terrorism insurance experience and behavior have evolved over the life
of TRIA.
Each survey is collecting information on coverage purchased within broad TRIAeligible lines as well as other factors that influence the decision to provide or
purchase terrorism insurance coverage and the price at which it is purchased or
provided. The factors include policyholder and insurer characteristics, overall risk
management strategies, and other factors influencing the demand for, and supply
of, insurance for non-TRIA terror risks. We believe this detailed micro data will
provide us with the information we need to better understand issues related to who
takes terrorism coverage, who offers coverage, and at what prices.
Access to a robust reinsurance market is considered an important determinant of
the capacity of the property and casualty insurance industry to offer terrorism risk
insurance after the program sunsets. We are therefore soliciting data about the
reinsurance through both our survey of insurers and our direct survey of reinsurers.
Our insurer survey also collects data on the availability of reinsurance for
deductibles and co-payments for TRIA-eligible coverage, and for non-certified
coverage. Survey data will also be collected from reinsurers to assess their
capacity to offer coverage for this risk to primary insurers.
Data collection for the first wave of the policyholder and insurer surveys began last
November and ran through mid-April of this year. Slightly more than 33,300
policyholders and insurers were contacted. Response rates have been especially
good in the insurer survey. The second wave of data collection for these groups is
now underway, and the reinsurers' questionnaire should be in the field in the next
week or two.
As I mentioned, I believe the Treasury data will be a unique resource in helping us
understand the dynamics of the terrorist risk insurance market. These critical data
are not available from any other source. I believe that because we acted in a timely
manner to respond to this important charge from Congress and have designed and
fielded these detailed multi-year longitudinal surveys, we will have the data we
need. Our survey is unique. We are touching on all parts of the market. We
believe we have enough detailed information to really learn something new about
the determinates of partiCipation in this market. Finally, because we have designed
our survey as longitudinal study, we believe we will be able to better assess the
dynamiCS of the markets.
Undertaking any nationally representative survey is a complex and arduous
undertaking. In this case, the complexity and difficulty are increased because we
are operating under a tight deadline and attempting to get detailed information from
three unique groups. Nevertheless we are pleased with our progress to date, and
believe, ultimately, we will have a better understanding of the terrorism risk
insurance market because of these efforts.
Thanks'

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JS-2117: Remarks of Mark. j. Vv'arshawsky Assistant Secretary for Economic Policy...

Page 9 of 9

LIFE CARE ANNUITY
Finally, I'd like to conclude with a brief discussion of an insurance product
innovation I have been working on for many years - the life care annuity. Use of
long-term care by the elderly is projected to double between 2000 and 2050.
Financing of long-term care is likely to be a challenge. The life care annuity
combines an immediate life annuity with the disability form of long-term care
insurance. In return for a single premium, an insurance company would make
steady periodic payments to a retired household (individual or couple), and would
increase them substantially when a member of the household becomes disabled to
the extent that he would require long-term care services.
Such a product could offer economic security for retirees by providing a steady
stream of income combined with protection in the event of catastrophic costs
associated with disability. The important innovation is that by linking the annuity
with the long-term care insurance, we pool populations with two different risks:
individuals who are likely to be long-lived and individuals who are in relatively poor
health. This pooling allows the integrated product to be sold more cheaply than a
comparable life annuity and long-term care insurance policy purchased separately.
Another benefit is that the pooling of risks also allows individuals who would not
ordinarily pass underwriting for long-term care insurance to be eligible for the
product, thus expanding the market.
While the long-term care insurance market is young, I believe the life care annuity
could become an important element in financing the long-term care needs of certain
elderly populations. Importantly, such an approach would reduce dependence on
public programs like Medicaid, and would work well as a distribution mechanism
from qualified retirement plans and Social Security PRAs.
There are still several open questions before such a product may be viable.
Obviously, in my role as Assistant Secretary, I am not advocating that insurers
enter any particular line of business; I leave the private sector to the private sector.
I do, however, think this idea is a potentially important innovation that has real
societal benefits.
CONCLUSION
In summary, the U.S. economy has responded well to the fiscal and monetary
policies of the past several years and is currently on a solid growth path. Our task
now is to secure the health of the economy in the future by facing our longer-term
challenges. I expect the coming months and years to be a busy and productive
time at the Treasury Department. As I have discussed today, fixing Social Security
is a critical and urgent issue and I believe personal accounts are an important part
of the solution. The defined benefit pension system provides retirement income for
44 million Americans; therefore adopting reforms that improve plan funding and
ensure the long-term solvency of the system and the PBGC are critical. We look
forward to sharing our findings about TRIA at the appropriate time. And if insurers
are interested in pursuing the life care annuity idea, my interest in championing it
will continue.

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JS-2118: Statement by Treasury ~ecretary John W. Snow on GOP Report

Page 1 of 1

:._<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
November 30, 2004
JS-2118

Statement by Treasury Secretary John W. Snow on GDP Report
We learned today that America's Gross Domestic Product (GOP) grew even faster
in the third quarter than we previously thought, with GOP rising at a solid rate of 3.9
percent. Today's report illustrates the strength of the U.S economy, and shows how
its underlying fundamentals are ensuring sustainable, non-inflationary growth.
Consumer spending was particularly strong in the third quarter, the strongest since
the fourth quarter of 2001, and this is a major key to our economy's strength.
Thanks to the President's economic policies that put more money into taxpayers'
pockets and that enhance the incentive to work and invest, our economy is on a
steady path of growth: today's GOP number is good news for all Americans.

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JS-2119:

Trea~ury

Deputy AssiswiIK6ecretary Iannicola to Keynote at Annual Meeting of... Page I of I

:._<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 1, 2004
JS-2119
Treasury Deputy Assistant Secretary lannicola to Keynote at Annual Meeting
of
Georgia Consortium for Personal Financial Literacy in Atlanta
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannicola, Jr.,
will deliver the keynote address at the annual meeting of the Georgia Consortium
for Personal Financial Literacy, the Georgia Jump$tart affiliate. lannicola will
highlight the potential of financial literacy to change lives and will explain how grass
roots organizations can help improve and expand financial education in Georgia.
The Georgia Consortium for Personal Financial Literacy works with businesses and
state and local governments to implement policies and practices that encourage
wise personal finance decision-making. The Jump$tart Coalition for Personal
Financial Literacy is a non-profit organization that seeks to improve the personal
financial literacy of young people.
WHO Treasury Deputy Assistant Secretary for Financial Education, Dan lannicola,
Jr.
WHAT Remarks on the importance of financial literacy and how to improve and
expand financial education in Georgia
WHEN Thursday, December 2, 2004
12 p.m. EST
WHERE Federal Reserve Bank of Atlanta
1000 Peachtree Street, N E
Atlanta. Georgia
'Due to security considerations, media planning to attend should call Jean
Tate of the Atlanta Fed at (404) 521-8035.

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1S-2120: Treasury and IRS !:ssm::: Guidance on Trade Show Activities

Page 1 of 1

:_<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

December 1, 2004
JS-2120
Treasury and IRS Issue Guidance on Trade Show Activities
The Treasury Department and the IRS issued guidance today on the tax treatment
of Internet activities conducted by a trade association in conjunction with a trade
show.
The revenue ruling extends the current-law exception from the definition of
unrelated trade or business for "qualified convention and trade show activity" to
Internet activities that are ancillary to a convention, annual meeting or trade show.
A "convention, annual meeting, or trade show" is a specific event at which
individuals representing a particular industry and members of the public gather in
person at one location during a certain period of time.
The ruling concludes that making the same information that is available at a trade
show available on the Internet, during approximately the same time period as the
trade show itself, is a "qualified convention and trade show activity." Making the
same information available on the Internet enhances and augments the trade show
by allowing interested persons to preview the show before attending and follow up
on information gathered at the show. The ruling also concludes that Internet
activities that are not ancillary to a convention, annual meeting, or trade show do
not qualify for the statutory exception for conventions, annual meetings, and trade
shows.
"The Internet is a valuable tool that organizations can use to supplement their trade
shows by making available in a different medium the same information that is
available at the event," said Treasury Acting Assistant Secretary Greg Jenner. "The
UBIT exception for qualified trade shows is narrow, but this guidance makes clear
that ancillary Internet activities fall within the exception."

REPORTS
•

Rev. Rul. 2004-112

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Part I
Section 513.--Unrelated Trade or Business

26 CFR 1.513-3: Qualified convention and trade show activity.

Rev. Rul. 2004-112
ISSUE
Under the circumstances described below, do Internet activities conducted by
trade associations described in § 501 (c)(6) of the Internal Revenue Code fall within the
specific exception for qualified convention and trade show activity under § 513(d)(3)(B)?
FACTS
Situation 1. ~ is a trade association that is exempt from federal income tax
under § 501 (a) as an organization described in § 501 (c)(6). A improves business
conditions in a certain industry and serves members that are part of this industry. A's
purposes include supporting and enhancing activities within the industry, acting as a
spokesperson for the industry, providing members with current information on technical
developments, training methods, and economic issues, encouraging and fostering
higher safety and technical standards, promoting technological advancements and
improvements, and gathering and disseminating information about markets and
products.
A conducts, as one of its substantial exempt purposes, semi-annual trade shows
to promote and stimulate interest in and demand for the products of ~'s industry. Each
trade show typically occurs at an exhibition facility, during a period of ten consecutive
days. ~ undertakes the planning and direction of the show, secures the facility, and
charges exhibitors a fee for use of space at the show. At each trade show, ~ sponsors
conferences and seminars, and ~'s members and suppliers to A's industry display their
products and services. The conferences, seminars, and exhibits offer a wide variety of
information on products and developments in the industry. Sales and order taking are
permitted. ~'s members, nonmembers, and potential customers attend the shows.
Revenues from the shows are used by A to defray the shows' operating costs, and any
excess of revenues over expenditures is used in furtherance of A's exempt purposes.
To serve its members throughout the year, ~ maintains a website with a variety
of information, including dates, locations, and advance ticket information about ~'s trade

-2-

shows. In addition, in conjunction with each semi-annual trade show, A adds a section
to its website that augments and enhances the trade show by allowing members and
the interested public to access in an alternative medium the same information that is
available at the show. The section contains information and visual displays, such as
product directories and specific product listings, and links to the websites of exhibitors
represented at the trade show, including members of 1:::. and those who are suppliers of
goods and services to 1:::.'s members. The section also contains order forms, and a
function that allows on-line purchases from members and suppliers represented at the
trade show. The supplementary section of the website typically is available on-line
during the ten-day period in which the semi-annual trade show occurs, and during a
three-day period prior to the beginning of the show and a three-day period subsequent
to the end of the show. At the end of the final three-day period, the supplementary
section is removed from the website. 1:::. charges a fee to exhibitors who wish to have
information listed on the supplementary section of the website. 1:::. controls all the
website's content.
Situation 2. B is a trade association that is exempt from federal income tax
under § 501 (a) as an organization described in § 501 (c)(6), and whose purposes are
the same as those of 1:::.. B establishes an Internet website that it makes available to the
general public 24 hours a day, 7 days a week for a two-week period. At the end of the
two-week period, the website is taken down. The two-week period does not overlap or
coincide with any international, national, State, regional, or local convention, annual
meeting, or show conducted by f!.
Like the website operated by A, B's website permits members and the interested
public to access information and visual displays, such as product directories and
specific product listings. The website contains links to the websites of members of f!
and those who are suppliers of goods and services to f!'s members. The website also
contains order forms, and a function that allows on-line purchases from members and
suppliers appearing on the website. f! charges a fee to those who wish to have
information listed on the website. B controls all the website's content.
LAW

Section 501 (c)(6), in part, provides for the exemption from federal income tax of
business leagues, chambers of commerce or boards of trade not organized for profit
and no part of the net earnings of which inures to the benefit of any private shareholder
or individual.
Section 1.501 (c)(6)-1 of the Income Tax Regulations, in part, provides that a
business league is an association of persons having some common business interest,
the purpose of which is to promote such common interest and not to engage in a regular
business of a kind ordinarily carried on for profit. The regulation provides that
organizations otherwise exempt from tax under § 501 (c) are taxable on their unrelated
business taxable income.

-3Section 511 (a) provides for the imposition of tax on the unrelated business
taxable income (as defined in § 512) of organizations described in § 501 (c)(6).
Section 512(a)(1) defines "unrelated business taxable income" as the gross
income derived by an organization from any unrelated trade or business regularly
carried on by it, less certain deductions, but with the modifications provided in § 512(b).
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 such
organization for income or funds or the use it makes of the profits derived) to the
exercise or performance by such organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under § 501.
Section 513(c) defines the term "trade or business" broadly to include any activity
that is carried on for the production of income from the sale of goods or the performance
of services. For purposes of § 513(c), an activity, such as advertising, does not lose
identity as a trade or business merely because it is carried on within a larger aggregate
of similar activities or within a larger complex of other endeavors that may, or may not,
be related to the exempt purposes of the organization.
Section 513(d)(1) provides, in part, that the term "unrelated trade or business"
does not include qualified convention and trade show activities of an organization
described in § 513(d)(3)(C). Organizations described in § 513(d)(3)(C) include any
organization described in § 501 (c)(6) that regularly conducts as one of its substantial
exempt purposes a show that stimulates interest in, and demand for, the products of a
particular industry or segment of such industry or that educates persons in attendance
regarding new developments or products and services related to the exempt activities of
the organization.
Section 513(d)(3)(A) defines the term "convention and trade show activity" as
any activity of a kind traditionally conducted at conventions, annual meetings, or trade
shows. A convention and trade show activity includes, but is not limited to, any activity
one of the purposes of which is to attract persons in an industry generally (without
regard to membership in the sponsoring organization) as well as members of the public
to the show for the purpose of (1) displaying industry products, (2) stimulating interest
in, and demand for, industry products or services, or (3) educating persons engaged in
the industry in the development of new products and services or new rules and
regulations affecting the industry.
Section 513(d)(3)(8) defines the term "qualified convention and trade show
activity" as a convention and trade show activity carried out by a qualifying organization
in conjunction with an international, national, State, regional, or local convention, annual
meeting, or show conducted by a qualifying organization, if one of the purposes of such
organization in sponsoring the activity is (1) the promotion and stimulation of interest in,
and demand for, the products and services of that industry in general, or (2) to educate
persons in attendance regarding new developments or products and services related to

-4the exempt activities of the organization, and the show is designed to achieve such
purpose through the character of the exhibits and the extent of the industry products
displayed.
Section 1.513-3(b) provides that a convention or trade show activity will not be
considered unrelated trade or business if it is conducted by a qualifying organization
described in § 513(d)(3)(C), in conjunction with a qualified convention or trade show
sponsored by the qualifying organization. Section 1.513-3(c)(1) provides that a
qualifying organization includes an organization described in § 501 (c)(6) that regularly
conducts as one of its substantial exempt purposes a qualified convention or trade
show.
Section 1.513-3(c)(2) provides that a qualified convention or trade show is a
show that is (i) conducted by a qualifying organization described in § 513(d)(3)(C), (ii)
has as at least one of its purposes the education of the qualifying organization's
members or the promotion of interest in and demand for the products or services of the
industry (or segment thereof) of the members of the qualifying organization, and (iii) is
designed to achieve that purpose through the character of a significant portion of the
exhibits or the character of conferences and seminars held at a convention or meeting.
Section 1.513-3(d)(1) provides that the rental of display space to exhibitors
(including exhibitors who are suppliers) at a qualified trade show or at a qualified
convention and trade show will not be considered unrelated trade or business even
though the exhibitors who rent the space are permitted to sell or solicit orders.
ANALYSIS
Activities that promote demand for industry products and services, like other
advertising activities, generally would constitute a "trade or business" under § 513(c) if
carried on for the production of income. Section 513(d) is a narrow exception to what
constitutes an "unrelated trade or business" under § 513(a). Section 513(d) was added
to the Code by the Tax Reform Act of 1976 (P.L. 94-455 § 1305), in response to a
series of revenue rulings (Rev. Ruls. 75-516 through 75-520, 1975-2 C.B. 220-226)
holding that income received by a § 501 (c)(6) organization at its convention or trade
show from renting display space may constitute unrelated business taxable income, if
selling by exhibitors is permitted or tolerated at the show. S. Rep. 94-938, at 601-603,
1976-3 C.B. 639-641. The activities described in § 513(d)(3) are specifically excepted
from the definition of an unrelated trade or business because they are conducted by a
qualifying organization in furtherance of its exempt purposes and in connection with a
convention, annual meeting, or trade show. The term "convention, annual meeting, or
trade show" as used in § 513(d)(3) refers to a specific event at which individuals
representing a particular industry and members of the general public gather in person at
one location during a certain period of time. Not only must the activities be conducted
at a "convention, annual meeting, or trade show," but the character of the exhibits and
the extent of the industry products displayed at the show must be designed to stimulate
interest in, and demand for, the products and services of the industry in general or to

-5educate persons in attendance regarding new developments or products and services
related to the exempt activities of the organization. It is the nature of the activities and
their connection to a specific convention, annual meeting, or trade show that
distinguishes "qualified convention and trade show activity" within the meaning of §
513(d)(3) and the regulations from other types of advertising and promotional activities
conducted by organizations described in § 501 (c)(6).
In Situation 1, A is a "qualifying organization" within the meaning of §
513(d)(3)(C), because it is an organization described in § 501 (c)(6) and regularly
conducts as one of its substantial exempt purposes a trade show to promote public
interest in 8.'s industry. A's semi-annual trade shows include conferences, seminars
and a wide variety of exhibits sponsored by members and suppliers with information
useful to those in A's industry and take place during a limited time, at one physical
location, where A's members, suppliers and potential customers meet together in
person, and interact face to face. Thus, each of A's semi-annual trade shows is a
"show" within the meaning of § 513(d)(3).
The activities conducted on the premises of each of 8.'s semi-annual trade shows
and on the special supplementary section of A's Internet website during the 16-day
period that coincides with each semi-annual trade show are of a kind traditionally
conducted at trade shows, as required by § 513(d)(3)(A), because the activities are
designed to attract to the show persons in A's industry and members of the public to
view industry products, to stimulate interest in, and demand for such products, and to
educate persons in the industry about new products and services. Therefore, these
activities are "convention and trade show activity."
Although not conducted on the premises of 8.'s semi-annual trade shows, the
activities conducted by A on the supplementary section of its Internet website during the
16-day period that coincides with each semi-annual trade show are carried out in
conjunction with A's semi-annual trade shows, as required by § 513(d)(3)(8). The
supplementary section is no more than ancillary to the trade show. The content of the
supplementary section serves to augment and enhance each semi-annual trade show
by making available in an alternative medium the same information available at the
show. The supplementary section of 8.'s Internet website is available to 8.'s members
and the interested public during essentially the same limited time period that each semiannual trade show is in operation. Although the supplementary section is available for a
slightly longer period than the trade show itself, the additional time is reasonably brief
and serves to allow for previewing the show before attending, or following up on
information gathered at the show. Thus, the supplementary section is merely an
extension of each semi-annual trade show.
Accordingly, both the activities conducted on the premises at 8.'s semi-annual
trade show and the activities conducted on the supplementary section of A's Internet
website during the 16-day period that coincides with 8.'s semi-annual trade show meet
the requirements to be a "qualified convention and trade show activity" under §

-6513(d)(3)(B). These activities, therefore, are not unrelated trade or business under §
513(a) because they meet the requirements for the limited exception under § 513(d)(3).
In Situation 2, B's operation of a website for a two-week period under the
circumstances described is not "qualified convention and trade show activity" as defined
in § 513(d)(3)(B), because, unlike the activities conducted on the supplementary section
of A's Internet website, B's Internet activities are not carried out in conjunction with any
international, national, regional, State, or local convention, annual meeting, or show
conducted by B. B's website is not itself a "convention, annual meeting, or trade show"
within the meaning of § 513(d)(3) because the website is not a specific event at which
~'s members, suppliers and potential customers gather in person at one physical
location during a certain period of time and interact face to face. Moreover, ~'s Internet
activities do not coincide with, nor do they augment and enhance, any such specific
event conducted by B for one of the purposes described in § 513(d)(3)(B). Therefore,
because B's website is not qualified convention and trade show activity, the operation of
the website, even for a relatively short period of time, is not excepted from the definition
of an unrelated trade or business under § 513(d)(1).
As B does not meet the specific exception under § 513(d)(3), whether its Internet
activities constitute an unrelated trade or business must be determined under the
requirements of § 513.
HOLDINGS
In Situation 1, under the circumstances described, the Internet activities
conducted by a trade association described in § 501 (c)(6) on the special supplementary
section of its Internet website do not constitute unrelated trade or business under §
513(a) because such activities meet the specific exception for qualified convention and
trade show activity under § 513(d)(3)(B).
In Situation 2, under the circumstances described, the activities conducted by a
trade association described in § 501 (c)(6) on its Internet website do not meet the
specific exception for qualified convention and trade show activity under § 513(d)(3)(B).
DRAFTING INFORMATION
The principal author of this revenue ruling is Charles Barrett of the Tax
Exempt and Government Entities Division, Exempt Organizations. For further
information regarding this revenue ruling, contact Mr. Barrett at (202) 283-8944
(not a toll-free number).

JS-2121: Secretar¥ JeM. w.

9TI~_

Applauds New Tool to Fight Identity Theft

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
December 1, 2004
JS-2121

Secretary John W. Snow Applauds New Tool to Fight Identity Theft
A provision of the Fair and Accurate Credit Transactions Act - which President Bush
signed into law last year - takes effect today, giving residents of the western part of
the United States the right to a free copy of their credit report each year. The
provision will be phased in for consumers in states east of the Rocky Mountains
over the course of the next nine months.
"This is an important step in the President's efforts to empower consumers with the
resources needed to fight identity theft," said Secretary Snow. "By closely
monitoring their credit information, consumers can better protect the financial
security and futures of their families. Improved access to credit reports provides a
critical tool for consumers in the fight against financial fraud."

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JS-2122: Statement by U.S. Yt6fteury-Assistant Secretary Randal Quarles Jakarta, In... Page I of 1

:PRE~.S

R()O M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 2, 2004
JS-2122
Statement by U.S. Treasury Assistant Secretary Randal Quarles
Jakarta, Indonesia
December 2,2004
Over the past two days, I have met with economic and financial officials in the new
Indonesian government as well as members of the business and international
communities. The meetings were very useful and I was impressed with the energy
and focus of President Yudhoyono's team. I also participated in the Manila
Framework Group meeting in Yogyakarta and thank our gracious Indonesian hosts
for chairing a very successful meeting.
With a strong mandate of over 60% of the popular vote, President Yudhoyono has
an opportunity to press through his reform agenda. His team has already made it
very clear: corruption will not be tolerated and the government must move forward
with reforms to improve the investment climate. We are confident that this
government can follow through with these pledges.
Macroeconomic stability has improved over the past few years, although some risks
remain. Continued constraint of fiscal spending will both be crucial in maintaining
macroeconomic stability, reducing the debt burden and increasing the confidence of
the market. On monetary policy, Bank Indonesia is continuing to establish a
inflation-targeting regime and full transparency will be key to its success.
The principal challenge facing Indonesia is to bring investment and growth back to
pre-crisis levels. For this, increasing the confidence of investors, both domestic and
foreign, is crucial. It is a concern that investors are deterred by high-profile and
unfavorable court decisions, corruption, conflicting regulations, and tax
administration issues, to name a few.
The government's efforts to review conflicting regulations between the center and
local governments and reduce bureaucratic obstacles are welcome first steps in
addressing this important issue. We look forward to the government continuing to
dedicate its full energy to all aspects of improving the investment climate so that it
will succeed.
There have clearly been improvements in governance in the banking and corporate
sectors since the 1997 crisis. We were pleased to here that the government and
Bank Indonesia will continue improving bank supervision, strengthening anti-money
laundering and counter-terrorist finance laws. It will be important as well for there to
be continued progress in privatizing the state banks.
This is a moment of opportunity for Indonesia - I believe that the new government
will take advantage of it and we will work closely with them as they carry out these
crucial tasks.

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113/2005

JS-2123: Treasllt'y ftna IRS I15~u" Ff.md Instructions for New Corporate Tax Return Form

Page 1 of 1

:._<:PRESS ROO M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

December 2,2004
JS-2123

Treasury and IRS Issue Final Instructions for New Corporate Tax Return Form
The Treasury Department and Internal Revenue Service today released the final
instructions for the Schedule M-3, Net Income (Loss) Reconciliation for
Corporations with Total Assets of $10 Million or More. Schedule M-3 is to be used
by certain corporate taxpayers filing Form 1120, U.S. Corporation Income Tax
Return. The original draft version of the Schedule M-3 instructions was released for
public comment on March 10, 2004. The final draft version of the Schedule M-3 was
issued on October 25, 2004.
Schedule M-3 is effective for any taxable year ending on or after December 31,
2004. In general, Schedule M-3 must be filed by a corporation required to file Form
1120, U.S. Corporation Income Tax Return, that reports on Form 1120 at the end of
the corporation's taxable year total assets that equal or exceed $10 million.
However, a corporation is only required to complete certain sections of Schedule M3 in the first taxable year the corporation is required to file the schedule.
The final instructions to Schedule M-3 provide additional guidance to those
corporations required to file the schedule, including detailed instructions for almost
every line and many illustrative examples. The Treasury and IRS believe that the
additional guidance and examples will significantly assist in completion of the
schedule.
The final Schedule M-3 instructions and final draft Schedule M-3 are attached and
may be accessed on WWW Irs C)ov. The final Schedule M-3 also will be available on
WWW.IIS ~ov when it is released.

REPORTS
•
•

Instructions for Schedule M-3 (Form 1120)
Reconciliation for Corporations

Ittp://www.tre..s.gov/press/re1eases/js21~.htm

113/2005

~@04

~l\\ Department of the Treasury
~t!JJ' Internal Revenue Service

Instructions for
Schedule M-3 (Form 1120)
Net Income (Loss) Reconciliation for Corporations With Total Assets of
$10 Million or More
Section references are to the Internal Revenue Code unless otherwise noted.

General Instructions

required or voluntary). A corporation
filing Schedule M-3 must not file
Schedule M-1.

Purpose of Schedule

If the parent corporation of a U.S.
consolidated tax group files Form 1120
and files Schedule M-3, all members of
the group must file Schedule M-3.
However, if the parent corporation of a
U.S. consolidated tax group files Form
1120 and any member of the group
files Form 1120-PC, U.S. Property and
Casualty Insurance Company Income
Tax Return, or Form 1120-L, U.S. Life
Insurance Company Income Tax
Return, that member may either (a) fully
complete Schedule M-3 as if the
member filed Form 1120; or (b)
complete Schedule M-3 by including
the sum of all differences between the
member's income statement net
income (or loss) and taxable income
(differences) (regardless of whether the
difference would otherwise be reported
elsewhere on Part II or on Part III) on
Part II, line 26, Other income (loss)
items with differences, and separately
state and adequately disclose each
difference in a supporting schedule.
Any member of the U.S. consolidated
tax group that files Form 1120-PC or
Form 1120-L and is required to file
Schedule M-3 (in accordance with the
preceding sentence) may classify all
differences as permanent in column (c)
or identify each difference as temporary
or permanent, as appropriate.

Schedule M-3 Part I asks certain
questions about the corporation's
financial statements and reconciles
financial statement net income (loss) for
the consolidated financial statement
group to income (loss) per the income
statement for the U.S. consolidated tax
group.
Schedule M-3 Parts II and III
reconcile financial statement net
income (loss) for the U.S. consolidated
tax group (per Schedule M-3, Part I,
line 11) to taxable income on Form
1120, page 1, line 28.

Who Must File
Schedule M-3 is effective for any tax
year ending on or after December 31,
2004. For purposes of determining
whether a corporation with a
52-53-week tax year must file Schedule
M-3, such corporation's tax year is
deemed to end or close on the last day
of the calendar month nearest to the
last day of the 52-53 week tax year.
(For further guidance on 52-53 week
tax years, see Regulations section
1.441-2(c)(1 ).) Any domestic
corporation (including a U.S.
consolidated tax group consisting of a
U.S. parent corporation and additional
includible corporations listed on Form
851, Affiliations Schedule) required to
file Form 1120, U.S. Corporation
Income Tax Return, that reports on
Schedule L of Form 1120 total
consolidated assets at the end of the
corporation's tax year that equal or
exceed $10 million must complete and
file Schedule M-3 in lieu of Schedule
M-1, Reconciliation of Income (Loss)
per Books With Income per Return. A
U.S. corporation filing Form 1120 that is
not required to file Schedule M-3 may
voluntarily file Schedule M-3 in place of
Schedule M-1. A corporation filing
Schedule M-3 must check the box on
Form 1120, page 1, item A, indicating
that Schedule M-3 is attached (whether

If the parent company of a U.S.
consolidated tax group files Form 1120
and any member of the group files
Form 1120-PC or Form 1120-L and the
consolidated Schedule L reported in the
return includes the assets of all of the
insurance companies (as well as the
non-insurance companies in the U.S.
consolidated tax group), in order to
determine if the group meets the $10
million threshold test for the
requirement to file Schedule M-3, use
the amount of total assets reported on
Schedule L of the consolidated return.
If the parent company of a U.S.
consolidated tax group files Form 1120
and any member of the group files
Form 1120-PC or Form 1120-L and the
Cat. No. 38103Y

consolidated Schedule L reported in the
return does not include the assets of
one or more of the insurance
companies in the U.S. consolidated tax
group, in order to determine if the group
meets the $10 million threshold test for
the requirement to file Schedule M-3,
use the sum of the amount of total
assets reported on the consolidated
Schedule L plus the amounts of all
assets reported on Forms 1120-PC and
1120-L that are included in the
consolidated return.
Schedule M-3 is not required for any
taxpayers other than those identified in
the preceding paragraphs including, for
example, taxpayers required to file
Form 1065, U.S. Return of Partnership
Income, Form 1120S, U.S. Income Tax
Return for an S Corporation, Form
1120-REIT, U.S. Income Tax Return for
Real Estate Investment Trusts, Form
1120-F, U.S. Income Tax Return of a
Foreign Corporation, Form 1120-H,
U.S. Income Tax Return for
Homeowners Associations, and Form
1120-SF, U.S. Income Tax Return for
Settlement Funds. In addition,
Schedule M-3 is not required for any
member of a U.S. consolidated tax
group if the parent corporation of the
group files Form 1120-PC or Form
1120-L.
Example 1. U.S. corporation A
owns U.S. subsidiary B and foreign
subsidiary F. For its 2004 tax year, A
prepares consolidated financial
statements with Band F that report
total assets of $12 million. A files a
consolidated U.S. federal income tax
return with B and reports total
consolidated assets on Schedule L of
$8 million. A's U.S. consolidated tax
group is not required to file Schedule
M-3 for the 2004 tax year.
If a corporation was required to file
Schedule M-3 for the preceding tax
year but reports on Schedule L of Form
1120 total consolidated assets at the
end of the current tax year of less than
$10 million, the corporation is not
required to file Schedule M-3 for the
current tax year. The corporation may
either (a) file Schedule M-3, or (b) file

Schedule M-1 , for the current tax year.
However, if the corporation chooses to
file Schedule M-1 for the current tax
year, and for a subsequent tax year the
corporation is required to file Schedule
M-3, the corporation must complete
Schedule M-3 in its entirety (Part I and
all columns in Parts II and III) for that
subsequent tax year.

books and records. The Schedule L
balance sheet may show tax-basis
balance sheet amounts if the
corporation is allowed to use books and
records for Schedule M-3 and the
corporation's books and records reflect
only tax-basis amounts.

In the case of a U.S. consolidated
tax group, total assets at the end of the
tax year must be determined based on
the total year-end assets of all
includible corporations listed on Form
851, net of eliminations for
intercompany transactions and
balances between the includible
corporations. In addition, for purposes
of determining for Schedule M-3
whether the corporation (or U.S.
consolidated tax group) has total assets
at the end of the current tax year of $10
million or more, the corporation's total
consolidated assets must be
determined on an overall accrual
method of accounting unless both of
the following apply: (a) the tax returns
of all includible corporations in the U.S.
consolidated tax group are prepared
using an overall cash method of
accounting, and (b) no includible
corporation in the U.S. consolidated tax
group prepares or is included in
financial statements prepared on an
accrual basis.

The amount shown on Schedule M-2,
line 2, Net income (loss) per books,
must equal the amount shown on
Schedule M-3, Part I, line 11. Schedule
M-2 must reflect activity only of
corporations included in the U.S.
consolidated tax return.

Other Form 1120
Schedules Affected by
Schedule M-3
Requirements
Report on Schedules L, M-2, and Form
1120, page 1, amounts for the U.S.
consolidated tax group.

Schedule L
Total assets shown on Schedule L, line
15, column (d), must equal the total
assets of the corporation (or, in the
case of a U.S. consolidated tax group,
the total assets of all members of the
group listed on Form 851) as of the last
day of the tax year, and must be the
same total assets reported by the
corporation (or by each member of the
U.S. consolidated tax group) in the
financial statements, if any, used for
Schedule M-3. If the corporation
prepares financial statements,
Schedule L must equal the sum of the
financial statement total assets for each
corporation listed on Form 851 and
included in the U.S. consolidated tax
return (includible corporation) net of
eliminations for intercompany
transactions between includible
corporations. If the corporation does not
prepare financial statements, Schedule
L must be based on the corporation's

Schedule M-2

Consolidated Return
(Form 1120, Page 1)
Report on Form 1120, page 1, each
item of income, gain, loss, expense, or
deduction net of elimination entries for
intercompany transactions between
includible corporations. The corporation
must not report as dividends on Form
1120, Schedule C, any amounts
received from an includible corporation.
In general, dividends received from an
includible corporation must be
eliminated in consolidation rather than
offset by the dividends-received
deduction.

Entity Considerations
for Schedule M-3
For purposes of Schedule M-3,
references to the classification of an
entity (for example, as a corporation, a
partnership, or a trust) are references to
the treatment of the entity for U.S.
federal income tax purposes. An entity
that generally is disregarded as
separate from its owner for U.S. federal
income tax purposes (disregarded
entity) must not be separately reported
on Schedule M-3. Instead, any item of
income, gain, loss, deduction, or credit
of a disregarded entity must be
reported as an item of its owner.

Consolidated
Schedule M-3 Versus
Consolidating
Schedules M-3
A U.S. consolidated tax group must file
a consolidated Schedule M-3. Parts I,
II, and III of the consolidated Schedule
M-3 must reflect the activity of the
entire U.S. consolidated tax group. The
parent corporation also must complete
Parts II and III of a separate Schedule
M-3 to reflect the parent's own activity.
In addition, Parts II and III of a separate
Schedule M-3 must be completed by
each includible corporation to reflect the
activity of that includible corporation.
Lastly, it generally will be necessary to

-2-

complete Parts II and III of a separate
Schedule M-3 for consolidation
eliminations. For example, if a U.S.
consolidated tax group consists of four
includible corporations (the parent and
three subsidiaries), the U.S.
consolidated tax group must complete
six Schedules M-3 as follows: (a) one
consolidated Schedule M-3 with Parts I,
II, and III completed to reflect the
activity of the entire U.S. consolidated
tax group; (b) Parts II and III of a
separate Schedule M-3 for each of the
four includible corporations to reflect
the activity of each includible
corporation; and (c) Parts II and III of a
separate Schedule M-3 to eliminate
intercompany transactions between
includible corporations and to include
limitations on deductions (e.g.,
charitable contribution limitations and
capital loss limitations) and carryover
amounts (e.g., charitable contribution
carryovers and capital loss carryovers).
If an item attributable to an includible
corporation is not shared by or
allocated to the appropriate member of
the group but is retained in the parent
corporation's financial statements (or
books and records, if applicable), then
the item must be reported by the parent
corporation on its separate Schedule
M-3. For example, if the parent of a
U.S. consolidated tax group prepares
financial statements that include all
members of the U.S. consolidated tax
group and the parent does not allocate
the group's income tax expense as
reflected in the financial statements
among the members of the group but
retains it in the parent corporation, the
parent corporation must report on its
separate Schedule M-3 the U.S.
consolidated tax group's income tax
expense as reflected in the financial
statements.
Any adjustments made at the
consolidated group level that are not
attributable to any specific member of
the U.S. consolidated tax group (e.g.,
disallowance of net capital losses,
contribution deduction carryovers, and
limitation of contribution deductions)
must not be reported on the separate
consolidating parent or subsidiary
Schedules M-3 but rather on the
consolidated Schedule M-3 and on the
consolidating Schedule M-3 for
consolidation eliminations (see the
second preceding paragraph).
If an includible corporation has no
activity for the tax year (e.g., because
the corporation is a dormant or inactive
corporation), no amount for the
corporation was included in Part I, line
11, and the corporation has no
amounts to report on Part II and Part III
of Schedule M-3 for the tax year, the
parent corporation of the U.S.
consolidated tax group may attach to

Instructions for Schedule M-3 (Form 1120)

the consolidated Schedule M-3 a
statement that provides the name and
EIN of the includible corporation in lieu
of filing a blank Part II and Part III of
Schedule M-3 for such entity.

the case of a U.S. consolidated tax
group, for the U.S. parent corporation's
consolidated group) filing Form 1120,
the U.S. corporation (or the U.S. parent
corporation of a U.S. consolidated tax
group) must enter "No" on questions
1a, 1b, and 1c, skip Part I, lines 2
through 10, and enter the net income
(loss) per the books and records of the
U.S. corporation (or U.S. consolidated
tax group) on Part I, line 11, Net
income (loss) per income statement of
includible corporations.

Completion of
Schedule M-3
A corporation (or any member of a U.S.
consolidated tax group) required to file
Schedule M-3 must complete the form
in its entirety. At the time the Form
1120 is filed, all applicable questions
must be answered on Part I (except
that in the case of a U.S. consolidated
tax group, Part I need only be
completed once, on the consolidated
Schedule M-3, by the parent
corporation), all columns must be
completed on Parts II and III, and all
numerical data required by Schedule
M-3 must be provided at the time the
Form 1120 is filed. Any schedule
required to support a line item on
Schedule M-3 must be attached at the
time Schedule M-3 is filed and must
provide the information required for that
line item.

Specific Instructions
for Part I
Part I. Financial
Information and Net
Income (Loss)
Reconciliation
When To Complete Part I
Part I must be completed for any tax
year for which the corporation files
Schedule M-3.

Line 1. Questions Regarding
the Type of Income
Statement Prepared
For Schedule M-3, Part I, lines 1
through 11, use only the financial
statements of the U.S. corporation filing
the U.S. federal income tax return (the
consolidated financial statements for
the U.S. parent corporation of a U.S.
consolidated tax group). If the U.S.
corporation filing a U.S. federal income
tax return (or the U.S. parent
corporation of a U.S. consolidated tax
group) is controlled by another
corporation (U.S. or foreign), the U.S.
corporation (or the U.S. parent
corporation of a U.S. consolidated tax
group) must not use the financial
statements of the controlling
corporation for its Schedule M-3, Part I.
If no financial statements are
prepared for the U.S. corporation (or, in

If a non-publicly traded U.S. parent
corporation of a U.S. consolidated tax
group prepares financial statements
and that group includes a publicly
traded subsidiary that files financial
statements with the Securities and
Exchange Commission (SEC), the
consolidated financial statements of the
parent corporation are the appropriate
financial statements for purposes of
completing Part I. Do not use any
separate company financial statements
that might be prepared for publicly
traded subsidiaries.
If a corporation (a) is included in the
consolidated financial statements of a
group (consolidated financial statement
group) with a U.S. parent corporation
filing a Form 1120 and Schedule M-3,
(b) is not included in the Form 1120 of
the parent corporation of the
consolidated financial statement group,
(c) does not have a separate financial
statement (certified or otherwise) of its
own, and (d) files its own Form 1120
(separate or consolidated), the
corporation must answer questions 1a,
1b, and 1c of Part I as appropriate for
its own Form 1120 and must report on
Part I, line 4 or 11, as appropriate, the
amount for the corporation's net income
(loss) that is equal to the amount
included in the income statement of the
consolidated financial statement group
and removed in Schedule M-3, Part I of
that group's U.S. federal income tax
return. However, if in the circumstances
described immediately above, the
corporation does have separate
financial statements (certified or
otherwise) of its own, independent of
the amount of the corporation's net
income included in its parent
company's consolidated financial
statements, the corporation must
answer questions 1a, 1b, and 1c of Part
I, as appropriate, for its own Form
1120, based on its own separate
income statement, and must report on
Part I, line 4, the net income amounts
shown on its separate income
statement.

Instructions for Schedule M-3 (Form 1120)

-3-

Line 2. Questions Regarding
Income Statement Period
and Restatements
Enter the beginning and ending dates
on line 2a for the corporation's income
statement period ending with or within
this tax year. Answer "Yes" on lines 2b
and/or 2c if the corporation's income
statement has been restated for any
reason, and attach an explanation for
each restatement, the original amount
of each income statement item
restated, and the restated amount of
each income statement item restated.

Line 3. Questions Regarding
Publicly Traded Voting
Common Stock
The primary U.S. publicly traded voting
common stock class is the most widely
held or most heavily traded within the
U.S. as determined by the corporation.
If the corporation has more than one
class of publicly traded voting common
stock, attach a list of the classes of
publicly traded voting common stock,
the trading symbol of each class, the
nine-digit CUSIP number of each class,
and the name and EIN of the
corporation issuing the stock.

Line 4. Worldwide
Consolidated Net Income
(Loss) per Income Statement
In completing Schedule M-3, the
corporation must use financial
statement amounts from the financial
statement type checked "Yes" on Part I,
line 1. If Part I, line 1a, is checked
"Yes," report on Part I, line 4, the net
income amount reported in the income
statement presented to the SEC on the
corporation's Form 10-K (the Form
10-K for the security identified on Part I,
line 3b, if applicable).
If a corporation prepares financial
statements, the amount on line 4 must
equal the financial statement net
income (loss) for the income statement
period ending with or within the tax year
as indicated on line 2a.
If the corporation prepares financial
statements and the income statement
period differs from the corporation's tax
year, the income statement period
indicated on line 2a applies for
purposes of Part I, lines 4 through 8.
If the corporation does not prepare
financial statements, skip lines 2a
through 10 and enter the net income
(loss) per the books and records of the
U.S. corporation or the U.S.
consolidated tax group on Part I, line
11, Net income (loss) per income
statement of includible corporations.
If line 4 includes net income (loss)
for a corporation that files Form
1120-PC or Form 1120-L, see the

instructions for Part I, line 10, for
adjustments that may be necessary to
reconcile financial statement income to
statutory income.

Line 5. Net Income (Loss) of
Nonincludible Foreign
Entities
Remove the financial statement net
income (line 5a) or loss (line 5b) of
each foreign entity that is included in
the consolidated financial statement
group and is not an includible
corporation in the U.S. consolidated tax
group (non includible foreign entity). In
addition, on Part I, line 8, adjust for
consolidation eliminations and correct
for minority interest and intercompany
dividends for any nonincludible foreign
entity. Do not remove in Part I the
financial statement net income (loss) of
any nonincludible foreign entity
accounted for in the financial
statements on the equity method.
Attach a supporting schedule that
provides the name, EIN (if applicable),
and financial statement net income
(loss) included on line 4 that is removed
on this line 5 for each nonincludible
foreign entity.

Line 6. Net Income (Loss) of
Nonincludible U.S. Entities
Remove the financial statement net
income (line 6a) or loss (line 6b) of
each U.S. entity that is included in the
consolidated financial statement group
and is not an includible corporation in
the U.S. consolidated tax group
(nonincludible U.S. entity). In addition,
on Part I, line 8, adjust for consolidation
eliminations and correct for minority
interest and intercompany dividends for
any non includible U.S. entity. Do not
remove in Part I the financial statement
net income (loss) of any non includible
U.S. entity accounted for in the financial
statements on the equity method.
Attach a supporting schedule that
provides the name, EIN (if applicable),
and financial statement net income
(loss) included on line 4 that is removed
on this line 6 for each nonincludible
U.S. entity.

Line 7. Net Income (Loss) of
Other Includible
Corporations
Include the financial statement net
income (line 7a) or loss (line 7b) of
each corporation includible in the U.S.
consolidated tax group that is not
included in the consolidated financial
statement group (other includible
corporation). In addition, on Part I, line
8, adjust for consolidation eliminations
and correct for minority interest and
intercompany dividends for any other
includible corporation.

Attach a supporting schedule that
provides the name, EIN (if applicable),
and financial statement net income
(loss) included on this line 7 for each
other includible corporation.

applicable) of each corporation to which
the adjustment relates, the net
adjustment included on line 10 for each
corporation, and an explanation of each
net adjustment.

Line 8. Adjustment to
Eliminations of Transactions
Between Includible
Corporations and
Nonincludible Entities

Line 11. Net Income (Loss)
per Income Statement of
Includible Corporations

Include on line 8 any adjustments for
minority interest, intercompany
dividends, and eliminations of
intercompany transactions associated
with amounts included on Part I, line 4,
amounts removed on Part I, line 5 or 6,
or amounts included on Part I, line 7, so
that the adjusted consolidation entries
and intercompany eliminations are only
those applicable to the income (loss) of
includible corporations for the financial
statement period. Adjustments on Part
I, line 8, for consolidation entries are
necessary to ensure that transactions
between includible corporations and
either nonincludible foreign entities or
nonincludible U.S. entities are not
eliminated. Additionally, adjustments on
Part I, line 8, for consolidation entries
are necessary to ensure that
transactions between includible
corporations that are in the
consolidated financial statement group
and other includible corporations that
are not in the consolidated financial
statement group are eliminated.

Line 9. Adjustment to
Reconcile Income Statement
Period to Tax Year
Include on line 9 any adjustments
necessary to the income (loss) of
includible corporations to reconcile
differences between the corporation's
income statement period reported on
line 2a and the corporation's tax year.

Line 10. Other Adjustments
Required To Reconcile to
Amount on Line 11
Include on line 10 any other
adjustments to reconcile net income
(loss) on Part I, line 4, with net income
(loss) of includible corporations
reported on Part I, line 11. If the net
income (loss) of an includible
corporation that files Form 1120-PC or
Form 1120-L is included on Part I, lines
4, 7, 8, or 9, and is computed on a
basis other than statutory accounting,
include on line 10 the adjustments
necessary such that Part I, line 11,
includes net income (loss) for such
corporation on a statutory accounting
basis.
Attach a supporting schedule that
provides the name and EIN (if

-4-

Report on line 11 the consolidated
income statement net income (loss) of
all corporations included in the U.S.
consolidated tax return for the tax year
and listed on the Form 851. If the
corporation does not prepare financial
statements, enter on line 11 the net
income (loss) per the books and
records of the U.S. consolidated tax
group.
Example 2. U.S. corporation P is
publicly traded and files Form 1O-K with
the SEC. P owns 80% or more of the
stock of U.S. corporations OS1-0S75,
between 51 % and 79% of the stock of
U.S. corporations OS76-0S100, and
100% of the stock of foreign
subsidiaries FS1-FS50. P eliminates all
dividend income from OS1-0S100 and
FS 1-FS50 in financial statement
consolidation entries. Furthermore, P
eliminates the minority interest
ownership of OS 1-0S 100 in financial
statement consolidation entries. p's
SEC Form 10-K includes P,
OS1-0S100 and FS1-FS50 on a fully
consolidated basis. P files a U.S.
consolidated tax return with OS1-0S75.
P must check "Yes" on Part I, line
1a. On Part I, line 4, P must report the
consolidated net income from the SEC
Form 1O-K for the consolidated financial
statement group of P, OS1-0S100, and
FS1-FS50. P must remove the net
income (loss) of FS1-FS50 on Part I,
lines 5a or 5b, as applicable. P must
remove the net income (loss) before
minority interests of OS76-0S100 on
Part I, lines 6a or 6b, as applicable. P
must reverse on Part I, line 8, the
elimination of any transactions between
the includible corporations (P and
OS1-0S75) and the nonincludible
entities (OS76-0S100 and FS1-FS50),
including dividends received from
OS76-0S100 and FS1-FS50 and the
minority interest's share of the net
income (loss) of OS1-0S100.
P reports on Part I, line 11, the
consolidated financial statement net
income (loss) attributable to the
includible corporations. Intercompany
transactions between the includible
corporations that had been eliminated
in the net income amount on line 4
remain eliminated in the net income
amount on line 11. Transactions
between the includible corporations and
the non includible entities that are
eliminated in the net income amount on

Instructions for Schedule M-3 (Form 1120)

line 4 are included in the net income
amount on line 11.
Example 3. Foreign corporation F
owns 100% of the stock of U.S.
corporation P. P owns 100% of the
stock of OS1, 60% of the stock of OS2,
and 100% of the stock of FS 1. F
prepares certified audited financial
statements. P does not prepare any
financial statements. P files a U.S.
consolidated tax return with OS1.
P must check "No" on Part I, lines
1a, 1b, and 1c, skip lines 2a through 10
of Part I, and enter net income (loss)
per the books and records of the
includible corporations (P and OS 1) on
Part I, line 11, net of eliminations for
transactions between P and OS1.
Example 4. U.S. corporation C
owns 60% of the capital and profits
interests in U.S. LLC N. N has net
income of $100 (before minority
interests) and makes no distributions
during the year. C treats N as a
corporation for financial statement
purposes and as a partnership for U.S.
federal income tax purposes. In its
financial statements, C consolidates N
and includes $60 of net income ($100
less the minority interest of $40) on
Part I, line 4.
C must remove the $100 net income
of N on Part I, line 6a. C must reverse
on Part I, line 8, the elimination of the
$40 minority interest net income of N.
The result is that C includes no income
for N on Part I, line 11. C's taxable
income from N must be reported by C
on Part II, line 9, Income (loss) from
U.S. partnerships.
Example 5. U.S. corporation P
owns 80% of the stock of corporation
OS1. OS1 is included in P's U.S.
consolidated federal income tax return,
even though OS1 is not included in p's
consolidated financial statements. OS1
has current year net income of $100
after it pays interest of $40 to P. P has
net income of $1 ,040 after recognition
of the interest income from OS1. In its
financial statements, P reports the $40
interest as part of its net income of
$1,040 on Part I, line 4. P is required to
include the $100 net income of OS1 on
Part I, line 7, and the operations of OS1
must be included in P's return on a fully
consolidated basis. P must remove on
Part I, line 8, the $40 of interest income
received from OS1 included by P on
line 4 and the $40 of interest expense
of OS1 included in line 7 for a net
change of zero on line 8. On line 8, P
must also remove the $20 minority
interest in the net income of OS1 (OS1
net income of $100 x 20% minority
interest). On Part 1, line 11, P reports
$1,120, $1,040 from line 4, $100 from
line 7, and ($20) from line 8. The result
is that P includes on Part I, line 11, the
entire net income of OS 1 of $140

before minority interest and interest
expense to P, less the minority interest
of $20 in the net income of OS1, and
the entire net income of P of $1 ,000
measured before recognition of the
intercompany interest from OS1 and the
consolidation of OS1 operations.

4. Report on Part II, line 30, column
(d), the sum of Part II, line 30, columns
(a), (b), and (c).
Note. Part II, line 30, column (d), must
equal the amount on Form 1120, page
1, line 28.

When To Complete
Columns (b) and (c)

Specific Instructions for
Parts II and III
For U.S. consolidated tax returns, file
supporting schedules for each
includible corporation. See
Consolidated returns on page 4 of the
Form 1120 instructions.

General Format of
Parts II and III
For each line item in Parts II and III,
report in column (a) the amount of net
income (loss) included in Part I, line 11,
and report in column (d) the amount
included in taxable income.

When To Complete
Columns (a) and (d)
A corporation is not required to
complete columns (a) and (d) of Parts II
and III for the first tax year the
corporation is required to file Schedule
M-3. The corporation must complete
columns (a) and (d) of Parts II and III
for all tax years subsequent to the first
tax year the corporation is required to
file Schedule M-3.
If, for any tax year (or tax years)
prior to the first tax year a corporation is
required to file Schedule M-3, a
corporation voluntarily files Schedule
M-3 in lieu of Schedule M-1, then in
those voluntary filing years the
corporation is not required to complete
columns (a) and (d) of Parts II and III.
In addition, in the first tax year the
corporation is required to file Schedule
M-3 the corporation is not required to
complete columns (a) and (d) of Parts II
and III.
If a corporation chooses not to
complete columns (a) and (d) of Parts II
and III in the first tax year the
corporation is required to file Schedule
M-3 (or in any year in which the
corporation voluntarily files Schedule
M-3), then Part II, line 30, is reconciled
by the corporation (or, in the case of a
U.S. consolidated tax group, by the
group's parent corporation on Part II,
line 30, of the group's consolidated
Schedule M-3) in the following manner:
1. Report the amount from Part I,
line 11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1
through 29, columns (a) and (d);
3. Leave blank Part III, columns (a)
and (d); and

Instructions for Schedule M·3 (Form 1120)

·5·

Columns (b) and (c) of Parts II and III
must be completed for any tax year for
which the corporation files Schedule
M-3.
For any item of income, gain, loss,
expense, or deduction for which there
is a difference between columns (a)
and (d), the portion of the difference
that is temporary must be entered in
column (b) and the portion of the
difference that is permanent must be
entered in column (c).
If financial statements are prepared
by the corporation in accordance with
generally accepted accounting
principles (GMP), differences that are
treated as temporary for GMP must be
reported in column (b) and differences
that are permanent (that is, not
temporary for GMP) must be reported
in column (c). Generally, pursuant to
GMP, a temporary difference affects
(creates, increases, or decreases) a
deferred tax asset or liability.
If the corporation does not prepare
financial statements, or the financial
statements are not prepared in
accordance with GMP, report in
column (b) any difference that the
corporation believes will reverse in a
future tax year (that is, have an
opposite effect on taxable income in a
future tax year (or years) due to the
difference in timing of recognition for
financial accounting and U.S. federal
income tax purposes) or is the reversal
of such a difference that arose in a prior
tax year. Report in column (c) any
difference that the corporation believes
will not reverse in a future tax year (and
is not the reversal of such a difference
that arose in a prior tax year).
If the corporation is unable to
determine whether a difference
between column (a) and column (d) for
an item will reverse in a future tax year
or is the reversal of a difference that
arose in a prior tax year, report the
difference for that item in column (c).

Example 6. For the 2004, 2005, and
2006 tax years, corporation A has total
consolidated assets on the last day of
the tax year as reported on Schedule L,
line 15, column (d), of $8 million, $11
million, and $12 million, respectively. A
is required to file Schedule M-3 for its
2005 and 2006 tax years.
For its 2004 tax year, A voluntarily
files Schedule M-3 in lieu of Schedule

M-1 and does not complete columns (a)
and (d) of Parts II and III.

that reportable transaction must be
reported on Part II, line 12.

For A's 2005 tax year, the first tax
year that A is required to file Schedule
M-3, A is only required to complete Part
I and columns (b) and (c) of Parts II and
III.

A corporation is required to report in
column (a) of Parts II and III the amount
of any item specifically listed on
Schedule M-3 that is in any manner
included in the corporation's current
year financial statement net income
(loss) or in an income or expense
account maintained in the corporation's
books and records, even if there is no
difference between that amount and the
amount included in taxable income
unless (a) otherwise provided in these
instructions or (b) the amount is
attributable to a reportable transaction
described in Regulations section
1.6011-4(b) other than a transaction
described in Regulations section
1.6011-(4 )(b)(6) (relating to significant
book-tax differences) and is therefore
reported on Part II, line 12. For
example, with the exception of interest
income reflected on a Schedule K-1
received by a corporation as a result of
the corporation's investment in a
partnership or other pass-through
entity, all interest income, whether from
unconsolidated affiliated companies,
third parties, banks, or other entities,
whether imputed interest or not,
whether from foreign or domestic
sources, whether taxable or exempt
from tax and regardless of how or
where the income is classified in the
corporation's financial statements, must
be included on Part II, line 13, column
(a). Likewise, all fines and penalties
paid to a government or other authority
for the violation of any law for which
fines or penalties are assessed must be
included on Part III, line 12, column (a),
regardless of the government authority
that imposed the fines or penalties,
regardless of whether the fines or
penalties are civil or criminal,
regardless of the classification,
nomenclature, or terminology attached
to the fines or penalties by the imposing
authority in its actions or documents,
and regardless of how or where the
fines or penalties are classified in the
corporation's financial income
statement or the income and expense
accounts maintained in the
corporation's books and records.

For A's 2006 tax year, A is required
to complete Schedule M-3 in its
entirety.

Example 7. Corporation B is a U.S.
publicly traded corporation that files a
U.S. consolidated tax return and
prepares consolidated GAAP financial
statements. In prior years, B acquired
intellectual property (IP) and goodwill
through several corporate acquisitions.
The IP is amortizable for both U.S.
federal income tax and financial
statement purposes. In the current
year, B's annual amortization expense
for IP is $9,000 for U.S. federal income
tax purposes and $6,000 for financial
statement purposes. In its financial
statements, B treats the difference in IP
amortization as a temporary difference.
The goodwill is not amortizable for U.S.
federal income tax purposes and is
subject to impairment for financial
statement purposes. In the current
year, B records an impairment charge
on the goodwill of $5,000. In its
financial statements, B treats the
goodwill impairment as a permanent
difference. B must report the
amortization attributable to the IP on
Part III, line 28, Other amortization or
impairment write-offs, and report
$6,000 in column (a), a temporary
difference of $3,000 in column (b), and
$9,000 in column (d). B must report the
goodwill impairment on Part III, line 26,
Amortizationlimpairment of goodwill,
and report $5,000 in column (a), a
permanent difference of ($5,000) in
column (c), and $0 in column (d).

Reporting Requirements
for Parts II and III
General Reporting
Requirements
If an amount is attributable to a
reportable transaction described in
Regulations section 1.6011-4(b) (other
than a transaction described in
Regulations section 1.6011-(4 )(b )(6)
relating to significant book-tax
differences), the amount must be
reported in columns (a), (b), (c), and
(d), as applicable, of Part II, line 12,
Items relating to reportable
transactions, regardless of whether the
amount would otherwise be reported on
Part II or Part III of Schedule M-3.
Thus, if a taxpayer files Form 8886,
Reportable Transaction Disclosure
Statement, the amounts attributable to

If a corporation would be required to
report in column (a) of Parts II and III
the amount of any item specifically
listed on Schedule M-3 in accordance
with the preceding paragraph, except
that the corporation has capitalized the
item of income or expense and reports
the amount in its financial statement
balance sheet or in asset and liability
accounts maintained in the
corporation's books and records, the
corporation must report the proper tax
treatment of the item in columns (b),
(c), and (d), as applicable.
-6-

Furthermore, in applying the two
preceding paragraphs, a corporation is
required to report in column (a) of Parts
II and III the amount of any item
specifically listed on Schedule M-3 that
is included in the corporation's financial
statements or exists in the corporation's
books and records, regardless of the
nomenclature associated with that item
in the financial statements or books and
records. Accurate completion of
Schedule M-3 requires reporting
amounts according to the substantive
nature of the specific line items
included in Schedule M-3 and
consistent reporting of all transactions
of like substantive nature that occurred
during the tax year. For example, all
expense amounts that are included in
the financial statements or exist in the
books and records that represent some
form of "Bad debt expense," must be
reported on Part III, line 32, in column
(a), regardless of whether the amounts
are recorded or stated under different
nomenclature in the financial
statements or the books and records
such as: "Provision for doubtful
accounts"; "Expense for uncollectible
notes receivable"; or "Impairment of
trade accounts receivable." Likewise,
as stated in the preceding paragraph,
all fines and penalties must be included
on Part III, line 12, column (a),
regardless of the terminology or
nomenclature attached to them by the
corporation in its books and records or
financial statements.
With limited exceptions, Part II
includes lines for specific items of
income, gain, or loss (income items).
(See Part II, lines 1 through 25.) If an
income item is described in Part II, lines
1 through 25, report the amount of the
item on the applicable line, regardless
of whether there is a difference for the
item. If there is a difference for the
income item, or only a portion of the
income item has a difference and a
portion of the item does not have a
difference, and the item is not
described in Part II, lines 1 through 25,
report and describe the entire amount
of the item on Part II, line 26, Other
income (loss) items with differences.
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
(See Part III, lines 1 through 34.) If an
expense item is described on Part III,
lines 1 through 34, report the amount of
the item on the applicable line,
regardless of whether there is a
difference for the item. If there is a
difference for the expense item, or only
a portion of the expense item has a
difference and a portion of the item
does not have a difference and the item
is not described in Part III, lines 1
through 34, report and describe the
Instructions for Schedule M-3 (Form 1120)

entire amount of the item on Part III,
line 35, Other expense/deduction items
with differences.
If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, loss, expense, or deduction
and the item is not described or
included in Part II, lines 1 through 26,
or Part III, lines 1 through 35, report the
entire amount of the item in column (a)
and (d) of Part II, line 29, Other income
(loss) and expense/deduction items
with no differences.
Separately stated and adequately
disclosed. Each difference reported in
Parts II and III must be separately
stated and adequately disclosed. In
general, a difference is adequately
disclosed if the difference is labeled in
a manner that clearly identifies the item
or transaction from which the difference
arises. For further guidance about
adequate disclosure, see Regulations
section 1.6662-4(f). If a specific item of
income, gain, loss, expense, or
deduction is described on Part II, lines
9 through 25, or Part III, lines 1 through
34, and the line does not indicate to
"attach schedule" or "attach details,"
and the specific instructions for the line
do not call for an attachment of a
schedule or statement, then the item is
considered separately stated and
adequately disclosed if the item is
reported on the applicable line and the
amount(s) of the item(s) are reported in
the applicable columns of the
applicable line. See the instructions
beginning on page 8 for specific
additional information required to be
provided for amounts reported on Part
II, lines 1 through 8.
Except as otherwise provided,
differences for the same item must be
combined or netted together and
reported as one amount on the
applicable line of Schedule M-3.
However, differences for separate items
must not be combined or netted
together and each item (and
corresponding amount attributable to
that item) must be separately stated
and adequately disclosed on the
applicable line of Schedule M-3. In
addition, every item of difference must
b~ separately stated and adequately
disclosed. Differences for dissimilar
items cannot be combined even if the
amounts are below a certain dollar
amount.
Example 8. Corporation C is a
calendar year taxpayer that placed in
service ten depreciable fixed assets in
2000. C was required to file Schedule
M-3 for its 2004 tax year and is

required to file Schedule M-3 for its
2005 tax year. C's total depreciation
expense for its 2005 tax year for five of
the assets is $50,000 for income
statement purposes and $70,000 for
U.S. federal income tax purposes. C's
total annual depreciation expense for its
2005 tax year for the other five assets
is $40,000 for income statement
purposes and $30,000 for U.S. federal
income tax purposes. In its financial
statements, C treats the differences
between financial statement and U.S.
federal income tax depreciation
expense as giving rise to temporary
differences that will reverse in future
years. C must combine all of its
depreciation adjustments. Accordingly,
C must report on Part III, line 31,
Depreciation, for its 2005 tax year
income statement depreciation expense
of $90,000 in column (a), a temporary
difference of $10,000 in column (b),
and U.S. federal income tax
depreciation expense of $100,000 in
column (d).

Example 9. Corporation D is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. On
December 31,2005, D establishes
three reserve accounts in the amount of
$100,000 for each account. One
reserve account is an allowance for
accounts receivable that are estimated
to be uncollectible. The second reserve
is an estimate of a settlement D may
have to pay as a result of pending
litigation. The third reserve is an
estimate of future warranty expenses.
In its financial statements, D treats the
three reserve accounts as giving rise to
temporary differences that will reverse
in future years. The three reserves are
expenses in D's 2005 financial
statements but are not deductions for
U.S. federal income tax purposes in
2005. D must not combine the
Schedule M-3 differences for the three
reserve accounts. D must report the
amounts attributable to the allowance
for uncollectible accounts receivable on
Part III, line 32, Bad debt expense, and
must separately state and adequately
disclose the amounts attributable to
each of the two reserves for pending
litigation and the warranty costs on a
required, attached schedule that
supports the amounts at Part III, line
35, Other expense/deduction items with
differences.
Example 10. Corporation E is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file

Instructions for Schedule M-3 (Form 1120)

-7-

Schedule M-3 for its 2005 tax year. On
January 2, 2005, E establishes an
allowance for uncollectible accounts
receivable (bad debt reserve) of
$100,000. During 2005, E increased
the reserve by $250,000 for additional
accounts receivable that may become
uncollectible. Additionally, during 2005
E decreases the reserve by $75,000 for
accounts receivable that were
discharged in bankruptcy during 2005.
The balance in the reserve account on
December 31, 2005, is $275,000. The
$100,000 amount to establish the
reserve account and the $250,000 to
increase the reserve account are
expenses on E's 2005 financial
statements but are not deductible for
U.S. federal income tax purposes in
2005. However, the $75,000 decrease
to the reserve is deductible for U.S.
federal income tax purposes in 2005. In
its financial statements, E treats the
reserve account as giving rise to a
temporary difference that will reverse in
future tax years. E must report on Part
III, line 32, Bad debt expense, for its
2005 tax year income statement bad
debt expense of $350,000 in column
(a), a temporary difference of
($275,000) in column (b), and U.S.
federal income tax bad debt expense of
$75,000 in column (d).

Example 11. Corporation F is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year.
During 2005, F incurs $200 of meals
and entertainment expenses that F
deducts in computing net income per
the income statement. $50 of the $200
is subject to the $50% limitation under
section 274(n). In its financial
statements, F treats the limitation on
deductions for meals and entertainment
as a permanent difference. Because
meals and entertainment expenses are
specifically described in Part III, line 11,
Meals and entertainment, F must report
all of its meals and entertainment
expenses on this line, regardless of
whether there is a difference.
Accordingly, F must report $200 in
column (a), $25 in column (c), and
$175 in column (d). F must not report
the $150 of meals and entertainment
expenses that are deducted in Fs
financial statement net income and are
fully deductible for U.S. federal income
tax purposes on Part II, line 29, Other
income (loss) and expense/deduction
items with no differences, and the $50
subject to the limitation under section
274(n) on Part III, line 11, Meals and
entertainment.

Part II. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return
Lines 1 Through 8.
Additional Information for
Each Corporation
For any item reported on Part II, lines 1,
3 through 6, or 8, attach a supporting
schedule that provides the name of the
entity for which the item is reported, the
type of entity (corporation, partnership,
etc.), the entity's EIN (if applicable), and
the item amounts for columns (a)
through (d). See the instructions for
Part II, lines 2 and 7, for the specific
information required for those particular
lines.

Line 1. Income (Loss) From
Equity Method Foreign
Corporations
Report on line 1, column (a), the
income statement income (loss)
included in Part I, line 11, for any
foreign corporation accounted for on
the equity method and remove such
amount in column (b) or (c), as
applicable. Report the amount of
dividends received and other taxable
amounts received or includible from
foreign corporations on Part II, lines 2
through 5, as applicable.

Line 2. Gross Foreign
Dividends Not Previously
Taxed
Report on line 2, column (d), the
amount (before any withholding tax) of
any foreign dividends included in
current year taxable income on Form
1120, page 1, line 28. Report on line 2,
column (a), the amount of dividends
from any foreign corporation included in
Part I, line 11. Do not report any
amounts that are reported on Part II,
lines 3 or 4, or dividends that were
previously taxed (see the instructions
for line 5 on this page).
For any dividends reported on Part
II, line 2, that are received on a class of
voting stock of which the corporation
directly or indirectly owned 10% or
more of the outstanding shares of that
class at any time during the tax year,
report on an attached supporting
schedule the name of the dividend
payer, the class of voting stock on
which the dividend was paid, the
payer's EIN (if applicable), and the item
amounts for columns (a) through (d).

Line 3. Subpart F, QEF, and
Similar Income Inclusions
Report on line 3, column (d), the
amount included in taxable income
under section 951 (relating to Subpart
F), gains or other income inclusions
resulting from elections under sections
1291(d)(2) and 1298(b)(1), and any
amount included in taxable income
pursuant to section 1293 (relating to
qualified electing funds). The amount of
Subpart F income corresponds to the
total of the amounts reported by the
corporation on line 6, Schedule I, of all
Forms 5471, Information Return of U.S.
Persons With Respect to Certain
Foreign Corporations. The amount of
qualified electing fund income
corresponds to the total of the amounts
reported by the corporation on line 3(a),
Part II, of all Forms 8621, Return by a
Shareholder of a Passive Foreign
Investment Company or Qualified
Electing Fund.
Also include on line 3 PFIC
mark-to-market gains and losses under
section 1296. Do not report such gains
and losses on Part II, line 16,
Mark-to-market income (loss).

Line 4. Section 78 Gross-Up
Report on line 4, column (d), the
amount of any section 78 gross-up. The
section 78 gross-up amount must
correspond to the total section 78
gross-up amounts reported by the
corporation on all Forms 1118, Foreign
Tax Credit-Corporations.

Line 5. Gross Foreign
Distributions Previously
Taxed
Report on line 5 any distributions
received from foreign corporations that
were included in Part I, line 11, and that
were previously taxed. For example,
include amounts that are excluded from
income under sections 959 and
1293(c). Report the full amount of the
distribution before any withholding tax.

Line 6. Income (Loss) From
Equity Method U.S.
Corporations
Report on line 6, column (a), the
income statement income (loss)
included in Part I, line 11, for any U.S.
corporation accounted for on the equity
method and remove such amount in
column (b) or (c), as applicable. Report
on Part II, line 7, dividends received
from any U.S. corporation accounted
for on the equity method.
-8-

Line 7. U.S. Dividends Not
Eliminated in Tax
Consolidation
Report on line 7, column (a), the
amount of dividends received from any
U.S. corporation included in Part I, line
11. Report on line 7, column (d), the
amount of any U.S. dividends included
in taxable income on Form 1120, page
1, line 28 (that is, taxable dividends
received from any U.S. corporation that
is not included in the U.S. consolidated
tax group and required to be listed on
Form 851).
For any dividends reported on Part
II, line 7, that are received on classes of
voting stock in which the corporation
directly or indirectly owned 10% or
more of the outstanding shares of that
class at any time during the tax year,
report on an attached supporting
schedule for Part II, line 7, the name of
the dividend payer, the class of voting
stock on which the dividend was paid,
the payer's EIN (if applicable), and the
item amounts for columns (a) through
(d).

Line 8. Minority Interest for
Includible Corporations
Report on line 8, column (a), the
minority interest in the income (loss)
included in the income statement
income (loss) on Part I, line 11, for any
member of the U.S. consolidated tax
group that is less than 100% owned.

Example 12. Corporation G is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. G
owns 90% of the stock of U.S.
corporation DS1. G files a U.S.
consolidated tax return with DS1. G
prepares certified GAAP financial
statements for the consolidated
financial statement group consisting of
G and OS 1. G has no net income of its
own, and G does not report its equity
interest in the income of DS1 on its
separate financial statements. DS1 has
financial statement net income (before
minority interests) and taxable income
of $1 ,000 ($2,500 of revenue less
$1,500 cost of goods sold). On Part I,
line 11, Net income (loss) per income
statement of includible corporations, of
the consolidated Schedule M-3, the
U.S. consolidated tax group must report
$900 of financial statement income
($1,000 net income less $100 minority
interest). On Part II, line 8, Minority
interest for includible corporations, of
the consolidated Schedule M-3, the
U.S. consolidated tax group reports
($100) in column (a), $100 in column
(c), and $0 in column (d). On Part II,
line 29, Other income (loss) and
expense/deduction items with no
Instructions for Schedule M-3 (Form 1120)

differences, of the consolidated
Schedule M-3, the U.S. consolidated
tax group reports $1,000 in both
columns (a) and (d). As a result,
financial statement net income on Part
II, line 30, column (a), will total $900,
net permanent differences on Part II,
line 30, column (c), will total $100, and
taxable income on line 30, column (d),
will total $1,000. G must prepare three
consolidating Schedules M-3, each with
Parts II and III, one for G, one for DS1,
and one for consolidation eliminations.
On the consolidating Schedule M-3 for
DS1, on Part II, line 29 and line 30, G
reports for DS1 $1,000 in both columns
(a) and (d). On the consolidating
Schedule M-3 for G, on Part II, line 30,
G reports for itself zero in both columns
(a) and (d). On the consolidating
Schedule M-3 for consolidation
eliminations, on Part II, line 8 and line
30, G reports the minority interest
elimination for the U.S. consolidated tax
group of ($100) in column (a), $100 in
column (c), and $0 in column (d).

Line 9. Income (Loss) From
U.S. Partnerships and Line
10. Income (Loss) From
Foreign Partnerships
For any interest owned by the
corporation or a member of the U.S.
consolidated tax group that is treated
as an investment in a partnership for
U.S. federal income tax purposes (other
than an interest in a disregarded entity),
report the following on Part II, line 9 or
10, as applicable:
1. In column (a) the sum of the
corporation's distributive share of
income or loss from a U.S. or foreign
partnership that is included in Part I,
line 11, Net income (loss) per income
statement of includible corporations;
2. In column (b) or (c), as
applicable, the sum of all differences, if
any, attributable to the corporation's
distributive share of income or loss from
a U.S. or foreign partnership; and
3. In column (d) the sum of all
amounts of income, gain, loss, or
deduction attributable to the
corporation's distributive share of
income or loss from a U.S. or foreign
partnership (Le., the sum of all amounts
reportable on the corporation's
Schedule(s) K-1 received from the
partnership (if applicable)), without
regard to any limitations computed at
the partner level (e.g., limitations on
utilization of charitable contributions,
capital losses, and interest expense).
For each partnership reported on
line 9 or 10, attach a supporting
schedule that provides the name, EIN
(if applicable), end of year profit-sharing
percentage (if applicable), end of year
loss-sharing percentage (if applicable),

and the amount reported in column (a),
(b), (c), or (d) of lines 9 or 10, as
applicable.

Example 13. U.S. corporation H is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. H
has an investment in a U.S. partnership
USP. H prepares financial statements
in accordance with GAAP. In its
financial statements, H treats the
difference between financial statement
net income and taxable income from its
investment in USP as a permanent
difference. For its 2005 tax year, H's
financial statement net income includes
$10,000 of income attributable to its
share of USP's net income. H's
Schedule K-1 from USP reports $5,000
of ordinary income, $7,000 of long-term
capital gains, $4,000 of charitable
contributions, and $200 of section 179
expense. H must report on Part II, line
9, $10,000 in column (a), a permanent
difference of ($2,200) in column (c),
and $7,800 in column (d).
Example 14. Same facts as
Example 13 except that corporation H's
charitable contribution deduction is
wholly attributable to its partnership
interest in USP and is limited to $90
pursuant to section 170(b )(2) due to
other investment losses incurred by H.
In its financial statements, H treated
this limitation as a temporary difference.
H must not report the charitable
contribution limitation of $3,910 ($4,000
- $90) on Part II, line 9. H must report
the limitation on Part III, line 21,
Charitable contribution limitation, and
report the disallowed charitable
contributions of ($3,910) in columns (b)
and (d).

Line 11. Income (Loss) From
Other Pass-Through Entities
For any interest in a pass-through entity
(other than an interest in a partnership
reportable on Part II, line 9 or 10, as
applicable) owned by a member of the
U.S. consolidated tax group (other than
an interest in a disregarded entity),
report the following on line 11 :
1. In column (a) the sum of the
corporation's distributive share of
income or loss from the pass-through
entity that is included in Part I, line 11,
Net income (loss) per income statement
of includible corporations;
2. In column (b) or (c), as
applicable, the sum of all differences, if
any, attributable to the pass-through
entity; and
3. In column (d) the sum of all
taxable amounts of income, gain, loss,
or deduction reportable on the
corporation's Schedules K-1 received
from the pass-through entity (if
applicable).

Instructions for Schedule M-3 (Form 1120)

-9-

For each pass-through entity
reported on line 11, attach a supporting
schedule that provides that entity's
name, EIN (if applicable), the
corporation's end of year profit-sharing
percentage (if applicable), the
corporation's end of year loss-sharing
percentage (if applicable), and the
amounts reported by the corporation in
column (a), (b), (c), or (d) of line 11, as
applicable.

Line 12. Items Relating to
Reportable Transactions
Any amounts attributable to any
reportable transactions (as described in
Regulations section 1.6011-4) other
than transactions described in
Regulations section 1.6011-4(b)(6)
relating to significant book-tax
differences must be included on Part II,
line 12, regardless of whether the
difference, or differences, would
otherwise be reported elsewhere in Part
II or Part III. Thus, if a taxpayer files
Form 8886 for any reportable
transaction described in Regulations
section 1.6011-4 and the transaction is
not described in Regulations section
1.6011-4(b)(6) relating to significant
book-tax differences, the amounts
attributable to that reportable
transaction must be reported on Part II,
line 12. In addition, all income and
expense amounts attributable to a
reportable transaction must be reported
on Part II, line 12, columns (a) and (d)
even if there is no difference between
the financial statement amounts and
the taxable amounts.
Each difference attributable to a
reportable transaction must be
separately stated and adequately
disclosed. A corporation will be
considered to have separately stated
and adequately disclosed a reportable
transaction on line 12 if the corporation
sequentially numbers each Form 8886
and lists by identifying number on the
supporting schedule for Part II, line 12,
each sequentially numbered reportable
transaction and the amounts required
for Part II, line 12, columns (a) through
(d).
In lieu of the requirements of the
preceding paragraph, a corporation will
be considered to have separately
stated and adequately disclosed a
reportable transaction if the corporation
attaches a supporting schedule that
provides the following for each
reportable transaction:
1. A description of the reportable
transaction disclosed on Form 8886 for
which amounts are reported on Part II,
line 12;
2. The name and tax shelter
registration number, if applicable, as
reported on lines 1a and 1b,
respectively, of Form 8886; and

3. The type of reportable transaction
(i.e., listed transaction, confidential
transaction, transaction with contractual
protection, etc.) as reported on line 2 of
Form 8886.
If a transaction is a listed transaction
described in Regulations section
1.6011-4(b )(2), the description also
must include the description provided
on line 3 of Form 8886. In addition, if
the reportable transaction involves an
investment in the transaction through
another entity such as a partnership,
the description must include the name
and EIN (if applicable) of that entity as
reported on line 5 of Form 8886.
Example 15. Corporation J is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. J
incurred seven different abandonment
losses during its 2005 tax year. One
loss of $12 million results from a
reportable transaction described in
Regulations section 1.6011-4(b )(5),
another loss of $5 million results from a
reportable transaction described in
Regulations section 1.6011-4(b)(4), and
the remaining five abandonment losses
are not reportable transactions. J
discloses the reportable transactions
giving rise to the $12 million and $5
million losses on separate Forms 8886
and sequentially numbers them Xi and
X2, respectively. J must separately
state and adequately disclose the $12
million and $5 million losses on Part II,
line 12. The $12 million loss and the $5
million loss will be adequately disclosed
if J attaches a supporting schedule for
line 12 that lists each of the
sequentially numbered forms, Form
8886-X1 and Form 8886-X2, and with
respect to each reportable transaction
reports the appropriate amounts
required for Part II, line 12, columns (a)
through (d). Alternatively, J's
disclosures will be adequate if the
description provided for each loss on
the supporting schedule includes the
names and tax shelter registration
numbers, if any, disclosed on the
applicable Form 8886, identifies the
type of reportable transaction for the
loss, and reports the appropriate
amounts required for Part II, line 12,
columns (a) through (d). J must report
the losses attributable to the other five
abandonment losses on Part II, line
23e, Abandonment losses, regardless
of whether a difference exists for any or
all of those abandonment losses.
Example 16. Corporation K is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. K
enters into a transaction with
contractual protection that is a

reportable transaction described in
Regulations section 1.6011-4(b)(4).
This reportable transaction is the only
reportable transaction for K's 2005 tax
year and results in a $7 million capital
loss for both financial statement
purposes and U.S. federal income tax
purposes. Although the transaction
does not result in a difference, K is
required to report on Part II, line 12, the
following amounts: ($7 million) in
column (a), zero in columns (b) and (c),
and ($7 million) in column (d). The
transaction will be adequately disclosed
if K attaches a supporting schedule for
line 12 that (a) sequentially numbers
the Form 8886 and refers to the
sequentially-numbered Form 8886-X1
and (b) reports the applicable amounts
required for line 12, columns (a)
through (d). Alternatively, the
transaction will be adequately disclosed
if the supporting statement for line 12
includes a description of the
transaction, the name and tax shelter
registration number, if any, and the type
of reportable transaction disclosed on
Form 8886.

Line 13. Interest Income
With the exception of interest income
derived from a pass-through entity and
required to be reported on Part II, line
9, 10, or 11, as applicable, or interest
from a reportable transaction (as
described in Regulations section
1.6011-4) other than a transaction
described in Regulations section
1.6011-4(b)(6) relating to significant
book-tax differences required to be
reported on Part II, line 12, Items
relating to reportable transactions,
report on Part II, line 13, column (a),
the total amount of interest income
included on Part I, line 11, and report
on Part II, line 13, column (d), the total
amount of interest income included on
Form 1120, page 1, line 28. In columns
(b) or (c), as applicable, adjust for any
amounts treated for U.S. federal
income tax purposes as imputed
interest income or other interest income
that are treated as some other form of
income in the financial statements. For
example, if rental income is reported in
the financial income statement or books
and records with respect to a
transaction required to be treated for
U.S. federal income tax purposes as a
sale in exchange for periodic payments
of purchase price, part of the "rent"
each year is principal and part is
interest income for U.S. federal income
tax purposes. The interest income
imputed on the transaction each year
must be shown as a difference on Part
II, line 13, columns (b) or (c), as
applicable, with the taxable interest
amount being included in column (d). A
description of how to report the
difference for the corresponding

-10-

financial statement rental income is
included on page 11 in the instructions
for line 18, Sale versus lease (for
sellers and/or lessors).

Line 14. Total Accrual to
Cash Adjustment
This line is completed by a corporation
that prepares financial statements (or
books and records, if permitted) using
an overall accrual method of accounting
and uses an overall cash method of
accounting for U.S. federal income tax
purposes (or vice-versa). With the
exception of amounts required to be
reported on Part II, line 12, Items
relating to reportable transactions, the
corporation must report on Part II, line
14, a single amount net of all
adjustments attributable solely to the
use of the different overall methods of
accounting (e.g., adjustments related to
accounts receivable, accounts payable,
compensation, accrued liabilities, etc.),
regardless of whether a separate line
on Schedule M-3 corresponds to an
item within the accrual to cash
reconciliation. Differences not
attributable to the use of the different
overall methods of accounting must be
reported on the appropriate lines of
Schedule M-3 (e.g., a depreciation
difference must be reported on Part III,
line 31, Depreciation).
Example 17. Corporation L is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. L
prepares financial statements in
accordance with GMP using an overall
accrual method of accounting. L uses
an overall cash method of accounting
for U.S. federal income tax purposes.
L's financial statements for the year
ending December 31,2005, report
accounts receivable of $35,000, an
allowance for bad debts of $10,000,
and accounts payable of $17,000
related to current year acquisition and
reorganization legal and accounting
fees. In addition, for L's year ending
December 31,2005, L reported
financial statement depreciation
expense of $15,000 and depreciation
for U.S. federal income tax purposes of
$25,000. For L's 2005 tax year using an
overall cash method of accounting, L
does not recognize the $35,000 of
revenue attributable to the accounts
receivable, cannot deduct the $10,000
allowance for bad debt, and cannot
deduct the $17,000 of accounts
payable. In its financial statements, L
treats both the difference in overall
accounting methods used for financial
statement and U.S. federal income tax
purposes and the difference in
depreciation expense as temporary
differences. L must combine all
Instructions for Schedule M-3 (Form 1120)

adjustments attributable to the
differences related to the overall
accounting methods on Part II, line 14.
As a result, L must report on Part II, line
14, $8,000 in column (a) ($35,000 $10,000 - $17,000), ($8,000) in column
(b), and zero in column (d). L must not
report the accrual to cash adjustment
attributable to the legal and accounting
fees on Part III, line 24, Current year
acquisition or reorganization legal and
accounting fees. Because the
difference in depreciation expense does
not relate to the use of the cash or
accrual method of accounting, L must
report the depreciation difference on
Part III, line 31, Depreciation, and
report $15,000 in column (a), $10,000
in column (b), and $25,000 in column
(d).

Line 15. Hedging
Transactions
Report on line 15, column (a), the net
gain or loss from hedging transactions
included in net income per the income
statement. Report in column (d) the
amount of taxable income from hedging
transactions. Use columns (b) and (c)
to report all differences caused by
treating hedging transactions differently
for financial accounting purposes and
for U.S. federal income tax purposes.
For example, if a portion of a hedge is
considered ineffective under GMP but
still is a valid hedge under section
1221 (b )(2), the difference must be
reported on line 15. The hedge of a
capital asset, which is not a valid hedge
for U.S. federal income tax purposes
but may be considered a hedge for
GAAP purposes, must also be reported
here.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 15 and
not on Part II, line 16, Mark-to-market
income (loss).
Report any gain or loss from
inventory hedging transactions on line
15 and not on Part II, line 17, Inventory
valuation adjustments.

Line 16. Mark-to-Market
Income (Loss)
Report on line 16 any amount
representing the mark-to-market
income or loss for any securities held
by a dealer in securities, a dealer in
commodities having made a valid
election under section 475(e), or a
trader in securities or commodities
having made a valid election under
section 475(f). "Securities" for these
purposes are securities described in
section 475(c)(2) and section 475(e)(2).
"Securities" do not include any items
specifically excluded from sections
475(c)(2) and 475(e)(2), such as
Instructions for Schedule M-3 (Form 1120)

contracts to which section 1256( a)
applies.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on Part II, line
15, Hedging transactions, and not on
line 16.

Line 17. Inventory Valuation
Adjustments
Report on line 17 any amounts
deducted as part of cost of goods sold
during the tax year, including any
amounts attributable to inventory
valuation, for example, amounts
attributable to cost-flow assumptions,
additional costs required to be
capitalized to ending inventory
(including depreciation) such as section
263A costs, inventory shrinkage
accruals, inventory obsolescence
reserves, and lower of cost or market
write-downs. Report section 481 (a)
adjustments related to cost of goods
sold or inventory valuation on Part II,
line 19, Section 481 (a) adjustments,
and not on this line 17.
Report any gain or loss from
inventory hedging transactions on Part
II, line 15, Hedging transactions, and
not on this line 17.
Report mark-to-market income or
(loss) associated with the inventories of
dealers in securities under section 475
on Part II, line 16, Mark-to-market
income (loss), and not on this line 17.

Line 18. Sale Versus Lease
(for Sellers and/or Lessors)
(Also see the instructions at Part III, line
34, on page 15, for purchasers and/or
lessees.)
Asset transfer transactions with
periodic payments characterized for
financial accounting purposes as either
a sale or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes. If the
transaction is treated as a lease, the
seller/lessor reports the periodic
payments as gross rental income and
also reports depreciation expense or
deduction. If the transaction is treated
as a sale, the seller/lessor reports gross
profit (sale price less cost of goods
sold) from the sale of assets and
reports the periodic payments as
payments of principal and interest
income.
On Part II, line 18, column (a), report
the gross profit or gross rental income
for financial income purposes for all
sale or lease transactions that must be
given the opposite characterization for
tax purposes. On Part II, line 18,
column (d), report the gross profit or
gross rental income for federal income
tax purposes. Interest income amounts
for such transactions must be reported

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on Part II, line 13, Interest income, in
column (a) or (d), as applicable.
Depreciation expense for such
transactions must be reported on Part
III, line 31, Depreciation, in column (a)
or (d), as applicable. Use columns (b)
and (c) of Part II, lines 13 and 18, and
Part 1II,Iine 31, as applicable to report
the differences between column (a) and
(d).

Example 18. Corporation M sells
and leases property to customers. M is
a calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. For
financial accounting purposes, M
accounts for each transaction as a sale.
For U.S. federal income tax purposes,
each of M's transactions must be
treated as a lease. In its financial
statements, M treats the difference in
the financial accounting and the U.S.
federal income tax treatment of these
transactions as temporary. During
2005, M reports in its financial
statements $1,000 of sales and $700 of
cost of goods sold with respect to 2005
lease transactions. M receives periodic
payments of $500 in 2005 with respect
to these 2005 transactions and similar
transactions from prior years and treats
$400 as principal and $100 as interest
income. For financial income purposes,
M reports gross profit of $300 ($1,000 $700) and interest income of $100 from
these transactions. For U.S. federal
income tax purposes, M reports $500 of
gross rental income (the periodic
payments) and (based on other facts)
$200 of depreciation deduction on the
property. On its 2005 Schedule M-3, M
must report on Part II, line 13, Interest
income, $100 in column (a), ($100) in
column (b), and zero in column (d). In
addition, M must report on Part II, line
18, $300 of gross profit in column (a),
$200 in column (b), and $500 of gross
rental income in column (d). Lastly, M
must report on Part III, line 31,
Depreciation, $200 in column (b) and
(d).

Line 19. Section 481(a)
Adjustments
With the exception of a section 481(a)
adjustment that is required to be
reported on Part II, line 12, Items
relating to reportable transactions, any
difference between an income or
expense item attributable to an
authorized (or unauthorized) change in
method of accounting made for U.S.
federal income tax purposes that
results in a section 481 (a) adjustment
must be reported on Part II, line 19,
regardless of whether a separate line
for that income or expense item exists
in Part II or Part III.

Example 19. Corporation N is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. N
was depreciating certain fixed assets
over an erroneous recovery period and,
effective for its 2005 tax year, N
receives IRS consent to change its
method of accounting for the
depreciable fixed assets and begins
using the proper recovery period. The
change in method of accounting results
in a positive section 481(a) adjustment
of $100,000 that is required to be
spread over four tax years, beginning
with the 2005 tax year. In its financial
statements, N treats the section 481 (a)
adjustment as a temporary difference.
N must report on Part II, line 19,
$25,000 in columns (b) and (d) for its
2005 tax year and each of the
subsequent three tax years (unless N is
otherwise required to recognize the
remainder of the 481 (a) adjustment
earlier). N must not report the section
481(a) adjustment on Part III, line 31,
Depreciation.

Line 20. Unearned/Deferred
Revenue
With the exception of income
recognized from long-term contacts that
is reported on line 21, Income
recognition from long-term contracts,
report on line 20 any revenue amounts
that are attributable to revenue that is,
or was, unearned or deferred for
financial statement purposes (or books
and records, if applicable) or U.S.
federal income tax purposes.

Line 21. Income Recognition
From Long-Term Contracts
Report on line 21 the amount of net
income or loss for financial statement
purposes (or books and records, if
applicable) or U.S. federal income tax
purposes for any contract accounted for
under a long-term contract method of
accounting.

Line 22. Original Issue
Discount and Other Imputed
Interest
Report on line 22 any amounts of
original issue discount (010) and
imputed interest. The term "original
issue discount and other imputed
interest" includes, but is not limited to:
1. The difference between issue
price and the stated redemption price at
maturity of a debt instrument, which
may be wholly or partially realized on
the disposition of a debt instrument
under section 1273;
2. Amounts that are imputed
interest on a deferred sales contract
under section 483;

3. Amounts treated as interest or
010 under the stripped bond rules
under section 1286; and
4. Amounts treated as 010 under
the below-market interest rate rules
under section 7872.

Line 23d. Net Gain/Loss
Reported on Form 4797, Line
17, Excluding Amounts From
Flow-Through Entities,
Abandonment Losses, and
Worthless Stock Losses

Line 23a. Income Statement
Gain/Loss on Sale,
Exchange, Abandonment,
Worthlessness, or Other
Disposition of Assets Other
Than Inventory and
Flow-Through Entities

Report on line 23d the net gain or loss
reported on line 17 of Form 4797, Sales
of Business Property, excluding
amounts from (a) flow-through entities,
which must be reported on Part II, lines
9, 10, or 11, as applicable; (b)
abandonment losses, which must be
reported on Part II, line 23e; and (c)
worthless stock losses, which must be
reported on Part II, line 23f.

Report on line 23a, column (a), all
gains and losses on the disposition of
assets except for (a) gains and losses
on the disposition of inventory, and (b)
gains and losses allocated to the
corporation from a flow-through entity
(e.g., on Schedule K-1) that are
included in the net income (loss) per
income statement of includible
corporations reported on Part I, line 11.
Reverse the amount reported in column
(a) in column (b) or (c), as applicable.
The corresponding gains and losses for
U.S. federal income tax purposes are
reported on Part II, lines 23b through
23g, as applicable.

Line 23b. Gross Capital
Gains From Schedule D,
Excluding Amounts From
Flow-Through Entities
Report on line 23b, gross capital gains
reported on Schedule 0, excluding
capital gains from flow-through entities,
which must be reported on Part II, lines
9, 10, or 11, as applicable.

Line 23c. Gross Capital
Losses From Schedule D,
Excluding Amounts From
Flow-Through Entities,
Abandonment Losses, and
Worthless Stock Losses
Report on line 23c, gross capital losses
reported on Schedule 0, excluding
capital losses from (a) flow-through
entities, which must be reported on Part
II, lines 9,10, or 11, as applicable; (b)
abandonment losses, which must be
reported on Part II, line 23e; and (c)
worthless stock losses, which must be
reported on Part II, line 23f. Do not
report on line 23c capital losses carried
over from a prior tax year and utilized in
the current tax year. See the
instructions for Part II, line 25,
regarding the reporting requirements for
capital loss carryovers utilized in the
current tax year.

-12-

Line 23e. Abandonment
Losses
Report on line 23e any abandonment
losses, regardless of whether the loss
is characterized as an ordinary loss or
a capital loss.

Line 23f. Worthless Stock
Losses
Report on line 23f any worthless stock
loss, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss. Attach a schedule that
separately states and adequately
discloses each transaction that gives
rise to a worthless stock loss and the
amount of each loss.

Line 23g. Other Gain/Loss on
Disposition of Assets Other
Than Inventory
Report on line 23g any gains or losses
from the sale or exchange of property
other than inventory and that are not
reported on lines 23b through 23f.

Line 24. Disallowed Capital
Loss in Excess of Capital
Gains
Report as a positive amount on line 24,
columns (b) or (c), as applicable, and
(d), the excess of the net capital losses
over the net capital gains reported on
Schedule 0, Capital Gains and Losses,
by the corporation. For a U.S.
consolidated tax group, the Schedule
M-3 adjustment for the amount of the
consolidated net capital loss that is
disallowed should not be made on the
separate consolidating Schedules M-3
of the includible corporations, but on
the separate Schedule M-3 for
consolidation eliminations as described
in Consolidated Schedule M-3 Versus
Consolidating Schedules M-3, on page
2.
Instructions for Schedule M-3 (Form 1120)

of the item on line 29. Instead, report
the entire amount of the item (i.e., both
the portion with a difference and the
portion without a difference) on the
applicable line of Part II, lines 1 through
26, or Part III, lines 1 through 35. See
Example 11 on page 7.

Line 25. Utilization of Capital
Loss Carryforward
If the corporation utilizes a capital loss
carryforward on Schedule 0 in the
current tax year, report the carryforward
utilized as a negative amount on Part II,
line 25, columns (b) or (c), as
applicable, and column (d). For a U.S.
consolidated tax group, the Schedule
M-3 adjustment for the amount of the
consolidated capital loss carryforward
should not be made on the separate
consolidating Schedules M-3 of the
includible corporations, but on the
separate Schedule M-3 for
consolidation eliminations as described
in Consolidated Schedule M-3 Versus
Consolidating Schedules M-3, on page

Line 30. Reconciliation
Totals
Combine all the amounts on lines 27
through 29 and enter the totals in
columns (a), (b), (c), and (d).
Note. Line 30, column (a), must equal
the amount on Part I, line 11, and line
30, column (d), must equal Form 1120,
page 1, line 28.
If a corporation chooses not to
complete columns (a) and (d) of Parts II
and III in the first tax year the
corporation is required to file Schedule
M-3 (or for any year in which the
corporation voluntarily files Schedule
M-3), Part II, line 30, is reconciled by
the corporation (or, in the case of a
U.S. consolidated tax group, on the
group's consolidated Schedule M-3) in
the following manner:
1. Report the amount from Part I,
line 11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1
through 29, columns (a) and (d);
3. Leave blank Part III, columns (a)
and (d); and
4. Report on Part II, line 30, column
(d), the sum of Part II, line 30, columns
(a), (b), and (c).

Line 26. Other Income (Loss)
Items With Differences
Separately state and adequately
disclose on Part II, line 26, all items of
income (loss) with differences that are
not otherwise listed on Part II, lines 1
through 25. Attach a schedule that
itemizes the type of income (loss) and
the amount of each item.
If any "comprehensive income" as
defined by Statement of Financial
Accounting Standards (SFAS) No. 130
is reported on this line, describe the
item(s) in detail. Examples of
sufficiently detailed descriptions include
"Foreign currency translation
adjustments" and "gains and losses on
available-for-sale securities."

Line 28. Total Expense/
Deduction Items

If there is no difference between the
financial accounting amount and the
taxable amount of an entire item of
income, gain, loss, expense, or
deduction and the item is not described
or included in Part II, lines 1 through
26, or Part III, lines 1 through 35, report
the entire amount of the item in
columns (a) and (d) of line 29. If a
portion of an item of income, loss,
expense, or deduction has a difference
and a portion of the item does not have
a difference, do not report any portion

Line 7. Foreign Withholding
Taxes
Report on line 7, column (a), the
amount of foreign withholding taxes
included in financial accounting net
income on Part I, line 11. If the
corporation is deducting foreign tax,
use column (b) or (c), as applicable, to
correct for any difference between
foreign withholding tax included in
financial accounting net income and the
amount of foreign withholding taxes
being deducted in the return. If the
corporation is crediting foreign
withholding taxes against the U.S.
income tax liability, use column (b) or
(c), as applicable, to negate the amount
reported in column (a).

Line 8. Incentive Stock
Options

Part III. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return - Expensel
Deduction Items

Do not report any amount on line 8,
column (a). Instead, include any
amount expensed per the income
statement for incentive stock options as
part of the amount on Part III, line 9,
column (a). Report on line 8, columns
(b), (c), and (d), as applicable, any
deductible amounts attributable to the
disposition of shares delivered pursuant
to the exercise of incentive stock
options.

Lines 1 Through 6. Income
Tax Expense

Line 9. Nonqualified Stock
Options

If the corporation does not distinguish
between current and deferred income
tax expense in its financial statements
(or its books and records, if applicable),
report income tax expense as current
income tax expense using lines 1, 3,
and 5, as applicable.

Report on line 9, column (a), any
amounts expensed per the income
statement attributable to all stock
options. Report on line 9, column (d),
any deductible amounts attributable to
the exercise of payments made
pursuant to nonqualified stock options
(i.e., stock options not qualified under
section 422 or 423).

Report on Part II, line 28, columns (a)
through (d), as applicable, the negative
of the amounts reported on Part III, line
36, columns (a) through (d). For
example, if Part III, line 36, column (a),
reflects an amount of $1 million then
report on Part II, line 28, column (a),
($1 million). Similarly, if Part III, line 36,
column (b), reflects an amount of
($50,000), then report on Part II, line
28, column (b), $50,000.

Line 29. Other Income/Loss
and Expense/Deduction
Items With No Differences

consolidated tax group (income tax
expense) is allocated among the
members of the U.S. consolidated tax
group in the group's financial
statements (or its books and records, if
applicable), then each member must
report its allocated income tax expense
on Part III, lines 1 through 6, of that
member's separate Schedule M-3.
However, if the income tax expense is
not shared or allocated among
members of the U.S. consolidated tax
group but is retained in the parent
corporation's financial statements (or
books and records, if applicable), then
amounts are reported only on Part III,
lines 1 through 6, of the parent's
separate Schedule M-3.

A U.S. consolidated tax group must
complete lines 1 through 6 in
accordance with the allocation of tax
expense among the members of the
U.S. consolidated tax group in the
financial statements (or its books and
records, if applicable). If the current and
deferred U.S., state, and foreign
income tax expense for the U.S.

Instructions for Schedule M-3 (Form 1120)

-13-

Line 10. Other Equity-Based
Compensation
Report on line 10 any amounts for
equity-based compensation or
consideration that are reflected as
expense in the financial statements

(column (a)) or deducted in the U.S.
federal income tax return (column (d))
other than amounts reportable
elsewhere on Schedule M-3, Parts II
and III (e.g., on Part III, lines 8 and 9,
for incentive stock options and
nonqualified stock options,
respectively). Examples of amounts
reportable on line 10 include payments
attributable to employee stock purchase
plans (ESPPs), phantom stock options,
phantom stock units, stock warrants,
stock appreciation rights, and restricted
stock, regardless of whether such
payments are made to employees or
nonemployees, or as payment for
property or compensation for services.

Line 11. Meals and
Entertainment
Report on line 11, column (a), any
amounts paid or accrued by the
corporation during the tax year for
meals, beverages, and entertainment
that are accounted for in financial
accounting income, regardless of the
classification, nomenclature, or
terminology used for such amounts,
and regardless of how or where such
amounts are classified in the
corporation's financial income
statement or the income and expense
accounts maintained in the
corporation's books and records.
Report only amounts not otherwise
reportable elsewhere on Schedule M-3,
Parts II and III (e.g., Part II, line 17,
Inventory valuation adjustments).

Line 12. Fines and Penalties
Report on line 12 any fines or similar
penalties paid to a government or other
authority for the violation of any law for
which fines or penalties are assessed.
All fines and penalties expensed in
financial accounting income (paid or
accrued) must be included on this line
12, column (a), regardless of the
government or other authority that
imposed the fines or penalties,
regardless of whether the fines and
penalties are civil or criminal,
regardless of the classification,
nomenclature, or terminology used for
the fines or penalties by the imposing
authority in its actions or documents,
and regardless of how or where the
fines or penalties are classified in the
corporation's financial income
statement or the income and expense
accounts maintained in the
corporation's books and records. See
sections 162(f) and 162(g) for additional
guidance.

Line 13. Punitive Damages
Include on line 13, column (a), any
amount included in net income per the
income statement attributable to
punitive damages, regardless of
whether the amount deducted was

attributable to an estimate of future
anticipated payments or actual
payments. Report in column (b) or (c),
as applicable, the deductible or
nondeductible punitive damages.
Report in column (d) the amount of
punitive damages deductible for U.S.
federal income tax purposes.

tax year that is not otherwise reportable
elsewhere on Schedule M-3, including
any compensation deductions deferred
in a prior tax year.

Line 14. Parachute Payments

Report on line 20 any charitable
contribution of intangible property, for
example, contributions of:
• Intellectual property, patents
(including any amounts of additional
contributions allowable by virtue of
income earned by donees subsequent
to the year of donation), copyrights,
trademarks;
• Securities (including stocks and their
derivatives, stock options, and bonds);
• Conservation easements (including
scenic easements or air rights);
• Railroad rights of way;
• Mineral rights; and
• Other intangible property.

Report on line 14, column (a), the total
expense included in financial
accounting net income on Part I, line
11, that is subject to section 280G.
Report in column (b) or (c), as
applicable, the amount of nondeductible
parachute payments pursuant to
section 280G, and report in column (d)
the deductible amount of compensation
after any excess parachute payment
limitations under section 280G. If a
payment is subject to limitation under
both sections 162(m) and 280G, report
the total payment on this line 14.

Line 15. Compensation With
Section 162(m) Limitation
Report on line 15, column (a), the total
amount of non-performance-based
current compensation expense for the
corporate officers to whom section
162(m) applies. Report the
nondeductible amount of current
compensation in excess of $1 million in
column (b) or (c), as applicable, and the
deductible compensation in column (d).
If a payment is subject to limitation
under both sections 162(m) and 280G,
report the total payment on Part III, line
14, Parachute payments. See
Regulations section 1.162-27(g) for the
interaction between sections 162(m)
and 280G.

Line 16. Pension and
Profit-Sharing
Report on line 16 any amounts
attributable to the corporation's pension
plans, profit-sharing plans, and any
other retirement plans.

Line 17. Other
Post-Retirement Benefits
Report on line 17 any amounts
attributable to other post-retirement
benefits not otherwise includible on Part
III, line 16, for example, retiree health
and life insurance coverage, dental
coverage, etc.

Line 18. Deferred
Compensation
Report on line 18, column (a), any
compensation expense included in the
net income amount reported in the
income statement that was not reported
elsewhere on Schedule M-3, column
(a). Report on line 18, column (d), any
compensation deductible in the current

-14-

Line 20. Charitable
Contribution of Intangible
Property

Line 21. Charitable
Contribution Limitation
Report as a negative amount on line
21, columns (b), (c), and (d) as
applicable, the excess of charitable
contributions made during the tax year
over the amount of the charitable
contribution limitation amount. When a
U.S. consolidated federal income tax
return is being filed, the Schedule M-3
adjustment for the amount of
contributions in excess of the limitation
should not be made on the separate
consolidating Schedules M-3 of the
includible corporations, but on the
separate consolidating Schedule M-3
for consolidation eliminations as
described in Consolidated Schedule
M-3 Versus Consolidating Schedules
M-3, on page 2.

Line 22. Charitable
Contribution Carryforward
Used
If the corporation utilizes a contribution
carryforward in the current tax year,
report the carryforward utilized as a
positive amount on Part III, line 22,
columns (b), (c), and (d), as applicable.
When a U.S. consolidated federal
income tax return is being filed, the
Schedule M-3 adjustment for the
amount of charitable contribution
carryforward used should not be made
on the separate consolidating
Schedules M-3 of the includible
corporations, but on the separate
consolidating Schedule M-3 for
consolidation eliminations and
adjustments as described in
Consolidated Schedule M-3 Versus
Consolidating Schedules M-3, on page

2.
Instructions for Schedule M-3 (Form 1120)

Line 23. Current Year
Acquisition or
Reorganization Investment
Banking Fees

a subsidiary, or an initial public stock
offering.

Report on line 23 any investment
banking fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (e.g., stock or
assets) or a tax-free reorganization.
Report on this line any investment
banking fees incurred at any stage of
the acquisition or reorganization
process including, for example, fees
paid or incurred to evaluate whether to
investigate an acquisition, fees to
conduct an actual investigation, and
fees to consummate the acquisition.
Also include on this line 23 investment
banking fees incurred in connection
with the liquidation of a subsidiary, a
spin-off of a subsidiary, or an initial
public stock offering.

Report on line 26 amortization of
goodwill or amounts attributable to the
impairment of goodwill.

Line 24. Current Year
Acquisition or
Reorganization Legal and
Accounting Fees
Report on line 24 any legal and
accounting fees paid or incurred in
connection with a taxable or tax-free
acquisition of property (e.g., stock or
assets) or tax-free reorganization.
Report on this line any legal and
accounting fees incurred at any stage
of the acquisition or reorganization
process including, for example, fees
paid or incurred to evaluate whether to
investigate an acquisition, fees to
conduct an actual investigation, and
fees to consummate the acquisition.
Also include on this line 24 legal and
accounting fees incurred in connection
with the liquidation of a subsidiary, a
spin-off of a subsidiary, or an initial
public stock offering.

Line 25. Current Year
Acqu isition/Reorgan ization
Other Costs
Report on line 25 any other fees paid or
incurred in connection with a taxable or
tax-free acquisition of property (e.g.,
stock or assets) or a tax-free
reorganization not otherwise reportable
on Schedule M-3 (e.g., Part III, line 23
or 24). Report on this line any fees paid
or incurred at any stage of the
acquisition or reorganization process
including, for example, fees paid or
incurred to evaluate whether to
investigate an acquisition, fees to
conduct an actual investigation, and
fees to consummate the acquisition.
Also include on this line 25 other
acquisition/reorganization costs
incurred in connection with the
liquidation of a subsidiary, a spin-off of
Instructions for Schedule M-3 (Form 1120)

Line 26. Amortizationl
Impairment of Goodwill

Line 27. Amortization of
Acquisition, Reorganization,
and Start-Up Costs
Report on line 27 amortization of
acquisition, reorganization, and start-up
costs. For purposes of column (b), (c),
and (d), include amounts amortizable
under section 167, 195, or 248.

Line 28. Other Amortization
or Impairment Write-Ofts
Report on line 28 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.

Line 29. Section 198
Environmental Remediation
Costs
Report on line 29, column (a), any
amounts attributable to environmental
remediation costs included in the net
income per the income statement.
Report in columns (b), (c), and (d), as
applicable, any deductible amounts
attributable to environmental
remediation costs described in section
198 that are paid or incurred during the
current tax year.

Line 31. Depreciation
Report on line 31 any depreciation
expense that is not required to be
reported elsewhere on Schedule M-3
(e.g., on Part II, lines, 9, 10, 11, or 17).

Line 32. Bad Debt Expense
Report on line 32, column (a), any
amounts attributable to an allowance
for uncollectible accounts receivable or
actual write-offs of accounts receivable
included in net income per the income
statement. Report in column (d) the
amount of bad debt expense deductible
for federal income tax purposes in
accordance with section 166.

Line 33. Corporate Owned
Life Insurance Premiums
Report on line 33 all amounts of
insurance premiums attributable to any
life insurance policy if the corporation is
directly or indirectly a beneficiary under
the policy or if the policy has a cash
value. Report in column (d) the amount
of the premiums that are deductible for
federal income tax purposes.

-15-

Line 34. Purchase Versus
Lease (for Purchasers and/or
Lessees)
(Also see the instructions at Part II, line
18, on page 11, for sellers and/or
lessors.)
Asset transfer transactions with
periodic payments characterized for
financial accounting purposes as either
a purchase or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes.
If a transaction is treated as a lease,
the purchaser/lessee reports the
periodic payments as gross rental
expense. If the transaction is treated as
a purchase, the purchaser/lessee
reports the periodic payments as
payments of principal and interest and
also reports depreciation expense or
deduction with respect to the purchased
asset.
Report on Part III, line 34, column
(a), gross rent expense for a
transaction treated as a lease for
income statement purposes but as a
sale for tax return purposes. Report on
Part III, line 34, column (d), gross rental
deductions for a transaction treated as
a lease for tax purposes but as a
purchase for income statement
purposes. Report interest expense or
deduction amounts for such
transactions on Part III, line 35, Other
expense/deduction items with
differences, in column (a) or (d), as
applicable. Report depreciation
expense or deductions for such
transactions on Part III, line 31,
Depreciation, in column (a) or (d), as
applicable. Use columns (b) and (c) of
Part III, lines 31,34, and 35, as
applicable, to report the differences
between column (a) and (d) for such
recharacterized transactions.
Example 20. U.S. corporation X
acquired property with a sale price of
$3,000 in a transaction that, for
financial accounting purposes, X treats
as a lease. X is a calendar year
taxpayer that was required to file
Schedule M-3 for its 2004 tax year and
is required to file Schedule M-3 for its
2005 tax year. For U.S. federal income
tax purposes, because of its terms, the
transaction is taxed as a purchase and
X must treat the periodic payments it
makes partially as payment of principal
and partially as payment of interest. In
its financial statements, X treats the
difference between the financial
accounting and U.S. federal tax
treatment of this transaction as
temporary. During 2005, X reports in its
financial statements $1,000 of gross
rental expense that, for federal income
tax purposes, is recharacterized as a
$700 payment of principal and a $300
payment of interest, accompanied by a

depreciation deduction of $1 ,200
(based on other facts). On its 2005
Schedule M-3, X must report the
following on Part III, line 34: column (a)
$1,000, its financial accounting gross
rental expense; column (b), ($1,000);
and column (d), zero. On Part III, line
35, X reports $300 in columns (b) and
(d) for the interest deduction: On Part
III, line 31, X reports $1,200 In columns
(b) and (d) for the depreciation
deduction.

Line 35. Other Expensel
Deduction Items With
Differences
Report on Part III, line 35, all items of
expense/deduction that are not
otherwise listed on Part III, lines 1
through 34.
Comprehensive income. If any
"comprehensive income" as defined by
SFAS No. 130 is reported on this line,
describe the item(s) in detail as, for
example, "Foreign currency translation
adjustments" and "Gains and losses on
available-for-sale securities."
Reserves and contingent liabilities.
Report on line 35 each reserve or
contingent liability that is not reported
elsewhere in Schedule M-3. Report on
line 35, column (a), expenses included
in net income reported on Part I, line
11, that are related to reserves and
contingent liabilities. Report on line 35,
column (d), amounts related to liabilities
for reserves and contingent liabilities
that are deductible in the current tax
year for U.S. federal income tax
purposes. Examples of items that must
be reported on line 35 include warranty
reserves, restructuring reserves,
reserves for discontinued operations,
reserves for legal proceedings, and
reserves for acquisitions and
dispositions. Only report on line 35
items that are not required to be
reported elsewhere on Schedule M-3,
Parts II and III. For example, the
expense for a reserve for inventory
obsolescence must be reported on Part
II, line 17, Inventory valuation
adjustments.
The schedule of details attached to
the return for line 35 must separately
state and adequately disclose the
nature and amount of the expense
related to each reserve and/or
contingent liability. The appropriate
level of disclosure depends upon each
taxpayer's operational activity and the
nature of its accounting records. For
example, if a corporation's net income
amount reported in the income
statement includes anticipated
expenses for a discontinued operation
as a single amount, and its general
ledger or other books, records, and

workpapers provide details for the
anticipated expenses under more
explanatory and defined categories
such as employee termination costs,
lease cancellation costs, loss on sale of
equipment, etc., a supporting schedule
that lists those categories of expenses
and their details will satisfy the
requirement to separately state and
adequately disclose. In order to
separately state and adequately
disclose the employee termination
costs, it is not required that an
anticipated termination cost amount be
listed for each employee, or that each
asset (or category of asset) be listed
along with the anticipated loss on
disposition.
Example 21. Corporation P is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. P
has been sued by its customers in a
class action product liability lawsuit.
The trial date is in 2006. In its 2005
financial statements, P establishes a
reserve of $1 million for its potential
liability related to the class action
lawsuit and reports corresponding
expenses in the amounts of $400,000
for estimated product replacement and
$600,000 for estimated personal
damages. For U.S. federal income tax
purposes, the $1 million is not
deductible in 2005. In its financial
statements, P treats the difference
between the financial statement
treatment and the U.S. federal income
tax treatment of the reserve for the
lawsuit as a temporary difference. P
must report in its 2005 U.S. federal
income tax return on Part III, line 35, $1
million in column (a), ($1 million) in
column (b), and zero in column (d). If P
attaches a supporting schedule to Part
III, line 35, explaining that the $1 million
of difference is attributable to estimated
product replacement cost in the amount
of $400,000 and estimated personal
damages in the amount of $600,000,
that level of detail will be sufficient to
separately state and adequately
disclose the $1 million adjustment.
Example 22. Same as Example 21
except that in 2006 P pays $1 million to
settle the lawsuit with the settlement
documents stipulating that the product
replacement amount is $450,000 and
the damage amount is $550,000. Both
the $450,000 and $550,000 settlement
amounts are deductible for U.S. federal
income tax purposes in 2006. On its
2006 Schedule M-3, P must report on
Part III, line 35, zero in column (a), $1
million in column (b), and $1 million in
column (d). If P attaches a supporting
schedule to Part III, line 35, explaining

-16-

Printed on recycled paper

that the $1 million of difference is
attributable to actual product
replacement cost in the amount of
$450,000 and actual personal damages
in the amount of $550,000, that level of
detail will be sufficient to separately
state and adequately disclose the $1
million deduction.
Various prepaid expenses. Report on
Part III, line 35, the amortization of
various items of prepaid expense, such
as prepaid subscriptions and license
fees, prepaid insurance, etc.
Example 23. Corporation Q is a
calendar year taxpayer that was
required to file Schedule M-3 for its
2004 tax year and is required to file
Schedule M-3 for its 2005 tax year. On
July 1 of each year, Q has a fixed
liability for its annual insurance
premiums that provides a 12-month
coverage period beginning July 1
through June 30. In addition, Q
historically prepays 12 months of
advertising expense on July 1. On July
1, 2005, Q prepays its insurance
premium of $500,000 and advertising
expenses of $800,000. For financial
statement purposes, Q capitalizes and
amortizes the prepaid insurance and
advertising over 12 months. For U.S.
federal income tax purposes, Q deducts
the insurance premium when paid and
amortizes the advertising over the
12-month period. In its financial
statements, Q treats the differences
attributable to the financial statement
treatment and U.S. federal income tax
treatment of the prepaid insurance and
advertising as temporary differences. Q
must separately state and adequately
disclose on Part III, line 35, its prepaid
insurance premium and report
$250,000 in column (a) ($500,000/12
months X 6 months), $250,000 in
column (b), and $500,000 in column
(d). Q must also separately state and
adequately disclose on Part II, line 29,
Other income (loss) and expense/
deduction items with no differences, its
prepaid advertising and report
$400,000 in column (a) and (d).

Line 36. Total Expensel
Deduction Items
Report on Part II, line 28, columns (a)
though (d), as applicable, the negative
of the amounts reported on Part III, line
36, column (a) through (d), as
applicable. For example, if Part III, line
36, column (a), reflects an amount of
$1 million, then report on Part II, line
28, column (a), ($1 million). Similarly, if
Part III, line 36, column (b), reflects an
amount of ($50,000), then report on
Part II, line 28, column (b), $50,000.

Instructions for Schedule M-3 (Form 1120)

SCHEDULE M-3
(Form 1120)

Net Income (Loss) Reconciliation for Corporations
With Total Assets of $10 Million or More

Department of the Treasury
Internal Revenue Service

~@04

~
~

Attach to Form 1120.
See separate instructions.

Name of corporation (common parent. if consolidated return)

':m..

OMS No. 1545-0123

Employer identification number

Financial Information and Net Income (Loss) Reconciliation

1a Did the corporation file SEC Form 10-K for its income statement period ending with or within this tax year?
Yes. Skip lines 1 band 1c and complete lines 2a through 11 with respect to that SEC Form 10-K.
No. Go to line 1 b.
b Did the corporation prepare a certified audited income statement for that period?
Yes. Skip line 1c and complete lines 2a through 11 with respect to that income statement.
No. Go to line 1c.
c Did the corporation prepare an income statement for that period?
Yes. Complete lines 2a through 11 with respect to that income statement.
No. Skip lines 2a through 10 and enter the corporation's net income (loss) per its books and records on line 11.

o
o

2a Enter the income statement period: Beginning
/
/
Ending
/
/
b Has the corporation's income statement been restated for the income statement period on line 2a?
Yes. (If "Yes," attach an explanation and the amount of each item restated.)
No.
c Has the corporation's income statement been restated for any of the five income statement periods preceeding the period
on line 2a?

o
o

Yes. (If "Yes," attach an explanation and the amount of each item restated.)
No.
3a Is any of the corporation's voting common stock publicly traded?
DYes.
No. If "No," go to line 4.

b Enter the symbol of the corporation's primary U.S. publicly traded voting common
stock.
c Enter the nine-digit CUSIP number of the corporation's primary publicly traded voting
common stock

Worldwide consolidated net income (loss) from income statement source identified in Part I, line 1

Sa (

Sa Net income from nonincludible foreign entities (attach schedule)

6a (

6a Net income from nonincludible U.S. entities (attach schedule) .

7a Net income of other includible corporations (attach schedule) .

7b (

b Net loss of other includible corporations (attach schedule)
Adjustment to eliminations of transactions between includible corporations and nonincludible entities
(attach schedule) .

Adjustment to reconcile income statement period to tax year (attach schedule)

Other adjustments to reconcile to amount on line 11 (attach schedule) .

Net income (loss) per income statement of includible corporations. Combine lines 4 through
10 .

For Privacy Act and Paperwork Reduction Act Notice, see the Instructions for
Forms 1120 and 1120-A.

)

b Net loss from nonincludible U.S. entities (attach schedule and enter as a positive amount)

)

b Net loss from non includible foreign entities (attach schedule and enter as a positive amount)

Cat No. 37961C

)

Schedule M-3 (Form 1120) 2004

Page

Name of corporation (common parent, if consolidated return)

Employer identification number

Name of subsidiary (if consolidated return)

Employer identification number

Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With
Taxable Income per Return
(a)
Income (Loss) per
Income Statement
(optional)

Income (Loss) Items
1
2
3

5
6
7
8
9
10
11
12
13
14
15
16

17
18
19
20
21
22

(b)
Temporary
Difference

(d)
Income (Loss) per
Tax Return
(optional)

Income (loss) from equity method foreign corporations
Gross foreign dividends not previously taxed
Subpart F, QEF, and similar income inclusions
Section 78 gross-up.
Gross foreign distributions previously taxed .
Income (loss) from equity method U.S. corporations
U.S. dividends not eliminated in tax consolidation.
Minority interest for includible corporations
Income (loss) from U.S. partnerships (attach schedule)
Income (loss) from foreign partnerships (attach schedule)
Income (loss) from other pass-through entities
(attach schedule)
Items relating to reportable transactions (attach details)
Interest income
Total accrual to cash adjustment
Hedging transactions
Mark-to-market income (loss) .
Inventory valuation adjustments
Sale versus lease (for sellers and/or lessors) .
Section 481 (a) adjustments
Unearned/deferred revenue
Income recognition from long-term contracts
Original issue discount and other imputed interest

23a Income statement gain/loss on sale, exchange,
abandonment, worthlessness, or other disposition of
assets other than inventory and flow-through entities
23b Gross capital gains from Schedule D, excluding
amounts from flow-through entities
23c Gross capital losses from Schedule D, excluding
amounts from flow-through entities, abandonment
losses, and worthless stock losses
23d Net gain/loss reported on Form 4797, line 17,
excluding amounts from flow-through entities,
abandonment losses, and worthless stock losses
23e Abandonment losses
23f Worthless stock losses (attach details)
239
24
25
26

Other gain/loss on disposition of assets other than inventory
Disallowed capital loss in excess of capital gains
Utilization of capital loss carryforward .
Other income (loss) items with differences (attach schedule)

Total income
through 26

Total expense/deduction
line 36)

Other income (loss) and expense/deduction
items with no differences
Reconciliation totals. Combine lines 27 through 29 .

(loss)

items. Combine

lines

items (from Part III,

Note. Line 30, column (a), must equal the amount on Part I, line 11, and column (d) must equal Form 1120, page 1, line 28.
Schedule M-3 (Form 1120) 2004

Schedule M-3 (Form 1120) 2004

Page

Name of corporation (common parent, if consolidated return)

Employer identification number

Name of subsidiary (if consolidated return)

Employer identification number

Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable
Income per Return-Expense/Deduction Items
(a)
Expense per
Income Statement
(optional)

Expense/Deduction Items
1

2
3
4
5
6

7
8
9

10
11
12
13
14
15
16
17

18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

(b)
Temporary
Difference

(d)
Deduction per
Tax Return
(optional)

U.S. current income tax expense
U.S. deferred income tax expense
State and local current income tax expense.
State and local deferred income tax expense
Foreign current income tax expense (other than
foreign withholding taxes)
Foreign deferred income tax expense
Foreign withholding taxes .
Incentive stock options.
Nonqualified stock options
Other equity-based compensation
Meals and entertainment
Fines and penalties
Punitive damages
Parachute payments
Compensation with section 162(m) limitation
Pension and profit-sharing
Other post-retirement benefits
Deferred compensation.
Charitable contribution of cash and tangible
property
Charitable contribution of intangible property
Charitable contribution limitation
Charitable contribution carryforward used
Current
year
acquisition
investment banking fees

reorganization

Current year acquisition or reorganization legal and
accounting fees
Current year acquiSition/reorganization other costs
Amortization/impairment of goodwill
Amortization of acquisition, reorganization, and
start-up costs .
Other amortization or impairment write-offs
Section 198 environmental remediation costs
Depletion
DepreCiation
Bad debt expense
Corporate owned life insurance premiums
Purchase versus
lessees)

lease (for purchasers and/or

Other expense/deduction items with differences
(attach schedule)
Total expense/deduction items. Combine lines 1
throuah 35. Enter here and on Part II, line 28

Prlnt&d on recycl&d paper

Schedule M-3 (Form 1120) 2004

J8-2124: Treasury's Deputy A~~iE;ti:lI1t Secretary Iannicola Speaks at Annual Meetin... Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
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December 2,2004
JS-2124

Treasury's Deputy Assistant Secretary lannicola Speaks at
Annual Meeting of Georgia Consortium for Per
Financial Literacy
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannicola, Jr.,
today delivered the keynote address at the annual meeting of the Georgia
Consortium for Personal Financial Literacy, the Georgia Jump$tart affiliate, at the
Federal Reserve Bank of Atlanta. lannicola addressed over 100 participants
representing nonprofit, private and government organizations focused on improving
financial education in Georgia. He presented the group with Treasury's Eight
Elements for a Successful Financial Education Program, which can help grass roots
organizations improve and expand financial education in the state.
lannicola encouraged the members of the Georgia Consortium for Personal
Financial Literacy to continue their efforts. "By partnering with one another you're
improving financial education in Georgia and you're getting the right information, to
the right people, at the right time," said lannicola. "These organizations you
represent are putting individuals and whole communities on the path to financial
security."
The Georgia Consortium for Personal Financial Literacy works with businesses and
state and local governments to implement policies and practices that encourage
wise personal finance decision-making. Some of the founding member
organizations include the Community Foundation for Greater Atlanta, Consumer
Credit Counseling Service, Georgia Council on Economic Education, the Federal
Reserve Bank of Atlanta, and Junior Achievement of Georgia. The Jump$tart
Coalition for Personal Financial Literacy is a non-profit organization that seeks to
improve the personal financial literacy of young adults.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 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.govlfinancialeducation.

REPORTS
•

lannicola's presentation of TrE)asury's Eight Elements for a Successful
Financial Education program

http://www.trcas.gov/press/reIeases/j:-.7124.htm

113/2005

Deputy Assistant Secretary Dan Iannicola's Presentation of Treasury's Eight
Elements of a Successful Financial Education Program to the Georgia
Consortium for Personal Financial Literacy
The Office of Financial Education works to ensure that Americans mve access to financial
education programs that can help them obtain practical knowledge and skills to make informed
financial choices throughout their lives. To that end, the Treasury Department published a list of
eight elements of a successful financial education program. The success factors relate to the
program's content, delivery, impact, and sustainability, and I suspect that upon closer inspection,
many of the programs offered by the organization;; represented here today are already well on
their way to meeting these success factors. These elements can serve as a guide, whether your
organization's goal is to develop new programs or to enhance existing program strategies for
achieving the greatest impact throughout the state.
Our first element states that a successful financial education program is one that focuses on one
or more of the four basic tenets of financial empowerment: basic savings, credit management,
home ownership and retirement planning. While there are other worthwhile financial education
topics, these four areas are the basic building blocks to achieving financial security and are
therefore the primary focus of Treasury's Office of Financial Education.
Our second element points out that a successful program is tailored to its target audience, taking
into account its language, culture, age and experience. Cultural biases, language differences, and
other related factors play an important role in the development of any educational program.
Our third element of a successful financial education program recognizes that programs having
the most profound impact are delivered through a local distribution channel that makes effective
use of community resources and contacts. Partnerships with local organizations that are already
ingrained in the community are one of the most effective means of garnering support and
acceptance within a community and will result in the more effective delivery of information.
Our fourth element is demonstrated when a financial education program follows up with
participants to reinforce the message and ensure that participants are able to apply the skills
taught. These actions serve to further break down those barriers and to pave the road to better
access to financial services.
Our fifth element requires that a successful program establishes specific program goals and uses
performance measures to track progress toward meeting toose goals. To achieve goals, an
organization must set goals. It is important that financial education providers set a standard of
excellence and track progress toward achieving their missions.
Our sixth element states that successful programs can prove their worth, by demonstrating a
positive impact on participants' attitudes, knowledge or behavior through testing, surveys or
other objective evaluation. Did participants increase their savings? Did they open bank
accounts? Did they save for a home and qualify for a mortgage? These are all measures of
success and ways that a financial education program can demonstrate impact on its community.

Our seventh element inquires whether a financial education program can be easily replicated on a
local, regional or national basis so as to have broad impact and sustainability.
And finally, under our eighth element we ask whether a financia I education program is built to
last as evidenced by factors such as continuing financial support, legislative backing or
integration into an established course of instruction. This element simply recognizes that good
programs must have the ability to survive if they are to have a strong impact.
Additionally, organizations with an interest in financial education can also receive input on
program design and available resources, explore partnerships with other organizations and learn
about best practices in financial education through the office's recently launched Technical
Assistance Center. By helping organizations to launch new programs or improve existing ones,
the center fills an important need in the financial education community. The center can be
accessed online at http://www.treasury.gov/financialeducationor by telephone at (202) 6229372.

-30-

JS-2125: ~tatement of Secretary John W. Snow on November Employment Report

Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 3, 2004
JS-2125

Statement of Secretary John W. Snow on November Employment Report
"November's job creation numbers are a confirmation that the American economy is
on a steady growth path. The economy has created more than 2 million jobs so far
this year, averaging nearly 200,000 new jobs a month. This is the fifteenth
consecutive month of job creation, with the economy adding 112,000 new jobs in
November. Falling to 5.4 percent last month, the unemployment rate remains below
the average of each of the past three decades.
"This is a clear sign that the President's economic policies are working the way they
were intended. By putting more money into taxpayers' pockets and enhancing the
incentive to work and invest, his tax cuts continue to lead to economic growth and
good job creation."

http://www.tfcas.goy/press/reieasesijs2125.htm

11312005

js-2127: Rqwrt to

C(ln£.IT~" '.)!~ l::~.:rnational

Economic and Exchange Rate Policies

Page 1 of 12

PRess ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free A,lo/)e(l, Auu/Ja/'.I)

Re<l(IF'li".

December 3, 2004
js-2127
Report to Congress on International Economic and Exchange Rate Policies
This report reviews developments in international economic policy, including
exchange rate policy, focusing on the first half of 2004, The report is required
under the Omnibus Trade and Competitiveness Act of 1988, which states, among
other things, that: "The Secretary of the Treasury shall analyze on an annual basis
the exchange rate policies of foreign countries, in consultation with the International
Monetary Fund, and consider whether countries manipulate the rate of exchange
between their currency and the United States dollar for purposes of preventing
effective balance of payments adjustments or gaining unfair competitive advantage
in international trade."
This report reviews the effects that significant international economic developments
have had on the United States and foreign economies and evaluates the factors
that underlie those developments, For the specific purpose of assessing whether
an economy is manipulating the rate of exchange between its currency and the U,S.
dollar according to the terms of the Act, Treasury has traditionally undertaken a
careful review of the trading partner's exchange rates, external balances, foreign
exchange reserve accumulation, macroeconomic trends, monetary and financial
developments, the state of institutional development, and financial and exchange
restrictions. Attention is given to both the changes and interactions of significant
variables. Isolated developments in anyone area do not typically provide sufficient
grounds to conclude that exchange rates are being manipulated under the terms of
the Act. A combination of factors, on the other hand, can and has in the past led
Treasury to find that certain countries had satisfied the terms of the Act.
After reviewing developments in the United States, the report examines exchange
rate policies in major economies across five regions of the world: (1) the Western
Hemisphere, (2) Europe and Eurasia, (3) Sub-Saharan Africa, (4) North Africa, the
Middle East and South Asia, and (5) East Asia. To summarize, the report finds
that:
Economies around the world continue to follow a variety of exchange rate
policies, ranging from a flexible exchange rate with little or no intervention to
currency unions and full dollarization. For example, Canada follows a flexible
exchange rate regime with no intervention, twelve countries are members of the
European Monetary Union, and EI Salvador, Ecuador and Panama use the U.S.
dollar as their "domestic" currency.
A notable trend observed over the past several years is the move by many
economies to adopt flexible exchange rates, combined with clear price stability
goals and a transparent system for adjusting monetary policy instruments.
The report finds that no major trading partner of the United States met the
technical requirements for designation under the Omnibus Trade and
Competitiveness Act of 1988 during the first half of 2004. The report notes that
while a number of economies continue to use pegged exchange rates and/or
intervene in foreign exchange markets, a peg or intervention does not in and of
itself satisfy the statutory test. Treasury has consulted with the IMF management
and staff, as required by the statute, and they concur with our conclusions. The
Administration strongly believes that a system of flexible, market-based exchange
rates is best for major trading partners of the United States.
Treasury is continuing to engage actively with economies and to encourage,

http://www.tr~aS.gov/press/releases/js2127.htm

113/2005

js-2127: Rel'ort to Congre~oo-lmeffiationai Economic and Exchange Rate Policies

Page 2 of 12

in both bilateral and multilateral discussions, policies for large economies that
promote a flexible market-based exchange rate combined with a clear price stability
goal and a transparent system for adjusting policy instruments. In this light, the
communiques of the G-7 Finance Ministers and Central Bank Governors in
February, April and October of this year stated: " ... that more flexibility in exchange
rates is desirable for major countries or economic areas that lack such flexibility to
promote smooth and widespread adjustments in the international financial system,
based on market mechanisms."

The United States International Accounts[1]
The current account deficit is conceptually equal to the gap between investment
and saving as a matter of international accounting. When investment in the United
States is higher than domestic saving, foreigners make up the difference, and the
United States has a current account deficit. In contrast, if saving exceeds
investment in a country, then that country has a current account surplus as its
people invest abroad.

The growth of the U.S. current account deficit over more than a decade has been
linked to high levels of domestic U.S. capital formation compared to domestic U.S.
saving. Perceived high rates of return on U.S. assets, based on sustained strong
productivity growth relative to the rest of the world, attract foreign investment.

In the first half of 2004, for example, the U.S. current account deficit was $594
billion (at a seasonally adjusted annual rate and on a national income and product
accounting, or NIPA, basis) or 5.1 percent of GDP. This $594 billion deficit equaled
the gap between $2,246 billion in investment and $1,652 billion in saving[2]. That
is, U.S. domestic investment was $594 billion more than domestic saving with net
foreign investment making up the difference.
Overall, rapid growth in real GDP over the latter part of 2003 extended into the first
quarter of 2004 when real GDP rose at a strong 4.5 percent annual rate. That was
followed by a softening in the second quarter, with real GDP rising at a 3.3 percent
pace, leaving growth in the first half, however, at a solid 3.9 percent annual rate.
The second-quarter slowdown was concentrated in personal consumption
expenditures, inventory investment and net exports. In contrast, business fixed
investment strengthened considerably in the second quarter, rising at a 12.5
percent pace following a 4.2 percent increase in the first quarter, supported by
growing profits and a profit margin that has been holding near a six-year high.
The current account was $627 billion in deficit (at a seasonally adjusted annual rate
and on a balance of payments basis[3]) in the first half of 2004. A major item
financing the current account deficit has been net private foreign purchases of U.S.
securities, which reached an annualized $503 billion in the first half of 2004.
(Included in these were net private foreign purchases of U.S. Treasury securities
amounting to $202 billion.) In addition, foreign official institutions increased their
U.S. assets by $403 billion.
Viewed over a longer period, the U.S. current account balance declined, as a
percent of GDP, from a 1 percent surplus in the first quarter of 1991 to a 4 percent
deficit in the fourth quarter of 2000, to a 5 percent deficit in the first half of 2004.
Due to the current account deficit the net investment position of the United States
(with direct investment valued at the current stock market value of owners' equity)
fell to a negative $2.7 trillion as of December 31,2003, the latest date for which
data are available, from a negative $2.6 trillion at the end of 2002. A $398 billion
valuation adjustment due to exchange rate changes offset much of 2003's financial
outflow. Despite a large negative position, U.S. residents earned $39 billion more
on their foreign investments in 2003 than foreigners earned on their U.S.
investments. These positive net income receipts are the result of large net inflows
of income from direct investment offsetting net outflows of income on portfolio
investment.

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The U.S. current account deficit is the counterpart of the aggregate surplus of other
economies in the world. The policies of all countries affect the global pattern of
current account balances. It is important that policies that the United States follows
to reduce global imbalances keep the United States and the world economy
strong. There are three types of economic policies that the Bush Administration is
pursuing and will continue to pursue which relate directly to the current account.
First are policies aimed at increasing saving of the public sector and the private
sector as the U.S. economy continues to expand. A second group of economic
policies are those that will raise global growth. A third area of policy relates to
exchange rate flexibility for certain Asian economies that lack such flexibility.
The U.S. Dollar
The Federal Reserve Board's "broad" nominal dollar index increased 2.2 percent
during the first half of 2004. The dollar rose 2.9 percent against the "major" foreign
currencies (seven other industrialized economy currencies) while rising 1.4 percent
against "other important trading partners" (largely currencies of emerging market
economies). The broad index declined 11.0 percent from February 27,2002, when
it reached its recent peak, through June 30, 2004. Over this latter period the dollar
depreciated 22.6 percent against the major currencies while appreCiating 5.8
percent against the currencies of other important trading partners.
Over the year ending in June 2004, the consumer price index rose 3.3 percent, the
largest 12-month increase since mid-2001. Energy prices were a primary factor, up
17.0 percent over the year ending in June. The core CPI (excluding food and
energy) increased 1.9 percent over the twelve months through June 2004
compared to 1.1 percent in the twelve months through December 2003, the latter
being the smallest increase in core consumer prices since 1966. The Fed
increased the federal funds target rate by 25 basis points to 1.25 percent at the end
of June from the 1 percent where it had been held for the preceding 12 months.
There were additional 25-basls point increases in August, September and
November.
As discussed below, the currencies of different economies showed varying degrees
of flexibility relative to the dollar, as some monetary authorities sought to dampen or
prevent movements of their exchange rates against the dollar while others did not
intervene at all. The United States did not intervene in foreign exchange markets
during the first half of 2004.
Western Hemisphere
Nominal exchange rates in the region on average depreciated against the U.S
dollar in the first half of the year. Interest rate spreads between the Latin American
Emerging Market Bond Index (EMBI+) and U.S. Treasury securities increased from
518 basis points at the end of 2003 to 600 basis pOints by end June. The region's
growth outlook remains positive for 2004, with the major economies posting solid
growth rates in the first half of the year.
Argentina
Argentina has had a flexible exchange rate since the end of 2001 when it
abandoned its convertibility law, which pegged the peso one-to-one with the U.S.
dollar. Argentina's currency remained relatively steady in the first half of 2004,
depreciating 1.0 percent from 2.93 pesos per dollar to 2.96 pesos per dollar.
Argentina's trade surplus was $5.9 billion in the first half of 2004, compared with
$8.3 billion for the same period the previous year, with exports rising 13 percent
and imports rising 71 percent. The seasonally adjusted current account surplus
narrowed to 2.1 percent in the first half of 2004 compared to 7.5 percent in the first
half of 2003. Argentina's gross foreign exchange reserves grew by $3.3 billion
during the first half of the year to $17.4 billion at the end of June 2004 as Argentina
intervened during periods of peso strengthening in order to rebuild reserves. The
economic recovery continued after the severe contraction in the first half of 2002,
with real GDP growing 6.7 percent at a seasonally adjusted annualized rate in the
first half of 2004 over the second half of 2003. Consumer prices accelerated
somewhat, with the year-on-year increase reaching 4.8 percent in June 2004
compared with 3.8 percent in December 2003. Conditions in the banking system
continued to improve. Interest rates on saving depOSits of 30-44 day maturities fell
from 3.6 percent at end-December 2003 to 2.4 percent as of end-June 2004.

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Brazil
Brazil has a floating exchange rate regime and relies on inflation targeting to guide
monetary policy. Following a 22 percent nominal appreciation in 2003, the real
depreciated 6.3 percent in the first half of the year to BRL3.08/US$. Brazil's
sovereign risk spread stood at 646 basis points over U.S. Treasuries at end-June
2004 versus 463 basis points at the end of 2003. Year-on-year inflation stood at
6.0 percent in June, slightly above the center of the central bank's 5.5 percent
target for 2004 but within the target band. Brazil had seasonally adjusted current
account surpluses of 1.2 percent and 2.2 percent of GOP in the first and second
quarters of 2004, respectively. The United States had a bilateral trade deficit with
Brazil of $2.4 billion in the first half of 2004 compared to a $3.3 billion deficit during
the same period in 2003. Foreign direct investment inflows grew in the first half of
the year to $4.0 billion compared with $3.5 billion during the same period in 2003.
Net international reserves increased to $25 billion at the end of June 2004
compared to $20.5 billion at the end of December 2003, in part due to central bank
purchases of foreign exchange. The economic recovery continued in the first half
of the year with annualized GOP growth rates of 7.5 percent and 5.5 percent in the
first and second quarters, respectively.
Canada
Canada has a floating exchange rate regime. It has not intervened in the foreign
exchange market since 1998, except to make a small contribution to the brief G-7
intervention in support of the euro in September 2000. During the first half of 2004
the Canadian dollar depreciated 3.6 percent, from 0.77 US$/C$ to 0.75 US$/C$.
The J.P. Morgan trade-weighted index for the real exchange rate for Canada
depreciated 5.6 percent while the J.P. Morgan trade-weighted index for the nominal
exchange rate for Canada depreciated 3.2 percent. Canada's current account
surpluses during the first and second quarters of 2004 were 2.6 percent and 3.5
percent of GOP, respectively. The merchandise trade surplus with the U.S. was
$32.5 billion during the first half of 2004. Canada's international reserves declined
by 2.3 percent in the first half of 2004 to $35.4 billion. M3 grew 8.1 percent yearon-year in June 2004 compared to 6.8 percent year-on-year in December 2003.
Year-on-year headline inflation in June 2004 was 2.5 percent. The economy
expanded in the first half of 2004, with annualized real GOP growth of 2.7 percent
and 3.9 percent in the first and second quarters, respectively.
Mexico
Mexico has a floating exchange rate regime. Its central bank targets an inflation
rate of 3 percent with a +/-1 percent band. The Bank of Mexico also follows a
transparent rule for selling foreign reserves accumulated by state enterprises.
During the first half of 2004 the Mexican peso depreciated 2.6 percent, from 11.2
pesos/dollar to 11.5 pesos/dollar. J.P. Morgan's Narrow Nominal Effective
Exchange Rate Index of the peso depreciated 1.0 percent while the J.P Morgan
real effective index of the peso appreciated by 1.8 percent. Mexico's current
account deficits during the first and second quarters of 2004 were 1.2 percent and
0.9 percent of GOP, respectively. The merchandise trade surplus with the U.S. was
$22.3 billion during the first half of 2004. Foreign direct investment during the
period was $11.0 billion, versus $6.8 billion in the comparable period in 2003.
International reserves grew $1.7 billion during the first half of the year, reaching
$59.1 billion by the end of June. M3 grew 13.9 percent year-on-year in June 2004
compared with 13.6 percent year-on-year in December 2003. Year-on-year
headline inflation was 4.4 percent in June. The economy grew robustly in the first
six months of 2004, with real seasonally adjusted GOP increasing at annual rates of
5.5 percent and 4.5 percent during the first and second quarters, respectively.
Europe and Eurasia
The European Monetary Union
The euro depreciated 3.3 percent against the dollar in the first half of 2004. The
real effective exchange rate depreciated 2.0 percent over the period. The ECB did
not intervene in foreign exchange markets during the first half of 2004.
The countries in the Euro-zone taken together had a current account surplus during
the first half of 2004 equal to $41.1 billion (sa) or 0.9 percent of GOP, up from $7.2

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billion and $20.5 billion In the first and second halves of 2003, respectively. Goods
exports increased 8.0 percent while goods imports increased 4.6 percent in the first
half of 2004 over the same period in 2003. The trade surplus of the Euro-zone VISa-vis the U.S. was $35.2 billion, which is about the same level as in the second half
of 2003.
Euro-zone growth was an estimated 2.3 percent (annualized) in the first half of
2004. Germany and Italy have held back Euro-zone growth, but France had
annualized growth of 3.3 percent in the second quarter, led by strong domestic
demand. For the region, final consumption expenditure rose 0.8 percent in the first
half of 2004 while investment declined 0.1 percent. The harmonized consumer
price index rose at an annual rate of 2.8 percent in the first half of 2004 while the
index excluding energy, food, alcohol and tobacco rose 2.0 percent.

Central Europe
The currencies of the major central European economies weakened slightly against
the dollar during the first half of 2004. This largely resulted from the dollar's
appreciation against the euro. Each of the currencies strengthened against the
euro, their main reference currency, supported by expectations of higher domestic
interest rates.
In Hungary, shorter term yields of 11.0 percent helped the forint appreciate 3.5
percent against the euro (and decrease 0.4 percent against the dollar), despite
continued concern about large fiscal and current account deficits. The National
Bank of Hungary's index of the real value of the forint rose 7.8 percent during the
first half due to higher Inflation.
Expectations of upcoming interest rate increases also led to appreciation of the
Polish zloty and the Czech koruna. The koruna appreciated 2.0 percent against the
euro (a decrease of 1.6 percent against the dollar), while the zloty rose 3.8 percent
against the euro during the first half of 2004 (a decrease of 0.2 percent against the
dollar). The koruna was little changed in real terms, but the National Bank of
Poland's index of the real zloty appreciated 7.6 percent.
In Slovakia, the koruna appreciated 3.0 percent against the euro (and decreased
0.2 percent against the dollar) supported by strong export growth and expectations
of large FDI inflows. High inflation contributed to a real koruna appreciation of 6.6
percent. Separately, the Bulgarian lev weakened against the dollar as its value was
fixed to the euro as part of Bulgaria's successful currency board arrangement.

Russia
The large net inflows resulting from high oil prices and high foreign borrowing by
Russian corporations in 2003 continued during the first half of 2004. Russia's
current account surplus in the first half of 2004 was $22.6 billion, or 8.1 percent of
GDP, compared to $17.4 billion, or 7.6 percent of GDP, in the second half of 2003.
The ruble appreciated 0.6 percent against the US. dollar in the first half 2004
compared to 3.8 percent in the second half of 2003. According to the J.P. Morgan
Broad Real Effective Exchange Rate Index, the ruble appreciated 6.0 percent in the
first half of 2004 compared to 3.3 percent in the second half of 2003. The Russian
monetary authorities continued to intervene to moderate the appreciation of the
ruble against the dollar, and foreign exchange reserves increased $11.3 billion to a
record high of $88.2 billion. M2 grew 40.4 percent in the year through June 2004
compared to 51.6 percent in the year through December 2003. Consumer prices
rose 10.1 percent in the year through June 2004 compared to 12.0 percent in the
year through December 2003.

Sub-Saharan Africa
Many African countries maintain pegged exchange rates. The currencies of the
CFA zone depreciated against the dollar during the period, in line with the euro to
which these currencies are pegged. Sub-Saharan African currencies with more
flexible regimes saw their currencies generally appreciate against the US. dollar on
a nominal basis in the first half of 2004. The South African rand, which is close to
freely floating, continued to strengthen, appreciating by 92 percent on a nominal
effective basis and 5.2 percent on a real effective basis. The rand has now
appreciated by over 60 percent in real terms from lows reached in December 2001.

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This strength reflects unwinding of the undershooting in 2001, rising commodity
prices, strong economic fundamentals, and improved Investor sentiment toward
emerging markets in general. In Zimbabwe, the introduction of new foreign
exchange regulations including a managed foreign exchange auction, together with
a government clampdown on parallel market activities, led to an appreciation of the
Zimbabwe dollar In the early part of the year. Later in the period, in an effort to
encourage exporters and overseas workers to remit foreign exchange earnings
through formal channels, the government allowed the auction rate to depreCiate
Nevertheless, the depreciation of the Zimbabwe dollar has not kept pace With
inflation, which stood at 363 percent in the year to end-July.
Real GOP growth in sub-Saharan Africa is expected to rise to around 4 ;/2 percent
in 2004 from 3 1/2 percent in 2003. This pickup In growth reflects improving
macroeconomic stability in many countries, eaSing external debt burdens, large
increases in oil production, higher global commodity prices, and improved security
situations in several countries. Sub-Saharan Africa's overall current account deficit
is projected to be 14 percent of GOP in 2004, compared to a deficit of 24 percent
in 2003, due largely to higher oil and other commodity prices. Africa's trade surplus
with the United States Increased to $22.6 billion during the first three quarters of
2004, compared to $16.5 billion during the same period of 2003, due in large part to
higher oil prices.
North Africa, the Middle East and South Asia
Growth continues to be very strong across the Middle East and North Africa,
supported by record high oil prices. GOP in the oil-exporting countries of the Gulf
Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and
the UAE), in particular, increased significantly. Current accounts across the Gulf
remain largely in balance or surplus, and have increased significantly, along with
holdings of official reserves, mainly due to higher oil prices. Oil-exporting GCC
countries tie their currencies directly to the U.S. dollar.
Many other countries in the region, such as Jordan and the countries of North
Africa, also maintain pegged exchange rate regimes. Egypt returned to a de facto
peg after the Egyptian pound depreciated 23 percent in nominal terms in the six
months following its official float in January 2003. In the first six months of 2004, the
pound depreciated 0.7 percent in the official market, while at the same time very
strong export receipts (primarily due to high oil export revenues, Suez Canal
receipts, and a rebound in tourism) and a tightening of monetary policy helped the
pound to appreciate nearly 10 percent on the black market, virtually eliminating the
spread between the two rates. Net international reserves increased by $60 million
to $14.8 billion during that peflod.
Turkey, however, maintains a floating exchange rate regime. The Turkish lira
depreciated 5.5 percent in nominal terms against the U.S. dollar in the six months
to June, but the lira's real trade-weighted value fell a more modest 2.2 percent.
Real GNP In the first half of 2004 grew by 13.5 percent compared to the first half of
2003, a significant increase from the 5.9 percent growth rate recorded in 2003.
Despite the strong growth, the inflation rate continued to decline, falling to 8.9
percent year-on-year In June 2004 from 184 percent in 2003. The current account
deficit for the first half of 2004 widened to 4 percent of GNP from its 2.8 percent
level in 2003 on the back of the strong domestic economy and consumer demand.
In the first six months of 2004, imports and exports increased 47 percent and 32
percent, respectively, compared with the same period in 2003. Imports of capital
and consumption goods grew by 84 percent and 109 percent, respectively, in the
same period, but intermediate goods continue to account for 67 percent of imports.
The growing current account deficit is still mostly financed through short-term
capital inflows. As a result, gross foreign exchange reserves changed little to June
2004, continuing to hover around $33 billion compared to $33.6 billion at endDecember 2003.
In Israel, which also maintains a floating exchange rate, the shekel depreciated
during the first half of 2004, falling 2.7 percent against the dollar in nominal terms
and 3.0 percent in real trade-weighted terms. This followed a 5.8 percent tradeweighted depreciation in the last half of the 2003. Foreign exchange reserves
remained nearly unchanged at around $25.7 billion at end-June, as compared with
the 4.9 percent growth in reserves in the second half of 2003. A weaker currency
and f1sing demand in major export markets helped boost exports, and as a result
GOP growth increased to 2.5 percent for the first half of 2004 compared to 1.2

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percent for 2003 as a whole.
In South Asia, India targets a Real Effective Exchange Rate (REER) benchmark
based on cross-border inflation differentials and currency movements. Although the
Reserve Bank of India does not intervene to curtail short-term volatility relative to
the U.S. dollar, the exchange rate has not been allowed to stray too far from its
REER benchmark. The rupee depreciated by less than 1 percent in the first half of
2004. The US. bilateral merchandise trade deficit with India rose to $48 billion for
the first half of 2004, compared to $4.1 billion for the first half of 2003. Foreign
exchange reserves stood at $114.15 billion at the end of June, up from $96.5 billion
at the end of 2003. Real GOP grew by 74 percent year-on-year in the second
quarter of 2004.

East Asia
After picking up speed in the last half of 2003, East Asian GOP growth accelerated
in the first quarter of 2004, fueled by buoyant export markets, the recovery of the
global IT sector, and strong growth in domestic demand, most notably in China and
Japan. Economic growth has been widespread across the economies of East Asia,
increasing at the fastest rate since the 1997 financial crisis.
After a very strong first quarter, East Asian growth rates dropped off in the second
quarter, particularly in Japan. Higher oil prices, and the expectation that they might
persist for some time, were clearly part of the reason. But efforts to slow the growth
of the Chinese economy also had an impact, since rapidly growing Chinese import
demand had provided a major boost to growth throughout the region
Rising interest rates in the United States: a sharp, although relatively brief, widening
of emerging market spreads: and higher oil prices all appear to have reduced
portfolio investment inflows to East Asia in the second quarter of 2004. As a result,
monetary authorities that faced large foreign exchange inflows and upward
pressures on their currencies in the second half of 2003 and first quarter of 2004
saw diminished inflows in the second quarter.
Trade flows among East Asian economies have increased sharply in recent years,
reflecting increased integration of economies in the region. But increased intraregional trade also reflects the increasing diffusion of component production among
economies in the region, often for products that are exported outside East Asia. As
a result, monetary authorities appear to be increasingly concerned about the effect
of currency appreciation on their competitiveness relative to other economies in
East Asia. While noting these concerns, the Administration has encouraged
increased exchange rate flexibility for East Asian economies generally, both in
bilateral discussions and in regional fora such as APEC. APEC Finance Ministers
took a significant step in this direction in their statement of September 3, welcoming
steps taken by member economies to facilitate the move to greater exchange rate
flexibility.
Japan
Japan's economic recovery, which began in the second quarter of 2002, continued
in the first half of 2004. Strong growth carried over into the first quarter but slowed
markedly in the second quarter. Japan also made some progress in its long
struggle to overcome deflation. In the first half of the year, consumer prices,
excluding fresh food, declined at the rate of 0.1 percent year-over-year, compared
to a deflation rate of about 0.6 percent a year ago. However, if the effect of higher
oil prices and other special factors are excluded, underlying consumer price
deflation appears to remain close to half a percent per year, and other measures of
price change show greater and undiminished deflation.
As in past recoveries, exports have contributed to this recovery, with particularly
strong growth of exports to China in this case. In the first half of 2004, exports grew
by 6.5 percent and imports by 4.8 percent. Japan's global current account surplus
grew to $88.9 billion (3.8 percent of GOP) in the first half of 2004, up from $75.8
billion (34 percent of GOP) in the second half of 2003. Japan's bilateral
merchandise trade surplus with the United States totaled $36.2 billion in the first
half, up from $33.8 billion in the second half of 2003.
However, private spending, notably private investment and consumer spending,

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has played an important role in this recovery, and contributed most of first half 2004
growth.[4] In contrast to past recoveries, expansionary fiscal policy has not
contributed to output growth this time, as the government continues with its
medium-term fiscal consolidation program. The persistent Japanese global current
account surplus reflects the high rate of Japanese domestic saving relative to
domestic investment. Despite the recent recovery of investment, expectations of
slower trend growth have meant lower investment, and the share of private
investment in GOP has fallen from 26 percent in the 1960s, to 22 percent in the
1980s, to 19 percent in the last three years. Rates of return on domestic
investment have been generally low, although the Prime Minister's program of
structural reform and deregulation and the recent acceleration of corporate
restructuring and mergers and acquisition activity hold out the prospect of higher
returns. Japan's surplus of private saving over private investment has been only
partially absorbed by government deficits, leading to a persistent current account
surplus and capital outflows to the rest of the world.
The Japanese recovery and the prospects of higher stock market prices led to large
net portfolio capital inflows in Japan, starting in May 2003. These inflows
strengthened over the course of 2003 and into the first quarter of 2004.
Expectations of yen appreciation also contributed to first quarter 2004 inflows.
International Monetary Market (IMM) data on short and long futures positions show
that market expectations of an appreCiation of the yen were particularly strong at
the beginning of 2004. This net portfoliO capital inflow slowed and then reversed in
the second quarter in response to changing expectations of U.S. growth relative to
Japanese growth and higher U.S. interest rates. About one-third of the net capital
inflows during the first quarter were subsequently reversed in the second quarter.
Following the end of the Japanese fiscal year March 30, pension fund reinvestment
overseas surged in April and May. Japanese investors also began diversifying into
overseas equities and shifted funds into U.S. bonds.
During the December 31,2003 to June 30,2004 reporting period, the yen
depreciated 2.1 percent against the dollar, and 2.7 percent on a real trade-weighted
basis, as measured by the J.P. Morgan Broad Real Effective Exchange Rate index.
The yen appreciated by 2.8 percent to ¥1 04.2 during the first quarter, a period in
which its value fluctuated fairly widely.[5] The yen subsequently weakened by 4.8
percent during the second quarter. Over a more extended period, since late
February 2002 through the end of June 2004, the dollar has depreCiated by 18.7
percent against the yen, similar to its 22.6 percent depreciation against the major
currency component of the index over the same period. Since June 30, the yen has
traded more narrowly against the dollar, ending October at ¥1 06.04, or 3.2 percent
stronger than at end-June.
Japanese authorities intervened in the foreign exchange market during the first
quarter of 2004, with yen sales totaling approximately $138 billion. Japanese
authorities publicly report their foreign exchange market intervention at the end of
each month, and have not reported any intervention since March 16, 2004.
Japanese authorities have stated that their "intervention is carried out when excess
volatility or over-shooting is observed in the markets," and that they do not target
particular values of the eXChange rate.
The Treasury is actively engaged in discussions with Japanese authorities on these
issues, both bilaterally and through the meetings of the G-7 finance ministers and
central bank governors. At G-7 meetings in Dubai, Boca Raton and more recently
Washington, the Treasury worked with the G-7 to promote a strong consensus in
support of flexible exchange rates. Japan joined the United States and other G-7
nations in these declarations.
China

China's economic growth rate accelerated in 2003 and into the first half of 2004,
with particularly rapid growth in investment. The officially reported growth figure for
2003 was 9.3 percent, but estimates based on expenditure suggest that growth in
2003 was over 11 percent. This led to bottlenecks in several sectors and rising
prices. Macroeconomic policy during 2004 has primarily been directed at slowing
credit and investment growth in order to dampen inflationary pressures and assure
sustained growth.
China's fixed exchange rate regime has made carrying out macroeconomic policy
more difficult during this period. China's accumulation of foreign exchange

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reserves continues to create monetary pressures that have fueled domestic credit
and investment growth and inflation. Chinese policymakers took administrative
measures over the last year to curb lending, but, until October 2004, hesitated to
raise domestic interest rates.
These macroeconomic policy measures have had some success in cooling off the
economy. Recent data suggest that the growth of several economic indicators has
moderated from the rapid pace of 2003. Industrial production, broad money growth,
and total loan growth slowed during the third quarter of this year compared to the
same period in 2003. Reported real GOP growth slowed to a year-over-year rate of
9.1 percent in the third quarter of this year, down from 9.7 percent in the first half.
But the risk of an inflationary boom followed by the hard landing that has
characterized past Chinese cycles remains. Fixed asset investment is still growing
at a double digit pace. Moreover, headline consumer price inflation rose to 5.2
percent year-on-year in September 2004, compared to 1.2 percent year-on-year
one year ago.
Reflecting strong import demand driven by investment growth, China's overall trade
balance recorded a (seasonally unadjusted) deficit in the first half of 2004 of
$7 billion (1.0 percent of GOP), compared to a $4 billion surplus in the same period
in 2003. China's exports rose 36 percent in the first half of 2004 compared to the
first half of 2003 on strong external demand. China's imports grew by 43 percent
during the same period. China's import growth has been driven by its rapid
economic growth and integration into the world trading system following accession
to the World Trade Organization (WTO). Growth rates for both Chinese imports
and exports have also been driven by increasing use of China as a locale for
assembly and final processing for East Asian manufacturing components into
products destined for other markets, often the United States. As a result of the
latter factor, China's trade surplus with the United States has been much larger
than its overall trade balance. China's bilateral surplus on trade in goods with the
United States in the first half of 2004 reached
$68.5 billion compared to $53.9 billion in the comparable period of 2003.
China kept its fixed exchange rate of 8.28 renminbi to the U.S. dollar throughout the
reporting period, a rate it has maintained since 1995, through periods of both
upward and downward pressures on the balance of payments. Its real tradeweighted exchange rate, a more important determinate of competitiveness, has
fluctuated considerably. With faster domestic inflation, the renminbi appreciated 3.0
percent in real trade-weighted terms, as measured by the J.P. Morgan Broad Real
Effective Exchange Rate Index, in the first half of 2004.
China's official foreign exchange reserves grew by a net $67 billion to $471 billion
during the first half of 2004.[6J This growth in Chinese reserves is the counterpart
of China's current account balance and net financial and capital inflows to the
nonofficial sector. Foreign direct investment inflows in the first nine months of 2004
were $48.7 billion, up 21 percent from the comparable period in 2003. As in 2003,
net non-FOI financial inflows to the non-official sector continue to be large and
positive in 2004, due mainly to a sharp increase in portfolio capital inflows reflecting
investors' expectations of continued strong growth and possible change in the
exchange rate regime.
The Administration has urged Chinese leaders to move as soon as possible to
greater flexibility, and has initiated an unprecedented level of engagement with the
Chinese government and other major trading partners of the United States to help
bring this about. In September 2004, the Treasury held the 16 th U.S.-China Joint
Economic Committee (JEC) meeting in Washington to discuss progress on a broad
range of economic and financial issues, including exchange rates and how greater
flexibility would better enable China to conduct monetary policy. In the JEC Joint
Statement, China strengthened its commitment to move to a market-based, flexible
exchange rate. In early October, G-7 Finance Ministers and Central Bank
Governors met for the first time as a group with their Chinese counterparts; China's
exchange rate policy was an important component of the discussions.
The United States continues to work actively with China in identifying and
overcoming impediments to greater exchange rate flexibility. Treasury held three
sessions with Chinese officials in 2004 focused on the mechanics of a flexible
currency regime, as part of its Technical Cooperation Program. In February,
meetings dealt with assessing and supervising currency risk in banking systems

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and developing financial instruments to manage that risk. The session in June
discussed banking supervision, credit analysis, international accounting standards,
and resolution of non-performing loans. In September, Chinese central bank
officials met with Treasury and other U.S. government agencies to discuss foreign
reserve management and supervision and regulation of a currency derivatives
market.
China has publicly stated its commitment to move to a flexible exchange rate
regime. In September 2004, Chinese Premier Wen said China "will further advance
the reform and forge a mechanism which is more adapted to the changes in market
supply and demand, with still better flexibility." In the communique of the 16th U.S.China Joint Economic Committee (JEC) meeting, China "reaffirmed its commitment
to further advance reform and to push ahead firmly and steadily to a market-based
flexible exchange rate." Governor Zhou of China's central bank has referred to the
movement to a flexible exchange rate as a top priority issue for China.
China is laying the groundwork for a shift to a market-based, flexible exchange
rate. The People's Bank of China, the central bank, recently liberalized certain
interest rates, which is consistent with a move towards a flexible exchange rate.
China has taken steps to reduce barriers to capital flows, which will help to deepen
markets involving foreign exchange transactions. In July, China announced it
would allow its national social security fund to invest in overseas capital markets.
China is working to strengthen its banks and bank supervision, and to prepare
these institutions for eXChange rate flexibility. In addition, China has taken steps to
develop financial products and systems to support foreign exchange trading and
hedging of eXChange rate risk.
The U.S. Government will pursue persistently and firmly its approach to promote
economic, financial and market reforms in China and assist China to move as soon
as possible to a flexible exchange rate regime.
Korea
Like the other economies in East Asia, Korea benefited greatly from growing
Chinese and U.S. import demand and the recovery of the global IT sector. But
domestic private demand in Korea has been much weaker than in other economies
in the region, as Korea has struggled with the after-effects of a credit card boom
and bust that has depressed household spending. Although Korea's economy was
strong in the second half of 2003, growth decelerated to a 4.9 percent annual rate
in the first half of 2004, largely due to a decline in private consumption of 0.7
percent. While inflation increased to 3.6 percent year-on-year by June 2004, this
was mainly due to higher oil prices. Citing a slowdown in the pace of economic
recovery, particularly in domestic demand, the Korean central bank reduced its
benchmark call rate a quarter-point in August and again in November, bucking the
global trend towards interest rate stabilization or increase.
External demand continued to support Korean growth in the reporting period.
Exports in the first half of 2004 were up 38.4 percent year-on-year, continuing the
strong pace set in the second half of 2003. Export growth to China was particularly
strong, rising 57 percent. The growth of imports did not nearly match that of
exports, although imports did rise 27 percent over the year. The difference in
import and export growth rates was reflected in Korean external balances. Korea's
current account surplus was 4.4 percent of GOP for the first half of 2004, compared
to 0.2 percent in the first half of 2003. The U.S. bilateral trade deficit with Korea for
the first half of 2004 totaled $9.0 billion, up from $2.1 billion for the same period in
2003, as U.S. imports from Korea grew by 21 percent, and exports to Korea by 5
percent. Total capital and financial flows, exclusive of reserve accumulation,
registered a net deficit (outflow) of $0.6 billion (nsa) for the first half of 2004, down
from a surplus of $13.2 billion for 2003, as investors become more concerned about
Korea's growth prospects.
Korea maintains a managed floating exchange rate regime. Consistent with
maintaining a relatively accommodative monetary stance in light of weak domestic
demand, the Korean authorities continued to intervene in the first half of 2004,
although the pace of reserve accumulation slackened. Official foreign reserves
increased by $11.7 billion over the first half of 2004 to $166.2 billion, roughly
equivalent to the total external debt of Korea, and equal to 2.8 times short-term
external debt. In April, the government partially removed restrictions that were
imposed in January 2004 limiting positions that domestic financial institutions could

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take in the foreign exchange non-deliverable forwards market. These measures
had been imposed in an attempt to curb upward speculation on a won appreciation.
Despite the Korean authorities' intervention, by end-June 2004 the won had risen
3.1 percent against the dollar since end-2003. Korea's real effective exchange rate
appreciated 5.5 percent over the course of the first half of 2004.
Taiwan
Accommodative monetary policy, along with higher oil and commodity prices,
succeeded in halting three years of deflation as the headline consumer price index
rose 3.1 percent saar in the six months through June 2004. Taiwan's GOP growth
slowed to 3.6 percent in the first half of 2004 relative to the second half of 2003,
after having rebounded at an annualized, seasonally adjusted rate of 10.7 percent
in the second half of 2003 due to a sharp recovery of domestic demand (in
particular business investment) and strong export growth (particularly to China).
The slowdown was the result of both a slowing of investment from the very high
growth of the second half of 2003 and a modest slowdown in government
consumption.
Taiwan's exports grew by 25.5 percent in the first half of 2004, compared to the first
half of 2003, with growth of exports to China particularly strong. Imports expanded
by 34.6 percent, resulting in a decline of the overall trade surplus from $12.0 billion
to $9.9 billion. Taiwan's bilateral trade surplus with the United States decreased
from $7.4 billion in the first half of 2003 to $5.8 billion in the first half of 2004.
The current account surplus in the first half of 2004 was 7.5 percent of GOP (or
$11.4 billion), marking a decline from a surplus of nearly 10 percent of GOP in
2003. Taiwan's high domestic saving relative to domestic investment make it a
substantial net exporter of capital, contributing to continued current account
surpluses.
Taiwan experienced strong portfolio capital inflows in the last half of 2003 and the
first quarter of 2004. These followed the decision by the Taiwan government in July
2003 to scrap a rule restricting foreign fund investments in Taiwanese shares to $3
billion per fund. However, portfolio capital inflows turned negative in the second
quarter due to tensions with China and several weeks of uncertainty following the
presidential election.
Taiwan maintains a managed floating exchange rate regime. Total foreign
exchange reserves increased by $23 billion in the first half of 2004, compared to a
$30 billion increase in the latter half of 2003. By end-June, total foreign exchange
reserves had reached $230 billion, or 80 percent of GOP and four times short term
external debt. Most (roughly four-fifths) of the first half growth in reserves occurred
in the first quarter. Reserve growth due to intervention diminished along with
capital inflows in the second quarter of 2004. Reserve growth has continued at this
slower pace since mid-year, with reserves rising by 1.3 percent in the third quarter
to $233 billion.
The NT dollar appreciated gradually against the U.S. dollar during the first quarter
of 2004, reaching a peak of NT32.93/USO in mid-April, up 3.8 percent from its end2003 value. It depreciated during the latter part of the reporting period, ending June
only slightly above its December 31 level. While Taiwan's central bank maintains
that "the NT dollar exchange rate is determined by market forces," the bank also
notes that "when the foreign exchange market is disrupted by seasonal or irregular
factors the Bank will step in."
Malaysia
Malaysia's economic recovery continued to accelerate in the first half of 2004,
growing at an 6.8 percent saar pace from the second half of 2003 after growth of
5.3 percent in 2003 and 4.1 percent in 2002. Personal spending picked up, and
private investment strengthened. Fiscal consolidation continued, as total public
sector spending grew moderately and public investment contracted.
The current account surplus was 13.1 percent of GOP in the first half of 2004,
compared with 14.4 percent in the first half of 2003. Malaysia's bilateral trade
surplus with the United States totaled $7.5 billion in the first half of 2004, up 13.7
percent from its level a year earlier.

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Malaysia has maintained a fixed peg to the dollar since September 1998, when it
also expanded capital controls. Although unchanged against the dollar in nominal
terms, the ringgit depreciated 0.7 percent over the first half of 2004 on a real tradeweighted basis, as measured by the JP Morgan index. At the end of June, total
foreign exchange reserve holdings stood at $53.9 billion, about five times shortterm external debt and up from $44.9 billion at end-December 2003.
Controls on capital flows have been relaxed since 1998, but offshore trading of the
ringgit remains prohibited, and foreign portfolio investment by residents continues to
be restricted. However, Malaysia implemented a number of capital account
liberalization measures in the first half of 2004. On March 26, the central bank
raised the ceilings on foreign currency holdings by residents, relaxed reporting
requirements for exporters, allowed domestic institutional investors and mutual
funds to invest up to 10 percent of their assets abroad, made it easier for nonresidents to borrow in ringgit, and allowed forward foreign exchange contracts.

[1] The IMF annually reviews U.S. economic performance and policies through the
so-called IMF Article IV surveillance process. The last Article IV surveillance review
took place in July 2004. The IMF staff paper and the results of the IMF Executive
Board's discussion of the U.S. Article IV review can be found at
httpllwww.imf.org/external/pubs/ftlscr/2004/cr04230.pdf. In addition, the IMF
discusses U.S. economic policies and performance in the context of its twice yearly
World Economic Outlook reports. These can be found at
http Ilwww.imf.org/external/pubs/ft/weo/weorepts.htm .
[2] Including a relatively small statistical discrepancy.
[3] Although the current account measures are conceptually the same, balance of
payments statistics are compiled on a slightly different basis from national income
statistics. Saving includes the statistical discrepancy between the income and
product accounts.
[4] That is, 4.2 percentage pOints of the 5.3 percent annualized growth.
[5] The yen varied over a range of 8-10 percent between its highs and lows against
the dollar during the first quarter.
[6] The Chinese government used $45 billion of its foreign exchange reserves to
recapitalize two Chinese banks at the end of 2003. This figure is not included in the
$471 billion foreign exchange reserves total.

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PH[SS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 5, 2004
js-2128

Remarks by John B. Taylor
Under Secretary for International Affairs
United States Treasury
World Economic Forum's India Economic Summit
New Delhi, India
India and the World Economic Expansion
I am so pleased to have been invited to speak to this very distinguished audience.
would like to thank the World Economic Forum for organizing this important event,
and the Indian government for its hospitality. And I would like to express my thanks
to Klaus Schwab for his kind introduction.
Before I begin, I would like to congratulate Finance Minister Chidambaram and the
entire economic team for their extraordinary leadership, and for the bold steps they
are taking on economic policy. They are setting a course for India towards a
promising and prosperous future with strong economic growth and poverty
reduction.
I would like to talk this afternoon about the state of the world economy, focusing in
particular on the role of economic policy in emerging market countries like India and
in developed countries like the United States. And I would like to use this
opportunity to discuss how economic experiences of fast growing economies offer
some lessons for economies around the world to meet their enormous economic
potential.

The World Economic Expansion
Since this is a meeting of the World Economic Forum, it is appropriate to begin by
reminding ourselves that the world economy is in a remarkably good state right
now. And then we should ask ourselves why it is in such a good state.
First note that for the world as a whole, economic growth is as high as it has been
in three decades. It is good news that there are no major recessions and no major
financial crises, a huge improvement over the crisis-ridden years of the 1990s.
And interest rate spreads between emerging market bonds and U.S. Treasuries, an
important measure of global risk, are at historically low levels. High inflation, once a
force of financial instability around the world, is gone in most countries; in the
emerging markets it is one-tenth what is was in the mid 1990s. I think it is important
that forces of contagion have diminished: when spreads increase in one country, as
they have recently in Ukraine, there is little or no spillover to other countries.
In the United States, the economy has nearly completed its recovery from the 20002001 stock market crash, corporate scandals, and 9/11 terrorist attacks, and it is
moving into an expansion phase. This year it is on track to complete the third year
of recovery with a strong 4 percent growth pace. Among other developed
economies, Japan, France, the United Kingdom, and Canada have also been
growing well, though Germany continues to lag. It is of particular note here in Asia
that Japan has been growing nicely for the last several years after its lost decade in
the 1990s. Of course, the rest of Asia is also growing strongly with India at close to
7 percent and China even trying to slow down a bit and remove inflationary
pressures. I could go on and on, reviewing the economic expansion in emerging
markets from Russia, to Turkey, to South Africa, to Brazil and Chile.

Good Economic Policies

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What accounts for this positive scenario? In my view, economic policies provide
the major part of the explanation. In the United States, we have implemented welltimed monetary and fiscal policies, including marginal tax rate cuts, which mitigated
the impacts of the 2000-2001 shocks and led to a sustainable recovery. Of course
the U.S. growth induced by those policies has been a major source of world
growth. In Japan, the focus on a monetary policy to end the deflation has been a
factor in the end of the stagnation of the 1990s. Similarly, the emphasis on strong
monetary and fiscal policy in Brazil and Turkey has brought these countries out of
crisis. These policies reflect an emerging consensus on how to support economic
growth and stability, including the importance of price stability, market flexibility, and
policies to raise productivity.
I believe that this growing policy convergence can be attributed--at least in part--to
several international economic policy initiatives underway. For example, the G-7
recently adopted the Agenda for Growth, which has emphasized increased flexibility
to boost productivity growth and employment. And the G-20--which includes
emerging market countries like India, China, and Indonesia--has adopted the
Accord for Sustained Growth, which has brought attention to the importance of
price stability, exchange rate flexibility, and structural reforms.
The U.S. is also pursuing several bilateral efforts intended to reinforce these
multilateral initiatives, including the Economic Dialogue with India, the Partnership
for Prosperity with Mexico, and the U.S.- Brazil Group for Growth. I welcome the
attention that India's government is giving to the Economic Dialogue with the United
States and would like to emphasize that we too view this as a very important
forum.
With the widespread adoption of sound monetary and fiscal policies, the global
economy may be poised to record the longest global expansion in history. I say this
because we have seen the tendency for expansions to get longer in countries that
adopt such policies. In the United States, for example, the move to end inflation
and focus on price stability in the early 1980s led to a major increase in the length
of our economic expansions in the 1980s, in the 1990s, and I believe now. The
same is true of other countries.

Avoiding Policy Mistakes
But realizing this outcome will depend on continued vigilance of economic policy
makers to avoid mistakes. Staying the monetary policy course and reacting in time
to keep inflation low is essential, because so many expansions in the past were cut
off by inflationary booms and the inevitable busts.
And we need to work together to combat the risks to this scenario. One issue that
has received a great deal of attention recently are the global current account
imbalances, as evidenced by the large current account deficit in the United States,
which has risen from about 1 percent in 1990 to about 4 percent in 2000 and about
5 percent in the first half of this year. The current account deficit is equal to the gap
between investment and saving in the United States. U.S. policies to reduce the
budget deficit and promote private savings through personal saving accounts will
raise saving and thereby reduce the current account deficit. These policies should
be matched by policies to raise economic growth in other countries and increase
exchange rate flexibility in countries that do not have such flexibility, which will also
help render a smooth adjustment in global payments.
Another worry is the threat from high oil prices. It is good news that prices have
eased off the recent peaks. But this should not mean that we are complacent
about developing policies to increase energy supplies. And while the credibility of
central banks in achieving low inflation has allowed monetary policy to continue to
support recovery, they cannot be complacent if inflationary expectations rise with
the higher oil prices.

Raising Economic Growth
My biggest concern is not with the length of the current global expansion,. but with
its strength. Growth in some countries is simply not robust enough to senously
reduce poverty. An important goal of the Bush Administration is to reduce poverty
by raising economic growth around the world. For example, our new development
agenda channels more funds to countries that follow pro-growth policies, and

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embodies two major principles: one, that resource flows be tied to measurable
results, and two, that the poorest countries receive increased levels of grants
instead of loans. This approach is reflected in the Millennium Challenge
Corporation, a new U.S. organization which will provide grant financing to strong
performers based on clear strategies for measuring progress toward stated
results.

India's Window of Opportunity
Economic growth this past year in India came in at 8 percent. India's leaders are
now facing critical decisions that will determine whether that high growth rate can
be sustained. The key here is productivity growth. Why productivity growth?
Because countries with low productivity have low per capita incomes and high rates
of poverty; to eradicate poverty, there is no alternative to increasing productivity. If
there are no impediments to the flow and accumulation of capital and technology,
then countries that are lagging in technology should have higher productivity
growth, and "catch up" to more advanced economies. Therefore, with the right set
of policies, countries should make productivity gains. This is not merely economic
theory, but has been borne out by countries from all regions of the globe.
Productivity growth in India has been about 3-1/2 percent over the past decade. To
get economic growth to 8 percent on a sustainable basis will require productivity
growth of about 6 percent because employment growth can be expected to be
about 2 percent.
Is this kind of productivity growth feasible? I believe it is if the right policies are
followed. Capital investment will have to grow rapidly and that will require
economic policies that encourage investment. The recent elimination of the longterm capital gains tax is exactly the kind of policy to encourage investment.
There is another crucial factor--education. In the R&D and IT sectors, investors
came to India because they were attracted to India's well-educated labor pool. But
with only 5 percent of Indians of college-age receiving a college education, this pool
is a relatively small part of the total workforce. In order for India's citizens to move
into high productivity sectors and away from low productivity sectors, India must
invest in its people, especially by doing more to provide education. Of course
India's leadership is fully aware of the need to significantly increase investment in
human capital, and has laid out its commitment to improving education and health
services in its Tenth Plan.
Clearly policy played an important role in productivity growth in the IT sector in
India. The IT sector has benefited from deregulation, liberalization of FDI, and the
privatization of government-owned services. In addition, IT-enabled services have
not had to face the infrastructural constraints faced by other sectors. Operating
through satellite links, Indian programmers are providing IT support to U.S. and
European firms in areas ranging from software development and maintenance,
back-office operations, data transcription and transmission, and telemarketing.
With respect to India, I am confident that deregulation and liberalization in other
critical sectors will generate new success stories, and welcome this government's
commitment to increase investment opportunities in telecom, insurance and civil
aviation.
These objectives underscore the urgency of moving ahead with other reforms, such
as tax reform, trade liberalization, and the elimination of subsidies, to ensure that
the government is not forced to confront the unenviable policy choice of whether to
invest in its people or pursue fiscal discipline. Fortunately, if the agenda outlined by
Prime Minister Singh and his government is implemented as planned, both goals
should be achievable.
I think it is interesting to note that in the United States, productivity acceleration also
seems to be happening more in some sectors than others, and, also like India,
gains have been especially relevant in areas such as the information technology
sector. Economists who have looked closely at this phenomenon speculate that the
U.S. predisposition to accepting intense competition and capacity to adjust rapidly
have enabled the retail sector to benefit from IT innovations. This phenomenon
may also encourage capital market development and more dynamic forms of higher
education, both of which contribute to higher productivity, all of which point to the

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importance of providing flexibility to reward and encourage more productive ways of
doing things.
Conclusion
Yesterday, I had the opportunity to travel to farms and villages in the state of Uttar
Pradesh. I visited World Bank-financed projects that are designed to improve
productivity of agricultural production systems, promote private sector development,
and improve rural infrastructure. I was especially impressed with a project involving
sodic land reclamation, which has had tremendous results in raising productivity
and reducing poverty. I visited schools and talked to students and teachers. I also
spoke with farmers and with business people. I addressed a crowd of nearly 5,000
people from villages and farms in the area, and spoke about the friendship between
the people of the United States and India.
This visit showed me the huge upside potential for policies that provide opportunity
to people. It is clear to me that if given the opportunity to work productively, the
Indian people can create economic growth rates on the order of 8 percent, which in
turn will translate into rapid improvements in living standards, lifting millions of
people out of poverty. I am confident that under its current leadership, India is on
the right path. We in the United States look forward to strengthening our economic
partnership with this great country.
Thank you.

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PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 6, 2004
JS-2129

Timothy S. Bitsberger Sworn in as Treasury Assistant Secretary for
Financial Markets
Timothy S. Bitsberger was sworn in today by Secretary John W. Snow as
Treasury's Assistant Secretary for Financial Markets. President Bush nominated
him to the post on May 11,2004; the U.S. Senate confirmed Bitsberger on
November 21, 2004.
As Assistant Secretary, Bitsberger will lead the efforts of the Office of Financial
Markets to formulate policy on federal debt management and financial markets
oversight. He will advise the Under Secretary for Domestic Finance on policy and
legislation on federal finance market issues and examine the impact of such
policies on industries and the markets.
Prior to joining the Treasury Department Bitsberger worked on Wall Street for more
than 15 years. He has extensive experience trading bonds and derivatives. In 1999
he was a Senior Vice President of Investments at Salomon Smith Barney. Before
that, he worked as a consultant for J.F. Lehman & Company, a LBO firm. From
1989 to 1998 he was a Senior Trading Manager and Vice President for
NationsBanc Capital Markets in New York. He was a trader for Drexel Burnham
Lambert from 1985 to 1989.
Bitsberger earned an MBA from Harvard University in 1985 after graduating from
Yale University in 1981 with a BA in Economics.
He was appOinted in October of 2001 to serve as Deputy Assistant Secretary for
Federal Finance. He has served as Acting Assistant Secretary for Financial Markets
since July 16, 2004.

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pr~ESS

Page 1 of2

ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ar/n/)()'.' ACio/Ja!'.>.' Re,/[/(-'r{·'.

December 7,2004
js-2130

Treasury Releases Report on Critical Financial Infrastructure Protection
Treasury Releases Report on Critical Financial Infrastructure Protection Study to
Serve as Model for Regional Coalitions to Strengthen Resiliency of Financial Sector
The Treasury Department today released a study commissioned by the Department
in coordination with BITS, the technology branch of the Financial Services
Roundtable. The study will provide a model for the nation's regional financial
centers to protect and strengthen their critical financial services infrastructure at the
local level.
The study is based on the experiences of ChicagoFIRST, a regional coalition of
financial institutions and local governmental organizations that banded together to
strengthen the Chicago financial services industry and coordinate with local, state,
and federal government agencies in the event of a potential natural or manmade
disorder.
"ChicagoFIRST is exemplary. It shows what a creative, dedicated group of
individuals and organizations can do, working together, to protect and strengthen
financial services readiness on a regional basis. These 'lessons learned' serve as a
model for other regional coalitions," said Treasury Assistant Secretary for Financial
Institutions Wayne A. Abernathy. "This past year, we visited over two dozen leading
financial communities across the nation to encourage local organization. This
'cookbook' will help people in those communities succeed in coming together,"
Abernathy said.
ChicagoFIRST was established in the wake of September 11 to protect the lives of
the people who work for its members, protect the financial assets that have been
entrusted to its members and to coordinate employee evacuations and access to
restricted areas with local authorities in the event of an emergency.
As the lead agency for the financial sector, the Treasury Department continues to
seek innovative ways to protect critical financial infrastructure here in the United
States. The Department backs the concept of regional coalitions to augment
existing information sharing efforts and will continue to work with interested groups
to facilitate their formation. The Department has supported ChicagoFIRST and
hopes it can be a helpful example for communities around the nation.
The study outlines the lessons derived from the creation of ChicagoFIRST and the
steps necessary to apply this model to other regions.
You can view the report, "Improving Business Continuity in the Financial Services
Sector: A Model for Starting Regional Coalitions," at the link below. Media
interested in contacting ChicagoFIRST should call (312) 322-6267.

REPORTS
•

Improving Business Continuity in the Financial Services Sector A Model for
Starting Regional Coalitions

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IMPROVING BUSINESS CONTINUITY IN
THE FINANCIAL SERVICES SECTOR:

MODEL FOR STARTING

REGIONAL COALITIONS

US DEPARTMENT OF THE TREASURY
DECEMBER 2004

TABLE OF CONTENTS

ACKNOWLEDGEMENTS ................................................................................................................................... 3
EXECUTIVE SUMMARY .................................................................................................................................... 4
CHICAGO FIRST: A CASE STUDY

•
•
•
•

•
•
•

The Impetus ................................................................................................................................................. 6
The Membership ......................................................................................................................................... 7
The Agenda .................................................................................................................................................. 9
The Organization ...................................................................................................................................... 10
- Education and Awareness ................................................................................................................. 11
Joint Operations Center .................................................................................................................... 12
Evacuation Procedures ...................................................................................................................... 12
Credentialing ....................................................................................................................................... 13
Organization and Funding ................................................................................................................ 13
Resources and Contributions .................................................................................................................. 14
The Experience ......................................................................................................................................... 15
Chicago FIRST Today ............................................................................................................................... 15

KEy SUCCESS FACTORS
• Leadership .................................................................................................................................................. 16
• Support ....................................................................................................................................................... 17
• Buy-In of Local Authorities ..................................................................................................................... 17
• Understanding ........................................................................................................................................... 17
• Focus ........................................................................................................................................................... 18
• Interim Support ......................................................................................................................................... 18
• Involvement and Cornrnitment............................................................................................................... 18
• Informal Benefits ...................................................................................................................................... 18
ADAPTING AND APPLYING THE MODEL

•
•
•
•
•
•
•

Preconditions for Success ........................................................................................................................ 20
Support ....................................................................................................................................................... 21
Membership ............................................................................................................................................... 22
Leadership .................................................................................................................................................. 23
Strategic Partners ....................................................................................................................................... 23
Interim Executive Leadership and Project Management Support.. ................................................... 23
Agenda and Implementation Plan .......................................................................................................... 24

CONCLUSION ................................................................................................................................................... 26

TABLE OF CONTENTS

APPENDICES

•
•
•
•
•
•

Appendix
Appendix
Appendix
Appendix
Appendix
Appendix

123456-

Sample Analyst Job Description for an Emergency Operations Center ................. 28
Sample Questions to Ask Local Authorities Regarding Evacuation Procedures ... 30
Highlights of the Corporate Emergency Access System - CEAS ............................ 31
Sample Position Specification Statement for an Executive Director ....................... 33
Illustrative Detailed Implementation Plan ................................................................... 35
Founding Members and Strategic Partners .................................................................. 38

ACKNOWLEDGEMENTS

This handbook is the result of a collaborative effort, funded by The United States Department of
the Treasury (the Treasury) and co-authored by BITS, The Boston Consulting Group (BCG) and
Chicago FIRST. It is based on several sources, including a comprehensive review of the existing
documentation in the archives of BITS and Chicago FIRST, a survey of representatives of the
founding member institutions, and in-depth interviews with leaders and key participants at more
than 15 institutions.
The Treasury, BITS and BCG wish to acknowledge all the dedicated individuals whose hard work
and commitment contributed to the success of Chicago FIRST. The Chicago FIRST experience
serves as the foundation for this handbook.
The ftnancial services industry is in debt to the founding Members and Strategic Partners of
ChicagoFIRST, the City of Chicago's Offtce of Emergency Management and Communications
(OEMC) and BITS for establishing a model for regional coalitions of ftnancial services ftrms. There
are many people to cite for their contributions to Chicago FIRST. (For a full list of the organizations
involved, please see Appendix 6.) However, two key individuals must be acknowledged at the outset:
Louis F. Rosenthal, Executive Vice President, LaSalle Bank Corporation, and Ro Kumar, First Vice
President of The Options Clearing Corporation. Their vision, commitment and leadership created
and continue to sustain ChicagoFIRST.

BITS

FINANCIAL SERVICES
ROUNDTABLE

ChicagoFIRST
Chicago Financial Services Industry Coalition
for Business Continuity

EXECUTIVE SUMMARY

ChicagoFIRST is exemplary. It shows what a creative, dedicated group 0/ individuals and
organizations can do, working together, to protect and strengthen the criticalfinancial
services infrastructure on a regional basis. These "lessons learned" serve as a modelfor
other regional coalitions.
W tD'ne A. Abernatf!J
Assistant Secretary for Financial Institutions
U.S. Department 0/ the Treasury

Prior to September 11, 2001, business continuity and disaster recovery plans were primarily
developed by and geared to individual financial services firms-with firms establishing, testing and
refining their own plans. The events of 9/11 showed us in horrifying detail how vulnerable these
firms are-and how dependent they are on each other. The financial services industry, under the
auspices of the Department of the Treasury, formed a national private sector coordinating body
known as The Financial Services Sector Coordinating Council for Critical Infrastructure Protection
and Homeland Security (FSSCC). The FSSCC was created to foster and facilitate financial services
sector-wide voluntary activities and initiatives designed to improve critical infrastructure protection
and homeland security. While the FSSCC serves at the national level, a few individuals saw the need
to establish regional coalitions. A physical terrorist attack will likely have localized or regional
implications. It makes sense for financial services firms located in close geographic proximity to
collaborate and cooperate on issues related to business continuity. It is important to note that
regional coalitions are not substitutions for national initiatives. Instead they are intended to
augment existing information sharing efforts.
Throughout 2003, a dedicated group of individuals from financial services firms in the Chicago
area-in collaboration with city, state and federal officials-worked together to form a regional
coalition known as ChicagoFIRST.
This document first tells the story of the "start up" of ChicagoFIRST, focusing on a core set of
questions:
• Why and how did Chicago FIRST take shape?
• Who joined? When? Why?
• What was the group's agenda?
• How did they organize to achieve it?
• What results have been achieved?
• What were the most important resources and contributions that drove the start up's success?
• What were the reactions of participants to the experience?

The answers to these questions form a solid roadmap for financial services firms in other regions to
follow if they wish to replicate ChicagoFIRST's success. Further, a set of "key success factors"
emerges from this example. Some combination of these factors will need to be present for a
regional coalition to succeed. To be successful, a regional coalition should:
• Have senior, dedicated and determined leadership at the outset.
• Arrange for support and involvement of key federal agencies to help jumpstart progress.
• Obtain "buy-in" and support of local authorities.
• Ensure that the private sector understands the public sector and vice versa.
• Stay focused on a prioritized and practical agenda with concrete, identifiable goals.
• Rely on a trusted third party for interim project management support.
• Steadily increase participant involvement and commitment over time.
• Appreciate the benefits of establishing an informal network to support business continuity and
disaster recovery across the financial services sector.
Using the ChicagoFIRST experience and the key success factors that were gleaned from it, this
handbook concludes by outlining the steps necessary to adapt and apply the model to other regions.
The Treasury supports the concept of regional coalitions of financial services firms and will work
with interested parties to facilitate their formation. For more information, please contact the Office
of Critical Infrastructure Protection and Compliance Policy at (202) 622-2602 or ocip@do.treas.gov.

CHICAGO FIRST - A CASE STUDY)
THE IMPETUS

In early 2003, key financial institutions in Chicago began discussions about the need for financial
services institutions in the city to cooperate on issues related to business continuity. These
discussions were prompted by a consensus that existing activities did not adequately address the
critical infrastructure protection concerns of Chicago's financial institutions.

EXISTING POST-9/11 ACTIVITIES DID NOT ADEQUATELY ADDRESS
CIP CONCERNS OF CHICAGO'S FINANCIAL INSTITUTIONS

Public
sector

Private
sector

• Chicago OEMC, Police and Fire
had minimal contact with
private sector
- not focused on
issues/agenda of financial
institutions per se

• U.S. Department of Treasury
and DHS focused primarily on
larger national issues

• FS/ISAC and FSSCC focused
• Individual firms developing
plans uncoordinated with other
largely on cyber issues and
players
national FS CIP agenda
• Faltering efforts by 3'" parties to
organize local FS CIP network
question of motives and
capabilities

Chicago region

National

No effective collective action among Chicago financial institutions
and public sector addressing CIP and preparedness concerns
Source. InterVIews, BCG analvSlS

The close geographic proximity of the financial institutions in Chicago-the core founding members
all had regional headquarters within a six-block radius-led to a common set of concerns including:
• How can we get people out of the area safely?
• How can we keep our business functioning during an emergency?
• How can we get timely and accurate information during a crisis?
• How can we get essential personnel back into affected areas for recovery?
In previous efforts to try to answer these questions on their own, leaders of the institutions that
would become the founding members experienced a great deal of frustration. They often did not
know whom in the city to call, and when they did they had difficulty in getting their questions
answered-and in some instances even in getting their calls returned. Similarly, city officials were
frustrated by having multiple points of contact for the financial services sector in Chicago.

1 This

Case Study covers the formative stages of Chicago FIRST, spanning roughly calendar year 2003.

The urgency and the ongoing frustration that characterized individual outreach efforts led to some
initial informal discussions among executives across institutions. These informal discussions rapidly
evolved into a proactive, grass-roots movement spearheaded by two individuals: Louis Rosenthal,
Executive Vice President of LaSalle Bank Corporation, and Ro Kumar, First Vice President of The
Options Clearing Corporation. The table below illustrates the key qualities shared by Louis and Ro,
as well as the effects of those qualities on the others contemplating Chicago FIRST membership.
QUALITIES

EFFECTS

Senior within their own institutions

Dedicated to the cause

~ Inspired others

Had support of their institution

~ Able to commit resources

Effective at outreach/ networking

~ Convinced others to join the cause

Had credibility

As representatives from various financial institutions in Chicago met informally, they discovered
commonalities that all agreed could best be addressed collaboratively. By April 2003, discussions led
to a formal meeting, during which the institutions represented agreed unanimously to pursue the
effort.
THE MEMBERSHIP

At the outset, 14 financial institutions comprised the founding membership of ChicagoFIRST. The
members were cognizant of the responsibilities that come with joining the single point of contact for
the fmancial services industry in the Chicago area. The membership had to be encompassing to
adequately cover the perspectives of the industry. Additionally, members recognized that for the
coalition to be successful, it was both necessary and advantageous to engage non-financial
institutions from the public and not-for-profit sectors as "strategic partners." This dual structure
allowed for a wide variety of institutions and organizations to participate in Chicago FIRST
FOUNDING MEMBERS

STRATEGIC PARTNERS

ABN Amra/LaSalle Bank Corporation
Archipelago
Bank of America Corporation
Chicago Board Options Exchange
Chicago Mercantile Exchange
Chicago Stock Exchange
Harris Bankcorp, Inc.
JP Morgan Chase
Mesirow Financial
Mizuho Securities USA Inc.
Northern Trust Corporation
The Options Clearing Corporation
UBS
William Blair

BITS
City of Chicago
Chicago Police Department
Chicago Regional Office of the FDIC
Commodities Futures Trading Commission
U.S. Department of Homeland Security

•

FEMA - Region V
• U.S. Secret Service
Federal Reserve Bank of Chicago
FS/ISAC
FSSCC
U.S. Department of the Treasury
The Office of the Comptroller of the Currency
Securities and Exchange Commission
State of Illinois - Office of Banks and Real Estate
U.S. Attorney's Office - Northern District of Illinois
Futures Industry Association

•

The Members and Strategic Partners of ChicagoFIRST are differentiated as follows:
MEMBERS

STRATEGIC PARTNERS

Private sector financial institutions

QUALIFICATIONS

•

PRIVILEGES

Attend all meetings
Voting rights
Pay dues
Sign LLC agreement

•
•
•

OBLIGATIONS

Public sector agencies or not-forprofit sector organizations
• Attend general meetings
• No voting rights
• Do not pay dues
• Do not sign LLC agreement

Why did member firms seek to partlClpate in ChicagoFIRST? As illustrated below, Members
reported that their belief in the mission of Chicago FIRST was the primary driver for participating,
followed closely by the fact that participation made good business sense.

BELIEF IN MISSION MOST IMPORTANT DRIVER OF MEMBERS'
PARTICIPATION
Reasons Members gave for joining Chicago FIRST
Respondents
('!o)

100
90
80
70
60
50
40
30

o Ranked 1"
o Ranked 2"·

20
10

•

Ranked 3'·

0
Belief in mission

Made good
business sense

Strong early
leadership

Prestige

Note ExCludes Irregular data, respondents were asked to rank lop three chOices

Source Member survey, Q2, n = 16

The Strategic Partners also cited "belief in mission" as the primary driver for participation, followed
by "strong early leadership."
Conversely, when Members were asked what gave them the most pause about participation, the
concerns (ranked 1 and 2, respectively) were expense and the amount of time investment. A
significant number of Members stated that they had no concerns or reservations about participation.

THE AGENDA

In May 2003, an organizational "straw model" was presented to interested financial institutions.
The straw model outlined the following regional imperatives and operating assumptions:
• The operational interdependence of the industry participants requires a cooperative and noncompetitive effort to protect industry stakeholders such as the public, local and state
administrations and the people in the industry.
• Recoverability of the industry in the event of a regional disaster will be substantially increased by
working direcdy with city and state authorities on emergency coordination and evacuation.
• An emphasis on rapid implementation of high-priority action items is required.
The mission of Chicago FIRST, announced in May 2003, was (and remains):
• To increase the resilience of the Chicago financial services industry in the event of a regional
disaster in collaboration with the city, state and federal agencies, including to:
protect the lives of the thousands of people that work in the industry;
protect the financial assets that have been entrusted for safe keeping and investment;
work direcdy with city and state authorities on emergency coordination and evacuation; and
implement the primary objectives in a rapid manner.
The primary objectives were:
• Obtaining a seat at Chicago's Joint Operations Center OOC) in the event of a crisis that affects
Chicago's financial community.
• Creating permits/passes for essential personnel to safely access business facilities in the event of
a general evacuation of the city (credentialing).
• Developing and communicating standard evacuation procedures for industry personnel to exit
city limits in the event of a disaster.
• Increasing city and state administrators' awareness of the criticality of the financial services
sector.
Not surprisingly, when asked to rank the importance of the primary objectives to the institutions,
Members and Strategic Partners had differing views. The Members cited obtaining a seat at
Chicago'S JOC as most important, consistent with their desire to be squarely in the communication
loop regarding emergency situations that could threaten their employees, facilities and businesses.
Strategic Partners cited increasing city and state administrators' awareness about the criticality of the
fmancial services sector as most important (perhaps in recognition that, once established, this would
help secure progress on many fronts).

MEMBERS MOST CONCERNED WITH OBTAINING SEAT ON JOC,
STRATEGIC PARTNERS WITH EDUCATION AND AWARENESS
Ranked objective
as most important

56
50

(%)

50
40

30
22
20

o Members
o Strategic Partners

Seat on JOC

Credentiaiing

Evacuation

Education &
awareness

Educating strategic partners is crucial to success of organization

Note. Excludes Irregular data, respondents ranked each objective from 1 to 4 'WIth 1 bemg the most important
Source Member survey

a 6, n = 18, Strategic partner survey Q 6, n::: 8

To further increase the resiliency of the industry, the following secondary objectives were identified:
• Collaborate with the city and regional telecommunications vendors to insure diverse routing of
networks within city limits.
• Work with key technology vendors to insure uninterrupted support services during a crisis.
• Provide a forum for public-private dialogue on issues related to business continuity and
protecting the regional financial industry.

THE ORGANIZATION

Rosenthal and Kumar were elected as co-chairmen. Shortly after the May meeting, they determined
that in order for ChicagoFIRST to gain traction on its primary objectives, the coalition would need
short-term operational assistance.
In July 2003, Rosenthal and Kumar asked BITS to provide Chicago FIRST with interim support.
BITS is a nonprofit industry consortium whose members are 100 of the largest financial institutions
in the United States. Serving as the strategic "brain trust" for the industry, BITS focuses on issues
related to e-commerce, payments and emerging technologies. The specifics of the arrangement
between BITS and ChicagoFIRST were defined in a memorandum of understanding (MOU). Key
points from the MOU include:
• BITS would provide facilitation and expertise in crisis management coordination by detailing
Teresa C. Lindsey, BITS chief of staff, to the project.
• Chicago FIRST would provide thought leadership, commitment and responsiveness.

•

In exchange for the resources BITS would devote to Chicago FIRST, BITS would be allowed to
document the process and develop a "lessons learned" publication so that the Chicago FIRST
experience could be replicated in other regions.

BITS was not paid for the time devoted to the project with the exception of reimbursement of travel
expenses. BITS' overall support, coupled with the fact that there was no payment for services
rendered, enabled members to steadily increase their participation in and benefits from the
organization without a major upfront investment.
The membership agreed to weekly conference calls. In addition to the conference calls,
ChicagoFIRST held in-person meetings with Members and with Strategic Partners. Task forces were
established around each of the primary objectives with member institutions taking ownership for
specific objectives. The ownership and activities of the task forces are described below.

SUBCOMMITTEES WERE CREATED TO DEVELOP ORGANIZATION
AND TO ADDRESS EACH PRIMARY OBJECTIVE ...

JP Morgan Chase

• Identified
questions to ask
city in response
to city's request
• Met with Chicago
police to discuss
questions

• Further
developed
questions and

delivered to city

• Northern Trust

• LaSalle

• UBS

• TheOCC

• Hosted

• Developed job
description

• Gave
presentation to
OEMC

• Put forth options
for structure and
funding

• Made subsequent
presentations to
other bodies

• Decided on LLC
structure I
created

information

exchange
between New
York City and
Chicago

• Worked with city
to obtain seat

• Delivered names

• Nominated
people to fill seat

of key personnel
to city to use on
credential list

• Worked with city
to set up
orientation
program

agreement

• Opted not to have
tiered

membership dues
• Recruited and
hired executive

• Improved "shelter

director

in placel! plans
Source Interviews, meeting mmutes

Education and Awareness
•

Objective: Increasing city and state administrators' awareness about the criticality of the financial
services sector.

An "Education and Awareness Briefing" was held August 22, 2003 and was well attended by
representatives from the City of Chicago. The Department of the Treasury and the FSSCC
partnered with Chicago FIRST for the briefing. The agenda ranged from answering the question
"Why should the City of Chicago care about the financial services industry in Chicago?" to the big
picture of how the financial services industry is organized nationally. The briefmg also provided an

opportunity for Chicago FIRST to express to the City what was needed from them-as well as to
solicit what ChicagoFIRST could provide the City.

In addition to this general briefing to the City of Chicago, Chicago FIRST members presented at
many outreach events, including FDIC-hosted/FBIIC and FSSCC sponsored events in Minneapolis,
Cleveland, Charlotte and Philadelphia, and presentations delivered to the State of Illinois Terrorism
Task Force, the Business Continuity Planning Exchange and the Lake County Emergency
Management Officials.

Joint Operations Center

•

Objective: Obtaining a seat at Chicago'S Joint Operations Center aOC) in the event of a crisis
that affects Chicago'S financial community.

By July 2003, the City'S OEMC had agreed that ChicagoFIRST would have a seat at the JOe.
However, many details needed to be worked out, including an agreement on when the
Chicago FIRST seat would be occupied and who would fill it. Through a series of conference calls,
ChicagoFIRST established a job description for the "JOC Analyst" 2 and a rotation schedule so
ChicagoFIRST members would know who would occupy the seat and when. Additionally, the
OEMC gave ChicagoFIRST members a tour of the JOC so they would be familiar with the facilities
and procedures.

Evacuation Procedures

•

Objective: Developing and communicating standard evacuation procedures for industry
personnel to exit city limits in the event of a disaster.

City officials requested that Chicago FIRST articulate what members needed to know relative to
evacuation procedures. A task force of Members and Strategic Partners developed a series of
questions. Chicago FIRST then requested an in-person meeting with appropriate city officials to
discuss the questions. The questions 3 were delivered to the executive director of the OEMC in a
letter dated September 5, 2003. The executive director responded in a letter dated October 17,
2003. Although not all of the questions posed were answered as thoroughly as anticipated, the letter
demonstrated the City's desire to work with Chicago FIRST.

A Sample Analyst Job Description for an Emergency Operations Center is included as Appendix 1 of this document.
Sample Questions Regarding Evacuation Procedures are included as Appendix 2 of this document.

Credentialing
•

Objective: Creating permits/passes for essential personnel to safely access business facilities in
the event of a general evacuation of the city (credentialing).

Chicago FIRST took a proactive stance and hosted a "Credentialing Information Exchange" on
November 4, 2003. ChicagoFIRST invited officials from Chicago's OEMC, as well as officials from
New York's Office of Emergency Management (OEM). The officials from New York presented
4
the turn-key credentialing system being used in New York City. ChicagoFIRST Members worked
with Chicago officials to outline and document the current "informal" process for credentialing.
Additionally, a "preferred" process was outlined. This process extended beyond the informal
process while falling short of the final model the City will eventually build.

Organization and Funding
•

Objective: Determining how ChicagoFIRST would be organized and funded long term.

While the original intent was not to build an organization but to accomplish specific goals, it was
agreed that the interests of the Chicago financial services industry would be best served by
establishing an independent entity that would be closely aligned with established and reputable
national industry associations. The Organization and Funding Task Force studied multiple
organizational models ranging from an informal coalition to a division of an existing organization to
a standalone organization to a variation of all of the above. The membership decided to form a
limited liability company (LLC). This decision was based on the advice of legal counsel. Readers
considering creating organizations similar to ChicagoFIRST should consult legal counsel
regarding whether an LLC structure is appropriate for their needs. To keep operating
expenses down, only one employee would be hired (an executive directors) and other resourcesincluding space, equipment and administrative support-would be provided by member companies.
Each week, Chicago FIRST made progress in its primary objective areas with varying degrees of
success. Organization and Funding, Education and Awareness and the JOC Seat achieved the
highest degrees of success as they were the least dependent on external forces. Evacuation
Procedures and Credentialing are complex issues that are still being worked on by ChicagoFIRST.
Below is a brief summary of the major accomplishments and the key enablers/obstacles for each of
the different initiatives.

Highlights of BNET's Corporate Emergency Access System (CEAS) are included as Appendix 3 of this document.
sample Position Specification Statement for an Executive Director is included as Appendix 5 of this document.

VARYING LEVELS OF PROGRESS TO DATE
Subcommltteo

Rnultato cia..

Evacuation

Credentlallng

• Limited .haring of
plana by City dUI to
contingant nature of

• City h. . lilt of
Individuals from CF

m.mb....

appropriate ... ponse
In I given altUlition

JOe seat
• Joe •••t obtained

• CF p....uaded City not

to UI. "from ICl'1Itch"

• 80me open questlona
on ,ltuatlona In which
eF can occupy ••• t

plana" by Individual
Institutions have been
developed I Improved

o,gafu~~~; and

currenty•• r
• Taakforcelargely
completed work

RFP for new Iystem

• "Shelter In place

E~~:~~~:snd

• Inltlaleducatkm of city • LLC created
officials achlevedrecognize Importance • Du•••tructure
of'.ctor
Implemented for
• ExecuUve director

hired
• City and atate working

together to develop
syatem

Keydrfveral

• Education I
InformaUon flow hal
been key success

Inlblers

• Wlilingne .. of City
and private Hclor to
cooperate

• NYC and Stille of IL
each have systems
thai could be used
impediments I
obstlclnto

• Optlmal evacuation
routes depend on
nature of Incidents

• City " using Interim
web·based ,olutlon,
not fully operational

• Communication line.
formed between city
andCF

Need to have more
pennanent
org,nlzatlon

• Wlilingne .. of
members to devole
tlme to education
• City hal more limited
w,w of the situations
In which CF rep
should occupy seal

• Concern about
committing to LLC
structure
• Worries that dues too
high for smaller
organizations

Source:

InteMew~.

minutes

RESOURCES AND CONTRIBUTIONS

When asked to identify the critical success factors that allowed ChicagoFIRST to grow from an idea
to an independent organization, both Members and Strategic Partners ranked "commitment,
leadership and outreach of founding chairmen" as the most important factor. Thereafter, the
Members and Strategic Partners differed on how they viewed the success factors.

CF PARTICIPANTS VIEW COMMITMENT OF FOUNDING
CHAIRMEN AS MOST IMPORTANT SUCCESS FACTOR
Member
relative importance
ranking (1)

Factor

Strategic Partner
relative importance
ranking(1)

Commitment, leadership and outreach of founding chalnnen
Interim leadership and project management provided by neutral 3'· party
Commitment of founding member institutions

Active Involvement of reps from member institutions
Criticality of the mission and primary objectives
Endorsement of Chicago's OEMC

Objectives and mission being very clear and manageable

Endorsement of Department of Treasury

Level of trust engendered among the members

Other

Endorsement of other strategic partners

1) Respondents were asked to lank top 5 With 1 being most Important POints were aSSIgned on a sliding scale to each ranking WIth 1
greater than 5 = 0 pornts The factors were then ranked based on the number of pOints given
Note Exdudes Irregular data
Source Member survey 09, n .: 19, Strategic partner survey 09, n .: 6

=5 pOints, 5 =1 point and anything

The input of "strategic partners" who were not direct members of Chicago FIRST played an
important role in helping the organization get started. Seven institutions were singled out by at least
50% of survey respondents as being either "very helpful" or "helpful," including BITS (95%),
Treasury (95%), Chicago's OEMC (85%), the U.S. Federal Reserve Bank of Chicago (80%),
Chicago's Police Department (75%), the State of Illinois (65%) and the U.S. Secret Service (50%).

THE EXPERIENCE

Members were asked to identify the factors they found most rewarding about the experience of
forming and participating in Chicago FIRST. Their top five responses, ranked in order:
1. The proactive nature of the experience (85%)
2. The chance to work with a coalition of other local financial institutions (80%)
3. The opportunity to ensure that certain initiatives would be accomplished (65%)
4. The experience of creating an organization from scratch that would likely serve as an example
elsewhere (45%)
5. The potential to forestall regulation that might force a less desirable outcome (15%)
Members were also asked to identify what they found most frustrating about the experience. While
not as salient as the benefits, the responses are nonetheless worth noting as items for other groups
to manage during any start-up effort:
1. The amount of time commitment (30%)
2. The need to secure help or support from public agencies (30%)
3. The heavy reliance on volunteer staffIng (30%)
4. The need and process to secure funding (25%)
5. The pace of collective decision making (20%)

CHICAGoFIRST TODAY
The start-up period of ChicagoFIRST ended in December 2003, at which time BITS concluded its
engagement with Chicago FIRST. An employee from one of the member institutions took on the
role of facilitator until late January 2004, when Brian Tishuk, a senior staff member of the Treasury
Department, was hired to serve as the executive director of the organization. Member financial
institutions signed the LLC agreement and made their first capital contributions to the LLC in early
2004, supporting the full-time executive director position.
ChicagoFIRST has continued to push and enhance its agenda. Recent initiatives include:
development of plans for "shelter-in-place" protocols for employees of member institutions; mutual
exploration with the OEMC of technology platforms to support credentialing; and the sponsorship
in July of 2004 of a highly successful "tabletop" exercise during which Members and Strategic
Partners worked through a scenario to test the plans and communication channels established to
date. ChicagoFIRST is a thriving, successful regional coalition of committed Members and Strategic
Partners and serves as a model for other regional coalitions.

KEy SUCCESS FACTORS

As stated in the Executive Summary, by studying the ChicagoFIRST experience, a solid roadmap
emerges for fInancial services fIrms to follow if they wish to replicate ChicagoFIRST's success in
other regions. Further, a set of "key success factors" can be identifIed. Some combination of these
factors must be present for a regional coalition to succeed. A regional coalition should:
• Have senior, dedicated and determined leadership at the outset.
• Arrange for support and involvement of key federal agencies to help jumpstart progress.
• Obtain "buy-in" of local authorities.
• Ensure that the private sector understands the public sector and vice versa.
• Stay focused on a prioritized and practical agenda with concrete, identifIable goals.
• Rely on a trusted third party for interim project management support.
• Steadily increase participant involvement and commitment over time.
• Appreciate the benefIts of establishing an informal network to support business continuity and
disaster recovery across the fInancial services sector.
The fIrst three factors are presented in priority order and are considered "must haves." The
remaining fIve factors will gready enhance the chances of achieving success when forming a regional
coalition.

LEADERSHIP

The importance of having senior, dedicated and determined leaders cannot be overstated. The
individuals who lead the charge will instill in others the desire to follow. The leaders should be:
• Senior within their company - so they can gain the necessary support of management and
their institution.
• Dedicated to the cause - so that their belief will be seen by others and serve as an inspiration.
This dedication includes a willingness to work to get the job done as a large time commitment
will be required, especially during the start-up phase.
• Able to garner support of their institution - so they can secure the time-and perhaps the
funding-necessary to launch a regional coalition.
• Effective at outreach and mobilizing the coalition - so they can convince others of the
cause and the value proposition.
• More than one person from more than one institution - to ensure that the project is seen as
a collective effort. This diffuses concerns about the coalition being formed for one institution's
benefIt. Two leaders from two institutions allow these individuals to lend support to each other.

SUPPORT

The support and involvement of key federal agencies will help to jumps tart progress. These
agencies:
• Add credibility - making members more willing to invest their resources. Additionally, they
can help cut through local red tape and encourage local authorities to get involved.
• Provide knowledge - leveraging experts who may reside in the agencies, contacts outside of
the agencies and existing knowledge bases.
• Provide funding - supporting initial meetings and future tabletop exercises.

BUY-IN OF LOCAL AUTHORITIES

By "buy-in," we mean that local authorities want a regional coalition formed and see the overall
benefits of a successful coalition. There must be a two-way information flow between the privatesector coalition and the local authorities. The benefits to the coalition members and to the local
authorities are almost mirror images. These benefits include:
• Establishing single points of contact - to facilitate communications during a crisis.
• Increasing information - to provide timely, accurate and credible information.
• Providing additional contacts - to increase the overall network of individuals who provide
support to each other.
• Increasing knowledge - so the public-sector partners understand the private sectors' needs,
and the private-sector members understand the public sectors' position on providing for those
needs.

UNDERSTANDING

To facilitate the kind of two-way information flow referred to above, there needs to be mutual
respect and understanding of the parameters under which both the private and public sectors
operate. The following "best practices" should help decrease misunderstandings and frustrations.
The private-sector members should understand that the public sector:
• Wants to help.
• Can't focus on the needs of just one group.
• Wants to understand the private sector's needs.
• Has a different pace and culture.
• May not be unwilling to provide information, but may be understaffed or unable to respond due
to other factors.
The public-sector partners should:
• Work to understand the private sector's needs.
• Proactively help the private sector understand any limitations and why they exist.
• Share information as appropriate and on a timely basis.
• Make personnel available for meetings and conference calls.

Focus
Regional coalitions should stay focused on a practical and prioritized agenda with concrete,
identifiable goals. Starting with a small number of critical, shared goals will help the Members and
Strategic Partners coalesce. Ideally, the agenda should:
• Include three to four initial primary objectives - This will allow participants to stay on track
and focus on what they have in common. Also, limiting the number of objectives will allow for
optimal use of the available resources.
• Focus on deliverables rather than building an organization - The participants should come
together to achieve practical, actionable deliverables. By working together to achieve these
deliverables, the participants build experience and trust. A sustainable, longer-term organization
mayor may not grow from the experience

INTERIM EXECUTIVE LEADERSHIP AND PROJECT MANAGEMENT SUPPORT

One of the challenges when launching a regional coalition is finding the resources necessary to
devote to the task. Representatives from Member institutions will have full-time responsibilities at
their individual institutions. Relying on a trusted third party for initial project management support
is a practical and effective way to deal with this potential roadblock. It is preferable for the third
party to be seen as a neutral entity that is not primarily driven by its own profit-seeking, trusted by
member institutions, and highly capable of managing the wide array of challenges in the start-up
phase. Financial services trade associations or regional business roundtables are examples of
organizations that could potentially provide staff to serve in this capacity.

INVOLVEMENT AND COMMITMENT

It is vitally important that the Members and Strategic Partners be committed to the cause. The
clearest way to demonstrate that commitment is through gradually increasing involvement over time,
as the benefits of membership become increasingly clear. The sequence could begin with simply
attending meetings; hosting them and paying for assorted incidentals; volunteering to lead and
"own" an agenda initiative; and finally serving as an external representative of the organization to
recruit members and resources. The financial and "in-kind" commitments (e.g., senior
executive/staff time) Members need to make also increase over each of these phases.
If participants are required to give too much, too soon-without seeing a return on their
investment-they may become wary and/or discouraged and disengage.

INFORMAL BENEFITS

One of the unexpected but clear benefits ansmg from participation in ChicagoFIRST was the
opportunity to open up communication links and interact with colleagues at other Member fmancial
institutions, the Strategic Partner public agencies and not-for-profit organizations on an ongoing and
informal basis. This is what organizational theorists refer to as a "social network."

To gauge the extent and impact of the network that ChicagoFIRST is helping to establish, the
Members and Strategic Partners were asked to estimate how many of these interactions they had
experienced over the past month (not including regular ChicagoFIRST meetings or conference
calls). The exhibit below conveys the results. Sixty-five percent of member representatives reported
four or more additional interactions in the month, with 80% of the respondents finding those
interactions "valuable" or "very valuable."

DO NOT UNDERESTIMATE THE BENEFITS
OF ESTABLISHING A NEW NETWORK
Members

Strategic Partners

Number of additional Interactions In last month

0~5

1 to 3

145

130

7~~~:

J15

10+ ~6

Respondents (%)

!::
10

Value of Informallnteraetlons

Neutral

Respondents (%)

Somewhat valuable ~===::J115

Not·yaluable

Value of Informal Interactions

veryV.IU'bl·I~~~I45
1==
I
Valuable

125

0
~--~--~--~--~--~--~

,--_ _ _ _ _ _ _ _ _ _ _ _R_""-'-PO_"_de_"Is_(:....%:....'_ _ _ _ _ _ _ _ _ _ _ _
Re_s"pondents (%)

"Every good thing in my career has come from relationships and they can't just develop during a crisis."
Note PartiCIpants ranked value on scale of 1 to 5 With 1 being very valuable and 5 being not valuable
Source. Member survey a 12,013, n = 20, Strategic partner survey 012, Q13, n 6

The increased lines of communication and trust illuminated in these survey results can only help to
increase the preparedness and resilience of the financial sector in Chicago. While informal and thus
hard to measure, the benefits of linking business leaders and continuity planning professionals
together in a rich, interactive network should not be underestimated. Several of our interviewees
indicated that this was the most important benefit of participating in the organization.

ADAPTING AND APPLYING THE MODEL

PRECONDITIONS FOR SUCCESS

Establishing a regional financial services coalition takes a substantive commitment of time, energy
and resources. The reward, however, is commensurate with the effort. Those considering whether
to undertake this responsibility should think through the following decision tree.

STRAWMAN FLOW FOR START UP
Would your region
benefit from a
financial services
coalition?

Can you get the
necessary support
from local and federal
authorities?

Are there institutions
willing to participate?

Proceed

Identify financial
institutions for
membership

Identify strategic
partners

Determine if a trusted third party is
needed to provide interim support

Develop an Agenda and an
Implementation Plan

When it comes to getting started, with respect to question 0, the answer is more likely to be yes if
the following circumstances prevail:
• The financial services sector constitutes a significant portion of the regional economy and
employment base.
• Financial institutions are relatively concentrated in the region so that:
The institutions face the same set of issues and challenges with respect to critical
infrastructure protection, physical security/employee safety, and continuity of operations.
The institutions need to deal with the same state and local officials on these issues.
With respect to question 8, the best way to find out is to network and take up these issues with
peers and leaders at other financial institutions in your region. Chances are that if you are concerned
about them so is a critical mass of your peer group. This was certainly the experience of the
Chicago FIRST founders.

If you can answer "yes" to the top three questions Oabeled 0, 8 and 0), you are ready to proceed
with the next steps (e, 0, 0, & and 0). If you answered "no" to any of the questions, you should
reconsider whether you should proceed with trying to establish a regional coalition of financial
services firms. The imperative may well be to focus on the "must haves" first.

Steps e,
and 0 are critical and should occur simultaneously. Identifying the leadership will be a
natural byproduct of this phase. Early on, the coalition members must determine whether or not
they will need to recruit a trusted third party to provide interim project management support
(step G). Also, the development of the agenda and the implementation plan (step0) is best
achieved as a "team building" exercise and can occur at one of the initial meetings of the interested
participants.
For the purposes of this Model, we will assume that the answers to questions 0 and 8 are yes. The
following are considerations to keep in mind as you answer question 0 and work through stepse,
0,0, & and 0.
QUESTION

Can you get the necessary support from local and federal authorities?
Coalition members must proactively seek buy-in from local and federal authorities. These are two
separate and distinct constituencies.
The table below identifies potential local authorities that you may wish to contact and illustrates the
areas in which the coalition should seek to educate local authorities.

ACTIVELY BEGIN TO SEEK BUY-IN OF LOCAL AUTHORITIES

Potential local
authorities to
contact
Mayor's office
OEMC

Police
What is
my group?

What can our
group do for you?

What do
we want?

• Don't assume
authorities know
who you are or
what you do

• Authorities want
to be helpful, let
them understand
your needs

• Start the social
networking
process

• Don't overwhelm,
stay basic and
focused

• It is a two way
street
• If your group can
help authorities
they will help
group

Fire
US Attorney's office

When seeking endorsement from a federal agency:
• Use your contacts.
• See what others have done.
• Be prepared to educate.
• Let them know how they can benefit.
• Have initiatives-not the organization-at the forefront.
Some agencies to consider:
• U.S. Department of the Treasury
• Federal Reserve Banks
• Federal Reserve Board
• Financial and Banking Information Infrastructure Committee (FBIIC)
• InfraGard
• Securities and Exchange Commission
• U.S. Department of Commerce
• U.S. Department of Homeland Security
• Your federal or state regulator
Keep in mind-whether you are dealing with local or federal authorities-that the public and private
sectors often work at different paces. Respect the differences.

STEP

Identify financial institutions for membership.
Personal contacts will help tremendously as coalition members seek eligible financial institutions.
The coalition should determine the geographic area that it intends to serve and then determine
eligible institutions within that area. They may be all or some combination of the following types of
financial institutions:
• a registered broker-dealer under the Securities and Exchange Act of 1934;
• a registered futures commission merchant or otherwise exempt from registration under the
Commodity Exchange Act;
• a registered national securities exchange or securities association;
• a registered contract market;
• a registered clearing agency;
• a registered derivatives clearing organization;
• a bank or trust company organized under the laws of the United States or a state thereof, and
regulated and examined by federal or state authorities having regulatory authority over banks or
trust companies;
• a bank or trust company that is organized under the laws of a country other than the United
States and has a federal or state branch or agency located in the United States; or
• an insurance company that is regulated and examined by a state authority(ies) having regulatory
authority over insurance companies.

It is best to start small and let the membership grow gradually over time. By keeping the initial
membership small (10 to 20 institutions), it is likely that a coalition will develop comprised of
members that:
• Are dedicated.
• Have commonalities.
• Are willing to devote resources and funds.
STEP

Identify leadership.
As coalition members begin to meet, natural leaders will more than likely emerge. But who among
these leaders can step up to the challenge of shepherding a new coalition through its formative
stages? The types of qualities that should be present in the coalition leaders are:
• Individuals senior enough within their institution to ensure credibility.
• Individuals with the support of their institution.
• Individuals personally dedicated and willing to devote time and money to the cause.
• Individuals with contacts that will prove helpful to the coalition and advance the
accomplishment of its initiatives.
• Individuals respected by peers and capable of effectively exercising leadership of
nascent/informal groups.
The importance of this last point should not be underestimated. By deflnition, a voluntary coalition
is not a formal, hierarchical organization with clearly established leadership selection mechanisms.
The respect among peers and the willingness and capabilities to lead were what ultimately
established the founding chairmen of Chicago FIRST in their positions.
STEP

Identify Strategic Partners.
Strategic Partners should be selected from the public and not-for-proflt sectors. Organizations
invited to participate as Strategic Partners should be ready, willing and able to provide needed
expertise, resources, and/or prestige to the organization, helping to drive the development of the
overall network and its agenda.

STEP.

Determine if a trusted third party will be needed to provide interim support.
The coalition members must determine if they have the bandwidth to drive the organization forward
until they hire full-time staff to take on the responsibility (if they do indeed hire full-time staff).
Having a trusted and neutral third party provide interim support has been identifled as a key success
factor for establishing regional coalitions. The following questions should be considered as
organizations are considered as potential interim project managers:

•
•
•
•
•
•
•

Is the party neutral?
Is it sufficiently respected by the Members and Strategic Partners?
Does it have helpful contacts?
Can it effectively drive the process?
Is it connected to our industry?
Will it be available for an appropriate duration?
Will it devote key personnel?

STEP

Develop an agenda and an implementation plan.
The agenda must be focused, prioritized and contain actionable deliverables. The coalition members
may start by creating a master list of possible items through a brainstorming session. The master list
should then be ftltered, identifying those items that are both important and achievable. Select a few
(three to four) objectives where success can be achieved.
Once the primary objectives are determined, the coalition members can identify secondary
objectives. However, these secondary objectives should not be pursued until the primary objectives
are achieved.
It is important to formalize the meeting process and
and "own" coalition initiatives.

begin to identify individuals who can lead

Considerations for effective meetings:
• Meetings must be held at regular intervals (e.g., once a week at a specific time). These meetings
can be held via conference call.
• Meetings should be action-oriented.
• Active participation is crucial to success.
• Meetings should be held early or late in the day so that attendance is not preempted by other
events.
• Each institution should have more than one representative available to participate in meetings.
• Detailed minutes of meetings will help track progress and establish actionable next steps.
• For in-person meetings, institutions can rotate hosting.
Initiative leaders will share many of the qualities found in the coalition leaders. These individuals
must:
•
•
•
•

Be actively involved.
Have the support of their institution.
Be given clear objectives and time frames within which to accomplish those objectives.
Be willing to report on their progress at meetings.

With the objectives identified, the coalition members can create an implementation plan. The plan
below is based on the ChicagoFIRST experience and is intended to be illustrative. Each region will
be unique, with differing needs, so the plan should be modified accordingly.

ILLUSTRATIVE IMPLEMENTATION PLAN

Identify Initial agenda
Host meetings
• Leaders
• Others
Identify other potential members
including strategic partners
Work to obtain national agency
endorsement

Get "buy.in" of local authorities
Obtain Interim management
support
Formalize meeting process
Seek volunteers for Initiatives
Discuss potential structures I
funding
Determine structure I funding

A detailed, illustrative implementation plan can be found
detailed plan covers the 12-week period outlined above.

ill

Appendix 5 of this document. The

CONCLUSION

Collaboration, tmst and commitment to get past ordinary obstacles were krys to enabling
ChicagoFIRST to accomplish extraordinary goals. Nothing less than the safety and
soundness oj an essential part oj our Nation's m'tical financial services infrastmcture was
at stake. We could not take "no "for an answer. The Nation is better off as a result. We
urge our counterparts throughout the country to create similar coalitions.
Ro Kumar
First Vice President
The Options Clearing Corporation

Louis Rosenthal
Executive Vice President
LaSaile Bank Corporation

A community has been defined as "a dynamic set of relationships in which a synergic, self-regulating
whole is created out of the combination of individual parts into a cohesive, identifiable, unified
form.,,6 ChicagoFIRST is a community of dedicated, committed individuals with a shared sense of
purpose. Chicago FIRST possesses many of the characteristics attributed to healthy communities:
participation, communication, commitment, trust, collaboration and efficacy.
By studying the experience and the key success factors of Chicago FIRST, and by following the steps
to adapt and apply the model, similarly healthy, robust communities can evolve elsewhere. These
communities will strengthen the resiliency of the financial services industry as a whole.

Cheryl Charles and Bob Samples, Coming Home: Community, Creativity and Consciousness (Personhood Press, Apn'l2004),
pp.36-43.

APPENDICES

APPENDIX 1

SAMPLE ANALYST JOB DESCRIPTION FOR AN EMERGENCY OPERATIONS CENTER7

The City of
Emergency Operations Center, located at
,
will generally be activated in cases where city- or region-wide coordination is imperative for effective
response to an emergency event, security threat, or extended weather condition. These events
include, but are not limited to extreme heat or cold, severe winter storm, extended or widespread
utility emergency, major building ftre or emergency, major hazardous materials event, security threat,
terrorist attack, large-scale civil disorder or disobedience or a planned citywide special event.
During certain emergencies or disasters,
will have access to and will
be requested to staff one position at the
Emergency Operations Center
(EOC). This includes emergencies in which ftnancial institutions are threatened, are at risk, or are
affected by an event.
representatives will be present to liaison between
the
and the ftnancial sector. The representative's primary role is to provide
information to and gather information from City offtcials regarding events affecting or potentially
affecting the ftnancial sector, disseminate the information efftciently and effectively to
_ _ _ _ _ _ _ _ contacts, and act as an advocate for the ftnancial sector.
_________ will also be requested to staff the Emergency Operations Center during a
RED National Threat Alert or during an ORANGE National Threat Alert, and/or when there have
been speciftc threats to the
region or the ftnancial sector leading to elevated
threat levels for the state or local area. The analysts will generally work at the center in three 81/2
hour shifts, providing 24-hour support during these event periods. The shifts will generally be as
follows (although these times may be changed depending on City preferences or stafftng issues):
st
• 1 shift 7:30 a.m.-4 p.m.
nd
• 2 shift 3:30 p.m.-12 a.m.
cd
• 3 shift 11 :30 p.m.-8 a.m.

Responsibilities
• Track the status of problems, and response and recovery efforts by all levels of government.
Assess the impact to the ftnancial sector of problems reported by other entities.
• Gather information on ftnancial sector operations and related entities by phone, fax, email,
Internet, and the media.
• Proactively provide ftrst responders with information regarding ftnancial sector issues
(key operational timelines, facility locations, stafftng issues, relocation logistics and recovery
priorities) .
• Utilize voice, Internet, and other communication tools to disseminate information to contacts.
• Arrange and attend conference calls and provide brieftngs on information.
• Provide brief status updates regarding the health of the ftnancial sector and key infrastructure
providers (oral and written). Provide a shift turnover report to the next analyst on duty.
7 The authors wish to acknowledge the contribution of the Securities Industry Association (SIA) for providing the
original documentation upon which this analyst description is based.

•
•

Provide information for status reports as requested.
Participate in meetings and conference calls as needed during the event periods.

Qualifications
• Ability to work under pressure.
• Minimum of five years of financial sector experience.
• Familiarity with regional, national and worldwide financial sector organizations and functions.
• Strong oral and written communication skills.
• Superior problem assessment and evaluation skills.
• Strong computer skills.
• If on-call, staff must be within one-half hour travel time to the Emergency Operations Center, if
activated.
• Must not have existing, higher-priority duties during an emergency.

APPENDIX 2

SAMPLE QUESTIONS TO ASK LOCAL AUTHORITIES REGARDING EVACUATION PROCEDURES

1. Where does "developing evacuation procedures" fall within the City's priorities?

2. Do primary and secondary evacuation routes already exist?
3. If an evacuation were imminent, when and how could industry representatives expect
notification? Whom should industry representatives expect to hear from? Will there be some
lead time before the information is released to the general public or to the media?
4. If a single building needs to be evacuated, will a certain circumference around that building also
be evacuated? If yes, can the City share what that circumference would likely be?
5. Would the City dedicate some mass transit (buses, for example) to help transport individuals that
perform critical sector functions to their relocation centers in the suburbs?
6. Is there a contact at the Department of Transportation that could provide a briefing on likely
evacuation scenarios, existing alternative plans for holidays/special events and lessons learned
from other events?
7. Would the City participate in a "tabletop exercise" with private industry that would illustrate
how the City would respond to a large-scale disaster?
8. Given that other areas in the U.S. publish evacuation routes for natural disasters, what can we do
to give the City some comfort that sharing evacuation routes with key industry representativesbefore a disaster-will help the private sector assist the City in achieving an orderly evacuation if
the need should arise?
9. What can we do to help?

ApPENDIX 3

HIGHLIGHTS OF THE "CORPORATE EMERGENCY ACCESS SYSTEM" (CEAS)8

Emergency Credentialing is a big issue for all areas - large and small. One alternative to
Credentialing - provided here for educational purposes - is the Corporate Emergency Access
System (CEAS). CEAS is:
• An identification system that provides a form of recognizable ID for private sector "first
responders" .
• Allows priority emergency access to cardholder when safety permits, through a written
agreement with local authorities.
• Designed to help businesses - both large and small.
• Constructed to help mitigate the potential damage and financial losses resulting from an
unforeseen emergency or catastrophe.
• Fully funded and administered by the private sector.
CEAS purpose is to:
• Assist local businesses in re-entering areas where their offices are located and typically restricted
from public access due to an emergency condition.
• Pre-identify and authorize building access to employees and contractors of companies that do
business in an area, whose job functions are considered essential to their companies' on-going
viability.
CEAS offers benefits to both the private and public sectors. Benefits to the private sector include
the ability to:
• Rescue assets such as, cash, checks, securities, bank notes, receipts, credit cards and stock
certificates.
• Retrieve vital records such as, contracts, invoices, client applications, customer records, phone
lists, legal briefs, letters of credit, emails, insurance documents, tax records, floor plans, deeds
and licenses.
• Power down networks, mainframes, and servers.
• Retrieve laptops and servers.
• Recover flies, computer records, and microfiche and back up tapes.
• Restore critical operations and customer services.
• Begin clean-up and restoration.
• Avoid severe financial loss, the loss of customers.
Benefits to the public sector include:
• Helps local governments speed area recovery by having businesses ready to resume normal
activities once restrictions are lifted.
• Limits the financial impact to the local economy by helping businesses control and limit loss.
The authors wish to acknowledge Business Network of Emergency Resources (BNet) for providing this information,
all rights reserved, BNet Inc. - 2004

•
•

Limits the loss of local tax revenues by shortening business recovery times.
Provides a great business retention and recruitment tool.

Basis tenets of the system:
• Individuals who are credentialed should be those who are necessary for the business to maintain
guardianship and keep core business functions operable. This is not "business as usual." Only
those individuals required to minimally sustain the company should be credentialed.
• Individual companies would be granted a pre-defined number of credentials based upon a
percentage of employees per facility. For example, for a facility with a staff of 1000 or more, the
company would be allowed to identify 10% of the employee base as key personnel. For a facility
with less than 20 people, the percentage is 25%. Exceptions could be granted with the
concurrence of the sponsoring City.
• Critical service providers can be included in a facility's total card allotment.
• The card is security embossed and includes a photo of the individual, primary location of
business. Upon demand, individuals would be required to provide a second form of photo ID.
There are no current plans to require additional authentication/validation other than physical
possession of the card. Local public safety officials maintain complete control of access on site
and may alter or terminate access at any time based on safety conditions
• The system is developed by BNet (Business Network of Emergency Resources) and grew out of
the Joint Loss Reduction Partnership study performed for the New York State Emergency
Management Office in conjunction with a consortium of top New York State businesses.
• The system is web-based. Administrative burden rests with the companies. They must apply for
and maintain their credentials through the web-based program. Charges are per card, per year with a 2 year expiration period. All costs associated with the development and maintenance of
the program are built into the price of the credential.
• The system has reporting capabilities so that companies can track the status of cards issued.
Local authorities also have access to information necessary for enforcement of the program.
• Key to implementation and overall success requires support from the chief elected official,
police and other local first responders.

ApPENDIX 4

SAMPLE POSITION SPECIFICATION STATEMENT FOR AN EXECUTIVE DIRECTOR

POSITION SPECIFICATION
TITLE:

Executive Director

ORGANIZATION:
LOCATION:
REpORTING
RELATIONSHIP:

The Executive Director will report to a Board of Directors (number to be
determined) consisting of representatives from the founding members of

On a day-to-day basis, the Executive Director will report
the Board.
ORGANIZATION
BACKGROUND:

the Chairman of

major
financial
institutions
formed
____________ , an industry coalition that will address
homeland security issues requiring a common response by the financial
community. Federal and local authorities have endorsed and expressed their
support
of
nusslOn 1S to enhance the resilience of the
financial sefV1ces industry in the event of a regional disaster.
__________ will partner with city, state and federal agencies to
immediately work towards achieving the following first priority business
objectives:
• To Be Inserted by Regional Coalition

RESPONSIBILITIES:

The Executive Director will manage the activities of _ _ _ _ _ _ __
and serve as the primary liaison between
and the City of
The Executive Director will be responsible for
proactively advancing the first priority business objectives (listed above) and
for developing and advancing future business objectives, including but not
limited to:
• Collaborating with the City and regional telecommunications vendors to
insure diverse routing of networks within city limits.
• Working with technology vendors to insure uninterrupted support
services during a crisis.

•
•
•

Provide a forum for public-private dialog on issues related to business
continuity and protecting the regional financial industry.
Champion national efforts such as simulation exercise and readiness
plans.
Coordinate with credible industry groups such as FSSCC, BITS and the
SIA.

The Executive Director will serve as the primary liaison between
__________ and its Strategic Partners. This liaison role includes
keeping the Strategic Partners informed and engaged in the activities of

The Executive Director will be responsible for coordinating and facilitating
meetings, whether by conference call or in person. The Executive Director
will publish minutes for the meetings. The Executive Director will also be
expected to serve as a spokesperson for
and develop
and deliver presentations at various industry events.
The Executive Director will be the primary and key responder and will fill
the financial services seat at the Emergency Operations Center when
activated. Though there will be others to staff the position on a rotation
basis, the Executive Director will be expected to always fill the first shift
during a crisis.
The Executive Director will develop and manage the annual budget and
manage an administrative assistant.
QUALIFICATIONS:

The Executive Director will be an adept, diplomatic negotiator, able to build
consensus and support among those with diverse views and opinions. The
Executive Director shall:
• Have a minimum of five years of experience in financial services.
• Be an exceptional communicator, proficient in oral and written
communication skills.
• Have excellent organizational skills.
• Have excellent computer skills.
• Have a broad background in a variety of functions in a fmancial services
entity.

COMPENSATION:

A competltlve compensation package will be offered to attract the most
qualified candidates.

APPENDIX 5

ILLUSTRATIVE DETAILED IMPLEMENTATION PLAN

The following tables are based on Chicago FIRST and are intended to be illustrative. Each region
will be unique, with differing needs. The Plan should be modified accordingly.

ILLUSTRATIVE IMPLEMENTATION PLAN

Identify Initial agenda
Host meetings

• Leaders
• Others
Identify other potential members
Including strategic partners
Work to obtain national agency
endorsement
Get "buy-In" of local authorities
Obtain Interim management
support

Fonnallz. meeting proc.aa
Seek volunteers for Inltlatlv••
Discuss potential structures I
funding
Detennin. structure I funding

IMPLEMENTATION SHOULD HAVE CLEAR OBJECTIVES BUT
MUST REMAIN FLEXIBLE (I)
Key activities

Goals
Identify/elevate leaders

Natural leaders may exist
If not, select at least 2 leaders who are
senior within own organization
dedicated to cause
have support of their company
able to effectively outreach

Identify initial agenda
Identify/elevate leaders

Continue to Identify / elevate leaders
Begin to Identify agenda for group
gather as many potential action
Items as possible
select no more than 4 to pursue
from start
make Items focused, prioritized and
achievable

Week 1

Week 2

IMPLEMENTATION SHOULD HAVE CLEAR OBJECTIVES BUT
MUST REMAIN FLEXIBLE (II)
Goals

Key activities

Identify other potential members
(including strategic partners)
Identify initial agenda

Continue to Identify and refine initial
agenda
Identify and recruit other potential
members Including strategic partners
number of initial members should be
small
members should be dedicated and
willing to donate time and money to
cause

Identify other potential members
(including strategic partners)

Continue to identify and recruit other
potential members

Week 3

Week 4

IMPLEMENTATION SHOULD HAVE CLEAR OBJECTIVES BUT
MUST REMAIN FLEXIBLE (III)
Key activities

Goals

Weeks
5-6

Week 7

Work to obtain endorsement of
national agency
Identify other potential members
(including strategic partners)

Continue to identify and recruit other
potential members
Work with contacts to obtain
endorsement of national agency(s)
Members other than leaders should
begin to host meetings

Get "buy-in" of local authorities
Obtain interim management
support
Formalize meeting process
Identify other potential members
(including strategic partners)

Continue to identify and recruit other
potential members
Work with local authorities to gain their
support
- hold meetings to educate
- use contacts
Obtain interim/project management
support
- helps to drive processes
Formalize meeting process
- hold weekly conference calls

IMPLEMENTATION SHOULD HAVE CLEAR OBJECTIVES BUT
MUST REMAIN FLEXIBLE (IV)
Goals

WeekS

Weeks

9-11

Key activities

Seek volunteers for initiatives
Get "buy-in" of local authorities
Obtain interim management
support
Formalize meeting process
Identify other potential members
(including strategic partners)

Continue to pursue activities from week 5
Seek volunteers to lead subcommittees
addressing initiatives
must have real accountability and
responsibility

Discuss potential
structures/funding
Seek volunteers for initiatives
Get "buy-in" of local authorities
Obtain interim management
support
Formalize meeting process
Identify other potential members
(including strategic partners)

Continue to pursue activities from week 8
Begin to discuss potential structures and
funding for group
consider how formal structure must be
- potential tiering of dues structure

IMPLEMENTATION SHOULD HAVE CLEAR OBJECTIVES BUT
MUST REMAIN FLEXIBLE (V)
Key activities

Goals

Week

Determine structure/funding
Seek volunteers for initiatives
Get "buy-in" of local authorities
Obtain interim management
support
Formalize meeting process
Identify other potential members
(including strategic partners)

Continue to pursue activities from weeks
9-11
Reach decision point on
structure/funding matters

APPENDIX 6

FOUNDING MEMBERS AND STRATEGIC PARTNERS

The fInancial services industry is in debt to the Founding Members and Strategic Partners of
ChicagoFIRST and the City of Chicago's OffIce of Emergency Management and Communications
(OEMC) for serving as a role model for other regions. The coalition could not have been
established without the commitment and dedication of the organizations listed below.
CHICAGOFIRST FOUNDING MEMBERS:

ABN Amro/LaSalle Bank Corporation

JP Morgan Chase

Archipelago

Mesirow Financial

Bank of America Corporation

Mizuho Securities USA Inc.

Chicago Board Options Exchange

Northern Trust Corporation

Chicago Mercantile Exchange

The Options Clearing Corporation

Chicago Stock Exchange

UBS

Harris Bankcorp, Inc.

William Blair

STRATEGIC PARTNERS

BITS

FSSCC

City of Chicago

Futures Industry Association

Chicago Police Department

U.S. Securities and Exchange Commission

Chicago Regional OffIce of the FDIC

State of Illinois - OffIce of Banks and Real
Estate

Commodities Futures Trading Commission
U.S. Attorney's OffIce - Northern District of
Illinois

U.S. Department of Homeland Security
•
•

FEMA - Region V
U.S. Secret Service

U.S. Department of the Treasury
• The OffIce of the Comptroller of the
Currency

Federal Reserve Bank of Chicago
FS/ISAC

JS-2131: Tirrlothy S. BitAbergsr Appointed to Air Transportation Stabilization Board

Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 7, 2004
JS-2131

Timothy S. Bitsberger Appointed to Air Transportation
Stabilization Board
Treasury Secretary John W. Snow appointed Assistant Secretary for Financial
Markets Timothy S. Bitsberger this week to serve as Treasury's designee on the Air
Transportation Stabilization Board. Bitsberger will replace Under Secretary for
Domestic Finance Brian C. Roseboro who is resigning from the Treasury
Department at the end of the year.

http://www.tre~s.gov/press/releasesJjt-.2~31.htm

113/2005

JS-2132: Medi<l Advisory: <:br:->Unitcd States and France to Sign Protocols Amending<br... Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 7, 2004
JS-2132

Media Advisory:
United States and France to Sign Protocols Amending
the U.S.-France Tax Treaties
Treasury Deputy Secretary Samuel Bodman and Jean-David Levitte, French
Ambassador to the United States, will hold a ceremony to sign protocols amending
the U.S.-France Income Tax and Estate Tax Treaties at 3:00 p.m. EST on
Wednesday, December 8, 2004 in the Treasury Department's Media Room (Room
4121),1500 Pennsylvania Avenue, NW.
Media without Treasury or White House press credentials planning to attend should
contact Treasury's Office of Public Affairs at (202) 622-2960 with the following
information: name, social security number and date of birth. This information may
also be faxed to (202) 622-1999.

http://www.tre:is.gov/presslreleases/Js2 1 32.htm

113/2005

ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
)ecember 7, 2004

W04-12-7-17-43-24-21879
U.S. International Reserve Position
-he Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
otaled $87,028 million as of the end of that week, compared to $86,748 million as of the end of the prior week.

I. Official U,S. Reserve Assets (in US millions)
November 26, 2004

December 3, 2004

86,748

87,028

TOTAL
1. Foreign Currency Reserves
3.

Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

12,104

15,334

27,438

12,209

15,337

27,546
0

Of which, issuer headquartered in the US.
). Total deposits with:

'J.i. Other central banks and BIS

11,890

3,082

14,972

11,985

3,083

15,068

'J.ii. Banks headquartered in the US.

).ii. Of which, banks located abroad

J.iii. Banks headquartered outside the US.

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

19,964

20,009

13,331

13,361

11,043

~, IMF Reserve Position

!. SpeCial Drawing Rights (SDRs)

L Gold Stock

i. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
December 3, 2004

November 26, 2004
Euro
· Foreign currency loans and securities

Yen

TOTAL

Euro

Yen

TOTAL

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

'.a. Short positions

.b. Long positions

· Other

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
November 26, 2004
Euro
1. Contingent liabilities in foreign currency

Yen

December 3, 2004

TOTAL

Euro

Yen

TOTAL

o
o

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

II Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
leposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
~eserves for the prior week are final.

~lThe items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
'alued in dollar terms at the official SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
lecessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

:t Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-2133: Statp,ment of U.S. TrS3t;Ury Deputy Assistant Secretary David Loevinger ...

Page 1 of2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 8, 2004
JS-2133
Statement of U.S. Treasury Deputy Assistant Secretary David Loevinger
Monrovia, Liberia, December 8, 2004
During December 7-8, I met with Liberia's economic leaders, including Chairman
Bryant, Finance Minister Lusinee Kamara, Minister for Planning and Economic
Affairs, Christian Herbert, and Acting Executive Governor of the Central Bank,
Charles Greene. I want to thank Chairman Bryant and his team for their gracious
hospitality. I also want to thank Ambassador Blaney, whose tireless efforts have
ensured that we in Washington are not distracted by events elsewhere in the world.
The U.S. Treasury Department has devoted significant resources to helping Liberia
recover and grow. In Africa, Liberia is the largest recipient of technical assistance
from the Treasury Department because we believe that peace will be sustained
only if there is economic growth and job creation. This will require disciplined,
transparent and accountable monetary and fiscal policies. That is why we have
provided advisors to the Ministry of Finance, the Bureau of the Budget, and the
Central Bank. The Treasury Department is also working closely with the IMF, World
Bank, and the African Development Bank to create conditions for these institutions
to once again provide resources to create jobs and reduce poverty.
The Transitional Government of Liberia has made important progress in restoring
growth (expected to be over 20% this year) and improving people's lives. As one
example, increased competition in cellular telecommunications has cut costs to
consumers significantly. Increased competition in other sectors could lead to
similar results.
But I must tell my Liberian friends that, despite some very useful reforms taken by
the NTGL and the progress made, there remain too many instances where actions
of a few individuals cost the Liberian people dearly and undermine the ability of
donors, the IMF and the Multilateral Development Banks to reengage with Liberia.
Too many revenues still never make it into the government's budget, particularly
from the port. And too much of the money collected continues to be spent outside
of agreed budgetary procedures. Government officials must be held accountable for
transparent management of public resources. This is important to donors, but even
more important to the welfare of the Liberian people. It is their money.
My visit to the Finance Ministry highlighted both the progress that has been made
and the work yet to do. A large taxpayers unit is making strides in ensuring that
businesses pay their fair share. I observed deliberations of the Cash Management
Committee, which was created to ensure that the government spends only the
resources it has, does not again run up arrears, and allocates scarce resources to
priority areas. However, there continues to be spending that does not conform with
the committee's recommendations.
I came because of Liberia's importance to the United States and the unique and
special relationship that we share. I came now because Liberia is at an important
crossroads. Actions in the coming months - particularly in the collection and use of
public funds -- will determine whether this country, so rich in human and natural
resources, achieves its economic potential or slips back to being a failed state.

http://www.tre..is.gov/press/re1eases/Js2 133.htm

11312005

JS-2134: Treasury Identifies Cuball Online Travel Agency Targeting American Tou ... Page 1 of2

•
'. ri-:s.\

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@.

December 8, 2004
JS-2134
Treasury Identifies Cuban Online Travel
Agency Targeting American Tourists
Bush Administration's Crackdown on Castro Castro e Continues
In another step against Fidel Castro's oppressive regime, the U.S. Department of
the Treasury today identified the travel agency TOUR & MARKETING
INTERNATIONAL LTD. as a National of Cuba.
"This travel provider is not only a generator of resources that the Cuban regime
uses to oppress its people, but it also facilitates the evasion of U.S. sanction
policy," said Juan Carlos Zarate, Treasury's Assistant Secretary for Terrorist
FinanCing and Financial Crimes.
"Castro himself placed his military in charge of Cuba's travel industry earlier this
year -reconfirming his urgent need for travel-related dollars to go directly to
propping up his regime," Zarate continued.
TOUR & MARKETING INTERNATIONAL LTD. provides a means by which U.S.
persons can travel to Cuba via third countries by purchasing Cuba travel and tour
services through the company's 60 Cuba-oriented websites, the most notable being
www.gocubaplus.com.
TOUR & MARKETING INTERNATIONAL LTD. caters to U.S. citizens by asserting
that it is not only Cuba's number one agency for American travelers, but also that it
is able to serve all travelers - regardless of whether they have a Treasury-issued
license to travel to the sanctioned country. In addition, the travel agency
emphasizes that it is mandatory for U.S. citizens to use the company's online
payment system.
TOUR & MARKETING INTERNATIONAL LTD. has five offices in Cuba, one in
Spain, one in England and one in the British Virgin Islands. The company's principal
and manager are either domiciled in Cuba or nationals of Cuba. TOUR &
MARKETING INTERNATIONAL LTD. is the official tour operator representing the
Government of Cuba's Agencia Receptora Ecotur S.A., one of Cuba's largest local
agencies.
Persons subject to U.S. jurisdiction may not engage in any transactions with TOUR

& MARKETING INTERNATIONAL LTD. unless authorized by the Treasury's Office
of Foreign Assets Control (OFAC). In addition, all property of TOUR & MARKETING
INTERNATIONAL LTD. that is in the possession of persons subject to U.S.
jurisdiction is blocked.
Today's action is part of the ongoing effort by the Bush Administration to choke off
dollars streaming to the Castro regime and to make it more difficult for the Cuban
government to harden its internal security and military infrastructure. These efforts
are part of the Bush Administration's overall strategy to hasten the day when the
people of Cuba can live free, democratic lives. Both in October 2003 and May 2004,
President Bush announced stepped-up enforcement of U.S. laws prohibiting travelrelated transactions with the island.
Treasury's identification of Cuban-controlled businesses furthers these efforts by
cutting the designees out of the U.S. financial system, therefore keeping more hard
currency from flowing into the coffers of Castro's regime. Today's action follows an

http://WWW.tr~dS.gOv/press/releases/Js2134.htm

113/2005

JS-2134: Treasury Identifies CulMII Online Travel Agency Targeting American Tou ... Page 2 of2
October announcement by the Treasury identifying the electronic money transfer
business, SERCUBA, as a national of Cuba.
With today's announcement, the Treasury Department has now taken action
against 14 Cuban-controlled entities since President Bush's October 2003
statement.
REPORTS
•
•

Entity Tour & Marketing International ltd.
Addresses

http://www.trt.~s.gov/press/releaseS/JS1~34.htm

113/2005

a.k.a. GO CUBA PLUS; a.k.a. T&M INTERNATIONAL LTD.; a.k.a.
WWW.ABOUTCUBA.COM; a.k.a. WWW.BON.lOURCUBA.COM; a.k.a.
WWW.CIAOCUBA.COM; a.k.a. WWW.CIC;ARSSUPERSTORE.COM; a.k.a.
WWW.CUBAADVICE.COl'vl; a.k.a. WWW.CUBA-BARAC()A.COM; a.k.a.
WWW.CUBi\.-BA Y AMO.COM; a.k.a. WWW.CUBA-CAM/\CiULY.COM; a.k.a.
WWW.CUBA-CA YOC '()C '( >.('( )M; a.k.a. WWW.C·UBA-C'A Y( )CiU I LL.ERM(>'('( )M;
a.k.a. WWW,CUBA-Ci\.'{OLARCiO.COM; a.k.a. WWW.CUBA-CA Y()LL:VISA.COM;
a.k.a. WWW.CU13i\.-CA YOSABINAL.C(}M; a.k.a. WWW.CUBACA YOSAETlA.COM; a.k.a. WWW.CUBA-CAY()SANTAMARIA.COM; a.k.a.
WWW.CUBA-CHL::.COIV1; a.k.a. WWW.CUBA-CIECiODEi\.VIL.A.COM; a.k.a.
WWW.CUBA-CIENFUtciOS.COM; a.k.a. WWW.CUBA-ECO,(,OURISM.COM; a.k.a.
WWW.CUBA-EUiUEA.COM; a.k.a. WWW.CUBArIRST.COM; a.k.a.
WWW.CUBAFUN.COM; a.k.a. WWW.CUBA-GIRON.COM; a.k.a. WWW.CUBAGRANMA.COM; a.k.a. WWW.CUBA-GUAMA.COM; a.k.a. WWW.CUBAGUARDALA VACA.COM; a.k.a. WWW.CUBA-IIAVANACITY.COM; a.k.a.
WWW.CUBA-HEMINGWAY.COM; a.k.a. WWW.CUBi\.-I-IOLeJUIN.C()M; a.k.a.
WWW.CUBA-ISLADELi\..IUVENTUD.C'OM; a.k.a. WWW.CUBi\.JARDINESDEL.EREY.COM; a.k.a. WWW.CUBi\.-LAHABANA.COM; a.k.a.
WWW.CUBA-LASTUNAS.COM; a.k.a. WWW.CUBA-MATANZAS.COM; a.k.a.
WWW.CUBANBASEBALLTRAVEL.COM; a.k.a. WWW.CUBANCULTURE.COM;
a.k.a. WWW.CUBA-OLDHA VANA.COM; a.k.a. WWW.CUBAONE.COM; a.k.a.
WWW.CUBA-PINARDELRI().COM; a.k.a. WWW.CUBA-SANC'TISPIRITUS.COM;
a.k.a. WWW.CUBA-SANTALUCIA.COM; a.k.a. WWW.CUBASANTIACiODECUBA.COM; a.k.a. WWW.CUBA-SHOPPINCI.COM; a.k.a.
WWW.CUBA-SOROA.COM; a.k.a. WWW.CUBASPORTS.COM; a.k.a.
WWW.CUBA-TOPESDEC()LLANTES.COM; a.k.a.
WWW.CUBATRAVELDIRECTORY.COM; a.k.a. WWW.CUBA.-TRINIDAD.COM;
a.k.a. WWW.CUBA-VARADEROBEACII.COM; a.k.a. WWW.CUBAVILLACLARA.COf\1; a.k.a. WWW.CUBAVIP.COM; a.k.a. WWW.CUBAWEATHER.COM; a.k.a. WWW.CiOCUBA.COM; a.k.a. WWW.CiOCUBA.CU; a.k.a.
WWW.GOCUBAPLUS.e'OM; a.k.a. WWW.IPIXCUBA.COM; a.k.a.
WWW.NO.GOCUBAPLUS.COM; a.k.a. WWW.REALESTATECUBA.COM; a.k.a.
WWW.TOURANDMARKETING.COM; a.k.a. WWW.VAMOSACUBA.COM)

Ellen L. Skelton Building, 4th Floor, Fishers Estate
P.O. Box 3820
Road Town, Tortola, Virgin Islands, British;
P.o. Box 24258, London, England SE9 1WS
United Kingdom
Hotel Acuaria
Suite 3511, Marina Hemingway
Santa Fe, Playa, Havana, Cuba
Hotel Acuaria
Suite 3541, Marina Hemingway
Santa Fe, Playa, Havana, Cuba
Hotel Acuaria
Suite 3542, Marina Hemingway
Santa Fe, Playa, Havana, Cuba
Hotel Viejo y el Mar
Suite 6005, Marina Hemingway
Playa, Havana, Cuba
Calle 12 Y Mar
Varadero Matanzas, Cuba
Calle Ramon Pino
No.4, 38650, Los Cristianos, Arona,
Tenerife, Spain
-30-

JS-2135: Deputy Treasury Secreta!,), Samuel Bodman Remarks at the Signing Cere ...

Page 1 0[2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AdolJe@ AcroIJat@ Reader@.

December 8, 2004
JS-2135
Deputy Treasury Secretary Samuel Bodman
Remarks at the Signing Ceremony for
Protocols to the Income Tax and Estate Tax Treaties
Between the United States and France
Thank you all for being here today. It's my pleasure to welcome you to the
Treasury Department. I would like to extend a particular welcome to Ambassador
Levitte and his colleagues from the French Embassy.
This Administration has made a strong commitment to our tax treaty program. We
are working to expand our treaty network by establishing new tax treaty
relationships with countries around the world.
Equally important to improving our tax treaty network is our work to keep existing
agreements up-to-date. We need to work together to ensure that our treaties
continue to serve the purposes of eliminating double taxation and preventing fiscal
evasion. And the protocols we will sign here today provide a great example of that
collaboration. Through these protocols, we will improve two existing agreements
between the United States and France - our income tax treaty and our estate tax
treaty.
The tax treaty relationship between our countries goes back 65 years, making it one
of our oldest such relationships. This long-standing relationship is particularly
notable because our legal and tax systems are in many ways quite different. These
protocols evidence our mutual commitment to ensuring that the differences in our
two countries' systems do not create tax barriers to the cross-border activity that
benefits both our economies.
While these are highly technical agreements, they are important to the lives of the
people who are affected by their provisions. These two protocols include key
provisions that will benefit individuals in both our countries -- including provisions
relating to the tax treatment of retirement benefits and the application of estate
taxes. With the ageing of our populations, these types of provisions are becoming
more and more important.
Another key provision in the income tax protocol addresses the treatment of crossborder investments made through partnerships and other similar forms of entity.
Because our two countries have very different approaches to the taxation of
partnerships, ensuring the right results was a particular challenge. But we worked
together to address it. This protocol includes rules needed to provide flexibility in
terms of form-of-entity and to reduce the risk of double taxation for U.S. investors in
France.
Today we are improving an already strong treaty relationship between the United
States and France. These two protocols will further our goals of facilitating crossborder trade and investment to the benefit of the citizens and businesses of both
our countries. I very much appreciate the hard work of everyone involved - on both
sides - in completing these agreements. I am pleased to sign these protocols
today.

REPORTS

http://www.trf.ds.gov/press/releases/JQ~35.htm

11312005

JS-213S: Depilly Treasury
•
•

S~cr~tUl) Samuel Bodman Remarks at the Signing Cere...

Page 2 of2

U.S. France Income Tax Protocol
U.S. France Estate Tax Protocol

http://www.trf.Js.gov/prcss/rclca~c~.>·135.htm

113/2005

JS-2135: Dt,pllty Treasury Secretury Samuel Bodman Remarks at the Signing Cere...

Page 2 of2

• U,S. France Income Tax Protocol
• U.S. France Estate Tax Protocol

http://www.tre:is.gov/press/releases/js~~35.htm

113/2005

PROTOCOL
AMENDING THE CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE FRENCH REPUBLIC
FOR THE AVOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND CAPITAL,
SIGNED AT PARIS ON AUGUST 31,1994
The Government of the United States of America and the Government of the French
Republic, desiring to amend the Convention Between the Government of the United States of
America and the Government of the French Republic for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at
Paris on August 31, 1994, have agreed as follows:
ARTICLE I
1.

Subparagraph (b) (iii) of paragraph 2 of Article 4 (Resident) of the Convention shall be

deleted and replaced by the following:
"(iii) in the case of the United States, a regulated investment company, a real
estate investment trust, and a real estate mortgage investment conduit; in the case
of France, a "societe d'investissement it capital variable"; and any similar
investment entities agreed upon by the competent authorities of both Contracting
States;".
2.

Subparagraph (b) (iv) of paragraph 2 of Article 4 (Resident) of the Convention shall be

deleted and replaced, and new subparagraphs (b) (v) and (vi) of paragraph 2 of Article 4 are
added as follows:

"iv) a partnership or similar pass-through entity, an estate, and a trust (other
than one referred to in subparagraph (ii) or (iii) above), whether or not

org~mized

or managed in one of the Contracting States, but only to the extent that the income
derived by such partnership, similar entity, estate, or trust is treated for taxation
purposes in that Contracting State as the income of a resident, either in the mnds
of such partnership, entity, estate or trust, or in the hands of its partners,
beneficiaries or grantors, it being understood that a "societe de personnes", a
"fonds commun de placement", a "groupement d'interet economique" (economic
interest group), or a "groupement europeen d'interet economique" (European
economic interest group) that is constituted in France and has its place of effective
management in France and that is not subject to company tax therein shall be
treated as a partnership for purposes of United States tax benefits under this
Convention, provided that a partnership or similar pass-through entity, an estate
and a trust which is not organized or managed in one of the Contracting States
shall be entitled to the benefits of this convention with respect to the income or
gains derived by such entity arising in France if the following additional
conditions are satisfied:
(aa) the absence of contrary provisions in a double taxation convention
between a Contracting State and the third State;
(bb) the fact that the partnership or similar pass-through entity, estate or trust
is not treated as a body corporate for tax purposes or otherwise liable to
tax on French source income either in its own hands or in the hands of its

3
partners, beneficiaries or grantors under the tax law of the third State;
(cc) a partner's, beneficiary's, or grantor's share of the income or gain of the
partnership or similar pass-through entity, estate or trust is taxed in the
same manner, including the nature or source of tmt income or gain and
the time when that income or gain is taxed, as would have been the case
if the income or gain had been derived directly, except to the extent
resulting from any difference in accounting methods, accounting periods,
or other similar difference; and
(dd) it is possible to exchange infonnation concerning the partnership or
similar pass-through entity, estate or trust or partners, beneficiaries or
grantors under the tenns of a double taxation convention between the
Contracting State in which the income or gain arises and the third State;
v) a partnership or similar pass-through entity, an estate, and a trust (other than
one referred to in subparagraph (ii) or (iii) above), which is organized in the
United States, shall be treated as a resident of the United States to the extent
provided in subparagraph (iv) above, and as a resident of France to the extent that
the income derived by such partnership, similar pass-through entity, estate or trust
arises in France and corresponds to the share ofthe profits or losses of such entity
which benefits a resident of France;
vi) it is understood that, for the purposes of the subparagraphs (iv) and (v)
above, the income derived by a partnership or similar pass-through entity, an
estate and a trust (other than one referred to in subparagraph (ii) or (iii) above), is

4
considered to be treated for taxation purposes in a Contracting State as the income
of a resident to the extent of this income which benefits a partner, beneficiary, or
grantor that is a pension trust, an other organization or a not- for-profit
organization referred to in subparagraph (ii) above, notwithstanding that all or part
of this income of such trust, other organization, or not- for-profit organization is
exempt from income taxation in that State."

ARTICLE II
The last sentence in the final paragraph of paragraph 2 of Article 10 (Dividends) of the
Convention shall be deleted and replaced by the following new sentence:
"In the case of dividends paid by a United States real estate investment trust, the
provisions of subparagraph (b) shall apply only if:
(i)

the beneficial owner of the dividends is an individual holding an interest
of not more than 10 percent in such real estate investment trust;

(ii) the dividends are paid with respect to a class of stock that is publicly
traded and the beneficial owner of the dividends is a person holding an
interest of not more than 5 percent of any class of the real estate
investment trust's stock; or
(iii) the beneficial owner of the dividends is a person oolding an interest of
not more than 10 percent in the real estate investment trust and the value
of no single interest in the real estate investment trust's real property
exceeds 10 percent of the real estate investment trust's total interests in

5
real property."

ARTICLE III
Article 18 (Pensions) of the Convention shall be deleted and replaced by the following:
"ARTICLE 18 - Pensions
1.

Payments under the social security legislation or similar legislation of a Contracting

State to a resident of the other Contracting State, and pension distributions and other similar
remuneration arising in one of the Contracting States in consideration of past employment paid
to a resident of the other contracting State, whether paid periodically or in a lump sum, shall be
taxable only in the first-mentioned State. For purposes of this paragraph, pension distributions
and other similar remuneration shall be deemed to arise in a Contracting State only if paid by a
pension or other retirement arrangement established in that State.
2.

(a) Where an individual renders personal services and is a resident of a Contracting
State but not a national of that State, and that individual is a participant in a pension
or other retirement arrangement that is established, maintained, and recognized for tax
purposes in the other Contracting State:
(i)

contributions paid by, or on behalf of, such individual to such pension or
retirement arrangement shall be deductible from the income taxable in the
first-mentioned State as if the contributions had been paid to a pension or
other retirement arrangement that is established, maintained, and
recognized for tax purposes in that State, subject to the same monetary
limits provided for by the law of that State; and

6
(ii) in the case of dependent personal services, any benefits accrued under
such arrangement or payments made to such an arrangement by or on
behalf of the individual's employer shall be excluded from the
individual's income taxable in the first-mentioned State and shall be
allowed as a deduction in computing the profits of the employer in that
State as if the contributions had been paid to a pension or other
retirement arrangement that is established, maintained, and recognized
for tax purposes in that State, subject to the same monetary limits
provided tOr by the law of that State.
(b) The provisions of this paragraph shall not apply unless:
(i)

contributions by or on behalf of the individual to the pension or other
retirement arrangement (or to another similar arrangement for which this
arrangement was substituted) were made before he arrived in the firstmentioned State; and

(ii) the competent authority of the first-mentioned State agrees that the
arrangement generally corresponds to a pension or other retirement
arrangement established, maintained, and recognized for tax purposes in
the first-mentioned State.
(c) For purposes of this paragraph:
(i)

in the case of the United States, it is understood that a French pension or
other retirement arrangement organized under the French social security
legislation shall be considered to generally correspond to a pension or

7
other retirement arrangement established, maintained, and recognized for
tax purposes in the United States; and
(ii) in the case of France, it is understood that the social security or similar
legislation of the United States, qualified plans under section 401(a) of
the Internal Revenue Code, individual retirement plans (including
individual retirement plans that are part of a simplified employee pension
plan that satisfies section 408(k), individual retirement accounts,
individual retirement annuities, and section 408(p) accounts), section
403(a) qualified annuity plans, and section 403(b) plans shall be
considered to generally correspond to a pension or other retirement
arrangement established, maintained, and recognized for tax purposes in
France; and
(iii) a pension or other retirement arrangement is recognized for tax purposes
in a Contracting State if the contributions to the arrangement would
qualify for tax relief in that State."

ARTICLE IV
1.

Paragraphs 2 and 3 of Article 19 (Public Remuneration) of the Convention shall be

deleted.
2.

A new paragraph 2 of Article 19 (Public Remuneration) of the Convention shall be

added as follows:
"2.

The provisions of Articles 14 (Independent Personal Services), 15 (Dependent

8
Personal Services), 16 (Directors' Fees), and 17 (Artistes and Sportsmen) shall apply to
remuneration paid in respect of services rendered in connection with a business carried on
by a Contracting State, a political subdivision (in the case of the United States) or local
authority thereof, or an agency or instrumentality of that State, subdivision, or authority."

ARTICLE V
1.

Subparagraph (b) (iv) of paragraph 2 [Paragraph 1 in French language] of Article 24

(Relief From Double Taxation) of the Convention shall be deleted.
2.

Subparagraphs (b) (v) and (b) (vi) of paragraph 2 [Paragraph 1 in French language] of

Article 24 (Relief From Double Taxation) of the Convention shall be renumbered as
subparagraphs (b) (iv) and (b) (v), respectively.
3.

Subparagraph (c) of paragraph 1 [Paragraph 2 in French language] of Article 24

(Relief From Double Taxation) of the Convention shall be deleted and replaced by the
following:
"( c) In the case of an individual who is both a resident and citizen of the United
States and a national of France, the provisions of paragraph 2 of Article 29
(Miscellaneous Provisions) shall apply to remuneration described in paragraph 1 of
Article 19 (Public Remuneration), but such remuneration shall be treated by the United
States as income from sources within France."

ARTICLE VI
1.

The last sentence of Paragraph 2 of Article 29 (Miscellaneous Provisions) of the

Convention shall be deleted and replaced by the following:
"For this purpose, the term ''citizen'' shall include a former citizen or long-term resident
whose loss of such status had as one of its principal purposes the avoidance of tax (as
defined under the laws of the United States), but only for a period of ten years following
such loss."
2.

Paragraph 3 of Article 29 (Miscellaneous Provisions) of the Convention shall be deleted

and replaced by the following:
" 3.

The provisions of paragraph 2 shall not affect:
(a) the benefits conferred under paragraph 2 of Article 9 (Associated

Enterprises), under paragraph 3 (a) of Article 13 (Capital Gains), under paragraph 1 of
Article 18 (Pensions), and under Articles 24 (Relief From Double Taxation), 25
(Non-Discrimination), and 26 (Mutual Agreement Procedure); and
(b) the benefits conferred under paragraph 2 of Article 18 (Pensions), and under
Articles 19 (Public Remuneration), 20 (Teachers and Researchers), 21 (Students and
Trainees), and 31 (Diplomatic and Consular Officers), upon individuals who are neither
citizens of, nor have immigrant status in, the United States."

ARTICLE VII
1.

The Contracting States shall notify each other when their respective constitutional and

statutory requirements for the entry into force of this Protocol have been satisfied. The
Protocol shall enter into force on the date of receipt of the later of such notification;.
2.

Except as provided in paragraph 3, the provisions of this Protocol shall have effect:

10
(a) in respect of taxes withheld at source, for any amount paid or credited on or after the
first day of the second month next following the date on which the Protocol enters into force;

and
(b) in respect of other taxes, for taxable periods beginning on or after the first day of
January next following the date on which the Protocol enters into force.
3.

The provisions of Article I, paragraph 2, of this Protocol, except to the extent such

paragraph treats a "fonds commun de placement" as a partnership for purposes of United States
tax benefits under this Convention, shall have effect:
(a) in respect of taxes withheld at source, for any amount paid or credited on or after
February 1, 1996; and
(b) in respect of other taxes, for taxable periods beginning on or after January I, 1996.

IN WITNESS WHEREOF, the undersigned, being duly authorized thereto, have signed
this Protocol.
Done at Washington, this eighth day of December, 2004, in duplicate, in the English
and French languages, each text being equally authentic.

FOR THE GOVERNMENT
OF THE UNITED STATES OF AMERICA

FOR THE GOVERNMENT
OF THE FRENCH REPUBLIC

PROTOCOL
AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA
AND THE FRENCH REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND
THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES,
INHERITANCES, AND GIFTS,
SIGNED AT WASHINGTON ON NOVEMBER 24, 1978

The Government of the United States of America and the Government of the French Republic,
desiring to amend the Convention Between the United States of America and the French Republic for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Estates, Inheritances, and Gifts, signed at Washington on November 24, 1978, have agreed as
follows:

ARTICLE I

A new paragraph (4) shall be added to Article I (Estates and Gifts Covered) of the Convention as
follows:
" (4)(a) Notwithstanding any other provision of the Convention, the provisions of this
Convention shall not preclude the United States from taxing in accordance with its law the
estate of a decedent or the gift of a donor who, at his death or at the making of the gift, was
(i) a citizen of the United States,
(ii) domiciled (within the meaning of Article 4 (Fiscal Domicile)) in the United States,
or
(iii) a former citizen or long- term resident whose loss of such status had as one of its
principal purposes the avoidance of tax (as defined under the laws of the United
States), but only for a period often years following such loss;
(b) Subparagraph (a) ofthis paragraph (4) shall not, however, affect the obligation undertaken
by the United States under:
(i) Article IO (Charitable Exemptions and Deductions); paragraph (2) of Article 11
(Community Property and Marital Deduction); paragraphs (2) or (8) of Article 12
(Exemptions and Credits); Article 13 (Time Limitations on Claims for Credit or
Refund) or Article 14 (Mutual Agreement Procedure);

(ii) paragraph (3) of Article 11 (Community Property and Marital Deduction) as
applied to the estates of persons other than fonner citizens or long-tenn residents
referred to in subparagraph (a) of this paragraph (4); or
(iii) the benefits conferred by the United States under Article 17 (Diplomatic and
Consular Officials), as applied to transfers by individuals who are neither citizens of,
nor have immigrant status in, the United States."

ARTICLE II
Paragraph (2) of Article 3 (General Definitions) ofthe Convention shall be deleted and replaced with
the following:
"(2) As regards the application of the Convention at any time by a Contracting State any tenn
not defined therein shall, unless the context otherwise requires, or the competent authorities
agree to a common meaning pursuant to the provisions of Article 14 (Mutual Agreement
Procedure), have the meaning which it has at that time under the law of that State for the
purposes of the taxes to which the Convention applies, any meaning under the applicable tax
laws of that State prevailing over a meaning given to the tenn under other laws of that State."

ARTICLE III
Article 5 (Immovable (Real) Property) of the Convention shall be deleted and replaced with the
following:
"ARTICLE 5 - REAL PROPERTY
(1) Real property may be taxed by a Contracting State if such property is situated in that
State.
(2) The term "real property" shall have the meaning which it has under the law of the
Contracting State in which the property in question is situated, being understood, however,
that mortgages or other debt-claims secured by real property shall not be regarded as real
property. The term shall in any case include property accessory to real property, livestock and
equipment used in agriculture and forestry, rights to which the provisions of general law
respecting landed property apply, usufruct ofreal property and rights to variable or fixed
payments as consideration for the working of, or the right to work, mineral deposits, sources
and other natural resources; ships and aircraft shall not be regarded as real property.
(3) The term "real property" shall also include shares, participations and other rights in a
company or legal person the assets of which consist, directly or through one or more other
companies or legal entities, at least 50 percent of real property situated in one of the
Contracting States or of rights pertaining to such property. These shares, participations and
other rights shall be deemed to be situated in the Contracting State in which the real property
is situated.

5
(4) The provisions of paragraph (1) shall also apply to real property of an enterprise and to
real property used for the performance of independent personal services."

ARTICLE IV
The last sentence of Article 6 (2) (Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of Professional Services) of the Convention shall
be deleted and replaced with the following:
"If an individual is a member of a partnership or other similar pass-through entity which is

engaged in industrial or commercial activity through a fixed place of business, he shall be
deemed to have been so engaged to the extent of his interest therein."

ARTICLE V
Paragraph (2) (b) of Article 10 (Charitable Exemptions and Deductions) of the Convention shall be
deleted and replaced with the following:
"(b) Is organized and operated exclusively for religious, charitable, scientific, literary,

educational, or cultural purposes; and".

ARTICLE VI
1. Paragraph (2) of Article 11 (Community Property and Marital Deduction) of the Convention shall
be deleted and replaced with the following:

"(2) Property (other than community property) which passes to a spouse who is not a citizen
of the United States from a decedent or donor who was domiciled in France, and which may
be taxed by the United States solely in accordance with Article 5 (Real Property), 6 (Business
Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the
Performance of Professional Services), or 7 (Tangible Movable Property), shall, for the
purpose of determining United States tax, be included in the taxable base only to the extent its
value (after taking into account any applicable deductions) exceeds 50 per cent of the value of
all property included in the taxable base which may be taxed by the United States. The
provisions of this paragraph shall not apply to a citizen of the United States domiciled in
France or a former citizen or long-term resident of the United States referred to in
subparagraph (4) (a) (iii) of Article 1 (Estates and Gifts Covered) ofthe Convention."
2. Paragraph (3) of Article 11 (Community Property and Marital Deduction) of the Convention shall
be renumbered as paragraph (4).
3. A new paragraph (3) shall be added to Article 11 (Community Property and Marital Deduction) of
the Convention as follows:
"(3) In determining the estate tax imposed by the United States on a decedent's estate with
respect to property that (within the meaning of the law of the United States) passes to the
decedent's surviving spouse and that would qualify for the estate tax marital deduction under
the law of the United States if the surviving spouse were a citizen of the United States and all

applicable elections were properly made (the "qualifYing property"), the decedent's estate shall
be entitled to a marital deduction provided that:
(a) At the time of the decedent's death (i) the decedent was domiciled in either France
or the United States or was a citizen of the United States; (ii) the decedent's surviving
spouse was domiciled in either the United States or France; and (iii) ifboth the
decedent and the decedent's surviving spouse were domiciled in the United States at
the time of the decedent's death, one or both was a citizen of France; and
(b) The executor of the decedent's estate elects the benefits of this paragraph and
irrevocably waives the benefits of any other estate tax marital deduction that would be
allowed under the law of the United States on a United States federal estate tax return
for the decedent's estate by the date on which a qualified domestic trust election could
be made under the law of the United States.
The marital deduction allowed under this paragraph (3) shall be equal to the lesser of the value
of the qualifYing property or the applicable exclusion amount (within the meaning of the law of
the United States of America as of the date of death ofthe decedent) determined without
regard to any gift previously made by the decedent."

ARTICLE VII
Article 12 (Exemptions and Credits) of the Convention shall be deleted and replaced with the
following:

"ARTICLE 12 - EXEMPTIONS AND CREDITS
(1) Except as otherwise provided in this Convention, each Contracting State shall impose its
tax, and shall allow exemptions, deductions, credits, and other allowances, in accordance with
its laws.
(2) Double taxation shall be avoided in the following manner:
(a) In determining the French tax, where the decedent or the donor was domiciled in
France at the time of the transfer:
(i) France shall tax the entire property comprising the estate or the gift,
including any property which may be taxed by the United States in
accordance with the provisions of this Convention, and shall allow as a
deduction from that tax an amount equal to the United States tax paid upon
the transfer of any property, which, in relation to the same event, may be
taxed in the United States.
(ii) The deduction referred to in subparagraph (i) shall not, however, exceed
that part of the French tax, as computed before any deduction is made, which
is attributable to the property in respect of which the deduction is to be
allowed. For purposes of this subparagraph (ii), "that part of the French tax"
means:
(A) Where the tax on the property concerned is computed by
applying a proportional rate, the amount of the taxable net value of

such property multiplied by the rate which actuaHy applies to that
property; and
(B) Where the tax on the property concerned is computed by
applying a progressive scale, the amount of the taxable net value of
such property multiplied by the rate resulting from the ratio of the
French tax actuaHy payable on the total property taxable in
accordance with French law to the net value of that total property.
(iii) For purposes of subparagraph (i), the United States tax
(A) shaH include any United States tax referred to in Article 2 (Taxes
Covered) but shaH not include any tax that is permitted to be imposed
by the United States under this Convention solely by reason of
paragraph (4) of Article 1 (Estates and Gifts Covered), and
(B) shaH be considered, in the case of property which may be taxed
by the United States pursuant to Article 5 (Real Property), 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of Professional
Services), or 7 (Tangible Movable Property), to be equal to that part
ofthe French tax, as defmed in subparagraph (ii), which is attributable
to such property, but only if the decedent at his death or the donor at
the time of the gift was a citizen of the United States and if it is

established that the United States tax obligations with respect to the
death or gift have been complied with.
(b)

In determining the United States tax:

(i)

Where both Contracting States impose tax with respect to property
which is taxable by France in accordance with Article 5 (Real
Property), 6 (Business Property of a Permanent Establishment and
Assets Pertaining to a Fixed Base Used for the Performance of
Professional Services), or 7 (Tangible Movable Property), the United
States shall allow a credit equal to the amount of the tax imposed by
France with respect to such property.

(ii)

If the decedent or donor was a citizen of the United States at the time
of death or the making of a gift and would be considered under Article
4 (Fiscal Domicile) as having been domiciled in France at such time,
the United States shall allow a credit equal to the amount of the tax
imposed by France (after allowing for the deduction from tax, if any,
allowed under paragraph (2) (a) ofthis Article).
Ifthe decedent was a former citizen or long-term resident of the
United States described in subparagraph (4) (a) (iii) of Article I
(Estates and Gifts Covered), the United States shall allow a credit
equal to the amount of the tax imposed by France in respect of all

property which is included in the United States gross estate solely by
reason of such status.
(iii) Notwithstanding the provisions of subparagraphs (i) and (ii), the total
amount of all credits allowed by the United States pursuant to this
Article or pursuant to its laws or other conventions with respect to all
property in respect of which a credit is allowable under subparagraphs
(i) and (ii) shall not exceed that part of the tax ofthe United States
which is attributable to such property.
(3) In detennining the estate tax imposed by the United States, the estate ofa decedent (other
than a citizen of the United States) who was domiciled in France at the time of his death shall
be allowed a unified credit equal to the greater of:
(a) The amount that bears the same ratio to the credit allowed under the law of the
United States to the estate of a citizen of the United States as the value of the part of
the decedent's gross estate that at the time of the decedent's death is situated in the
United States bears to the value of the decedent's entire gross estate wherever
situated; or
(b) The unified credit allowed under the law of the United States to the estate of a

nonresident not a citizen of the United States.
The amount of any unified credit otherwise allowable under this paragraph shall be reduced by
the amount of any credit previously allowed with respect to any gift made by the decedent.

For purposes of subparagraph (a), the part of the decedent's gross estate that is situated in the
United States shall not exceed the part of the decedent's gross estate that may be taxed by the
United States in accordance with this Convention. A credit otherwise allowable under
subparagraph (a) shall be allowed only if all information necessary for the verification and
computation of the credit is provided.
(4) In determining the gift or inheritance tax imposed by France with respect to transfers by
reason of death or by gift by an individual, who at the time of the death or the making of the
gift was a citizen of the United States or was domiciled in the United States, there shall be
allowed the same deductions and credits as if the individual were domiciled in France. In
determining the gift or inheritance tax imposed by France with respect to transfers by reason
of death or by gift by an individual, who at the time of death or the making of the gift was
domiciled in France, to an individual who is a citizen of the United States or is domiciled in the
United States, there shall be allowed the same deductions and credits as if the recipient were
domiciled in France.
(5) Any credits or deductions for tax imposed by a Contracting State allowable under this
Article are in lieu of, and not in addition to, any such credits or deductions allowed by the laws
of the other Contracting State and shall be computed in accordance with the provisions and
subject to the limitations of the law of the other Contracting State, as it may be amended from
time to time without changing the general principle thereof.

(6) If Wlder this Convention any property would be taxable only in one Contracting State and
tax, though chargeable, is not paid (otherwise than as a result of a specific exemption,
deduction, exclusion, credit, or allowance) in that State, tax may be imposed on that property
in the other Contracting State notwithstanding any other provision to the contrary.
(7) Where in accordance with the provisions of the Convention property may not be taxed in

a Contracting State, that Contracting State may nevertheless, in calculating the amoWlt of tax
on property that may be taxed in that Contracting State Wlder the provisions of the
Convention, take into accoWlt the exempted property that is taxable Wlder the internal law of
that Contracting State.
(8) The provisions of this Convention shall not result in an increase in the amoWlt of the tax

imposed by either Contracting State Wlder its domestic laws. A reduction in the credit or
deduction allowed against a Contracting State's tax for the tax paid to the other Contracting
State which results from the application of this Convention shall not be construed as an
increase in tax."

ARTICLE VIII
The last sentence of paragraph (2) of Article 15 (Filing of Returns and Exchange of Information) shall
be deleted and replaced with the following:
"Any information furnished shall be treated as secret and shall not be disclosed to any persons
other than those (including a court or administrative body) involved in the assessment,

14
collection, enforcement, or prosecution in respect of the taxes which are the subject of this
Convention. "
ARTICLE IX
I. The Contracting States shall notify each other when their respective constitutional and statutory
requirements for the entry into force of this Protocol have been satisfied.
2. This Protocol shall enter into force on the date of receipt of the later of such notifications and shall
have effect with respect to gifts made and deaths occurring after that date.
3. Notwithstanding paragraph (2) ofthis Article, paragraph (3) of Article 11 (Community Property
and Marital Deduction) of the Convention and paragraph (3) of Article 12 (Exemptions and Credits)
of the Convention, in each case as amended by this Protocol shall, notwithstanding any limitation
imposed under the law of a Contracting State on the assessment or refund with respect to a person's
or estate's return, have effect with respect to gifts made or deaths occurring after November 10,
1988, provided that (i) any claim for refund by reason of this Article IX is filed before the date that is
one year after the first day of the second month following the date on which this Protocol enters into
force or within the otherwise applicable period for filing such claims under domestic law, and (ii) the
provisions of paragraph (4) of Article 1 (Estates and Gifts Covered) shall apply with respect to such
claim for refund. In the case of an estate that, prior to the date on which this Protocol enters into force,
was allowed a marital deduction by reason of a transfer to a qualified domestic trust, such estate may,
within the time limit for filing a claim for refund referred to in the preceding sentence, elect to treat the
qualified domestic trust as if it had not been established in order to claim the benefits of paragraph (3)

of AI1icle 11 (C0I11I11lUlity Property and Marital Deduction) or paragraph (3) ofAI1icle 12
(Exemptions and Credits) of the Convention. Ifsuch an election is made, the property shall be treated
as ha\·ing been transfelTed to the strrviving spouse at the time of the decedent's death for all ptrrposes
of this Convention.

IN WITNESS WHEREOF, the representatives of the govemments, being duly authorized
thereto, have signed this Protocol.
Done at Washington, this eighth day of December, 2004, in duplicate, in the English and
French languages, each text being equally authentic.

FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA

FOR THE GOVERNMENT OF
THE FRENCH REPUBLIC

'
U

JS-2136: Sw.cmont on Visit to India lohn B. Taylor Under Secretary for Internati ... Page 1 of2
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PRESS ROOM

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FROM THE OFFICE OF PUBLIC AFFAIRS
December 9, 2004
JS-2136
Statement on Visit to India
John B. Taylor
Under Secretary for International Affairs
Mumbai, India
I just completed a five day visit to India, which included stops in New Delhi,
Bangalore and Mumbai. The purpose of my visit was to pursue my government's
commitment to economic engagement with India under the U.S.-India Economic
Dialogue.
During this trip, I gave a speech at the World Economic Forum in New Delhi on
India and its role in the global economic expansion. In addition, I visited several
development projects in Uttar Pradesh, as well as a high-tech center in Bangalore.
I also met with national and state-level financial officials, representatives of
international financial institutions, and numerous business officials, including
members of India's financial sector.
In my discussions with public officials, I emphasized the priority that our
government places on establishing closer ties with India in the context of the U.S.India Dialogue. I was very pleased by the level of enthusiasm expressed by India's
economic leaders with respect to the adoption and implementation of India' new
economic reform agenda. I am looking forward to release of the detailed plan
outlining this agenda in the coming months. In addition, I welcomed their focus on
the private sector, particularly the decision to create an investment commission in
which prominent Indian business leaders will provide input on investment climate
reforms.
During many of my meetings with economic and finance officials, we discussed the
goal of India's new government to generate sustainable growth rates of 7-8
percent. I conveyed my government's strong support for this objective. We also
discussed the kinds of reforms that can ensure that benefits of growth are extended
to those who remain in poverty, and explored how the US-India Economic Dialogue
can be supportive of this effort.
In this context, I stressed the importance of productivity growth, which will need to
double in order to generate 7-8 percent growth. I commended the Government for
its focus on second-generation reforms in support of this objective, such as tax
reform and efforts to increase foreign direct investment in India.
I had the opportunity to see what the private sector can offer during a visit to farms
and villages in Uttar Pradesh, where the introduction of new technology has led to
substantial increases in output and incomes for farmers. I also learned about the
contributions that the financial sector is making to support higher living standards.
For example, I was very impressed by ICICI, a private bank that is providing a
range of financial services to rural areas for the first time. Also impressive is the
success of banks in dramatically lowering the cost of remittances in India. In
addition, I learned about the benefits of new computer terminals in rural areas that
provide information about prices of commodity futures, which is helping inform
decisions on crop production.
I was impressed to hear about new efforts at the state level to combat fiscal
problems. I discussed one plan in detail with officials in Karnataka who are working
to eliminate their budget deficit and improve management of public finances with
assistance from the Agency for International Development and the World Bank.

http://www.tfcas.gov/press/reieases/js2136.htm

11312005

JS-2136: .::.utement on ViGit to Intiia lohn B. Taylor Under Secretary for Intemati ... Page 2 of2
In the future, I am looking forward to working with India in the Doha Development
Round. Further trade liberalization will be another important growth stimulus for
India and other emerging markets.

http;llwww.tr(as.2:oy/oresslreieases/js2136.htm

11312005

JS-2137: Fn.ui.i Kal'1'lataka tu Califbrnia: The Challenges of State Fiscal Reform in a ...

Page 1 of 2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 7, 2004
JS-2137

From Karnataka to California: The Challenges of
State Fiscal Reform in a Federated System"
John B. Taylor
Under Secretary for International Affairs
United States Department of the Treasury
Institute of Management
Bangalore, India
December 7, 2004
Good morning. I would like to thank Professor Apte for this unique
opportunity to visit the India Institute of Management. As a former professor and
current United States government official, I welcome this chance to talk with
students and faculty who share my interest in public policy management and
economic development.
As the Treasury Under Secretary for International Affairs, I frequently speak
with officials from ministries of finance and central banks from countries around the
world to discuss about the importance of sound fiscal policy. In fact, just yesterday,
I had the pleasure of discussing fiscal matters with Finance Minister Chidambaram.
Tomorrow, I will meet with Governor Reddy of the Reserve Bank of India in
Mumbai.
The fact that I have chosen to speak on this topic in Karnataka - a state
with a population of 50 million people -- is a reflection of the especially important
role that state governments play in Indian fiscal policy. This is similar to my own
country, where states also exercise substantial control over budgetary matters. In
fact, I advised the Governor of California as a member of the state's Council of
Economic Advisors, which addresses many of the same questions that Karnataka
and other Indian states face regarding the management of public finances.
Like California, in recent years the government of Karnataka has been
facing financial difficulties, which have important implications for the growth of the
entire country. Here in southern India, the U.S. Agency for International
Development and the World Bank are playing a leading role in promoting sound
public financial management at the state level. I have been quite impressed with
what I have learned so far about Karnataka's progress on budget reform, and
understand that several of you at the 11M are actively supporting this effort. I
strongly believe this partnership is critical for resolving Karnataka's fiscal
challenges, and freeing up resources to support human investment.
Later today, I will be meeting with state finance officials, where I will stress
that bringing budgets into balance requires policies to stimulate growth and reduce
poverty, both in the rural and urban areas. These policies should not necessarily
include subsidies. Rather, the key is to implement measures that generate
productivity growth, and provide opportunities to those who have been left behind. I
have already witnessed the benefits of productivity-enhancing measures in Upper
Pradesh, where I visited a World Bank project designed to introduce farmers to new
technology, with tremendous results.
Bangalore's story is a first-rate example of the impact that economic
freedom can have on economic growth, and later today I will visit a world-class
research and development facility that epitomizes this success. I am confident that
with the extension of sound policies to other sectors, including agriculture, the kind
of success so powerfully demonstrated in the IT and R&D, will be duplicated.
Thank you.

http://www.tr~as.gov/press/release~ljs.:t37.htm

11312005

js-2138: MeJia Advisory: 8Cl:ldary Snow to Travel to Morocco This Week

Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 9, 2004
js-2138

Media Advisory: Secretary Snow to Travel to Morocco This Week
Treasury Secretary John Snow and Secretary of State Colin Powell will lead a
delegation from the United States to the Forum on the Future meeting to be held in
Rabat, Morocco on Saturday, December 11. The meeting will bring together
foreign ministry and finance ministry representatives from the region, the G-8, and
other interested nations. The Forum will be co-chaired by the United States and
Morocco.
The Forum on the Future is a cooperative effort by the states of the Broader Middle
East and North Africa (BMENA) region, the G-8 industrialized countries, and other
partners. Forum members are united around a common agenda that advances the
universal values of human dignity, democracy, economiC opportunity and social
justice.
BMENA States: Afghanistan, Algeria, Arab League, Bahrain, Egypt, Iran, Iraq,
Jordan, Kuwait, Lebanon, Libya, Mauritania, Oman, Pakistan, Palestinian Authority,
Quatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, Yemen
G-8: Canada, France, Germany, Italy, Japan, United Kingdom, United States
Other states: Netherlands, Turkey
The following events are open to the media presenting media credentials and photo
identification:

Friday, December 10
Press Availability with Moroccan Finance Minister Fathallah Oualalou
3:45 pm local time
Moroccan Ministry of Finance
Rabat, Morocco

Saturday, December 11
Opening Plenary Session
Opening Remarks
9:00 am local time
Moroccan Ministry of Foreign Affairs
Rabat, Morocco
** Top of meeting open to cameras only
** Text will be available
Joint Press Conference of Forum Co-Chairs
(Sec. Snow, Sec. Powell and Minister Oualalou and Minister Benaissa)
1:00 pm local time
Moroccan Ministry of Interior Annex
Rabat, Morocco
** Media must be set up by 12:00 pm local time for security sweeps
-30-

http://www.tr~ds.gov/press/releases;jS=138.htm

11312005

js-2139: Trea:SUIY Dt:pury Assistant Secretary Iannicola Addresses Coalition for Personal... Page 1 of 1

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PRESS ROOM

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FROM THE OFFICE OF PUBLIC AFFAIRS
December 10,2004
js-2139

Treasury Deputy Assistant Secretary lannicola Addresses Coalition for
Personal Financial Literacy
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. today spoke
to the Jump$tart Coalition for Personal Financial Literacy in Washington, DC.
lannicola addressed members representing nonprofit, private and government
organizations focused on improving financial education for young people. He spoke
about the www.MyMoney.gov Web site and the 1-888-mymoney toll-free hotline
launched by the Financial Literacy and Education Commission. The free service
provides the American public with easy access to federal financial education
materials covering a wide-range of personal financial topics.
"For years the federal government has had a treasure of free financial education
materials," said lannicola. "But up until now it has been a hidden treasure.
MyMoney is an excellent tool for consumers of all ages and those organizations,
like Jump$tart members, who teach them at the grass roots level."
The Jump$tart Coalition for Personal Financial Literacy is a non-profit organization
that seeks to improve the personal financial literacy of young people. Jump$tart's
purpose is to evaluate the financial literacy of young people; develop, disseminate,
and encourage the use of standards for grades K-12; and promote the teaching of
personal finance.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 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.govlfinancialeducation.
-30-

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11312005

JS-2140: forum tor the

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Treasury secretary John W. Snow Opening S ... Page 10f2

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FROM THE OFFICE OF PUBLIC AFFAIRS
December 11, 2004
JS-2140
Forum for the Future
U.S. Treasury Secretary John W. Snow
Opening Statement
December 11, 2004
Rabat, Morocco
It's a great pleasure to be here with my colleague, Secretary of State Colin Powell. I
want to thank our co-chairs, Ministers Oualalou and Benaissa, and the Government
of Morocco for hosting this meeting. I am honored to join my colleagues from the
G8 and Broader Middle East and North Africa (BMENA) region at this historic first
meeting of the Forum for the Future.
The Forum represents a unique opportunity for foreign affairs, finance and
economics ministers to share ideas on how to best meet the region's aspirations for
greater economic opportunities, jobs and rising living standards. Our presence here
today also highlights international support for the market-oriented, but politically
difficult, reforms that many of you are advancing at home. The rejuvenated marketoriented reform programs we see in many countries in the region are home-grown,
and we are here to support your efforts. My hope is that decisions we make today
we will create a strong foundation for a continued and productive partnership
between the leaders of the G8 and Broader Middle East and North Africa. The
economic and political agendas are self-reinforcing; linking them in this forum will
have the greatest impact.
As you know, for the finance and economics ministers of the G8 and the region, the
Forum for the Future is the culmination of a process that we started over a year ago
to deepen our partnership to promote financial sector development, capacity
building and further integration of the region into the global economy. And this
represents just a portion of our engagement, as last month's meeting of a regional
group of the Financial Action Task Force to fight financial crimes attests. The
overarching objective is to promote a level of sustained economic growth necessary
to meet the employment demands of the region's rapidly growing population. We
have all agreed that growth is essential and growth must be private sector led,
relying the region's greatest resource - your people.
We have also agreed that we want this to be more than just dialogue, as a result,
we're focusing on concrete results. I am pleased to note that the International
Finance Corporation has made significant progress in creating a regional facility to
provide training and technical assistance to small businesses. Total financing
available for the Facility currently amounts to over $60 million, with the most recent
pledge by the Islamic Development Bank. With your support, more is on the way. At
our breakout session this morning, we will be discussing the facility's priorities and
looking to target its activities where it can be the most effective.
We will also explore ways for greater cooperation among development finance
institutions, both regionally based and global. These efforts build on existing
institutions and collaboration to improve the effectiveness of official financing and
serve as an advisory group for ministers in our discussions. Lastly, we will be
discussing ideas to facilitate capital flows to the region, including through removing
obstacles to the transfer of remittances.
Throughout our discussion today, we will be guided by priorities that emanate from
the region. The role of the United States and the rest of the G8 is to support
indigenous reform, and I look forward to continued discussions how to best do this.
Thank you.

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11312005

:142: Treasury lssut:s Accounting Method Change Procedure

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®.

December 13, 2004
JS-2142

Treasury Issues Accounting Method Change Procedure
The Treasury Department and IRS today issued a revenue procedure that sets forth
the exclusive administrative procedures that taxpayers must use to obtain
automatic consent to change their method of accounting for the second taxable
year ending on or after December 31,2003, under the final regulations on
capitalizing costs incurred in acquiring or creating intangible assets.
The procedures issued today generally are consistent with Rev. Proc. 2004-23,
which provided for automatic changes in method of accounting for a taxpayer's first
taxable year ending on or after December 31,2003. As required in Rev. Proc.
2004-23, taxpayers that changed to a method of accounting provided in the final
regulations without the consent of the Commissioner are not eligible to use the
procedures issued today unless they amend their prior federal income tax returns to
correct their unauthorized change in method of accounting. However, although Rev.
Proc. 2004-23 waived certain limitations that may prevent taxpayers from qualifying
to automatically change a method of accounting, the procedures issued today do
not contain such a waiver.
The Service intends to issue future guidance for changes in methods of accounting
made for subsequent taxable years, including automatic consent procedures for
some or all of the methods of accounting provided in the final regulations.
REPORTS
•

Rev. Proc. 2005-9

http://www.tr(.Kgov/press/releases/js2142.htm

7/5/2005

Part III
Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part 1, §§ 162,263,446,461,481; 1.167(a)-3(b), 1.263(a)-4, 1.263(a)-5, 1.446-1,
1.461-4,1.461-5,1.481-1)

Rev. Proc. 2005-9
SECTION 1. PURPOSE
This revenue procedure provides the exclusive administrative procedures under
which a taxpayer described in section 4 of this revenue procedure may obtain automatic
consent for the taxpayer's second taxable year ending on or after December 31,2003,
to change to a method of accounting provided in §§ 1.263(a)-4, 1.263(a)-5, and
1.167(a)-3(b) of the Income Tax Regulations (the "final regulations").
SECTION 2. BACKGROUND
.01 On January 5, 2004, the Internal Revenue Service and Treasury Department
published final regulations in the Federal Register (TO 9107; 69 FR 436). Section
1.263(a)-4 prescribes the extent to which taxpayers must capitalize amounts paid or
incurred to acquire or create (or to facilitate the acquisition or creation of) intangibles.
Section 1.263(a)-5 prescribes the extent to which taxpayers must capitalize amounts
paid or incurred to facilitate an acquisition of a trade or business, a change in the capital
structure of a business entity, and certain other transactions. Section 1.167(a)-3(b)
provides a safe harbor useful life for certain intangible assets. The final regulations

under §§ 1.263(a)-4 and 1.263(a)-5 are effective for amounts paid or incurred on or
after December 31,2003. The final regulations under § 1.167(a)-3(b) are effective for
intangible assets created on or after December 31,2003 .
.02 Sections 1.263(a)-4(p) and 1.263(a)-5(n) provide that a taxpayer seeking to
change to a method of accounting provided in the final regulations must secure the
consent of the Commissioner in accordance with the requirements of § 1.446-1 (e). In
addition, §§ 1.263(a)-4(p) and 1.263(a)-5(n) provide that, for the taxpayer's first taxable
year ending on or after December 31,2003, the taxpayer is granted the consent of the
Commissioner to change to a method of accounting provided in the final regulations,
provided the taxpayer follows the administrative procedures issued under § 1.4461(e)(3)(ii) for obtaining the Commissioner's automatic consent to a change in
accounting method (for further guidance, for example, see 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, 2002-1 C.B. 696, and amplified, clarified,
and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432). The final regulations further
provide that any applicable § 481 (a) adjustment for a change to a method of accounting
provided in the final regulations for a taxpayer's first taxable year ending on or after
December 31,2003, is determined by taking into account only amounts paid or incurred
in taxable years ending on or after January 24, 2002. The preamble to the final
regulations states that the Service may issue additional guidance for utilizing the
automatic consent procedures to change to a method of accounting provided in the
regulations .
.03 Section 1.446-1 (e)(3)(ii) 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 .
.04 Rev. Proc. 2002-9 provides procedures by which a taxpayer may obtain
automatic consent to change to a method of accounting described in the Appendix of
Rev. Proc. 2002-9 .
.05 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 .
.06 Rev. Proc. 2004-23, 2004-16 I,R.B. 785, provides the exclusive
administrative procedures under which a taxpayer may obtain automatic consent for the
taxpayer's first taxable year ending on or after December 31,2003, to change to a
method of accounting provided in the final regulations and, if desired, to change to a
method of utilizing the 3% month rule authorized by § 1.461-4(d)(6)(ii) or the recurring
item exception authorized by § 1.461-5 in conjunction with a change to a method of
accounting provided in the final regulations. Under Rev. Proc. 2004-23, a term and
condition of the Commissioner's consent with respect to a change to a method of
accounting provided in the final regulations is that any applicable § 481 (a) adjustment
take into account only amounts paid or incurred in taxable years ending on or after
January 24,2002. In addition, Rev. Proc. 2004-23 states that for taxable years
subsequent to the first taxable year ending on or after December 31, 2003, a similar

term and condition will apply. (For further background, see Section 2 of Rev. Proc.
2004-23.)
.07 This revenue procedure applies only for a taxpayer's second taxable year
ending on or after December 31,2003. As in Rev. Proc. 2004-23, this revenue
procedure grants taxpayers the Commissioner's consent to change to a method of
utilizing the 3% month rule or the recurring item exception only for the item for which the
taxpayer is simultaneously changing to a method of accounting provided in the final
regulations. In addition, a term and condition of obtaining the Commissioner's consent,
whether or not automatic, is that any applicable § 481 (a) adjustment take into account
only amounts paid or incurred in taxable years ending on or after January 24, 2002.
The Service intends to issue future guidance for changes in methods of accounting
made for subsequent taxable years, including automatic consent procedures for some
or all methods of accounting provided in the final regulations. Such guidance will
include as a term and condition of obtaining the Commissioner's consent, whether or
not automatic, that any applicable § 481 (a) adjustment take into account only amounts
paid or incurred in taxable years ending on or after January 24, 2002 .
.08 This revenue procedure constitutes the exclusive guidance for utilizing the
automatic consent procedures to change to a method of accounting provided in the final
regulations for a taxpayer's second taxable year ending on or after December 31,2003.
For any change in method of accounting to which this revenue procedure applies, a
taxpayer may not file an application for a change in method of accounting under Rev.
Proc. 97-27,1997-21 I.R.B. 10 (as modified and amplified by Rev. Proc. 2002-19, 200213 I.R.B. 696, as amplified and clarified by Rev. Proc. 2002-54, 2002-35 I.R.B. 432).

See section 4.02(1) of Rev. Proc. 97-27.
SECTION 3. HOW THIS REVENUE PROCEDURE DIFFERS FROM REV. PROC.
2004-23
.01 Rev. Proc. 2004-23 applies to a taxpayer's first taxable year ending on or
after December 31,2003. This revenue procedure applies to a taxpayer's second
taxable year ending on or after December 31,2003 .
.02 Rev. Proc. 2004-23 waives the scope limitations in section 4.02 of Rev. Proc.
2002-9. This revenue procedure does not waive those limitations .
.03 Rev. Proc. 2004-23 does not require taxpayers to complete many of the lines
in Part II of Form 3115. Because this revenue procedure does not waive the scope
limitations of Rev. Proc. 2002-9, this revenue procedure requires taxpayers to complete
more of the lines in Part II of Form 3115. See section 5.02(2)( d) of this revenue
procedure.
SECTION 4. SCOPE
.01 This revenue procedure applies to a taxpayer that seeks, for the taxpayer's
second taxable year ending on or after December 31,2003, to change to a method of
accounting provided in the final regulations .
.02 This revenue procedure also applies to a taxpayer that, for the taxpayer's
second taxable year ending on or after December 31,2003, in addition to seeking a
change to a method of accounting provided in the final regulations, also seeks to
change its method of accounting to utilize the 3Y2 month rule authorized by § 1.4614(d)(6)(ii) or to utilize the recurring item exception authorized by § 1.461-5.
SECTION 5. APPLICATION

.01 In general. A taxpayer within the scope of this revenue procedure is, in
accordance with section 6.01 of Rev. Proc. 2002-9, granted the consent of the
Commissioner to change to a method of accounting provided in the final regulations
(and, if desired, to also utilize the 3}'2 month rule authorized by § 1.461-4(d)(6)(ii) or the
recurring item exception authorized by § 1.461-5) provided that the taxpayer follows the
automatic change in method of accounting provisions in Rev. Proc. 2002-9, with the
following modifications:
(1) The taxpayer must prepare and file Form 3115, Application for Change
in Accounting Method, in accordance with section 5.02 of this revenue procedure;
(2) The copy of Form 3115 must be sent to the following special address
(note the special post office box number): Commissioner of Internal Revenue, Attention:
CC:ITA (Automatic Rulings Branch, Rev. Proc. 2005-9 Filing) P.O. Box 7616, Benjamin
Franklin Station, Washington, D.C. 20044 (or in the case of a private delivery service or
hand delivery to the courier's desk: Commissioner of Internal Revenue, Attention:
CC:ITA (Automatic Rulings Branch, Rev. Proc. 2005-9 Filing), 1111 Constitution
Avenue, N.W., Washington, D.C. 20224);
(3) The taxpayer must compute any applicable § 481 (a) adjustment and
take such adjustment into account in accordance with section 6 of this revenue
procedure; and
(4) A taxpayer described in section 5.03(2) of this revenue procedure must
file one or more amended federal income tax returns (amended returns) in accordance
with section 5.03(3), (4), or (5), as applicable, of this revenue procedure .
.02 Form 3115. In preparing the Form 3115 referred to in section 5.01 of this

revenue procedure, a taxpayer must comply with the following procedures:
(1) The taxpayer may use one Form 3115 for all changes in method of
accounting made pursuant to the final regulations;
(2) The taxpayer is required to complete only the following information on
Form 3115:
(a) The identification section of Page 1 (above Part I);
(b) The signature section at the bottom of Page 1;
(c) Part I, Line 1(a). The designated automatic accounting method
change number for changes in method of accounting made pursuant to this revenue
procedure is No. "78";
(d) Part II, all lines except lines 11, 13, 14, 15, and 17 (for purposes
of completing line 12, see section 6.02(2) of this revenue procedure if the taxpayer is
making more than one change in method of accounting);
(e) Part IV, in accordance with section 6 of this revenue procedure;
and
(f) Schedule E, if applicable;
(3) In addition to the other information required on line 12 of Form 3115,
the taxpayer must include the citation to the paragraph of the final regulations that
provides for the proposed method of accounting for each item (e.g., § 1.263(a)-4(d)(6)
or § 1.263(a)-4(f)), and, if applicable, whether the taxpayer is also proposing to change
to a method that uses the 3Y2 month rule authorized by § 1.461-4(d)(6)(ii) or the
recurring item exception authorized by § 1.461-5 with respect to the item;
(4) In addition to the other information required on Schedule E of Form

3115 (if applicable), the taxpayer must include a statement as to whether the useful life
is the safe harbor useful life prescribed by § 1.167(a)-3(b)(1) or § 1.167(a)-3(b)(1)(iv)
and, if the useful life is the safe harbor useful life prescribed by § 1.167(a)-3(b)(1), a
statement explaining why the intangible asset does not have a useful life the length of
which can be estimated with reasonable accuracy; and
(5) A taxpayer that must file one or more amended returns as provided in
section 5.03 of this revenue procedure to be eligible to use the automatic consent
procedures of this revenue procedure must attach to the Form 3115 a written statement
signed under penalties of perjury confirming that the taxpayer has filed the amended
returns pursuant to section 5.03 of this revenue procedure .

.03 Unauthorized change in

a preceding year.

(1) A taxpayer may change a method of accounting only with the consent
of the Commissioner. § 1.446-1 (e )(2). A taxpayer that changes a method of accounting
without the consent of the Commissioner has made an unauthorized change in method
of accounting. If a taxpayer makes an unauthorized change in method of accounting,
the Service may adjust the taxpayer's taxable income during the examination of the
taxpayer's income tax return for the taxable year the unauthorized change was made
and for all affected subsequent years. In the notice of proposed rulemaking that
preceded the publication of the final regulations (REG-125638-01; 67 FR 77701), the
Service and Treasury Department advised taxpayers not to seek to change a method of
accounting in reliance on rules contained in the notice of proposed rulemaking until the
rules were published as final regulations. The Service and Treasury Department are
aware that some taxpayers have made an unauthorized change in method of

accounting for an item the treatment of which is provided for in the final regulations.
The Service and Treasury Department have determined that it is not appropriate for
taxpayers that have made an unauthorized change in method of accounting for an item
the treatment of which is provided for in the final regulations to obtain automatic consent
under this revenue procedure without correcting such unauthorized change. Therefore,
a taxpayer that made an unauthorized change in method of accounting for an item the
treatment of which is provided for in the final regulations is eligible to use the automatic
consent procedures provided in this revenue procedure only if the taxpayer amends
prior federal income tax returns to correct the unauthorized change in method of
accounting. However, as a matter of administrative grace, the Service and Treasury
Department have limited the application of this section 5.03 to certain taxpayers
described in section 5.03(2) of this revenue procedure.
(2) This section 5.03 applies to a taxpayer that (a) in a taxable year for which the due date of the federal income
tax return (including extensions, regardless of whether such extension is
automatic and whether or not actually requested) is after January 24, 2002 -(i) made any unauthorized change in method of accounting
for an item the treatment of which is provided for in the final regulations; or
(ii) impermissibly changed the treatment of an item that is
provided for in the final regulations in the taxpayer's first taxable year
ending on or after December 31,2003, but has only used such treatment
on one federal income tax return; or
(b) made an unauthorized change in method of accounting to a

method of accounting that is provided in the final regulations in a taxable year for
which the due date of the federal income tax return (including extensions,
regardless of whether such extension is automatic and whether or not actually
requested) is on or before January 24, 2002, and for which the statute of
limitations has not yet expired, if the taxpayer wishes to use the automatic
consent procedures to obtain the Commissioner's consent to change to the same
method of accounting to which the taxpayer previously made the unauthorized
change.
(3) A taxpayer described in section 5.03(2)(a)(i) of this revenue procedure
is eligible to use the automatic consent procedures to obtain the Commissioner's
consent to change to a method of accounting provided in the final regulations only if the
taxpayer changes back to the prior method of accounting (i.e., the method of accounting
used for an item prior to making the unauthorized change for the item) for each item
referred to in section 5.03(2)(a) of this revenue procedure by amending its federal
income tax returns for all of the preceding taxable years in which the unauthorized
method (or methods) was used.
(4) A taxpayer described in section 5.03(2)(a)(ii) of this revenue procedure
is eligible to use the automatic consent procedures to obtain the Commissioner's
consent to change to a method of accounting provided in the final regulations only if the
taxpayer amends its federal income tax return for the preceding taxable year in which
the unauthorized treatment was used to change the treatment of each item referred to in
section 5.03(2)(a) of this revenue procedure to a treatment consistent with the
taxpayer's historic method of accounting (i.e., the method of accounting used for an

item prior to changing the treatment of the item).
(5) A taxpayer described in section 5.03(2)(b) of this revenue procedure is
eligible to use the automatic consent procedures to obtain the Commissioner's consent
to change to the same method of accounting provided in the final regulations to which
the taxpayer previously made the unauthorized change only if the taxpayer changes
back to its prior method of accounting for the item (i.e., the method of accounting used
for the item prior to making the unauthorized change for the item) by amending its
federal income tax returns for all of the preceding taxable years in which the
unauthorized method was used.
(6) A taxpayer filing one or more amended returns pursuant to section
5.03(3), (4), or (5) of this revenue procedure must file the amended returns on or before
the date the taxpayer files a Form 3115 under this revenue procedure (including the
copy of Form 3115 filed with the national office under section 5.01 (2) of this revenue
procedure) for the taxpayer's second taxable year ending on or after December 31,
2003. For this purpose, a taxpayer under examination will be considered to have filed
an amended return by providing the amended return to the examining agent.
(7) In accordance with § 1.446-1 (e)(3)(ii) and Rev. Rul. 90-38, consent is
hereby granted for a taxpayer described in section 4.01 of this revenue procedure that
also is described in section 5.03(2)(a)(i) or (b) of this revenue procedure to file the
amended returns referred to in section 5.03(3) or (5) of this revenue procedure to
retroactively change its method of accounting. This consent is granted for the taxable
year for which the taxpayer made the unauthorized change and for any subsequent
taxable year affected by the unauthorized change.

.04 Prior change. For purposes of this revenue procedure, a change in method of
accounting made pursuant to Rev. Proc. 2004-23 (including a change required to be
made on an amended return as provided by section 4.03 of Rev. Proc. 2004-23) for an
item is not treated as a prior change of the same method of accounting within the
meaning of section 4.02(6) of Rev. Proc. 2002-9 with respect to a different item covered
by this revenue procedure. Thus, for example, a taxpayer that obtained automatic
consent under Rev. Proc. 2004-23 to change to a method of applying the 12-month rule
to prepaid property insurance is not prohibited by section 4.02(6) of Rev. Proc. 2002-9
from obtaining consent under this revenue procedure to change to a method of applying
the 12-month rule to the taxpayer's prepaid licenses and permits.
SECTION 6. COMPUTATION OF SECTION 481(a) ADJUSTMENT
.01 In general. A taxpayer changing a method of accounting under this revenue
procedure is required to take into account any applicable § 481 (a) adjustment as
provided in §§ 1.263(a)-4(p)(3) and 1.263(a)-5(n)(3). The § 481 (a) adjustment is
computed as of the first day of the taxpayer's second taxable year ending on or after
December 31,2003, and, as provided in the final regulations, takes into account only
amounts paid or incurred in taxable years ending on or after January 24, 2002. Thus,
the § 481 (a) adjustment is computed by taking into account only amounts paid or
incurred in the period beginning with the first day of the taxable year that includes
January 24, 2002, and ending with the last day of the first taxable year ending on or
after December 31,2003. The amount of the § 481 (a) adjustment must include (i) as a
reduction of taxable income, any amounts paid or incurred in the period beginning with
the first day of the taxable year that includes January 24, 2002, and ending with the last

day of the first taxable year ending on or after December 31,2003, that were capitalized
under the taxpayer's present method of accounting and are currently deductible under
the taxpayer's proposed method of accounting, reduced by the amount of such
capitalized costs recovered through amortization or depreciation under the taxpayer's
present method of accounting, (ii) as an increase to taxable income, any amounts paid
or incurred in the period beginning with the first day of the taxable year that includes
January 24, 2002, and ending with the last day of the first taxable year ending on or
after December 31, 2003, that were currently deducted under the taxpayer's present
method of accounting and are capitalized under the taxpayer's proposed method of
accounting, reduced by the amount of capitalized costs that would have been recovered
through amortization or depreciation if the taxpayer's proposed method of accounting
had been applied in taxable years ending on or after January 24, 2002, and (iii) as an
increase or a reduction to taxable income, as appropriate, any other adjustments
required as a result of the change in method of accounting. If under its present method
of accounting a taxpayer capitalized costs incurred prior to the first taxable year that
includes January 24, 2002, the taxpayer must continue to treat amortization or
depreciation deductions attributable to those costs in accordance with the taxpayer's
present method of accounting. Thus, for example, a taxpayer that files its federal
income tax return on a calendar year basis continues to amortize or depreciate in 2004
an intangible created in 2001, even though the taxpayer has changed to a method of
accounting provided in the final regulations under which the entire cost of the intangible
would be currently deductible if incurred in 2004 .

.02 Reporting the section 481 (a) adjustment on Form 3115.

(1) Netting. For purposes of determining the adjustment period under
section 2.05(2) of Rev. Proc. 2002-9, the § 481(a) adjustment is determined separately
for each change in method of accounting being made under this revenue procedure.
Thus, a positive adjustment attributable to a change in one method may not be netted
against a negative adjustment attributable to a change in another method. However, in
determining the adjustment attributable to a change in method, a taxpayer must net
positive § 481 (a) adjustments and negative § 481 (a) adjustments resulting from that
change in method (e.g., if a taxpayer changes to a method of applying the 12-month
rule to prepaid amounts, the taxpayer must net the resulting negative § 481 (a)
adjustment with the positive § 481 (a) adjustment that results from including those
amounts in inventory pursuant to the taxpayer's existing § 263A method of accounting
for inventory).

(2) Itemized listing on Form 3115. The taxpayer must include on Form
3115, Part IV, line 25, the total § 481 (a) adjustment for all changes in methods of
accounting being made. If the taxpayer is making more than one change in method of
accounting under the final regulations, the taxpayer must include on an attachment to
Form 3115(a) the information required by Part IV, line 25 for each change in method
of accounting (including the amount of the § 481 (a) adjustment for each change
in method of accounting);
(b) the information required by Part II, line 12 of Form 3115 that is
associated with each change; and
(c) the citation to the paragraph of the final regulations that provides for

each proposed method of accounting (e.g., § 1.263(a)-4(d)(6) or § 1.263(a)-4(f)) .
.03 Example: Y, a calendar year taxpayer that uses an accrual method of

accounting, is a service provider not required to maintain inventories. Y wishes to
change to a method of accounting provided in the final regulations for taxable year
2004, which is V's second taxable year ending on or after December 31,2003. Y
incurred and capitalized $100x in taxable year 2001 , $200x in taxable year 2002, and
$250x in taxable year 2003. In addition, Y incurred $300x in taxable year 2004. The
$100x, $200x, and $250x capitalized and depreciated by Yin 2001,2002, and 2003 all
relate to the same method of accounting and would be currently deductible under the
final regulations if the amounts had been incurred on or after December 31,2003. Y
claimed a depreciation deduction of $1 Ox in each of the taxable years 2001, 2002, and
2003 with respect to the $1 OOx incurred and capitalized in 2001, a depreciation
deduction of $20x in each of the taxable years 2002 and 2003 with respect to the $200x
incurred and capitalized in 2002, and a depreciation deduction of $25x in taxable year
2003 with respect to the $250x incurred and capitalized in 2003. For taxable year 2004,
Y may apply for an automatic change in method of accounting with respect to the
method under which the amounts had been capitalized. V's section 481 (a) adjustment
is a decrease in income of $385x ($160x relating to amounts capitalized in 2002 ($200x
- $40 ($20 for 2002 and $20 for 2003)) + $225x relating to amounts capitalized in 2003
($250x - $25x)). Y must continue to use its present method of accounting for the
amount capitalized in 2001. Y uses its new method of accounting for the amount
incurred in 2004.
SECTION 7. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002-9 is modified and amplified to include these automatic changes
in method of accounting in section 3 of the APPENDIX.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for a taxpayer's second taxable year ending
on or after December 31,2003.
SECTION 9. DRAFTING INFORMATION
The principal author of this revenue procedure is Grace Matuszeski of the
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure call Ms. Matuszeski at (202) 622-7900 (not a toll free
call).

143: U.S. Treasury Utticial Promotes Financial Education in Puerto Rico

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·U
,--..-,

PRESS ROOM

""_;

.t:

0,-

FROM THE OFFICE OF PUBLIC AFFAIRS
December 13, 2004
JS-2143
U.S. Treasury Official Promotes Financial Education in Puerto Rico
Sandra Pedroarias, Director of Outreach for Treasury's Office of Financial
Education, today taught sixth graders at the Abraham Lincoln Elementary School in
San Juan, Puerto Rico how to budget and save. While in Puerto Rico, Pedroarias
met with officials from the Puerto Rico Department of Education and the Youth
Affairs Agency to learn about their financial education initiatives. She also shared
with them financial education best practices as well as tools and resources provided
by the federal government.
"Teaching children to make good financial decisions like increasing their savings
will serve them well throughout their lives," said Pedroarias. "I congratulate the
Department of Education of Puerto Rico for advancing the cause for financial
education and for their leadership in promoting financial education in Puerto Rico
schools."
Through partnerships with the banking industry, the Department of Education of
Puerto Rico provides financial education to elementary and high school students.
The Department has also implemented a curriculum to train high school teachers in
personal finance so that they are better prepared to teach students about money.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 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/financlaleducatlon.

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144: Forum for-the Future<HK>U.S. Treasury Secretary John Snow Opening Statement ...

Page 1 of2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 11, 2004
JS-2144

Forum for the Future
U.S. Treasury Secretary John Snow
Opening Statement
December 11, 2004
Rabat, Morocco
I want to thank our co-chairs, Ministers Oualalou and Benaissa, and the
Government of Morocco for hosting this meeting. I am honored to help bring
together all my colleagues from the G8 and Broader Middle East and North Africa
(BMENA) region at this historic first meeting of the Forum for the Future.
The Forum represents a unique opportunity for foreign affairs, finance and
economics ministers to share ideas on how to best meet the region's aspirations for
greater economic opportunities, jobs and rising living standards. Our presence
today also highlights international support for the market-oriented, but politically
difficult, reforms that many of you are advancing at home. The rejuvenated marketoriented reform programs we see in many countries in the region are home-grown,
and we are here to support it, not impose anything from outside. My hope is that
decisions we make today we will create a strong foundation for a continued and
productive partnership between the leaders of the G8 and Broader Middle East and
North Africa.
As you know, for the finance and economics ministers of the G8 and the region, the
Forum for the Future is the culmination of a process that we started over a year ago
to deepen our partnership to promote financial sector development, capacity
building and further integration of the region into the global economy. And this is
just part of a range of efforts to deepen our engagement, as last month's meeting of
a regional group of the Financial Action Task Force to fight financial crimes attests.
The overarching objective is to promote a level of sustained economic growth
necessary to meet the employment demands of the region's rapidly growing
population. We have all agreed that growth must be private sector led, relying our
greatest resource - our people.
We have also agreed that we want this to be more than just dialogue and focus on
advancing a few concrete results. As a result, I am pleased to note that the
International Finance Corporation has made significant progress in creating a
regional facility to provide training and technical assistance to small businesses.
Donor commitments currently total $60 million, with the most recent pledge by the
Islamic Development Bank. With your support, more is on the way. Today, I hope
to hear your thoughts on the facility's priorities, to target its activities where it can be
the most effective.
I also look forward to your thoughts on how we can facilitate cooperation among
development finance institutions, both regionally based and global. Establishing a
Network of Funds will build on existing institutions and collaboration to improve the
effectiveness of official financing and serve as an advisory group for ministers in our
discussions. Lastly, I look forward to your thoughts on how we can facilitate capital
flows to the region, including through removing obstacles to the transfer of
remittances.
Throughout our discussion today, we will be guided by priorities that emanate from
the region. The role of the US and the rest of the G8 is to support indigenous

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144: Forum for the Future U.S. Treasury Secretary John Snow Opening Statement ...

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reform, and I look forward to continued discussions how to best do this.
Thank you.

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·U_-

js-2145: jOi.lu U. Tdylul ..... bk.> under Secretary for International Affairs United State...

Page 1 of 2

.. _ ' 1
,;;.

PHLSSf-fOOM

".-.

FROM THE OFFICE OF PUBLIC AFFAIRS
December 11, 2004
js-2145
John B. Taylor
Under Secretary for International Affairs .
United States Treasury
American Chamber of Commerce in Morocco
Casablanca, Morocco
Encouraging Economic Freeedom
in the Broader Middle East and North Africa
Good evening. Thank you for inviting me to speak at the Chamber's Annual Gala
Ball. En~agin~ :-vith business leaders tonight is a fitting end to a day when finance
and forelg~ mlnlster~ ~rom the Broader Middle East and North African gathered in
Ra~at to discuss political and economic reform with their counterparts from the
Untted States and the other G8 countries.
That finance ministers and foreign ministers were meeting together is of symbolic
and substantive significance because il underscores the close link between
economic and political reform. As Secretary Powell said in the meeting. "Political
freedom and economic freedom go hand in hand." Our hope is that the decisions
made today will create a strong foundation for both economic and political freedom
that will benefit the people of the Broader Middle East and North Africa.
But tonight I want 10 focus on economic freedom. The overarching objective of
economic reforms is to promote sustained economic growth strong enough to
create jobs for the region's rapidly growing population. to raise incomes. and to
reduce poverty, The broad consensus is that strong economic growth is achievable
only when governments adopt economic policies that enable entrepreneurs to
become the main driver of growth.
The Moroccan government has already demonstrated its recognition of the private
sector's role in generating strong economic growth. The Moroccan government's
commitment to the privatization of state-owned enterprises. its efforts to increase
the transparency of government decision-making. and the liberalization of its trade
policy are all visible examples of this recognition.
Moreover. Morocco can playa key leadership role in promoting economic reform
throughout the Broader Middle East and North African region. Statist economic
policies - embraced by Middle Eastern countries for so many years - have
prevented the region from achieving its full economic potential. The most powerful
advocates for economic change in the region are reform-oriented countries such as
Morocco.
The United States and other developed nations also have an important role to play
by supporting reforming countries and by encouraging further reform. 'The U.S.Morocco Free Trade Agreement and Morocco's eligibility for funding from the
Millennium Challenge Account are two examples of such support and
encouragement. Morocco is the only country in the region th~t is both eligible for
MeA funding and has negotiated a Free Trade Agreement With the United States.
The Millennium Challenge Account was specifically designed to target our
development resources to those countries where economic reforms are taking
place. Morocco was the only new country selected fo~ MeA funding in 2~05
thanks to its strong performance in the three b~oad policy categories: Ruling Justly,
Investing in People. and Encoura~ing .Ec?nomlc Freedom. Morocco scored
particularly high in the anti-corruption Indicator.

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js-2145: JOlLU D. Ti1ylUl.....:Bit> under Secretary for International Affairs United State... Page 2 of 2
Nonetheless there remains room for improvement. Within the Economic Freedom
category, for instance, Morocco performed below the average on the fiscal policy
indicator due to its high and rising fiscal deficIt. Hence, the government must
reform taxatio'l and control spending in order to bring this Indicator into line.
The business community C,'ln help ensure that MeA funding is directed towmds
projects that increClse economic growth The development of an MeA compact and
specifiC proposals IIwolves an open consultative process I would encourage you to
begin thinking about how the MeA can further the process of economic reform In
Morocco.
The Free Trade Agreement, which was ratified by the United States in August and
now awaits approval by your Parliament, is another indicator of U.S support for
Morocco's economic reform. The agreement, which would eliminate ninety-five
percent of all tanffs on bilateral trade in Industrial and consumer goods once In
force, represents the best market access package of any U S Free Trade Area with
a developing country Signed to date. It falls to the Moroccan pnvate sector to take
advantage of this generous access and spur Moroccan growth through increased
exports.
The agreement rewards the economic reforms undertaken by your government. In
entering into the agreement, Morocco allowed financial firms greater access to the
Moroccan market, thereby Iflcreasing competition in this key sector and supporting
further liberalization. The agreement provides strong legal protections for U.S.
investors, a framework which - if extended to all foreign investors - could Ilelp
boost foreign investment flows to Morocco. The private sector benefits from the
FTA therefore Include not only the expanded trade opportunities arising from duty
free access to U.S. markets, but also improved economic policies.
Morocco's commitment to reform sends a clear signal to other countries In the
region that a market-oriented economy that is open to trade and Investment is the
surest path to sustainable growth - a theory that is borne out in recent economic
data. From 2000 to 2003 Morocco's real GDP growth was about 4 percent per
year, above the average of 3 percent for regional non-oil producing countries during
the same period
The work of economic reformers, however, never seems to be done. You - the
leaders of Morocco's private sector - must continue to be forceful advocates for
economic reform within Morocco. And the United States will continue to support
Morocco's reform efforts and those of other countries in trle Broader Middle East
and North Africa region Together we can encourage economic freedom that will
improve people's lives here in Morocco and throughout the region.

' I' C(l"'~'
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, ] '"t15.htm

113/2005

Js.2146: United Stales-Brazil to Hold <-BR>"Group for Growth" Meetings in Washington, DC

Page 1 of2

Pfi[SS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 14, 2004
JS-2146

United States-Brazil to Hold
"Group for Growth"
Meetings in Washington, DC
On Wednesday, December 15, the United States and Brazil will hold the third
meetings of the Group for Growth in Washington, DC. The meetings will
begin at 9:30 AM in the Treasury Department's Media Room, 1500
Pennsylvania Avenue, NW.
The U.S. delegation will be chaired by John B. Taylor, Under Secretary for
International Affairs at the Department of Treasury The Brazilian delegation will be
chaired by Joaquim V. Levy, Secretary of the National Treasury, Finance Ministry
(Participant list attached.)
Formation of the Group was announced at the June 2003 meeting between
President Bush and President Lula with the goal of developing strategies to raise
economic growth in both countries. Since then, meetings were held in August 2003
in Washington, and last April in Rio de Janeiro, Brazil.
The delegations will discuss the measures each country is taking to raise
productiVity growth and strategies for increasing growth in the future.

*The TOP of the meeting will be OPEN PRESS. Media wishing to cover the
top of meeting should assemble at the Treasury Media Room (Room 4121) no
later than 9:15 AM.
*At 2:30 PM, Under Secretary Taylor and Secretary Levy will hold a brief
Media Availability in the Media Room.
Media without Treasury or White House press credentials planning to attend
should contact Treasury's Office of Public Affairs at (202) 622-2960 with the
following information: name, social security number, and date of birth. This
information may also be faxed to (202) 622-1999 or email to
frances. anderson@do.treas.gov.

U.S.-Brazil Group for Growth
Participants
United States
Dr. John Taylor, Under Secretary for International Affairs
Dr. Mark Warshawsky, Assistant Secretary for Economic Policy
Dr. Harvey Rosen, Council of Ecollomic Advisers. Member-Designate

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Js-2146: United States-Brazil to Hold "Group for Growth" Mcetings in Washington, DC

Page 2 of2

Dr. Nancy Lee Deputy Assistant Secretary, Europe, Eurasia, and the Western
Hemisphere
Mr. James Derham, Principal Deputy Assistant Secretary, Western Hemisphere
Affairs. State
Dr. Tom Connors, Senior Associate Director. Federal Reserve Board
Mr. Ramln Toloul, Director, Office of the Western Hemisphere, U.S. Treasury,
Mr. Mathew Haarsager, U.S. Treasury Representative for South America
Dr. Francisco Parodi, Brazil Economist, Office of the Western Hemisphere, U.S.
Treasury,
Dr Patrice Robitaille, Brazil Economist, Federal Reserve Board
Mr. David Edwards, Senior Brazil Desk Officer, State
Mr. Bill Block, Council of Economic Advisers
Mr. Anthony Curcio, Office of Management and Budget
Brazil

Dr. Joaquim V. Levy, Secretary of the National Treasury, Finance Ministry
Ambassador Roberto Abdenur, Embassy of Brazil
Mr. Nestor Forster, Embassy of Brazil, Financial Section

h tt'p

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7/5/2005

JS-2147: Prt:.:s StAtement of U.S. Treasury Assistant Secretary Randal Quarles Manil...

Page I of2

PHLSS HO(!M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 3, 2004
JS-2147
Press Statement of U.S. Treasury Assistant Secretary Randal Quarles
Manila, Philippines,
December 3, 2004
On this visit to the Philippines I am meeting with key members of President Arroyo's
economic team, leading Philippine legislators, and members of the domestic and
foreign business community to discuss the economic challenges facing the
Philippines. I think that there is wide recognition within the Philippines of the
challenges that the country faces. Prompt and deciSive action will assure that the
Philippines shares in the rapid growth of the Asian region.
The United States supports the goals of poverty reduction, fiscal deficit reduction,
and the establishment of more rapid growth set out by President Arroyo in her
inaugural address. Achieving these goals will require strong, and at times difficult,
actions by both the Administration and the Congress.
Significant measures to reduce the fiscal deficit to a sustainable level are
particularly urgent. Rising deficits, of both the national government and
government-owned corporations and entities, have precluded government
expenditure needed to support more rapid growth and poverty reduction, and have
added to an already large public sector debt.
Strong leadership. by both the Arroyo administration and the Congress, is needed
to take action now to significantly reduce the government deficit and place
government finances on a sustainable basis. PreSident Arroyo began that process
in the fiscal measures that she proposed shortly after her election. I encourage the
government and the Congress to work together to ensure that key revenue
measures, sufficient to reach or exceed the original goals set out by the President,
are taken as quickly as possible.
Longstanding problems in the power sector have discouraged investments in
capacity necessary to support long-term growth and have become an increaSingly
large fiscal burden. There is an immediate need to reduce the losses in the power
sector, including by adjusting tariffs to reflect the increased costs of generation. The
recent decision of the Energy Regulatory Commission to adjust tariffs was a
welcome step. Private sector investment is critical to assuring that future needs for
power are met. This requires a legal and regulatory environment that is both stable
and predictable, and one that assures investors of a reasonable expectation of
profit. These principles are important for encouraging investment in other sectors as
well, and this week's deCision of the Supreme Court upholding the Mining Act is
welcome.
A healthier and more efficient financial sector is also critical to assuring long term
growth. Bank should be encouraged to dispose of non-penforming loans and
strengthen their capital positions. Financial supervision should also be
strengthened, including by assuring that supervisors have the authority and legal
protection necessary to intervene in insolvent institutions.
Fundamental reforms are required to meet the challenges that the Philippines faces
in assuring rapid and sustained growth necessary to bring about employment
growth and poverty reduction. But the potential rewards are very high. Strong
actions by the Arroyo Administration and Congress - working together - are
necessary to meet these challenges. The United States encourages and strongly
supports the Philippines In those efforts to bring about sustained growth.

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\/3/2005

JS-2148: G8/Broudcr MiJJle East and North Africa Forum for the future Mcctinl! U .... Pa15c 101'2

FROM THE OFFICE OF PUBLIC AFFAIRS
December 11, 2004
JS-2148

G8/Broader Middle East and North Africa Forum for the Future Meeting
U.S. Treasury Secretary John Snow
December 11, 2004
First. let me thank His Royal Highness King Mohammed VI and the Government of
Morocco fOl' making the inaugural meeting of the Forum for the Future such a
success I am particularly grateful to Minister Oualalou for his tremendous
involvement and leadership In the finance ministers' dialogue.
This morning Ministers Oualalou. Benaissa. Secretary Powell and I had the great
pleasure of co-chairing the Forum for the Future meeting. Minister Oualalou and I
then co-chaired a working session of finance and economic ministers from the
countries of the Broader Middle East and North Africa (BMENA). the G8 and other
partners. This Forum was the culmination of dialogue fostered among the G8 and
the countnes of the region, both at the Sea Island Summit and in meetings between
finance ministers that began over a year ago to discuss how the G8 and other
partners can support economiC reforms to achieve faster growth and Job creation in
the region. This meeting reaffirms the commitment of the G8 to its partnership With
the BMENA countries. Together we will continue to work toward supporting both
political and home-grown. market-oriented economiC reforms in the region. We
must remember that economic freedom plays a critical role in allowing the citizens
of our countries to improve living standards for their families and to realize their
dreams. This is true In any country. In every corner of the globe. The momentum
towards economic reforms in the BMENA region is the key to promoting sustained
long-term economic growth.
Recognizing the important role of the private sector, Ministers reviewed progress in
launching the International Finance Corporation's (IFC) facility for technical
assistance to support small and medium enterprises (SMEs) in the region. Aclivitl8S
are underway in SME manager:1ent training. flllanCial institutions and markets. and
promoting an enabling environment for business. Donors have pledged more than
$40 mlll!on to the facility. including a recent $5 million from the Islamic Development
Bank. In addition to the IFe's own $20 million - bringing the total level of financing
to over $60 million so far - an impressive figure. I particularly appreciated a
presentation by Minister Mohieldin of Egypt about the achievements and benefits of
past IFC technical facilities In his country. The ministers endorsed an approach to
assessing the success of the IFC facility through mCCIsurable targets. We also
agreed to share experiences on Improving business climates by focusing on
Improving key indicators for small business development.
Ministers discussed a strategy that would facilitate greater cooperation among
development financial institutions in the region through a Network of Funds.
Building on existing mechanisms. the Network of Funds would serve as an advisory
group for G8 and BMENA governments on poliCies to promote cooperation and
improve the effectiveness of the region's offiCial finanCing. In his presentation.
Minister Saif of Bahrain emphaSized the importance of building on the eXlstlllg
coordination mechanisms and that the Network of Funds should be a regionally
based cooperative framework that would respect the autonomy and accommodate
the different strategic missions of participating institutions. The Ministers asked the
Arab Monetary Fund to organize a meeting of concerned Institutions to develop the
network. We look forward to discussions among regional and international
development institutions on launching the Network of Funds.
Ministers agreed to establish a regional, microfinance consultative group
coordinated by the Consultative Group to Assist the Poor (CGAP) Ministers also
agreed to establish a CGAP technical hub and trallling center In Jordan by mld-

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JS-2148:

G~/Broadel

Middle East and North Africa Forum for the Future Meeting U.... Page 2of2

2005 that aims to build capacity and introduce microfinance best practice principals
to the region. Following a presentation by Jordan and Yemen, we reviewed and
endorsed the initiative's first pilot program in Yemen, which could provide a strong
demonstl"ation effect for other BMENA countries
We also had a very productive discussion on promoting fillancial flows for
investment following a presentation by Commissioner Almunia of the European
Commissiorl Remittances were Identlflerj as <J significant component In these
IIlfiows. While it's clear that such inflows are making a substantial contribution to
economic growth and development in the region, they are still impeded by
inefficiencies in remittance markets With this In mind, Ministers agreed to examine
addressing impediments to these flows to allow remittances to playa more
productive role in fostering sustainable development
Finally, in order to move our diSCUSSions forward towards the practical and concrete
steps necessary to realize the goals of market-oriented reforms that will promote
sustained long-term economic growth, ministers agreed to form a sub-ministerial
organizing committee to prepare for future meetings and to review the activities of a
limited number of working groups.
I want to thank all the G8 and BMENA ministers who have taken part in the Forum
for their participation In, and dedication to, our continuing dialogue Ministers
welcomed the Kingdom of Bahrain's offer to host the next meeting of the Forum of
the Future In 2005, and we look forward to another productive meeting. As we look
to the future, it is our hope that this Forum will proVide the finance ministers'
dialogue with a framework within which they can pursue sustained engagement and
on-going diSCUSSions on economic issues of interest to the reg·lon.

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lESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 14, 2004
2004-12-14-15-36-32-27618

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
lotaled $85,998 million as of the end of that week, compared to $87,028 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US mil/ions)

December 3, 2004

December 10, 2004

87,028

85,998

TOTAL

1. Foreign Currency Reserves

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

12,209

15,337

27,546

12,076

14,917

26.993

Of which, issuer headquartered in the US.

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

11,985

3,083

15,068

11,841

2,998

14,839

bJi. Banks headquartered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US

2. IMF Reserve Position

3. Special Drawing Rights (SORs)

4. Gold Stock

20,009

19,861

13,361

13,262

11,043

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

5. Other Reserve Assets

II. Predetermined Short·Term Drains on Foreign Currency Assets
December 10, 2004

December 3, 2004
Euro
1. Foreign currency loans and securities

Yen

TOTAL

Euro

Yen

TOTAL

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

2b. Long positions

3. Other

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 3, 2004
Euro

1. Contingent liabilities in foreign currency

Yen

December 10,2004

TOTAL

Euro

Yen

TOTAL

o
o

o
a

1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2 Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines
3a. 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 US. dollar
4.a. Short positions

4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions

4.b.1. Bought calls
4b.2. Written puts

Notes:

!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
eposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
leserves for the prior week are final.
/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
alued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
ecessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
I

Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-2149 -TI.3U1~ury I1'1.telilationat Capital (TIC) Data For October

Pagelof2

f-HLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend prmtmg this release usmg thA PDF file I)e/ow
Tel view or print the PDF content on this page downiudC/ the flee ·\,1,

December 15, 2004
JS-2149
Treasury International Capital (TIC) Data For October
Treasury International Capital (TIC) data for October are released today and posted on the US Treasury web site (.
which will report on data for November, is scheduled for January 18, 2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,2227 billion in October, exceeding gross sales of dom
billion during the same month.
Foreign purchases of domestic securities reached $63.3 billion on a net basIs in October, relative to $64.7 billion duril
reached $491 billion in October. Net private purchases of Treasury BOllds and Notes decreased to $3.5 billion from ~
private purchases of Government Agency Bonds were $228 billion, up from $6.1 billion the prevIous month Net prrvc
$183 billion from $42.7 billion the previous month. Net private purchases of Equities rose to $4.5 billion from minus $
OffiCial net purchases of U.S. securities were $14.2 billion in October, relative to $13.0 billion In September. Official n
Notes of $14.8 billion more than accounted for the official Inflows in October, up from $9.8 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securrties owned by US residents were $253.3 billion in October, relative to gross sales
$2685 billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $15.2 billion, highlighting net US purchas
$32 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 $481 billion In Oct(
September. Net foreign purchases of long-term securities were $850.6 billion in the 12-months through October 2004
twelve months through October 2003.
The flJll data set, including adjustments for repayments of principal on asset-backed SeCUrities, as well as historical
C,,' :

II ' " h 1111'; ·IIC·.

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)

2003

12 Months Through
Oct-04
Oct-03

13,022.9 14,922.1
12,475.4 14.175.0

14.772,7 15,852.3
14,077.8 14,940.3

2002
I Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line J less line
4

Private, net 12

http://www.tr~as.gov/press/releascs~js2149.htm

547.6

747.1

694.9

911.9

508.3

607.7

569.4

669.7

\/3/2005

JS-2149 -'freabury l\'\tClllutional Cllpital (TIC) Data For October
5
6
7
8

Treasury Bonds & Notes. flt:t
GOy't Agency Bonds, net
Corporate Bonds. net
Equities. net

112.8
166.6
176.7
52.2

168.8
136.1
264.7
38.1

148.0
144.3
251.7
25.4

IM'.O
191.5
2k3.7
26.5

Official, net
Treasury Bonds & Notes. net
GOy't Agency Bonds. net
Corporate Bonds, net
Equities. net

39.3
7.1
28.6
5.6
-2.0

J 39.4

J 25.5

1U9.3
24.9
5.5
-0.4

97.7
23.3
4.6
-0.1

242.3
207.0
27.0
9.3
-1.1

2,640.0
2,613.0

3,037.8
3,086.4

2,962.3
3,007.8

3,393.8
3,455.2

27.0

-48.7

-45.5

-61.4

28.5
-1.5

22.3
-71.0

23.0

-68.5

6.8
-68.2

574.6

698.4

649.4

850.6

10
11
12
\J

14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line
Foreign Bonds Purchased, net
Foreign Equities Purchased. net

17
18
19

12
/3

Page 2 of2

Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)

Source: U.S. Department of the Treasury
REPORTS

http://www.tr~as.gov/press/retcascs/ls2149.htm

1/3/2005

,I·

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
December 15, 2004
EMBARGOED UNTIL 9:00 AM

Contact:

Tony Fratto
202-622-2910

TREASURY INTERNATIONAL CAPITAL DATA FOR OCTOBER
Treasury International Capital (TIC) data for October 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
November, is scheduled for January 18,2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,222.7 billion in October, exceeding
gross sales of domestic securities by foreigners of $1,159.4 billion during the same month.
Foreign purchases of domestic securities reached $63.3 billion on a net basis in October, relative
to $64.7 billion during the previous month. Private net flows reached $49.1 billion in October.
Net private purchases of Treasury Bonds and Notes decreased to $3.5 billion from $6.0 billion
the preceding month. Net private purchases of Govemment Agency Bonds were $22.8 billion,
up from $6.1 billion the previous month. Net private purchases of Corporate Bonds fell to $18.3
billion from $42.7 billion the previous month. Net private purchases of Equities rose to $4.5
billion from minus $3.1 billion.
Official net purchases of U.S. securities were $14.2 billion in October, relative to $13.0 billion in
September. Official net purchases of Treasury Bonds and Notes of$14.8 billion more than
accounted for the official inflows in October, up from $9.8 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $253.3 billion in October,
relative to gross sales of foreign securities to U. S. residents of $268.5 billion during the same
month.

Gross sales of foreign securities to U.S. residents exceeded purchases by $15.2 billion,
highlighting net U.S. purchases of $12.0 billion in Foreign Equities and $3.2 bilJion in Foreign
Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents
were $48.1 billion in October compared with $67.5 billion in September. Net foreign purchases
of long-tenn securities were $850.6 billion in the 12-months through October 2004 as compared
to $649.4 billion during the twelve months through October 2003.
The full data set, including adjustments for repayments of principal on asset-backed securities, as
well as historical series, can be found on the TIC web site, http://www.treas.govltic/.

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2003

12 Months Through
Oct-03
Oct-04

Jul-04

Aug-04

Sep-04

Oct-04

\ 3,022.9 14,9221
12,475.4 14,175.0
547,6
747.1

14,772.7 15,852.3
14,077.8 14.940.3
694,9
91\.9

1,231.1
1,160.6
70.5

1,233.1
1.177.9
55.2

1,281.5
1.216.8
64.7

1,222.7
1,159.4
63.3

36.1

49.1
3.5
22.8
18.3
4.5

2002
\

2
3

Gross Purchases of Domestic Securities
Gross Sales of Domestic Securities
Domestic Securities Purchased, net (line I less line 2) 11

4
5
6
7
8

Private, net 12
Treasury Bonds & Notes, net
Gov't Agerlcy BOrlds, net
Corporate Rands. net
Equities. net

508,3
112.8
166.6
176.7
52.2

607.7
168.8
136.1
264.7
38.1

569.4
148.0
144.3
251.7
25.4

669.7
168.0
191.5
283.7
26.5

6\.5
7.6
16.8
27.3
9.7

15.0
23.3
-1.2

51.7
6.0
6.1
42.7
-3.1

9
10
II
12
13

Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds. net
Equities, net

39.3
7.1
28.6
5.6
-2.0

139.4
1093
24.9
5.5
-0.4

125.5
97.7
23.3
4.6
-0.1

242.3
207.0
270
9.3
-I I

9,0
5.6
2.5
0.8
0.1

19.2
15.5
2.5
1.1
0.1

13.0
9.8
2.0
1.2
0.0

14.2
14.8
-0.8
0.9
-0.7

2.640.0
2.613.0
27.0

3,037.8
3.086.4
-48.7

2,962.3
3.007.8
-45.5

3,393.8
3,455.2
-61.4

235.3
244.7
-9.4

233.9
234.9
-1.0

248.3
245.6

253.3
268.5
-15.2

28.5
-1.5

22.3
-71.0

23.0
-68.5

-0.2
-9.3

-1.9
0.9

1.4

-68.2

I.3

-3.2
-12.0

574.6

698.4

649.4

850.6

61.1

54.2

67.5

48.1

14
15
16
17
18
19
II
12

Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) 13
Foreign Bonds Purchased. net
Foreign Equities Purchased, net
Net Long-Term Flows (line 3 plus line 16)
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)

Source: U.S. Department of the Treasury

-\.I

2.7

JS-21S0: Tre~u;ury to Relect:-it: Preliminary Report on U.S. Holdings of Foreign Securities

Page I of 1

f-'HLSS H(>OM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 15. 2004
JS-2150

Treasury to Release Preliminary Report on U.S. Holdings of Foreign
Securities
Preliminary data from the benchmark survey of U.S. portfolio holdings of foreign
securities at year-end 2003 will be released on Friday. December 17 at 400 PM
and posted on the U.S. Treasury web site (\"\IV\' 11".i:. (:r)'i I,r ). Final survey results,
Including additional detail and revisions to the data, will be reported by March 31.
2005.
The survey was undertaken jointly by the US. Treasury. the Federal Reserve Bank
of New York. and the Board of Governors of the Federal Reserve System. The
most recent preliminary survey was for year-end 2001. and some revisions from
that survey are reported in this release. Future surveys are scheduled to be carried
out annually and the next survey Will be for year-end 2004.
A complementary benchmark survey measuring foreign holdings of U.S. securities
is also carried out annually. Data from the most recent such survey, which reports
on securities held on June 30, 2004, are currently being rrocessed Preliminary
results are expected to be reported by July 31, 2005.
Previous benchmark surveys can be found at v,vvw Irt:d';.(Jovll(

fpl:' 111I Ii

- END-

http://www.t r cas.gov/press/releases.h;150.htm

1/3/2005

JS-21S1: The Honorable John W. Snow Prepared Remarks: Opening Statement for th... Page 1 of 3

fo'HLSS H()OM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 15. 2004
JS-2151
The Honorable John W. Snow
Prepared Remarks: Opening Statement for the President's
Economic Forum
Panel on Tax and Regulatory Burdens
December 15, 2004
Good rnornlng and thank you all so much for being here. I especially appreciate the
time and expertise that is being generously given by our panel members today.
Each one of you IS an expert. thanks to both study of these issues and your actual
life experience. So thank you very much for participating. I look forward to hearing
your Ideas.
The purpose of this conference today is to talk about where our economy stands,
the challenges we face and the steps we must take to ensure our economy will
continue to grow. create jobs and meet the needs of American workers in a
changing world. DiSCUSSions Will cover everything from tax and regulatory burdens
- which is our tasr<: here on this panel - to the Impact of lawsuit abuse. the high
costs of health care. the fiscal challenges we face near and long term. and the
importance of p~epanng American workers for the jobs of the 21 st Century.
I'm pleased to report that our nation is on track for sustained economic growth
because of the resilience and determination of the American people and the progrowth policies of this Administration. However, the President Will not be satisfied
until every American who wants to work can find a Job, and all Americans have
economic security.
The President believes a changing world can be a time of great opportunity for all
Americans to earn a better liVing. have a rewarding career, and enjoy a fulfilling life.
We must transform some of our most fundamental, but outdated, systems - the tax
code. our health care system, worker training programs, and retirement plans - so
all Americans are equipped and prepared to realize the American Dream.
As I mentioned already, our panel will address the burden of taxes and regulations
on our economy. It is, and has been, a top prionty of the Bush Administrallon to be
mindful of those burdens, and to reduce them whenever possible. The President
believes that this is critical in the effort to make America the best place in the world
in which to invest and create jobs.
Tax rates are lower In America today because of the President's leadership, and as
a result the economy is much stronger. The linkage between low tax rates and
economic growth is clear and we see it in the greatly Improved performance of the
economy since the PreSident's tax cuts took effect.
Today tax rates are lower for every American who pays taxes - lower for families,
lower for workers and entrepreneurs alike and lower for investors. Tax rates on
capital howe been significantly reduced. The lower tax rates on dividends, on
capital gams, on small business, on families and workers have put us on a path of
economic growth and strong job creatIOn
High tax rates hurt an economy but so can regulation which in many ways acts like
a tax. The PreSident knows this and has directed his Administration to make sure
that new regulations do not cost OUf economy more than they are worth.
Regulation can be particularly harmful to small businesses who don't have the
resources - lawyers and accountants - to deal with the burdens.

http://www.trf.ds.gov/press /re]eases/jS2151.htm

1/3/2005

JS-21S1: The Honot"aL!t: John W. Snow Prepared Remarks: Opening Statement for th... Page 2 of 3
Small businesses create most of the new jobs in the United States and excessive,
burdensome regulation undercuts their ability to grow. expand and create jobs. So
it is absolutely critical that we seek to reduce the burden of regulation wherever
possible.
Since the President took office. his Administration has slowed the growth of
burdensome new regulations by 75 percent, while stili moving forward With cruCial
safeguards for homeland security, human Ilealth, and elwlronmental protection
Thanks to the President's emphasis on protecting small business from excessive
regulation, American small bUSinesses were spared $6 billion in regulatory
compliance costs In fiscal year 2003 and have saved more than $30 billion In
regulatory costs since 2001, according the Small Business Administration's Office
of Advocacy. When we look at our terrific economic growth we have to consider the
stimulating effect these actions have had as well, and keep that In mind as we set
policy going forward
Some In Washington, DC might question why we would combine a panel discussion
on taxes and regulations. But I can promise you that It does not seem like an odd
combination of tOPICS to any bUSiness owner. The burdens imposed by both taxes
and regulations feel very similar to the country's most modestly sized powerhouses
of job creation. Both high taxes and excess regulations are a drag on their
companies and a drag on our overall economy.
Economics tells us that anything you tax. you get less of. That's why high marginal
taxes on investment and Innovation are a bad idea--they kill jobs. And regulations
implemented in a costly and burdensome manner act Just like a tax·-Iowering our
nation's productive capacity and costing jobs.
This Administration appreciates that government must wield the power of taxation
and regulation very carefully because of the economic headwind they can produce.
We know that when we are able to lighten the burden of taxes and regulations. our
economy begins to soar.
Much of what we will discuss in thiS forum today is truly historic. This is an exciting
moment for the country because we are embarking on something that Americans in
every tax bracket have dreamed of for decades: reform of our tax code. Reform that
will make the code simpler. More fair. A new code that Will promote strong
economic growth - growth that produces Jobs and prosperity for our citizens.
The code is too complicated, and it needs to be overhauled. Ronald Reagan
referred to it as a "daily mugging." Indeed, a complicated code robs citizens and
business owners of precious resources: namely, their time and money. And it also
allows too many people to find loopholes, which undermines our system of
voluntary compliance.
Fundamental tax reform is a top priority of President Bush's second term in office.
This administration is committed to the taSk. and we will get it done.
The President set out some very sound guidelines during his campaign, and I'd like
us to keep them in mind today. His goals are to make the code simpler and \0
increase long-run economic growth and job creation. He believes taxes should be
applied fairly, and that reform should recognize tne importance of homeownershlp
and charity In our American society.
We have a lot of work to do today, and over the coming four years; so let's get
started.

http://www.tn::as.gov/press/rekase~/I .. =lS1.htm

i;'3/2005

JS-2I52: Treasury Issues General License for Publishing Activities

Page I of2

f-'HLSS HOUM

FROM THE OFFICE OF PUBLIC AFFAIRS
To

VI8W

or pnnt the PDF conlenl on II1Is paCJe. download the free·1, /.. : J'

.J •• II

I', ). f,

December 15, 2004
JS-21S2

Treasury Issues General License for Publishing Activities
The US. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today issued a new rule clarifying the extent to which publishing activities with
persons in Cuba, Iran and Sudan are authorized, notwithstanding the US
embargoes against those countries. Today's action addresses a series of issues
that have come to the attention of the Treasury during the past year.
"OFAC's prevIous guidiJnce was Interpreted by some as discouraging the
publication of dissident speech from within these oppressive regimes. That is the
opposite of what we want," said Stuart Levey, the Treasury's Under Secretary for
the Office of Terrorism and Financial Intelligence (TFI). "This new policy Will ensure
those dissident voices and others will be heard without undermining our sanctions
policy."
The new rule enables U.S. persons to freely engage In most ordinary publishing
activities With persons in Cuba, Iran and Sudan, while maintaining restrictions on
certain interaclions with the governments, government officials, and people acting
on behalf of the governments of those countries. The rule entails the issuance of
general licenses in the Cuban Assets Control Regulations, 31 CFR part 515, the
Iranian Transactions Regulations, 31 CFR part 560, and the Sudanese Sanctions
Regulations, 31 CFR part 538.
"Persons engaging in the activities authorized in the general licenses can do so
Without seeking permission from OFAC," said OFAC Director Robert Werner. "This
rule prOVides clarity and promotes important policies aimed at the free exchange of
ideas without undermining the national security objectives of these country
sanctions."
Iran, Sudan, and Cuba are subject to U.S. sanctions under the International
Emergency Economic Powers Act (IEEPA) and the Trading With the Enemy Act
(TWEA) based on the threat they pose to the national security. foreign policy and
economy of the United States.
IEEPA and TWEA give the president the authority to impose sanctions In times of
war or national emergency. These statutes are critical to U.S. interests with respect
to dangerous regimes, terrorists, narcotics traffickers and the proliferation of
weapons of mass destruction. Embargoes established under IEEPA and TWEA
often prohibit persons under U.S. Jurisdiction from providing goods or services to
persons in sanctioned countries, unless authorized by OFAC.
Economic sanctions against foreign states and groups whose actions pose
Significant threats to the United States are an integral part of our overall national
security policy. OFAC is charged with implementing and administering the U.S.
Government's economic sanctions programs to effectively put pressure on those
pOSing sllch threats. while promoting real and positive change.

REPORTS
•

/1 ( ,1[1" I)! 'f11

fll (

:!J

,!t,

http://www.trcas.gov/pressJreleJsC-.;·1~.·152.htm

I.'

;

1/3/2005

Billing Code 4810-25-P
DEPARTMENT OF THE TREASURY

Office of Foreign Assets Control

31 CFR Parts 515, 538 and 560

Cuban Assets Control Regulations
Sudanese Sanctions Regulations
Iranian Transactions Regulations

AGENCY: Office of Foreign Assets Control, Treasury

ACTION: Final rule.

SUMMARY: The Office of Foreign Assets Control ("OFAC") of

the U.S. Department of the Treasury is revising the Cuban
Assets Control Regulations, the Sudanese Sanctions
Regulations, and the Iranian Transactions Regulations to
add general licenses pertaining to certain publishing
activities.

DATES: Effective Date:

[insert date of publication] .

Comments may be submitted at any time.

ADDRESSES:

You may submit comments by any of the following

methods:

•

Federal eRulemaking Portal:
h~tF:/h';\,j\.'J.J>='l,;l"ti')II:C'.·l')V.

Follow the instructions

for submitting comments.
•

Agency Web Si te:

•

Fax:

•

Mail:

Chief of Records, 202/622-1657.
Chief of Records, ATTN:

Request for Comments,

Office of Foreign Assets Control, Department of the
Treasury,
D.C.

1500 Pennsylvania Avenue, N.W., Washington,

20220.

Instructions:

All submissions received must include the

agency name and the FR Doc. number that appears at the end
of this document.
change to

Comments received will be posted without

LLt[j://'vJ'I;\'J.L::CI~.'l:·!,//,~)r,,(',

information provided.

including any personal

For detailed instructions on

submitting comments and additional information on the

rulemaking process, see the "Public Participation" heading
of the SUPPLEMENTARY INFORMATION section of this document.
To read background documents or comments received, go to

FOR FURTHER INFORMATION CONTACT: Chief of Policy Planning

and Program Management, tel. 202/622-2500, Chief of
Licensing, tel.: 202/622-2480, Chief of Compliance, tel.
202/622-2490, or Chief Counsel, teJ.: 202/622-2410, Office
of Foreign Assets Control, Department of the Treasury,
Washington, DC 20220 (not toll free numbers) .

SUPPLEMENTARY INFORMATION:
Electronic and Facsimile Availability

This file is available for download without charge in
ASCII and Adobe Acrobat readable (*.PDF) formats at GPO

Access.

GPO Access supports HTTP, FTP, and Telnet at

fedbbs.access.gpo.gov.

It may also be accessed by modem

dialup at 202/512-1387 followed by typing "/GO/FAC."

Paper

copies of this document can be obtained by calling the
Government Printing Office at 202/512-1530.

This document

and additional information concerning the programs of the
Office of Foreign Assets Control are available for
downloading from the Office's Internet Home Page:

http://www.treas.gov/ofac, or via FTP at ofacftp.treas.gov.

Facsimiles of information are available through the
Office's 24-hour fax-on-demand service: call 202/622-0077
using a fax machine,

fax modem, or (within the United

States) a touch-tone telephone.

Background

The Cuban Assets Control Regulations,

31 CFR part 515

(the "CACR"), were issued by the U.S. Government on July 8,
1963, under the Trading with the Enemy Act (50 U.S.C. App.
5 et

~.)

(TWEA), in response to certain hostile actions

by the Cuban Government.

Since that time, U.S. policy

toward Cuba has been to encourage a rapid and peaceful
transition to democracy.

The TWEA sanctions are intended

to isolate the Cuban Government economically and deprive it
of U.S. dollars that the Cuban Government would otherwise
use to maintain or strengthen its repressive apparatus,
enforce its information blockade on the Cuban people, and
arrange for a succession and the continuation of the
totalitarian Communist government.
The Sudanese Sanctions Regulations, 31 CFR part 538
(the "SSR"), implement Executive Order 13067, issued on
November 3, 1997, pursuant to,

inter alia, the

International Emergency Economic Powers Act (50 U.S.C.

1701-1706) (IEEPA).

In the order, the President declared a

national emergency with respect to the policies and actions
of the Government of Sudan, "including continued support
for international terrorism; ongoing efforts to destabilize
neighboring governments; and the prevalence of human rights
violations, including slavery and the denial of religious
freedom."

To deal with this national emergency, Executive

Order 13067 imposed trade sanctions with respect to Sudan
and blocked all property and interests in property of the
Government of Sudan in the United States or within the
possession or control of U.S. persons.
The Iranian Transactions Regulations, 31 CFR part 560
(the "ITR"), implement a series of Executive orders,
beginning with Executive Order 12957, issued on March 15,
1995.

In that order, the President declared a national

emergency pursuant to IEEPA to deal with the unusual and
extraordinary threat to the national security, foreign
policy, and economy of the United States constituted by the
actions and policies of the Government of Iran, including
its support for international terrorism, its efforts to
undermine the Middle East peace process and its efforts to
acquire weapons of mass destruction and the means to
deliver them.

To deal with this threat, Executive Order

12957 imposed prohibitions on certain transactions with

respect to the development of Iranian petroleum resources.
On May 6,

1995, the President issued Executive Order 12959

imposing comprehensive trade sanctions to further respond
to this threat, and on August 19, 1997, the President
issued Executive Order 13059 consolidating and clarifying
the previous orders.
The Treasury Department's Office of Foreign Assets
Control

("OFAC")

is amending the CACR, SSR and ITR to

authorize certain activities relating to publishing that
otherwise entail the prohibited exportation of services to,
or prohibited importation of services from, Cuba, Sudan or
Iran.
With certain exceptions, the exportation and
importation of information and informational materials to
or from any country are exempt from regulation by the
President under TWEA and IEEPA.

See 50 U.S.C. App 5(b) (4)

and 50 U.S.C. 1702(b) (3), respectively.

OFAC is issuing

the new general licenses set forth at 31 C.F.R. § 515.577,
31 C.F.R.

538.529 and 31 C.F.R.

560.538 to authorize

transactions not already exempt from regulation that
directly support the publishing and marketing of
manuscripts, books,

journals, and newspapers, in paper or

electronic format.
Each of the general licenses is similar in structure

and scope, authorizing a variety of activities relating to
publishing with appropriate exceptions, such as those for
the governments of each of the sanctioned countries.
Section 515.545, a pre-existing general license pertaining
to information and informational materials remains in
effect, but is being revised to include a note referring to
the further authorizations contained in

515.577.

Public Participation

Because the amendment of the CACR, ITR and SSR
involves a foreign affairs function,

the provisions of

Executive Order 12866 and the Administrative Procedure Act
(5 U. S. C. 553)

(the "APA") requiring notice of proposed

rulemaking, opportunity for public participation, and delay
in effective date, are inapplicable.

Because no notice of

proposed rulemaking is required for this rule, the
Regulatory Flexibility Act (5 U.S.C. 601-612) does not
apply.

However, OFAC encourages interested persons who

wish to comment to do so in writing.

The address for

submitting comments appears in the ADDRESSES section near
the beginning of this document.

OFAC will not accept

public comments written in languages other than English or
accompanied by a request that a part or all of the
submission be treated confidentially because of its

business proprietary nature or for any other reason.

OFAC

will return such submissions to the originator. All public
comments on these regulations will be a matter of public
record.

Copies of the public record concerning these

regulations will be made available not sooner than [90 DAYS
FROM DATE OF PUBLICATION IN THE FEDERAL REGISTER], and will
be obtainable from OFAC's Internet Home Page at
j

If that service is unavailable,

written requests for copies may be sent to Office of
Foreign Assets Control, U.S. Department of the Treasury,
1500 Pennsylvania Ave., N.W., Washington, D.C. 20220, Attn:
Chief, Records Division.

Paperwork Reduction Act
The collections of information related to 31 CFR parts
31 CFR parts 560 and 538 are contained in 31 CFR part 501
(the "Reporting, Procedures and Penalties Regulations").
Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.
3507), those collections of information have been approved
by the Office of Management and Budget under control number
1505-0164.

An agency may not conduct or sponsor, and a

person is not required to respond to,

a collection of

information unless the collection of information displays a
valid control number.

List of Subjects

31 CFR Part 515.

Administrative practice and

procedure, Cuba, Exports, Foreign trade, Imports,
Information.

31 CFR Part 538.

Administrative practice and

procedure, Exports, Foreign trade,

Imports, Information,

Sudan.

31 CFR Part 560.

Administrative practice and

procedure, Exports, Foreign trade,

Imports, Information,

Iran.

For the reasons set forth in the Preamble, 31 CFR
parts 515, 538 and 560 are amended as follows:

PART SIS-CUBAN ASSETS CONTROL REGULATIONS

The authority citation for part 515 continues to

read as follows:

Authority:

18 U.S.C. 2332d; 22 U.S.C. 2370(a),

6001-6010;

31 U.S.C. 321(b); 50 U.S.C. App 1-44; Pub. L. 101-410, 104
Stat. 890 (28 U.S.C. 2461 note); Pub. L. 106-387, 114 Stat.
1549; E.O. 9193, 7 FR 5205, 3 CFR,

1938-1943 Comp., p.

1147; E.O. 9989, 13 FR 4891, 3 CFR, 1943-1948 Comp., p.
748; Proc. 3447, 27 FR 1085, 3 CFR, 1959-1963 Comp., p.
157; E.O. 12854, 58 FR 36587, 3 CFR, 1993 Comp., p. 614.

Subpart E--Licenses, Authorizations, and Statements of
Licensing Policy

Section 515.545 is amended by adding a note at the

end of the section to read as follows:

515.545 Transactions related to information and
~aterials.

informational

* * * * *
Note to

515.545.

With respect to transactions

necessary and ordinarily incident to the publishing and
marketing of manuscripts, books, journals and newspapers,
see

515.577.

3. Add a new

515.577 to subpart E to read as

follows:

515.577

Authorized transactions necessary and ordinarily

incident to publishing.
(a)

To the extent that such activities are not exempt

from this part, and subject to the restrictions set forth
in paragraphs

(b)

through (d) of this section, persons

subject to the jurisdiction of the United States are
authorized to engage in all transactions necessary and
ordinarily incident to the publishing and marketing of
manuscripts, books, journals, and newspapers

(collectively,

"written publications"), in paper or electronic format.
This section does not apply if the parties to the
transactions described in this paragraph include the
Government of Cuba.

For the purposes of this section, the

term "Government of Cuba" includes the state and the
Government of Cuba, as well as any political subdivision,
agency, or instrumentality thereof, including the Central
Bank of Cuba; any person occupying the positions identified
in § 515.570(a) (3); employees of the Ministry of Justice;
and any person acting or purporting to act directly or
indirectly on behalf of any of the foregoing with respect
to the transactions described in this paragraph.

For the

purposes of this section, the term "Government of Cubau
does not include any academic and research institutions and
their personnel.

Pursuant to this section, the following

activities are not prohibited, provided that persons
subject to the jurisdiction of the United States ensure
that they are not engaging, without specific authorization,
in the activities identified in paragraph (d) of this
section:
(1)

Commissioning and making advance payments for

identifiable written publications not yet in existence, to
the extent consistent with industry practice;
(2)

Collaborating on the creation and enhancement of

written pUblications;
(3)

Augmenting written publications through the

addition of items such as photographs, artwork,
translation, and explanatory text;
(4)

Substantive editing of written publications;

(5)

Payment of royalties for written publications;

(6)

Creating or undertaking a marketing campaign to

promote a written publication; and
(7)

Other transactions necessary and ordinarily

incident to the publishing and markeLing of written
publications as described in this paragraph (a).

(b)

This section does not authorize transactions

involving the provision of goods or services not necessary
and ordinarily incident to the publishing and marketing of
written publications as described above.

For example, this

section does not authorize persons subject to the
jurisdiction of the United States:
(1) To provide or receive individualized or customized
services (including, but not limited to, accounting, legal,
design, or consulting services), other than those necessary
and ordinarily incident to the publishing and marketing of
written publications, even though such individualized or
customized services are delivered through the use of
information and informational materials;
(2) To create or undertake for any person a marketing
campaign with respect to any service or product other than
a written publication, or to create or undertake a
marketing campaign of any kind for the benefit of the
Government of Cuba;
(3) To engage

the exportation or importation of

goods, other than information and informational materials,
to or from Cuba;
(4)

To operate a publishing house, sales outlet, or

other office in Cuba; or

(5) To engage in transactions related to travel to,
from and within Cuba.
(c)

This section does not authorize persons subject

to the jurisdiction of the United States to engage the
services of publishing houses or translators in Cuba unless
such activity is primarily for the dissemination of written
publications in Cuba.
(d)

This section does not authorize:

(1)

Transactions for the development, production,

design, or marketing of software;
(2)

Transactions for the developmenL, production,

design, or marketing of technology specifically controlled
by the International Traffic in Arms Regulations, 22 C.F.R.
parts 120 - 130 (ITAR), the Export Administration
Regulations, 15 C.F.R. parts 730 - 774 (EAR), or the
Department of Energy Regulations set forth at 10 C.F.R.
part 810.
(3)

The exportation of information or technology

subject to the authorization requirements of 10 C.F.R. part
810, or Restricted Data as defined in section 11 y. of the
Atomic Energy Act of 1954, as amended, or of other
information, data, or technology the release of which is
controlled under the Atomic Energy Act and regulations
therein;

(4)

The exportation of information subject to license

application requirements under the EAR.

These EAR license

application requirements cover not only the exportation of
information controlled on the Commerce Control List, 15
C.F.R. part 774, but also the exportation of any
information subject to the EAR where a U.S. person knows or
has reason to know that the information will be used,
directly or indirectly, with respect to certain nuclear,
missile, chemical and biological weapons, and nuclearmaritime end-uses.

In addition, U.S. persons are precluded

from exporting any information subject to the EAR to
certain restricted end-users, as provided in the Commerce
Department's end-user and end-use based controls set forth
at 15 C.F.R. part 744; or
(5)

The exportation of information subject to

licensing requirements under the ITAR, or exchanges of
information that are subject to reguiation by other
government agencies.
(e)

Specific licenses may be issued on a case-by-case

basis authorizing the travel-related transactions set forth
in

515.560(c)

for purposes necessary and ordinarily

incident to the publishing and
publications.

marke~ing

of written

PART 538-SUDANESE SANCTIONS REGULATIONS

The authority citation for part 538 continues to

read as follows:

Authority: 3 U.S.C. 301; 31 U.S.C. 321(b); 18 U.S.C. 2339B,
2332d; 50 U.S.C.

1601-1651, 1701-1706; Pub. L. 106-387, 114

Stat. 1549; E.O. 13067, 62 FR 59989; 3 CFR, 1997 Comp., p.
230.

Subpart E--Licenses, Authorizations, and Statements of
Licensing Policy

Add a new

538.529 to subpart E to read as

follows:

538.529 Authorized transactions necessary and ordinarily

incident to publishing.
(a)

To the extent that such activities are not exempt

from this part, and subject to the restrictions set forth
in paragraphs (b)

through (d) of this section, U.S. persons

are authorized to engage in all transactions necessary and
ordinarily incident to the publishing and marketing of
manuscripts, books,

journals, and newspapers (collectively,

"written publications H

in paper or electronic format.

This section does not apply if the parties to the
transactions described in this paragraph include the
Government of Sudan.

For the purposes of this section, the

term "Government of Sudan" includes the state and the
Government of Sudan, as well as any political subdivision,
agency, or instrumentality thereof, including the Central
Bank of Sudan; and any person acting or purporting to act
directly or indirectly on behalf of any of the foregoing
with respect to the transactlons described in this
paragraph.

For the purposes of this section, the term

"Government of Sudan H does not include any academic and
research institutions and their personnel.

Pursuant to

this section, the following activities are not prohibited,
provided that U.S. persons ensure that they are not
engaging, without specific authorization, in the activities
identified in paragraph (d) of this section;
(1)

Commissioning and making advance payments for

identifiable written publications not yet in existence, to
the extent consistent with industry practice;
(2)

Collaborating on the creation and enhancement of

written publications;

(3)

Augmenting written publications through the

addition of items such as photographs, artwork,
translation, and explanatory text;
(4)

Substantive and artistic editing of written

publications;
(5)

Payment of royalties for written publications;

(6)

Creating or undertaking a marketing campaign to

promote a written publication; and
(7)

Other transactions necessary and ordinarily

incident to the publishing and marketing of written
publications as described in this paragraph (a).
(b)

This section does not authorize transactions

involving the provision of goods or services not necessary
and ordinarily incident to the publishing and marketing of
written publications as described above.

For example, this

section does not authorize u.S. persons:
(1) To provide or receive individualized or customized
services (including, but not limited to, accounting, legal,
design, or consulting services), other than those necessary
and ordinarily incident to the publishing and marketing of
written publications, even though such individualized or
customized services are delivered through the use of
information and informational materials;

(2) To create or undertake for any person a marketing
campaign with respect to any service or product other than
a written publication, or to create or undertake a
marketing campaign of any kind for the benefit of the
Government of Sudan;
(3) To engage in the exportation or importation of
goods, other than information and informational materials,
to or from Sudan; or
(4) To operate a publishing house, sales outlet, or
other office in Sudan.

(c)

This section does not authorize U.S. persons to

engage the services of publishing houses or translators in
Sudan unless such activity is primarily for the
dissemination of written publications in Sudan.
(d)

This section does not authorize:

(1) Transactions for the development, production,
design, or marketing of software;
(2)

Transactions for the development, production,

Department of Energy Regulations set forth at 10 C.F.R.
part 810.
(3)

The exportation of information or technology

The exportation of information subject to license

application requirements under the EAR.

These EAR license

u.s.

person knows or

has reason to know that the information will be used,
directly or indirectly, with respect to certain nuclear,
missile,

chemical and biological weapons, and nuclear-

maritime end-uses.

In addition,

u.s.

persons are precluded

from exporting any information subject to the EAR to
certain restricted end-users, as provided in the Commerce
Department's end-user and end-use based controls set forth
at 15 C.F.R. part 744; or

(5)

The exportation of information subject to

licensing requirements under the ITAR, or exchanges of
information that are subject to regulation by other
government agencies.

PART 560--IRANIAN TRANSACTIONS REGULATIONS

The authority citation for part 560 continues to

read as follows:

Authority: 3 U.S.C. 301; 18 U.S.C. 2339B, 2332di 22 U.S.C.
2349aa-9; 31 U.S.C. 321(b);50 U.S.C. 1601-1651, 1701-1706;
Pub. L. 101-410, 104 Stat.890

(28 U.S.C. 2461 note); Pub.

L. 106-387, 114 Stat. 1549; E.O. 12613, 52 FR 41940, 3 CFR,
1987 Comp., p. 256; E.O.
Camp., p. 332; E.O.

356; E. 0 . 13059,

12957, 60 FR 14615, 3 CFR, 1995

12959,

60 FR 24757,3 CFR, 1995, Comp.,

62 FR 44531,

3 CFR,

1997 Camp.

p. 21 7 .

Subpart E--Licenses, Authorizations I and Statements of
Licensing Policy

7.
follows:

Add a new

560.538 to subpart E to read as

560.538

Authorized transactions necessary and ordinarily

incident to publishing.
(a)

To the extent that such activities are not exempt

from this part, and subject to the restrictions set forth
in paragraphs

(b) through (d) of this section, U.S. persons

are authorized to engage in all transactions necessary and
ordinarily incident to the publishing and marketing of
manuscripts, books,

journals, and newspapers

(collectively,

"written publications"), in paper or electronic format.
This section does not apply if the parties to the
transactions described in this paragraph include the
Government of Iran.

For the purposes of this section, the

term "Government of Iran ff includes the state and the
Government of Iran, as well as any political subdivision,
agency, or instrumentality thereof, which includes the
Central Bank of Islamic Republic of Iran; and any person
acting or purporting to act directly or indirectly on
behalf of any of the foregoing with respect to the
transactions described in this paragraph.

For the purposes

of this section, the term "Government of Iranff does not
include any academic and research institutions and their
personnel.

Pursuant to this section, the following

activities are not prohibited, provided that U.S. persons
ensure that they are not engaging, without specific

authorization,

in the activities identified in paragraph

(d) of this section:
(1)

Commissioning and making advance payments for

identifiable written publications not yet in existence, to
the extent consistent with industry practice;
(2)

Collaborating on the creation and enhancement of

written publications;
(3)

Augmenting written publications through the

addition of items such as photographs, artwork,
translation, and explanatory text;
(4)

Substantive editing of written publications;

(5)

Payment of royalties for written publications;

(6)

Creating or undertaking a marketing campaign to

promote a written publication; and
(7)

Other transactions necessary and ordinarily

incident to the publishing and marketing of written
publications as described in this paragraph (a).

(b)

This section does not authorize transactions

involving the provision of goods or services not necessary
and ordinarily incident to the publishing and marketing of
written publications as described above.
section does not authorize U.S. persons:

For example, this

(1) To provide or receive individualized or customized
services

(including, but not limited to, accounting, legal,

design, or consulting services), other than those necessary
and ordinarily incident to the publishing and marketing of
written publications, even though such individualized or
customized services are delivered through the use of
information and informational materials;
(2) To create or undertake for any person a marketing
campaign with respect to any service or product other than
a written publication, or to create or undertake a
marketing campaign of any kind for the benefit of the
Government of Iran;
(3) To engage in the exportation or importation of
goods, other than information and informational materials,
to or from Iran; or
(4)

To operate a publishing house, sales outlet, or

other office in Iran.
(c)

This section does not authorize

u.s.

persons to

engage the services of publishing houses or translators in
Iran unless such activity is primarily for the
dissemination of written publications in Iran.
(d)

This section does not authorize:

(1)

Transactions for the development, production,

design, or marketing of software;

(2)

Transactions for the development, production,

The exportation of information or technology

The exportation of information subject to license

application requirements under the EAR.

These EAR license

In addition, U.S. persons are precluded

from exporting any information subject to the EAR to
certain restricted end-users, as provided in the Commerce
Department's end-user and end-use based controls set forth
at 15 C.F.R. part 744; or

(5)

The exportation of information subject to

licensing requirements under the ITAR, or exchanges of
information that are subject to regulation by other
government agencies.

Dated: December

, 2004.

Robert W. Wernert
Director, Office of Foreign Assets Control.

Approved: December

, 2004.

Juan C. Zarate, Assistant Secretary, Terrorist Financing
and Financial Crimes,
Department of the Treasury.

BILLING CODE 4810-25-P

2004-12-15-151632-213542: Secretary John Snow moderates a pand on tax and rcgulato ... Page 1 of 1

PHLSSH()()M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 15, 2004
2004~ 12-15-15-16-32-28542

Secretary John Snow moderates a panel on tax and regulatory burden at the
White House Conference on the Economy

Secretary John Snow moderates a panel on tax and regulatory burden at the White
House Conference on the Economy
All media queries should be directed to
The Press Office at (202) 622-2960
Only call this number if you are a member of the media.

http://www.treas.gov/press/releases/2004 121S1S163228542.htm

1/3/2005

JS-21S3: Joint Vres8

Relci:l~e,br>U.S.-Brazil

Group for Growth December 15,2004

Page 1 of 1

I-'HLSS Hl)()M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 15, 2004
JS·2153

Joint Press Release
U.S.-Brazil Group for Growth
December 15, 2004
The United States and Brazil held the third meeting of the Group for Growth today
in Washington, D.C. Creation of the Group was announced at the June 2003
meeting between President Bush and President Lula with the purpose of
developing strategies to raise economic growth in both countnes. The previous
meetings of the Group were in August 2003 in Washington and April 2004 In Rio de
Janeiro, Brazil.
The meeting was co-chaired by John B. Taylor, Under Secretary for International
Affairs at the U.S. Department of Treasury, and Joaquim V. Levy, Secretary of the
Brazilian National Treasury. U.S. participants included Treasury Assistant
Secretary for Economic Policy Mark Warshawsky and Council of Economic
AdVisors member Harvey Rosen.
During the meeting, the delegations reviewed the macroeconomic outlooks and
Dol icy agendas for both countries. The participants noted the solid economic
performance in Brazil and the United States In Brazil, real GDP grew 6.1 % for the
year ending in the third quarter--the highest growth rate since 1996 In the United
States, economic growth continues to be robust and the strong job market
performance has continued With more than 2 million jobs created since the
beginning of the year.
"I am Impressed by the strength of economic growth in Brazil," John Taylor said.
"Employment has risen sharply, real salaries are up, and investment is growing at
record levels. It IS clear that the Lula Administration's policies--particularly
disciplined fiscal and monetary policies--are yielding posItive results and creating
jobs. I am struck by our shared focus on priorities like promoting savings and
making the tax system more supportive of growth and job creation"
"The Group for Growth is a very important part of our bilateral relations," Joaquim
Levy said. "We discussed Brazi!'s strong and steady progress on our ambitious
reform agenda, including passage of bankruptcy reform yesterday. These reforms
will lay the basis for continued rapid growth in investment and Jobs as interest rates
come down. We also had a useful exchange about developments in the mortgage
market and growth in construction and home ownership in both countries."
The Group agreed to reconvene in Brazil in the second quarter of 2005. Under
Secretary Taylor and Treasury Secretary Levy agreed to invite business people to
the next meeting to discuss how best to promote innovation and research &
development.

httv:l/www.trea.).gov/press/releases/js2153.htm

1/3/2005

JS-2IS4: Operation Balkan Vice V: Treasury Designates Persons Obstmcting the Du... Puge I of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
To vtCw

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December 16. 2004
JS-2154
Operation Balkan Vice V: Treasury Designates Persons
Obstructing the Dayton Peace Accords in Bosnia
In another step to help establish peace and stability In the Western Balkans the
US, Department of the Treasury today deSignated SIX individuals and three entities
under Executive Order 13219. as amended by Executive Order 13304,
"Today's action furthers the steps taken by the President to act against those who
bring strife to the Western Balkans and threaten international stabilization efforts,"
said Bob Werner, Director of the Treasury's Office of Foreign Assets Control
(OFAC), The three entities designated today have obstructed Implementation of the
Dayton Peace Accords in Bosnia through the continued protection and material
support of Persons Indicted for War Crimes (PIFWCs) by the International Criminal
Tribunal for the former Yugoslavia (ICTY) and through organized criminal activity In
addition, SIX individuals, Ljubisa Beara, Miroslav Bralo, Vlastimir DJordjevic, Goran
Hadzic, Vladimir Lazarevic. Sreten Lukic, all of whom are under open indictment by
the ICTY, are being designated under E,Q, 13304
Today's designation effectively blocks any assets the designees have located in the
United States and prohibits U ,S persons from engaging in business or transactions
with them,
Under Executive Order 13219, the PreSident of the United States exercised his
statutory authOrity to declare a national emergency in response to the unusual and
extraordinary threat to national security and foreign policy of the United States
posed by persons who threaten international stabilization efforts in the Western
Balkans, including, among others, those persons engaged in. assisting. sponsoring
or supporting acts obstructing implementation of the Dayton Peace Accords in
Bosnia.
REPORTS

http://www.treu:-.go y /prcss/releases/js21j:l.htm

1/3/2005

js-2155: Joint i)rcAb Rolcag~ ufthe Council of Economic Advisors, the Department of the ... Page 1 of2

';~~<-"~
-. . ~

~
-

I-'H L S S H O() M

.,-0-

FROM THE OFFICE OF PUBLIC AFFAIRS
December 17, 2004
IS~2155

Joint Press Release of the Council of Economic Advisors, the Department of
the Treasury, and the Office of Management and Budget
The Administration today released Its economiC forecast for 2005, showing that the
economy IS fundamentally strong, with growth expected to continue at sol.id rates.
The forecast projects real GOP growth of 3.5 percent during the four quarters of
2005 and of 3 4 percent during 2006. Projec,ed growth then tapers to 31 percent
by 2009 and 2010. ThiS forecast is consistent with the consensus of professional
economic forecasters.
"Fiscal restraint and a strong economy are the two critical elements required to cut
the budget deficit in half by 2009," said Director of the Office of Management and
Budget Joshua B. Bolten. "This forecast shows that the pro-growth policies we've
enacted will help generate the economic growth necessary to meet that goal."
The unemployment rate is projected to gradually decline from Its current 5.4 percent
level to 5.1 percent 1:1 2007 and later years. Payroll employment has increased
185,000 per month during the first 11 months of 2004, according to preliminary
estimates from the Bureau of Labor Statistics (BLS). The Bureau has announced
that they expect to revise these numbers upward. Job growth during the four
quarters of 2005 is estimated to be about 175,000 per month--a figure In line with
the consensus forecast--so that payroll employment is estimated to average 133.4
million in 2005.
"Given the powerful contractiorli:HY forces at work since early 2000, the strength of
our economy IS remarkable" said Council of Economic Advisers Chairman Gregory
Mankiw. "The United States faced the bursting of the high-tech bubble of the
19905, corporate scandals, and slow growth among our trading partners, and today
our economy is strong and growing."
The forecast projects that Inflation, as measured by the price index tor GOP, will
remain near 2 percent for the entire forecast period. ThiS matches the rate of core
inflation over the last four quarters and is about the same as that expected by the
consensus of private forecasters. Consumer price Inflation has been temporarily
boosted during the past year by high oil prices As the Impact of these oil price
Increases recedes, consumer price inflation is expected to come down and
eventually stabilize around 2.4 percent.
The current slope of the yield curve (the difference between the Yield on 10-year
Treasury notes and the 91-day rate) suggests that market participants expect shortterm interest rates to rise. The Administration Interest rate projections reflect these
views as well as those of the consensus of economic forecasters. By 2010, the
rates on 1O-year and 91-day Treasury securities relative to the rate of expected
consumer price inflation are projected to be close to their historical average
DUring the last four quarters (through the third quarter), real GOP has risen 4.0
percent, significantly above the average post-war growth rate. The rate of inflation
remains low, with core consumer price inflation at 2.2 percent during the 12 months
through November. The unemployment rate of 5.4 percent in November is down
from 6.3 percent in June 2003 and IS below tile average of the past three decades.
"Today's forecast demonstrates that the substantial tax relief passed In President
Bush's fll'st term, together With expansionary monetary POliCY, provided economic
stimulus and put tile economy on the road to recovery and subsequelll expanSion,"

http://www.trea:...gov/press /release5/j521j5.htm

\/312005

js-2155: Joint

Pr~g8

Rel(;«::;t; of the council of Economic Advisors, the Department of the ... Page 2 or 2

said Secretary of the Treasury John Snow.
The forecast was developed by a team from the Council of Economic Advisers, the
Department of the Treasury, and the Office of Management and Budget, with
assistancp. from other agencies

http://www.trea:-.gov!prcss/releascs/js21S .... htm

1/3/2005

js-2156: Statement of Tu;asury Secretary John W. Snow U.S.-lraq Debt Reduction A...

Page 1 of I

FROM THE OFFICE OF PUBLIC AFFAIRS
December 17. 2004
js-2156
Statement of Treasury Secretary John W. Snow
U.S.-Iraq Debt Reduction Agreement Signing Ceremony
Thank you, Secretary Powell It is a great pleasure to be here today, participating In
the signing of this historic agreement.
The Pans Club agreed last month that very deep debt reduction was needed for
sustainability and economic reforms to be aChieved in Iraq. That agreement was a
significant milestone in Iraq's ongoing reintegration into the international
community, and I believe it will open the door to broader international participation
in Iraq's reconstruction.
I congratulate Finance Minister Mahdi and Central Bank Governor Shabibi for the
work they did to achieve that successful outcome in the Paris Club
Our action today in eliminating the Iraqi debt owed to our country IS another critical
milestone for Iraq and Its people
This agreement shows our unwavering commitment to the Iraqi people, and their
efforts to achieve sustainable reforms and stability in their country.
And with the signrng of this agreement the Iraqi government is demonstrating. once
again, their commitment resolve to foster a sound economic environment that will
be a source of stability within the region and a source of hope for Iraq's citizens.
The situation that Iraq faces is unprecedented and the response of the world
community needs to be - and has been - unprecedented as well. Iraq's debt levels
were simply unsustainable. The situation had to be addressed by the world
community, and by this action today we are keeping faith With the high aspirations
of the Iraqi people.
Today is an Important step toward achieving economic restoration, but more will be
needed. The U.S. IS therefore ready to assist the Iraqis in implementing the Paris
Club agreement, including seeking comparable treatment from sovereign creditors
who do not participate in the Paris Club. I urge Iraq's other creditors to work quickly
In forging agreements like this one to reduce Iraq's debt.
I also urge Iraq to move qUickly in negotiating and implementing an IMF Stand-By
Arrangement. which will trigger the full aillount of debt reduction promised by Paris
Club members.
The U.S Treasury looks forward to working with the Iraqi government as you
continue your historic efforts of reconstruction and economic reform.
-30-

http://www.treas.gov/press/releases/js21~(.htm

1;'3/2005

js-2157: Janjaiani D09igl\dleJ Cor Leadership Position in the Abu SayyafGroup

Page I of2

PHLSS HOC'M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 17, 2004
JS-2157

Janjalani Designated for Leadership Position in the Abu Sayyaf Group
--Brutal Team of Separatists OperatinQ in the Philippines--

The US. Department of the Treasury today designated Khadafi Abubakar Janjalani
(Janjalani) for acting on behalf of the Abu Sayyaf Group (ASG). Today's action was
taken pursuant to Executive Order 13224
"JanJalani is a despicable terrorist, responsible for the kidnapplngs and beheadlngs
of American civilians and other innocents. We must do everything In our power to
cut off Individuals like him from their support hnes," said Stuart Levey, Treasury's
Under Secretary for the Office of Terrorism and Financial Intelligence (TFI).
The ASG has been named a Foreign Terrorist Organization (FTO) and a Specially
DeSignated Global Terrorist (SDGT) by the US Government. The group was
formed in the early 1990s under the leadership of Janjalani's older brother,
Abdurajak Abubakar Janjalani. Following the death of Abdurajak Abubakar
Janjalani in a clash with PhiliPPine police in 1998, the younger Janjalani was
elevated to a leadership position In the ASG, heading one of its major factions.
Janjalani perpetrated brutal acts of terronsm against US. citizens and foreign
nationals On August 29, 2000, Jeffrey Schilling, an Amencan citizen, was
kidnapped and held hostage for more than seven months by members of the ASG,
including Janjalanl. Using Schilling as leverage, the ASG demanded the release of
three individuals imprisoned by the U.S Government, payment of $10 million in
ransom and the cessation of military operations by the Government of the
Philippines agalllst the ASG. The ASG accompanied these demands with threats to
behead or otherwise kill Schilling if they were not met. Schilling managed to escape
from his captors on Apn112, 2001.
On May 27, 2001, roughly six weeks after Schilling's escape, the ASG - led by
Janjalani - kidnapped three American and 17 Pililippine nationals from the Dos
Palmas Island Resort on the island of Palawan in the Philippines. The ASG again
threatened to behead or otherwise kill the ilostages if their demands were not met.
On June 1, 2001, two of the Philippine hostages were beheaded, and days later the
ASG announced that It had also beheaded one of the American hostages.
Guillermo Sobero. American hostages Martin and Gracia Burnham and Filipino
hostage Edlborah Yap were held hostage for another year before Gracia Burnham
was rescued on June 7, 2002. Martin Burnham and Edlborah Yap were both killed
durlllg an encounter between the ASG and the Armed Forces of the PhiliPPines
In March 2000, Janjalani led efforts by the ASG to kidnap a number of students and
their teachers - several of whom were tortured and killed.
Janjalani, along with four conspirators, IS wanted to stand trial in the United States.
He is charged with the following offenses
•
•
•

One count of conspiracy to comrnt hostage taking resulting In death,
One count of hostage taking and aiding and abetting; and
Three counts of hostage taking resulting In death and aiding and abetting

Identifier Information

http://www.treas.govjpress/releases!Js~IS7.htm

1/3/2005

js-2lS7: JanjalJni Desigllaled for Leadership Position in the Abu SayyafGroup

Page 2 of 2

KHAOAFI ABUBAKAR JANJALANI
AKAs

Khadafy Janjalani
Khaddafy AbLbakar Janjalani
Abu Muktar

DOB Marcil 3. 1975
POB Isabela. Basilan. PhilipPines
Nationality Philippine
Janjalani was designated today pursuant to Executive Order 13224 under
paragraphs 1(c) and 1(d) based 011 a determination that he acts for or on behalf of
the ASG. assists in. sponsors or provides financial, material. or technological
support for. or financial or other services to or in support of. the ASG and acts of
terrorism: and is otherwise associated with the ASG. an entity listed as subject to
EO 13224
Blocking actions such as today's are critical to combating the financing of terrorism.
When an action IS put into place, any assets exisllng in the U.S. formal financial
system at the time of the order are requlced to be frozen. Blocking actions serve
additional functions as well, including acting as a deterrent that puts the public on
notice that they are prohibited from having any business or other dealings with the
blocked person. This serves as a warning to non-deSignated parties who might
otherwise be Willing to finance terrorist activity. Additionally. blocking actions
expose terrorist financing "money trails" that may generate leads to previously
unknown terrOrist cells and finanCiers, disrupt terrorist financing networks by
encouraging designated terrorist supporters to disassociate themselves from
terrorist activity and renounce their affiliation with terrorist groups terminate terrorist
cash flows by shutting down the pipelines used to move terrorist-related assets:
force terrorists to use alterr,ative. more costly and higher-risk means of financing
their activities: ana engender International cooperation.
With thiS action, the United States has deSignated 394 individuals and enlities as
terrorists, their financiers or facilitators. In addition. the global community has frozen
over $144 million in terrorist-related assets.
-30-

http://www.treas.gov/prcss/reteases/js21:.-.-;.htm

113/2005

js-2158: Treasury Officiab Support Financial Literacy Efforts in Washington, DC Neighb ... Page I of I

r'HLSS HO()M

FROM THE OFFICE OF PUBLIC AFFAIRS
December 15, 2004
IS-2158

Treasury Officials Support Financial Literacy Efforts in Washington, DC
Neighborhood
Under Secretary Brian Roseboro and Deputy Assistant Secretary Dan lannicola
today met with represent8tlves of Operation Hope to discuss progress on bringing
financial literacy to the Inner city The roundtable discussion brought together
Operation Hope sponsors, supporters and community leaders to discuss financial
literacy in general and the newest Hope Center scheduled to open in early 2005.
The Hope Center model offers financial literacy and economic education, as well as
hands-on financial case management and wealth building til rough homeownership
and small business owners~lip.
Under Secretary Roseboro highlighted the organization's commitment to improving
financial education in urban communities. "Operation Hope brings together
expertise and passion to get results in urban America ," said Roseboro.
Deputy Assistant Secretary Dan lannicola recognized the new center's sponsors
and supporters' commitment to improving financial education, as well as E*TRADE
Bank's multi-year commitment to serve as the signature sponsor for Hope Center
Anacostia in the Washington D.C metro area. "The involvement of E*TRADE bank
III establishing this center for the people of Anacostia shows the positive impact
members of the lending community can have on financial literacy."
Operation HOPE is a national proVider of financial literacy and economic
empowerment programs. Through ongoing collaborations and long-term
partnerships with leading government, private sector, and community interests,
Operation HOPE works to bring self-sufficiency and a sustained spirit of
revitalization to America's inner-city communities.
The Department of the Treasury is a leader in promoting financial education.
Treasu:y established the Office of Financial Educatioll in May of 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:
,'-j',/Vw trc:;]'-, (J()V:flil, ·I1U:ll,:dllCJllun.
-30-

http://www.treas.gov/press/rcleases/js21)7.htm

J 13/2005

JS-2159: Preliminary Anuui:tl Report on U.S. Holdings Of Foreign Securities

Page 10f2

I-'HLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print fhe PDF content on this page. download the free

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December 17, 2004
JS-2159

Preliminary Annual Report on U.S. Holdings Of Foreign Securities
Preliminary data from an annual survey of U.S. portfolio holdings of foreign
securities at year-end 2003 are released today and posted on the U.S. Treasury
web site at (\\WW t:<},ISlj()v;t1c/ipl:, 1111111). Final survey results, which will include
additional detail as well as revisions to the data, will be reported by March 31,2005.
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank
of New York. and the Board of Governors of the Federal Reserve System. The
most recent survey was for year-end 2001, and some revisions from that survey are
reported in this release. Future surveys are scheduled to be carried out annually
and the next survey will be for year-end 2004.
A complementary survey measuring foreign holdings of U.S. securities will also be
carried out annually. Data from the most recent such survey. which reports on
securities held on June 30, 2004, are currently being processed. Preliminary results
are expected to be reported by April 30, 2005.

Overall Preliminary Results
The survey measured U.S. holdings of foreign securities at year-end 2003 of
approximately $3,153 billion, with $2,080 billion held in foreign equities, $874 billien
in foreign long-term debt securities (original term-to-maturity in excess of one year),
and $199 billion in foreign short-term debt securities. The previous survey.
conducted as of year-end 2001, measured U.S. holdings of approximately $2.317
billion, with $1.613 billion held in foreign equities, $557 billion in foreign long-term
debt securities (revised from $502 billion), and $147 billion in foreign short-term
debt securities (see Table 1).

Table 1. U.S. holdings of foreign securities, by type of security, as of survey
dates
(Billions of dollars, except as noted)
Dec. 31,2001

Dec. 31,2003

Long-term Securities

2,170

2,955

equity

Type of Security

1,613

2,080

long-term
debt

557

874

Short-term debt securities

147

199

2.317

3,153

Total

U.S. Portfolio Investment by Country
Table 2. U.S. holdings of foreign securities, by country and type of security,
for the countries attracting the most U.S. investment, as of December 31,

2003
(Billions of dollars)

http://www.treas.gov/presslreleasesiJs.2IY).htm

11312005

Page 2 0(,2

JS-21S9: Prelinunary Annual Report on U.S. Holdings Of Foreign Securities
663

1 United Kingdom
2Uaoan
3Canada
4 Germany
5 France
6 Netherlands
7 Cayman Islands
8 Switzerland
9 Bermuda
10 Australia
11 Italy
12 Mexico
13 ~outh Korea
14 Spain
15 Brazil
16 Sweden
17 Finland
18 HonQ Kong, S.A.R.
19 Ireland
20 Israel
21 Taiwan
22 Sinqapore
23 Netherlands Antilles
24 Luxembourq
25 Denmark
Rest of world
otal value of
investment

307
301
189
185
182
125
120
116
91
67

56
53
52
50
45
41
38

421
255
149
103
131

143

14
12
15
11

116

45
118

76
1

108

29
25
28
4
6
18
13
6
1
8
12
0

39
29
49
44

32
28
35
36

29
27
25
25
23

16
27
2'1

10
160

288
3.153

23
6

2,0801
I

139
71
43

3
0

°
1

5
0
0

a
0

1
15
10
116

0
2
12

874

199

The stock of foreign securities for December 31,2003 reported in this survey may
not, for a number or reasons, correspond to the stock of foreign securities on
December 31,2001 plus cumulative flows reported in Treasury's transactions
reporting system. The final report on U.S. holdings of foreign securities as of endyear 2003 will contain an analysis or the relation between the stock and flow data.

REPORTS

http://www.trea~.gov!press!re1cascsj.ls11 ...q.htm

li3/2005

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DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
December 17, 2004
EMBARGOED UNTIL 4:00 PM

Contact:

Tony Fratto
202-622-2910

PRELIMINARY ANNUAL REPORT ON
U.S. HOLDINGS OF FOREIGN SECURITIES
Preliminary data from an annual survey of U. S. portfolio holdings of foreign securities at yearend 2003 are released today and posted on the U.S. Treasury web site at
(http://www.treas.gov/tic/fpis.html). Final survey results, which will include additional detail as
well as revisions to the data, will be reported by March 31,2005.
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York,
and the Board of Govemors of the Federal Reserve System. The most recent survey was for
year-end 2001, and some revisions from that survey are reported in this release. Future surveys
are scheduled to be carried out annually and the next survey will be for year-end 2004.
A complementary survey measuring foreign holdings of U.S. securities will also be carried out
annually. Data from the most recent such survey, which reports on securities held on June 30,
2004, are currently being processed. Preliminary results are expected to be reported by April 30,
2005.
Overall Preliminary Results
The survey measured U.S. holdings of foreign securities at year-end 2003 of approximately
$3,153 billion, with $2,080 billion held in foreign equities, $874 billion in foreign long-term debt
securities (original term-to-maturity in excess of one year), and $199 billion in foreign short-term
debt securities. The previous survey, conducted as of year-end 2001, measured U.S. holdings of
approximately $2,317 billion, with $1,613 billion held in foreign equities, $557 billion in foreign
long-tenn debt securities (revised from $502 billion), and $147 billion in foreign short-term debt
securities (see Table 1).

Table 1. U.S. holdings of foreign securities, by type of security, as of survey dates I
(Billions of dollars, except as noted)
Type of Security

Dcc. 31, 2001

Dec. 31, 2003

Long-tenn Securities
equity
long-term debt
Short-tenn debt securities

2,170
1,613
557
147

2,955
2,080
874
199

Total

2,317

3,153

U.S. Portfolio Investment by Country
Table 2. U.S. holdings of foreign securities, by country and type of security, for the
countries attracting the most U.S. investment, as of December 31,2003
(Billions of dollars)

2
3
4

6
7
8

9
10
11

12
13
14
15
16
17
18
19
20
21
22
23
24
25

United Kingdom
Japan
Canada
Germany
France
Netherlands
Cayman Islands
Switzerland
Berml1da
Australia
Italy
Mexico
South Korea
Spain
BrazIl
Sweden
Finland
Hong Kong, S.A.R.
Ireland
Israel
Taiwan
Singapore
Netherlands Antilles
Luxembourg
Denmark
Rest of world
Total value of investment

Debt securities:
Short-term
Long-term

Total

Equities

663
307
301
189
185
182
125
120
116
91
67

421
255
149
103
131
116
45
118
108
56
39
29
49
44

143
37
139
71

99
14
12
15

58
76

8
4

9
29
2S
28
4

18
13
6

0
5
0
0

53
52
50
45
41
38
33
29

28
35

3
0
0

8
12

25
25
23
22
288

22
16
27
22
23
6
10
160

15
10
116

0
0
0
0
2
2
12

3,153

2,080

874

199

3
I

I The stock of foreign securities for Decemher 31, 2003 reported in this survey may not, for a number or reasons,
correspond to the stock of foreign securities on December 31, 2001 plus cumulative flows reported in Treasury's
transactions reporting system. The final report un U.S. holdings of foreign securitics as of end-year 2003 will
contain an analysis of the relation between the stock and flow data.

"
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JS-2161: Trealmry Anlluunces Entry into Force of Protocol Amending .S.-Barbados... Page 1 of I

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FROM THE OFFICE OF PUBLIC AFFAIRS
December 20. 2004
JS-2161
Treasury Announces Entry into Force of Protocol Amending
.S.-Barbados Income Tax Treaty
Today Treasury Deputy Secretary Samuel Bodman and :he Honorable Michael
King. Ambassado~ to the Umted States from Barbados. exchanged the instruments
of ratification for the protocol amending the income tax treaty between the United
Slates and Barbados. This exchange of instruments brings the protocol into force
today
"This protocol reflects Important improvements to the U.S.-Barbados tax treaty,
demonstrating the commitments of our respective governments to keeping the
provisions of the treaty up to date in light of economic developments," said Deputy
Secretary Bodman. "We are pleased ttlat OUI' two countries were able to work
together to make the changes necessary to preserve and enhance the tax treaty
relationship."
The United States and Barbados signed the protocol at a ceremony at the Treasury
Department on July 14,2004. The United States Senate approved tile protocOl on
Oelober 11, 2004
The protocol amends the existing tax treaty, which dates back to 1984. The protocol
was negotiated to ensure that the U S.-Barbados tax treaty operates to accomplish
Its intended purpose of addressing double taxation and cannot be used
inappropriately :0 eliminate taxation altogether. The modifications reflected in the
protocol prevent the potential for exploitation of the treaty by U.S. corporations to
facilitate Iflappropriate US tax reductions in connection with a corporate inversion
transaction. The protocol also provides that the treaty's reductions III U S
Withholding taxes do not apply in the case of entities that are not subject to the
generally applicable Barbados tax system and that benefit Instead from a
preferential tax regime.
With the entry into force today. the protocol generally will be effective for taxable
years beginning on or after January 1, 2005. The provisions of the protocol relating
to withholding taxes will be effective for amounts paid or credited on or after
February 1, 2005.

http://www.treo5.gov!press/relcasCS/l~~ I (l.htrn

1I3i2005

js-2162: Treasury and IRS Issue Guidance on Defen-cd Compensation

I-'f{

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Page I of I

l)(] M

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print tile PDF content on this page, download the (me ,1,1

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December 20, 2004
js-2162
Treasury and IRS Issue Guidance on Deferred Compensation

The Treasury Department and IRS issued Notice 2005-1 today which provides
gUidance regarding transition rules under section 409A. Section 885 of the recently
enacted American Jobs Creation Act of 2004 added section 409A to the Internal
Revenue Code, providing new rules for nonqualified deferred compensation plans,
Section 409A provides that unless specified requirements are met, all amounts
deferred under a non qualified deferred compensation plan for all taxable years are
currently includible in gross income, to the extent not subject to a substantial risk of
forfeiture and not previously included in gross income,
Under sections 885(e) and 885(f) of the legislation, Congress directed the Secretary
of the Treasury to Issue guidance regarding the termination and amendment of
certain nonqualified deferred compensation arrangements and to define a change
in ownership or control for purposes of Section 409A, within 60 days and 90 days
respectively of enactment of the legislation, Notice 2005-1 addresses these
guidance Items, In addition, this guidance defines the arrangements that will be
considered deferred compensation subject to the new rules, Finally, this guidance
outlines the new reporting and employment tax obligations of employers In
connection with section 409A,
IRS Chief Counsel Donald Korb said, "Given the significant changes that section
409A will require for nonqualified deferred compensation plans, we developed this
guidance being mindful to avoid establishing rules that could become traps for the
unwary,"
Section 409A applies to amounts deferred on or after January 1, 2005, subject to
several speCial effective date rules.
A copy of NotIce 2005-1 is attached.

REPORTS

http://www.trCil..i.gov/press/releases/Js~I(;2.htm

1/312005

NOT-159640-04

Part IV - Items of General Interest

Guidance Under § 409A of the Internal Revenue Code

Notice 2005-1

I. Purpose and Overview
Section 885 of the recently enacted American Jobs Creation Act of 2004, Pub.
Law No. 108-357, 118 Stat. 1418 (the Act), added § 409A to the Internal
Revenue Code (Code). Section 409A provides that all amounts deferred under a
nonqualified deferred compensation plan for all taxable years are currently
includible in gross income to the extent not subject to a substantia! risk of
forfeiture and not previously included in gross income, unless certain
requirements are met. Section 409A also includes rules applicable to certain
trusts or similar arrangements associated with nonqualified deferred
compensation, where such arrangements are located outside of the United
States or are restricted to the provision of benefits in connection with a decline in
the financial health of the sponsor.
As explained more fully below, this notice provides the first part of what is
expected to be a series of guidance with respect to the application of § 409A.
The Treasury Department and the Internal Revenue Service (Service) intend to
incorporate the principles of this notice into additional, more comprehensive
guidance in 2005.
Taxpayers should note that although the statute makes a number of fundamental
changes, § 409A does not alter or affect the application of any other provision of
the Code or common law tax doctrine. Accordingly, deferred compensation not
required to be included in income under § 409A may nevertheless be required to
be included in income under § 451, the constructive receipt doctrine, the cash
equivalency doctrine, § 83, the economic benefit doctrine, the assignment of
income doctrine or any other applicable provision of the Code or common law tax
doctrine.

A. Definitions and Coverage
This notice generally outlines the scope of coverage of § 409A. The notice first
provides definitions of a nonqualified deferred compensation plan, a plan and the
deferral of compensation. Guidance is provided on the application of § 409A to
welfare plans, plans covered by § 457, stock appreciation rights, and
arrangements between partners and partnerships. This notice provides a
definition of a substantial risk of forfeiture.
The definition of nonqualified deferred compensation contains an exception for
amounts actually or constructively received by the service provider within a short
period following the lapse of a SUbstantial risk of forfeiture. The exception is
intended to address multi-year compensation arrangements, where the right to
the compensation is or may be earned over multiple years but is payable at the
end of the earning period. For example, a three-year bonus program requiring
the performance of servkes over three years and entitling the service provider to
a payment within a short specified period following the end of the third year
generally would not constitute a deferral of compensation. The Treasury
Department and the Service are, however, concerned about arrangements
purported to involve a substantial risk of forfeiture and fixed payment date where
the parties do not intend for the substantial risk of forfeiture or fixed payment date
to be enforced. Accordingly, the Treasury Department and the Service are
considering a more restrictive rule under which arrangements involving payments
in later taxable years structured to coincide with a lapse in a substantial risk of
forfeiture would constitute deferrals of compensation subject to § 409A.
However, even under a more restrictive rule, the Treasury Department and the
Service anticipate that a payment within a short period following a scheduled
vesting date and, in specified circumstances, within a short period following an
accelerated vesting date, would be permitted under the statutory authority
provided to permit accelerated payments that are not inconsistent with the
purposes of the statute. Comments are requested with respect to these issues
and the extent to which additional guidance is required to prevent arrangements
designed to evade application of § 409A.
This notice does not provide generally applicable methods for calculating the
amount of deferrals for a given year. However, a rule is provided for calculation
of the amount of deferrals before January 1, 2005 for purposes of applying the
effective date provisions. The Treasury Department and the Service anticipate
issuing guidance in 2005 providing methods for calculating the amount of
deferrals for purposes of all deferrals to which § 409A applies, including deferrals
preceding the issuance of the guidance. Until such guidance is issued, certain
transition relief is provided to address information reporting and withholding
requirements. However, nothing in this guidance should be interpreted to
exempt amounts actually distributed to the taxpayer in 2005 from inclusion in
income or from applicable reporting or withholding requirements.

B. Nonstatutory Stock Options and Stock Appreciation Rights
The definition of nonqualified deferred compensation contains an exception that
generally excludes certain nonstatutory stock options from coverage under
§ 409A. This exception is consistent with the further exception covering transfers
of restricted property, as the taxation of transfers of nonstatutory stock options
and transfers of restricted property generally both are governed by § 83.
Commentators have pointed out that under certain conditions, stock appreciation
rights yield economically equivalent results to nonstatutory stock options
exercised in a cashless transaction, and have requested that stock appreciation
rights be treated similarly. However. the Treasury Department and the Service
are concerned that a general exception for stock appreciation rights may be
exploited as a method to avoid application of § 409A, particularly in regard to
valuation of the underlying stock where the value is not established by and in an
established securities market. In many respects, stock appreciation rights are
similar to other forms of nonqualified deferred compensation, particularly where
the recipient of a stock appreciation right may receive cash. In such cases, the
taxation of stock appreciation rights generally is governed by § 451 and the
constructive receipt doctrine. See Rev. Rul. 80-300,1982-2 C.B. 165.
Accordingly, this notice provides limited exceptions from coverage under § 409A
for certain stock appreciation rights which do not present potential for abuse or
intentional circumvention of the purposes of § 409A. Under this exception, a
stock appreciation right will not constitute a deferral of compensation if (1) the
value of the stock the excess over which the right provides for payment upon
exercise (the SAR exercise price) may never be less than the fair market value of
the underlying stock on the date the right is granted. (2) the stock of the service
recipient subject to the right is traded on an established securities market, (3)
only such traded stock of the service recipient may be delivered in settlement of
the right upon exercise, and (4) the right does not include any feature for the
deferral of compensation other than the deferral of recognition of income until the
exercise of the right. In addition, until further guidance is issued, a payment of
stock or cash pursuant to the exercise of a stock appreciation right (or
economically equivalent right), or the cancellation of such a right for
consideration, where such right is granted pursuant to a program in effect on or
before October 3, 2004 will not be treated as a payment of a deferral of
compensation subject to the requirements of § 409A if: (1) the SAR exercise
price may never be less than the fair market value of the underlying stock on the
date the right is granted, and (2) the right does not include any feature for the
deferral of compensation other than the deferral of recognition of income until the
exercise of the right. The Treasury Department and the Service request
comments on the extent to which stock appreciation rights should be excepted
from coverage under § 409A, in light of the statutory purpose.
The Treasury Department and the Service also are concerned about the potential
for taxpayers to avoid application of § 409A by combining an exception from

coverage under § 409A for nonstatutory stock options or stock appreciation rights
with a requirement or right that the stock acquired by the service provider be
repurchased by the service recipient. Accordingly, the Treasury Department and
the Service are considering a restriction on the exception from coverage under
§ 409A for nonstatutory stock options or stock appreciation rights, to options or
rights that are not accompanied by an arrangement or agreement under which
the service recipient has an obligation or right to repurchase the acquired shares
(includi ng repurchases for an amount other than fair market value). In this
context, the Treasury Department and the Service also request comments on
appropriate techniques for valuation of stock subject to options or stock
appreciation rights where the value of such stock is not established by and in an
established securities market, in order to ensure that such valuation reflects the
actual fair market value of the stock.
To the extent the additional guidance adopts a position on an issue addressed in
this notice with respect to stock options or stock appreciation rights that is less
favorable to taxpayers than provided in this notice, the Treasury Department and
the Service anticipate that such a position will be applied only on a prospective
basis with adequa1e transition relief to allow modification of plans to comply on a
prospective basis.
C. Change in Control Events

This notice next addresses what constitutes a change in ownership or effective
control of a corporation, or in the ownership of a substantial portion of the assets
of a corporation (Change in Control Event) for purposes of § 409A. Section
885(e) of the Act requires that within 90 days of the enactment of the legislation,
the Treasury Department and the Service issue guidance on what constitutes a
Change in Control Event. Section 409A provides that, to the extent provided by
the Treasury Department and the Service in guidance, a nonqualified deferred
compensation plan may permit amounts deferred under the plan to be distributed
upon a Change in Control Event.
D. Acceleration of Payments

Except under circumstances specified by the Treasury Department and the
Service in guidance, a nonqualified deferred compensation plan may not permit
the acceleration of payments under the plan. This notice provides circumstances
under which payments under the plan may be accelerated, such as to meet the
requirements of a domestic relations order or conflict of interest divestiture
requirements. Comments are requested as to other circumstances under which
a plan should be allowed to accelerate payments under the plan.

E. Effective Dates and Transition Relief
The notice provides guidance on the effective date provisions and transition
relief. Section 409A generally is effective with respect to amounts deferred after
December 31,2004. Section 409A also is effective with respect to amounts
deferred in taxable years beginning before January 1, 2005 if the plan under
which the deferral is made is materially modified after October 3, 2004. This
notice addresses what amounts will be considered deferred after December 31,
2004, generally providing that an amount will be treated as deferred on or before
December 31 , 2004 only if the service recipient has a binding legal obligation to
pay an amount in a future taxable year and the service provider's right to the
amount is earned and vested as of December 31 ,2004. Methods of calculating
amounts treated as deferred on or before December 31, 2004 are provided. This
notice also addresses when a plan under which a deferral is made will be
considered materially modified after October 3, 2004.
This notice addresses the requirements of § 885(f) of the Act, which provides that
within 60 days of the enactment of the legislation, the Treasury Department and
the Service must issue guidance providing that for a limited period and under
certain conditions, a nonqualified deferred compensation plan may be amended
without violating certain provisions of § 409A to (i) allow a participant to terminate
participation in the pia n, or cancel an outstanding deferral election with respect to
amounts deferred after December 31,2004, or (ii) conform the plan to the
provisions of § 409A with respect to amounts deferred after December 31,2004.
This notice provides certain relief addressing the application of the initial deferral
election requirements to compensation attributable, in whole or in part, to the
performance of services in the years 2004 or 2005. This includes, for example,
provisions addressing the deferral of bonuses, including bonuses for services
performed in 2004.

F. Application of Information Reporting and Wage Withholding
Requirements
This notice next addresses certain information reporting and wage withholding
requirements imposed by § 885(b} of the Act with respect to deferred amounts.
For information reporting purposes, the Act amends §§ 6041 and 6051 to require
that all deferrals for the year under a nonqualified deferred compensation plan be
separately reported on a Form 1099 (Miscellaneous Income) or a Form W-2
(Wage and Tax Statement). For wage withholding purposes, the Act amends
§ 3401 (a) to provide that the term "wages" includes any amount includible in
gross income of an employee under § 409A. Finally, for purposes of reporting
nonemployee compensation, the Act further amends § 6041 to require that
amounts includible in gross income under § 409A that are not treated as wages
under § 3401 (a) must be reported as gross income. This notice does not provide
methods for calculating the amount of deferrals for the year or the amounts
includible in gross income under § 409A and in wages under § 3401 (a).

Consequently, interim guidance is provided with respect to an employer's
withholding and reporting obligations where the employer furnishes an expedited
Form W-2 prior to the issuance of additional guidance providing such methods.
II. Reliance on Transition Guidance; Good Faith, Reasonable Interpretation
This notice provides rules governing the application of § 409A. The Treasury
Department and the Service a nticipate issuing additional guidance that
incorporates this notice. To the extent the additional guidance adopts a position
on an issue addressed in this notice that is less favorable to taxpayers than
provided in this notice, the Treasury Department and the Service anticipate that
such a position will be applied only on a prospective basis with adequate
transition relief to allow modification of plans to comply on a prospective basis.
This notice does not provide comprehensive guidance with respect to the
application of § 409A. Until additional guidance is issued, to comply with the
requirements of § 409A with respect to issues not addressed in this notice,
taxpayers should base their positions upon a good faith, reasonable
interpretation of the statute and its purpose, which includes consideration of the
legislative history. Whether a taxpayer position constitutes a good faith,
reasonable interpretation of the statutory language generally will be determined
based upon all of the relevant facts and circumstances, including whether the
taxpayer has applied the position consistently and the extent to which the
taxpayer has resolved unclear issues in the taxpayer's favor. In addition, certain
provisions of § 409A provide definitive rules, but allow the Treasury Department
and the Service to issue guidance providing exceptions to such rules. For
example, § 409A(a)(3) provides that the Treasury Department and the Service
may issue guidance providing an exception to the general prohibition against the
acceleration of the time or schedule of any payment under a nonqualified
deferred compensation plan. A taxpayer position based on an expected
exception that the taxpayer speculates that the Treasury Department and the
Service will adopt in future guidance is not a good faith, reasonable interpretation
of the statutory language. In addition, as discussed above, the Treasury
Department and the Service intend to issue guidance in 2005 providing methods
for calculating the amount of deferrals for a year for purposes of all amounts of
deferrals to which § 409A applies, including deferrals predating the issuance of
the anticipated guidance. Accordingly, taxpayers will not be able to rely upon
methods of calculation that differ from the methods provided in the 2005
guidance.
III. Request for Comments on Anticipated Guidance

A. Request for Comments
The Treasury Department and the Service request comments on all aspects of
the application of § 409A, including but not limited to the topics addressed in this

notice. The Treasury Department and the Service specifically request comments
with respect to the following:
(1) The application of§ 409A to severance plans, including whether to exclude
any specific types of severance plans or arrangements (see Q&A 19).
(2) Funding arrangements for nonqualified deferred compensation that involve
foreign trusts or similar arrangements, and identification of arrangements that will
not result in an improper deferral of United States tax and will not result in assets
being effectively beyond the reach of creditors for purposes of the potential
exemption from the provisions of § 409A(b) that the Treasury Department and
the Service are authorized to provide under § 409A(e)(3).
(3) The application of § 409A to arrangements involvi ng partners and
partnerships. Comments are specifically requested with respect to the
applicability of § 409A to arrangements subject to § 736, and whether there
should be a distinction between payments subject to § 736(a) and (b) and the
coordination of the timing rules of § 1.736-1 (b)(5) with the rules of§ 409A for
nonqualified deferred compensation plans. Comments are also specifically
requested on whether there should be special rules in applying § 409A in the
case of a putative allocation and distribution which is recast, under
§ 707(a)(2)(A), as a payment to a nonpartner under § 707(a)(1).
(4) Potential additional exclusions from coverage under § 409A with respect to
contractual arrangements between businesses (see Q&A 8).
(5) Situations where the acceleration of benefits should be permitted under
§ 409A(a)(3) (see Q&A 15), particularly in light of the legislative history regarding
accelerated payments required for reasons beyond the control of the participant.
All materials submitted will be available for public inspection and copying.
B. Submission of Comments
Comments may be submitted to Internal Revenue Service, CC:PA:LPD:RU
(Notice 2005-1), Room 5203, PO Box 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may also be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to the Courier's Desk at 1111
Constitution Avenue, NW, Washington DC 20224, Attn: CC:PA:LPD:RU (Notice
2005-1), Room 5203. Submissions may also be sent electronically via the
internet to the following email address: Notice.comments@irscounsel.treas.qov.
Include the notice number (Notice 2005-1) in the subject line.

IV. Guidance
A. Definitions and Coverage
Q-1 What does § 409A provide, in general?
A-1 Section 409A provides that all amounts deferred under a nonqualified
deferred compensation plan for all taxable years are currently includible in gross
income to the extent not subject to a sUbstantial risk of forfeiture and not
previously included in gross income, unless certain requirements are satisfied.
Section 409A also includes rules applicable to certain trusts or similar
arrangements associated with nonqualified deferred compensation, where such
arrangements are located outside of the United States or are restricted to the
provision of benefits in connection with a decline in the financial health of the
sponsor.

Q-2 What are the federal income tax consequences of a failure to satisfy
the requirements of§ 409A?
A-2 Generally, if at any time during a taxable year a nonqualified deferred
compensation plan fails to meet the requirements of § 409A, or is not operated in
accordance with those requirements, all amounts deferred under the plan for the
taxable year and all preceding taxable years, by any participant with respect to
whom the failure relates, are includible in gross income for the taxable year to the
extent not subject to a substantial risk of forfeiture and not previously included in
gross income. If a deferred amount is required to be included in income under
§ 409A, the amount also is subject to interest and an additional income tax. The
interest imposed is equal to the interest at the underpayment rate plus one
percentage point, imposed on the underpayments that would have occurred had
the compensation been includible in income for the taxable year when first
deferred, or if later, when not subject to a substantial risk of forfeiture. The
additional income tax is eq ual to 20 percent of the compensation required to be
included in gross income.
Q-3 What is a nonqualified deferred compensation plan?

A-3 (a) In general. Except as otherwise provided in this A-3, the term
nonqualified deferred compensation plan means any plan (within the meaning 0 f
Q&A 9) that provides for the deferral of compensation (within the meaning of
Q&A 4). The application of § 409A is not limited to arrangements between an
employer and an employee. For example, § 409A may apply to arrangements
between a service recipient and an independent contractor, or arrangements
between a partner and a partnership (see Q&A 7 and Q&A 8).
(b) Qualified employer plans. The term nonqualified deferred compensation plan
does not include (i) any plan, contract, pension, account, or trust described in

subparagraph (A) or (8) of § 219(g)(5) (without regard to subparagraph (A)(iii),
(ii) any eligible deferred compensation plan (within the meaning of § 457(b», and
(iii) any plan described in § 415(m). Accordingly, the term nonqualified deferred
compensation plan does not include a qualified retirement plan, tax-deferred
annuity, simplified employee pension, SIMPLE or § 501 (c)(18) trust.
(c) Certain welfare benefits. The term nonqualified deferred compensation plan
does not include any bona fide vacation leave, sick leave, compensatory time,
disability pay, or death benefit plan. For these purposes, the term disability pay
has the same meaning as provided in § 31.3121(v)(2)-1(b)(4)(iv)(C) of the
Employment Tax Regulations, and the term death benefit plan refers to a plan
providing death benefits as defined in § 31.3121 (v)(2)-1 (b)(4)(iv)(C). The term
nonqualified deferred compensation plan also does not include any Archer
Medical Savings Account as described in § 220, any Health Savings Account as
described in § 223, or any other medical reimbursement arrangement, including
a health reimbursement arrangement, that satisfies the requirements of § 105
and § 106.
0-4 What constitutes a deferral of compensation?
A-4 (a) Deferral of compensation defined. A plan provides for the deferral of
compensation only if, under the terms of the plan and the relevant facts and
circumstances, the service provider has a legally binding right during a taxable
year to compensation that has not been actually or constructively received and
included in gross income, and that, pursuant to the terms of the plan, is payable
to (or on behalf of) the service provider in a later year. A service provider does
not have a legally binding right to compensation if that compensation may be
unilaterally reduced or eliminated by the service recipient or other person after
the services creating the right to the compensation have been performed.
However, if the facts and circumstances indicate that the discretion to reduce or
eliminate the compensation is available or exercisable only upon a condition that
is unlikely to occur, or the discretion to reduce or eliminate the compensation is
unlikely to be exercised, a service provider will be considered to have a legally
binding right to the compensation. For this purpose, compensation is not
considered subject to unilateral reduction or elimination merely because it may
be reduced or eliminated by operation of the objective terms of the plan, such as
the application of an objective provision creating a substantial risk of forfeiture
(within the meaning of Q&A 10). Similarly, a service provider does not fail to
have a legally binding right to compensation merely because the amount of
compensation is determined under a formula that provides for benefits to be
offset by benefits provided under a plan that is qualified under § 401 (a), or
because benefits are reduced due to actual or notional investment losses, or in a
final average pay plan, subsequent decreases in compensation.
(b) Compensation payable pursuant to the service recipienfs customary
payment timing arrangement. A deferral of compensation does not occur solely

because compensation is paid after the last day of the service provider's taxable
year pursuant to the timing arrangement under which the service recipient
normally compensates service providers for services performed during a payroll
period described in § 3401 (b), or with respect to a non-employee service
provider, a period not longer than the payroll period described in § 3401(b).
(c) Short-term deferrals. Until additional guidance is issued, a deferral of
compensation does not Occur if, absent an election to otherwise defer the
payment to a later period, at all times the terms of the plan require payment by,
and an amount is actually or constructive Iy received by the service provider by,
the later of (i) the date that is 2 12 months from the end of the service provider's
first taxable year in which the amount is no longer subject to a substantial risk of
forfeiture (as defined in Q&A 10) or (ii) the date that is 2 12 months from the end
of the service recipient's first taxable year in which the amount is no longer
subject to a substantial risk of forfeiture (as defined in Q&A 10). For these
purposes. an amount that is never subject to a substantial risk of forfeiture is
considered to be no longer subject to a substantial risk of forfeiture on the date
the service provider has a legally binding right to the amount. For example, an
employer with a calendar year taxable year who on November 1,2006 awards a
bonus so that the employee is considered to have a binding legally binding right
to the payment as of November 1, 2006, will not be considered to have provided
for a deferral of compensation if, in accordance with the terms of the bonus plan,
the amount is paid or made available to the employee on or before March 15,
2007. An employer with a September 1 to August 31 taxable year who on
November 1, 2006 awards a bonus so that the employee is considered to have a
legally binding right to the payment as of November 1,2006, will not be
considered to have provided for a deferral of compensation if, in accordance with
the terms of the bonus plan, the amount is paid or made available to the
employee on or before November 15, 2007. NotWithstanding the foregoing, if an
election is provided to the service provider with respect to the taxable year in
which payment of the compensation will occur, and the service provider elects a
taxable year later than the taxable year in which he or she obtained a legally
binding right to the payment, the arrangement constitutes a deferral of
compensation subject to § 409A, including the deferral election timing rules of
§ 409A(a)(4). In addition, the arrangement continues to be subject to applicable
U.S. Federal tax principles which may require immediate income inclusion.
(d) Stock options, stock appreciation rights, and other equity-based
compensation. (i) Except as provided in paragraphs (ii), (iii) and (iv), the grant of
a stock option, stock appreciation right or other equity-based compensation
provides for a deferral of compensation subject to § 409A. Stock appreciation
rights generally will be covered by § 409A; however, stock appreciation rights
may be structured to comply with the provisions of § 409A. For example, the
terms of a stock appreciation right with a fixed payment date generally will
comply with the provisions of § 409A.

(ii) Nonstatutory stock options. An option to purchase stock of the service
recipient, a ther than an incentive stock option described in § 422 or an option
granted under an employee stock purchase plan described in § 423, does not
provide for a deferral of compensation if: (1) the amount required to purchase
stock under the option (the exercise price) may never be less than the fair market
value of the underlying stock on the date the option is granted, (2) the receipt,
transfer or exercise of the option is subject to taxation under § 83, and (3) the
option does not include any feature for the deferral of compensation other than
the deferral of recognition of income until the later of exercise or disposition of
the option under § 1.83-7. For purposes of the preceding sentence, the right to
receive substantially nonvested stock (as defined in § 1.83-3(b)) upon the
exercise of a stock option does not constitute a feature for the deferral of
compensation. If under the terms of the option, the amount required to purchase
the stock is or could become less than the fair market value of the stock on the
date of grant, the grant of the stock option may provide for the deferral of
compensation within the meaning of this A-4. For purposes of determining the
fair market value of the stock at the date of grant, any reasonable valuation
method may be used. Such methods include, for example, the valuation method
described in § 20.2031-2 of the Estate Tax Regulations. To the extent an
arrangement grants the recipient a right other than to purchase stock at a defined
price and such additional rights allow for the deferral of compensation (for
example, tandem arrangements involving options and stock appreciation rights),
the entire arrangement provides for the deferral of compensation. If the
requirements of § 1.424-1 would be met if the nonstatutory option were a
statutory option, the substitution of a new option pursuant to a corporate
transaction for an outstanding option or the assumption of an outstanding option
will not be treated as the grant of a new option or a change in the form of
payment for purposes of § 409A. For purposes of the preceding sentence, the
requirement of § 1.424-1 (a)(5)(iii) will be deemed to be satisfied if the ratio of the
option price to the fair market value of the shares subject to the option
immediately after the substitution or assumption is not greater than the ratio of
the option price to the fair market value of the shares subject to the option
immediately before the substitution or assumption.
(iii) Statutory stock options. The grant of an incentive stock option as described
in § 422, or the grant of an option under an employee stock purchase plan
described in § 423 (including the grant of an option with an exercise price
discounted in accordance with § 423(b)(6) and the accompanying regulations),
does not constitute a deferral of compensation.
(iv) Certain stock appreciation rights. A stock appreciation right with respect to
stock of the service recipient does not provide for a deferral of compensation if:
(1) the value of the stock the excess over which the right provides for payment
upon exercise (the SAR exercise price) may never be less than the fair market
value of the underlying stock on the date the right is granted, (2) the stock of the
service recipient subject to the right is traded on an established securities

market, (3) only such traded stock of the service recipient may be delivered in
settlement of the right upon exercise, and (4) the right does not include any
feature for the deferral of compensation other than the deferral of recognition of
income until the exercise of the right. For purposes of the preceding sentence,
the right to receive substantially nonvested stock (as defined in § 1.83-3(b)) upon
the exercise of a stock appreciation right does not constitute a feature for the
deferral of compensation. If, under the terms of the stock appreciation right, the
SAR exercise price is or could become less than the fair market value of the
underlying stock on the date of grant, the right may be settled upon exercise in a
medium other than the traded stock of the service recipient, or there is an
agreement or arrangement under which the service recipient will purchase the
stock delivered in settlement of the right upon exercise, then the grant of the
stock appreciation right may provide for the deferral of compensation within the
meaning of this A-4. In addition, until further guidance is issued, a payment of
stock or cash pursuant to the exercise of a stock appreciation right (or
economically equivalent right), or the cancellation of such right for consideration,
where such right is granted pursuant to a program in effect on or before October
3,2004 will not be treated as a payment of a deferral of compensation subject to
the requirements of § 409A if: (1) the SAR exercise price may never be less than
the fair market value of the underlying stock on the date the right is granted, and
(2) the right does not include any feature for the deferral of compensation other
than the deferral of recognition of income until the exercise of the right.
(e) Restricted property. If a service provider receives property from, or pursuant
to, a plan maintained by a service recipient, there is no deferral of compensation
merely because the value of the property is not includible in income (under § 83)
in the year of receipt by reason of the property being nontransferable and subject
to a substantial risk of forfeiture, or is includible in income (under § 83) solely due
to a valid election under § 83(b). However, a plan under which a service provider
obtains a legally binding right to receive property (whether or not the property is
restricted property) in a future year may provide for the deferral of compensation
and, accordingly, may constitute a nonqualified deferred compensation plan. For
purposes of this paragraph, a transfer of property includes the transfer of a
beneficial interest in a trust or annuity plan, or a transfer to or from a trust or
under an annuity plan, to the extent such a transfer is subject to § 83, § 402(b) or
§ 403(c).

(f) Earnings. References to the deferral of compensation include references to
income (whether actual or notional) attributable to such compensation or such
income.

Q-5 Who is the service recipient?
A-5 For purposes of § 409A, the service recipient refers to the person for whom
the services are performed, and all persons with whom such person would be
considered a single employer under § 414(b) (employees of controlled group of

corporations), and all persons with whom such person would be considered a
single employer under § 414(c) (employees of partnerships, proprietorships, etc.,
which are under common control).
Q-6 How Does § 409A Apply to Arrangements Covered by § 457?

A-6 The rules of § 409A apply to nonqualified deferred compensation plans
under § 457(f) in addition to a ny requirements already applicable to such plans
under § 457(f). Eligible plans under § 457(b) are not subject to the requirements
of § 409A. However, nonelective deferred compensation of nonemployees
described in § 457(e)(12) and grandfathered plans under prior § 457 transition
rules generally are subject to § 409A. Pending additional guidance, length of
service awards to bona fide volunteers under § 457(e)(11)(A)(ii) are not subject
to § 409A. Further, pending additional guidance, State and local government
and tax exempt entities may rely on the definitions of bona fide vacation leave,
sick leave, compensatory time, disability pay, and death benefit plans for
purposes of § 457(f) as applicable for purposes of applying § 409A to
nonqualified deferred compensation plans under § 457(f). However, State and
local government and tax exempt entities may not rely upon the definition of a
deferral of compensation for purposes of § 409A as applicable for purposes of
the § 457(f) definition of a deferral of compensation. For example, for purposes
of § 457(f), a deferral of compensation includes stock options (whether
nonstatutory or under § 422 or § 423) and arrangements in which an employee
or independent contractor of a State or local government or tax-exempt entity
earns the right to future payments for services, even if those amounts are paid
immediately upon vesting.
Q-7 How Does § 409A Apply to Arrangements Between a Partnership and a
Partner of the Partnership?

A-7 The application of § 409A is not limited to arrangements between an
employer and employee. Accordingly, § 409A may apply to arrangements
between a partner and a partnership which provides for the deferral of
compensation under a nonqualified deferred compensation plan. However, until
additional guidance is issued, for purposes of § 409A taxpayers may treat the
issuance of a partnership interest (including a profits interest). or an option to
purchase a partnership interest, granted in connection with the performance of
services under the same prinCiples thatgovern the issuance of stock (see
Q&A 4). Specifically, until additional guidance is issued, for purposes of § 409A,
taxpayers may treat an issuance of a profits interest in connection with the
performance of services that is properly treated under applicable guidance as not
resulting in inclusion of income by the service provider at the time of issuance, as
also not resulting in the deferral of compensation. Similarly, until additional
guidance is issued, for purposes of § 409A, taxpayers may treat an issuance of a
capital interest in connection with the performance of services in the same
manner as an issuance of stock. The § 409A rules governing other stock-based

compensation may be applied by analogy to grants of equity-based
compensation where the compensation is determined by reference to partnership
equity. In addition, until further guidance is issued, taxpayers may treat
arrangements providing for payments subject to § 736 as not being subject to
§ 409A, except that an arrangement providing for payments which qualify as
payments to a partner under § 1402(a)(10) are subject to § 409A. Finally,
§ 409A may apply to payments covered by § 707(a)(1) (partner not acting in
capacity as partner), if such payments otherwise would constitute a deferral of
compensation under a nonqualified deferred compensation plan.
Q-8 To Which Service Providers Does § 409A Apply?

A-8 Until additional guidance is issued, a service provider for purposes of
§ 409A includes (i) an individual, (ii) a personal service corporation (as defined in
§ 269A(b)(1)), or a noncorporate entity that would be a personal service
corporation if it were a corporation, or (iii) a qualified personal service corporation
(as defined in § 448(d)(2)), or a noncorporate entity that would be a qualified
personal service corporation if it were a corporation. Section 409A does not
apply to arrangements between taxpayers all of whom use the accrual method of
accounting. Section 409A also does not apply to arrangements between a
service provider and a service recipient if (a) the service provider is actively
engaged in the trade or business of providing substantial services, other than (I)
as an employee or (II) as a director of a corporation; and (b) the service provider
provides such services to two or more service recipients to which the service
provider is not related and that are not related to one another. For purposes of
the preceding sentence, a person is related to another person if (i) the persons
bear a relationship to each other that is specified in § 267(b) or 707(b)(1), subject
to the modifications that the language "20 percent" is used instead of "50
percent" each place it appears in §§ 267(b) and 707(b)(1), and § 267(c)(4) is
applied as if the family of an individual includes the spouse of any member of the
family; or (ii) the persons are engaged in trades or businesses under common
control (within the meaning of § 52(a) and (b). The Treasury Department and
the Service intend to issue additional guidance addressing types of service
providers not subject to § 409A.
Q-9 What constitutes a plan?

A-9 A plan includes any agreement, method or arrangement, including an
agreement, method or arrangement that applies to one person or individual. A
plan may be adopted unilaterally by the service recipient or may be negotiated
among or agreed to by the service recipient and one or more service providers or
service provider representatives. A n agreement, method or arrangement may
constitute a plan regardless of whether it is an employee benefit plan under
§ 3(3) of the Employee Retirement Income Security Act of 1974 (ERISA), as
amended (29 U.S.C. 1002(3». Unless otherwise specified in this notice, the
requirements of § 409A are applied as if (a) a separate plan or plans is

maintained for each service provider, and (b) all compensation deferred with
respect to a particular service provider under an account balance plan (as
defined in § 31.3121 (v)(2)-1 (c)(1 )(ii)(A) is treated as deferred under a single
plan, all compensation deferred under a nonaccount balance plan (as defined in
§ 31.3121 (v)(2)-1 (c)(2)(i» is treated as deferred under a separate single plan,
and all compensation deferred under a plan that is neither an account balance
plan nor a nonaccount balance plan (for example, discounted stock options,
stock appreciation rights or other equity-based compensation described in
§ 31.3121 (v)(2)-1 (b)(4)(ii» is treated as deferred under a separate single plan.
For these purposes a severance plan is either an account balance plan or a
nonaccount balance plan, determined in accordance with the rules of this A-9.

Q-10 When is an amount subject to a substantial risk of forfeiture?
A-10 (a) Definition. Compensation is subject to a substantial risk of forfeiture if
entitlement to the amount is conditioned on the performance of substantial future
services by any person or the occurrence of a condition related to a purpose of
the compensation, and the possibility of forfeiture is substantial. For purposes of
this A-1 0, a condition related to a purpose of the compensation must relate to the
service provider's performance for the service recipient or the service recipient's
business activities or organizational goals (for example, the attainment of a
prescribed level of earnings, equity value or a liquidity event). Any addition of a
substantial risk of forfeiture after the beginning of the service period to which the
compensation relates, or a ny extension of a period during which compensation is
subject to a substantial risk of forfeiture, in either case whether elected by the
service provider, service recipient or other person (or by agreement of two or
more of such persons), is disregarded for purposes of determining whether such
compensation is subject to a substantial risk of forfeiture. An amount is not
subject to a substantial risk of forfeiture merely because the right to the amount is
conditioned, directly or indirectly, upon the refraining from performance of
services. For purposes of § 409A, an amount will not be considered subject to a
substantial risk of forfeiture beyond the date or time at which the recipient
otherwise could have elected to receive the amount of compensation, unless the
amount subject to a substantial risk of forfeiture (ignoring earnings) is materially
greater than the amount the recipient otherwise could have elected to receive.
For example, a salary deferral generally may not be made subject to a
substantial risk of forfeiture. However, where an election is granted to receive a
materially greater bonus amount in a future year rather than a materially lesser
bonus amount in an earlier year, the materially greater bonus may be made
subject to a substantial risk of forfeiture.
(b) Enforcement of forfeiture condition. In determining whether the possibility of
forfeiture is substantial in the case of rights to compensation granted to a service
provider by the service recipient corporation, where the service provider owns a
significant amount of the total combined voting power or value of all classes of
stock of the service recipient corporation or of its parent corporation, there will be

taken into account (i) the service provider's relationship to other stockholders and
the extent of their control, potential control and possible loss of control of the
corporation, (ii) the position of the service provider in the corporation and the
extent to which the service provider is subordinate to other service providers, (iii)
the service provider's relationship to the officers and directors of the corporation,
(iv) the person or persons who must approve the service provider's discharge,
and (v) past actions of the service recipient in enforcing the restrictions. For
example, if a service provider would be considered as having deferred
compensation subject to a substantial risk of forfeiture, but for the fact that the
service provider owns 20 percent of the single class of stock in the transferor
corporation, and if the remaining 80 percent of the class of stock is owned by an
unrelated individual (or members of such an individual's family) so that the
possibility of the corporation enforcing a restriction on such rights is substantial,
then such rights are subject to a substantial risk of forfeiture. On the other hand,
if 4 percent of the voting power of all the stock of a corporation is owned by the
president of such corporation and the remaining stock is so diversely held by the
public that the president, in effect, controls the corporation, then the possibility of
the corporation enforcing a restriction on the right to deferred compensation of
the president is not substantial, and such rights are not subject to a substantial
risk of forfeiture.

B. Change in Control Events
Q-11 Under what circumstances will payments be permitted upon a change
in the ownership or effective control of a corporation, or a change in the
ownership of a substantial portion of the assets of a corporation?
A-11 (a) In general. Pursuant to § 409A(a)(2)(A)(v), a plan may permit a
payment upon the occurrence of a change in the ownership of the corporation
(as defined in Q&A 12), a change in effective control of the corporation (as
defined in Q&A 13), or a change in the ownership of a substantial portion of the
assets of the corporation (as defined in Q&A 14) (collectively referred to as a
Change in Control Event). To qualify as a Change in Control Event, the
occurrence of the event must be objectively determinable and any requirement
that any other person, such as a plan administrator or board of directors
compensation committee, certify the occurrence of a Change in Control Event
must be strictly ministerial and not involve any discretionary authority. For
purposes of this paragraph (a), a payment also will be treated as occurring upon
a Change in Control Event if the right to the payment arises due to the
corporation's exercise of discretion under the terms of the plan to terminate the
plan and distribute the compensation deferred thereunder within 12 months of
the Change in Control Event. The plan may provide for a payment on any
Change in Control Event, and need not provide for a payment on all such events,
provided that each event upon which a payment is provided qualifies as a
Change in Control Event.

(b) Identification of relevant corporation(s). To constitute a Change in Control
Event as to the plan participant, the Change in Control Event must relate to (i)
the corporation for whom the participant is performing services at the time of the
Change in Control Event, (ii) the corporation that is liable for the payment of the
deferred compensation (or all corporations liable for the payment if more than
one corporation is liable), or (iii) a corporation that is a majority shareholder of a
corporation identified in (i) or (ii), or any corporation in a chain of corporations in
which each corporation is a majority shareholder of another corporation in the
chain, ending in a corporation identified in (i) or (ii). For example, assume
Corporation A is a majority shareholder of Corporation B, which is a majority
shareholder of Corporation C. A change in ownership of Corporation B will
constitute a Change in Control Event to plan participants performing services for
Corporation B or Corporation C, and to plan participants for which Corporation B
or Corporation C is solely liable for payments under the plan (for example, former
employees), but will not constitute a Change in Control Event as to Corporation A
or any other corporation of which Corporation A is a majority shareholder.
Notwithstanding the foregoing, a sale of Corporation B may constitute an
independent Change in Control Event for Corporation A, Corporation Band
Corporation C if the sale constitutes a change in the ownership of a substantial
portion of Corporation A's assets (see Q&A 14). For purposes of this paragraph,
a majority shareholder is a shareholder owning more than 50% of the total fair
market value and total voting power of such corporation.
(c) Attribution of stock ownership. For purposes of this A-11, Q&A 12, Q&A 13
and Q&A 14, § 318(a) applies to determine stock ownership. Stock underlying a
vested option is considered owned by the individual who holds the vested option
(and the stock underlying an unvested option is not considered owned by the
individual who holds the unvested option). For purposes of the preceding
sentence, however, if a vested option is exercisable for stock that is not
substantially vested (as defined by §§ 1.83-3(b) and (j)), the stock underlying the
option is not treated as owned by the individual who holds the option. In addition,
mutual and cooperative corporations are treated as havirg stock for purposes of
this paragraph (c).
Q-12 What is a change in the ownership of a corporation?

A-12 (a) Change in the ownership of a corporation. For purposes of § 409A, a
change in the ownership of a corporation occurs on the date that anyone person,
or more than one person acting as a group (as defined in paragraph (b)),
acquires ownership of stock of the corporation that, together with stock held by
such person or group, constitutes more than 50 percent of the total fair market
value or total voting power of the stock of such corporation. However, if anyone
person or more than one person acting as a group, is considered to own more
than 50 percent of the total fair market value or total votirg power of the stock of
a corporation, the acquisition of additional stock by the same person or persons
is not considered to cause a change in the ownership of the corporation (or to

cause a change in the effective control of the corporation (within the meaning of
Q&A 13)). An increase in the percentage of stock owned by anyone person, or
persons acting as a group, as a result of a transaction in which the corporation
acquires its stock in exchange for property will be treated as an acquisition of
stock for purposes of this section. This A-12 applies only when there is a transfer
of stock of a corporation (or issuance of stock of a corporation) and stock in such
corporation remains outstanding after the transaction (see Q&A 14 for rules
regarding the transfer of assets of a corporation).
(b) Persons acting as a group. For purposes of paragraph (a), persons will not
be considered to be acting as a group solely because they purchase or own
stock of the same corporation at the same time, or as a result of the same public
offering. However, persons will be considered to be acting as a group if they are
owners of a corporation that enters into a merger, consolidation, purchase or
acquisition of stock, or similar business transaction with the corporation. If a
person, including an entity, owns stock in both corporations that enter into a
merger, consolidation, purchase or acquisition of stock, or similar transaction,
such shareholder is considered to be acting as a group with other shareholders
in a corporation prior to the transaction giving rise to the change and not with
respect to the ownership interest in the other corporation. See § 1.280G-1,
Q&A 27(d), Example 4.
(c) Stock ownership. For purposes of determining stock ownership, see
Q&A 11.
Q-13 What is a change in the effective control of a corporation?

A-13 (a) Change in the effective control of the corporation. For purposes of
§ 409A, notwithstanding that a corporation has not undergone a change in
ownership under Q&A 12, a change in the effective control of a corporation
occurs on the date that either(i) Anyone person, or more than one person acting as a group (as determined
under paragraph (iv)), acquires (or has acquired during the 12-month period
ending on the date of the most recent acquisition by such person or persons)
ownership of stock of the corporation possessing 35 percent or more of the total
voting power of the stock of such corporation; or
(ii) a majority of members of the corporation's board of directors is replaced
durirg any 12-month period by directors whose appointment or election is not
endorsed by a majority of the members of the corporation's board of directors .
prior to the date of the appointment or election, provided that for purpos.es of thiS
paragraph (ii) the term corporation refers solely to the relevant .corporatlo~ .
identified in Q&A 11, paragraph (b) for which no other corporation IS a majorrty
shareholder for purposes of that paragraph (for example, if Corporation A is a
publicly held corporation with no majority shareholder, and Corporation A is the

majority shareholder of Corporation B, which is the majority shareholder of
Corporation C, the term corporation for purposes of this paragraph (ii) would refer
solely to Corporation A).

In the absence of an event described in paragraph (i) or (ii), a change in the
effective control of a corporation will not have occurred.
(b) Multiple Change in Control Events. A cha nge in effective control also may
occur in any transaction in which either of the two corporations involved in the
transaction has a Change in Control Event under A-12 or A-14. Thus, for
example, assume Corporation P transfers more than 40 percent of the total gross
fair market value of its assets to Corporation 0 in exchange for 35 percent of O's
stock. P has undergone a change in ownership of a substantial portion of its
assets under A-14 and 0 has a change in effective control under this A-13.
(c) Acquisition of additional control. If anyone person, or more than one person
acting as a group, is considered to effectively control a corporation (within the
meaning of this A-13), the acquisition of additional control of the corporation by
the same person or persons is not considered to cause a change in the effective
control of the corporation (or to cause a change in the ownership of the
corporation within the meaning of Q&A 12).
(d) Persons acting as a group. Persons will not be considered to be acting as a
group solely because the y purchase or own stock of the same corporation at the
same time, or as a result of the same public offering. However, persons will be
considered to be acting as a group if they are owners of a corporation that enters
into a merger, consolidation, purchase or acquisition of stock, or similar business
transaction with the corporation. If a person, including an entity, owns stock in
both corporations that enter into a merger, consolidation, purchase or acquisition
of stock, or similar transaction, such shareholder is considered to be acting as a
group with other sharehok:lers in a corporation only with respect to the ownership
in that corporation prior to the transaction giving rise to the change and not with
respect to the ownership interest in the other corporation.
(e) Stock ownership. For purposes of determining stock ownership, see
Q&A 11.

Q-14 What is a change in the ownership of a substantial portion of a
corporation's assets?
A-14 (a) Change in the ownership of a substantial portion of a corporation's
assets. For purposes of § 409A, a change in the ownership of a substantial
portion of a corporation's assets occurs on the date that anyone person, or more
than one person acting as a group (as determined in paragraph (c)), acquires (or
has acquired during the 12-month period ending on the date of the most recent
acquisition by such person or persons) assets from the corporation that have a

total gross fair market value equal to or more than 40 percent of the total gross
fair market value of all of the assets of the corporation immediately prior to such
acquisition or acquisitions. For this purpose, gross fair market value means the
value of the assets of the corporation, or the value of the assets being disposed
of, determined without regard to any liabilities associated with such assets.
(b) Transfers to a related person. There is no Change in Control Event under
this A-14 when there is a transfer to an entity that is controlled by the
shareholders of the transferring corporation immediately after the transfer, as
provided in this paragraph (b). A transfer of assets by a corporation is not
treated as a change in the ownership of such assets if the assets are transferred
to(i) A shareholder of the corporation (immediately before the asset transfer) in
exchange for or with respect to its stock;
(ii) An entity, 50 percent or more of the total value or voting power of which is
owned, directly or indirectly, by the corporation;
(iii) A person, or more than one person acting as a group, that owns, directly or
indirectly, 50 percent or more of the total value or voting power of all the
outstanding stock of the corporation; or
(iv) An entity, at least 50 percent of the total value or voting power of which is
owned, directly or indirectly, by a person described in paragraph (iii).
For purposes of this paragraph (b) and except as otherwise provided, a person's
status is determined immediately after the transfer of the assets. For example, a
transfer to a corporation in which the transferor corporation has no ownership
interest before the transaction, but which is a majority-owned subsidiary of the
transferor corporation after the transaction is not treated as a change in the
ownership of the assets of the transferor corporation.
(c) Persons acting as a group. Persons will not be considered to be acting as a
group solely because they purchase assets of the same corporation at the same
time, or as a result of the same public offering. However, persons will be
considered to be acting as a group if they are owners of a corporation that enters
into a merger, consolidation, purchase or acquisition of assets, or similar
business transaction with the corporation. If a person, including an entity
shareholder, owns stock in both corporations that enter into a merger,
consolidation, purchase or acquisition of stock, or similar transaction, such
shareholder is considered to be acting as a group with other shareholders in a
corporation only to the extent of the ownership in that corporation prior to the
transaction giving rise to the change and not with respect to the owne rship
interest in the other corporation.

(d) Stock ownership. For purposes of determining stock ownership, see
Q&A 11.

Acceleration of Payments

Q-15 Under what conditions maya plan permit the acceleration of the time

or schedule of any payment under the plan?
A-15 (a) In general. Except as provided in paragraphs (b) through (f) below, a
plan may not permit the acceleration of the time or schedule of any payment
under the plan. It is not an acceleration of the time or schedule of payment of a
deferral of compensation if a service recipient waives or accelerates the
satisfaction of a condition constituting a substantial risk of forfeiture applicable to
such deferral of compensation, provided that the requirements of § 409A are
otherwise satisfied with respect to such deferral of compensation. For example,
if a nonqualified deferred compensation plan provides for a lump sum payment of
the vested benefit upon separation from service, and the benefit vests under the
plan only after 10 years of service, it is not a violation of the requirements of
§ 409A if the service recipient reduces the vesting requirement to 5 years of
service, even if a service provider becomes vested as a result and qualifies for a
payment in connection with a separation from service.
(b) Domestic relations order. A plan may permit such acceleration of the time or
schedule of a payment under the plan to an individual other than the plan
participant as may be necessary to fulfill a domestic relations order (as defined in
§ 414(p)(1)(B).
(c) Conflicts of interest. A plan may permit such acceleration of the time or
schedule of a payment under the plan as may be necessary to comply with a
certificate of divestiture (as defined in § 1043(b )(2)).
(d) Section 457 plans. A plan subject to § 457(f) may permit an acceleration of
the time or schedule of a payment to a participant to pay income taxes due upon
a vesting event, provided that the amount of such payment is not more than an
amount equal to the income tax withholding that would have been remitted by the
employer if there had been a payment of wages equal to the income includible by
the participant under § 457(f) at the time of the vesting.
(e) De minimis and specified amounts. A plan that does not otherwise provide
for de minimis cashout payments may be amended to permit the acceleration of
the time or schedule of a payment to a participant under the plan, provided that
(i) the payment accompanies the termination of the entirety of the participant's
interest in the pia n; (ii) the payment is made on or before the later of (A)
December 31 of the calendar year in which occurs the participant's separation
from service from the service recipient or (8) the date 2 Y2 months after the
participant's separation from service from the service recipient; and (iii) the

payment is not greater than $10,000. Such an amendment may be made with
respect to previously deferred amounts under the plan as well as amounts to be
deferred in the future. In addition, a nonqualified deferred compensation plan
that otherwise complies with § 409A may be amended with regard to future
deferrals to provide that, if a participant's interest under the plan has a value
below an amount specified by the plan at the time that amounts are payable
under the plan, then the participant's entire interest under the plan shall be
distributed as a lump sum payment.

(f) Payment of employment taxes. A plan may permit the acceleration of the
time or schedule of a payment to pay the Federal Insurance Contributions Act
(FICA) tax imposed under § 3101 and § 3121 (v)(2) on compensation deferred
under the plan (the FICA Amount). Additionally, a plan may permit the
acceleration of the time or schedule of a payment to pay the income tax at
source on wages imposed under § 3401 on the FICA Amount, and to pay the
additional income tax at source on wages attributable to the pyramiding § 3401
wages and taxes. However, the total payment under this acceleration provision
must not exceed the aggregate of the FICA Amount, and the income tax
withholding related to such FICA amount.
(g) Definition of plan. For purposes of this A-15, the term plan has the meaning
provided in Q&A 9, except that the provisions treating all account balance plans
under which compensation is deferred as a single plan, all nonaccount balance
plans under which compensation is deferred as a separate single plan, and all
other nonqualified deferred compensation plans as a separate single plan, does
not apply.

D. Effective Dates and Transition Guidance
Q-16 When does section 409A become effective?
A-16 (a) In general. Except as provided in Q&As 19 through 23, § 409A is
effective with respect to (i) amounts deferred in taxable years beginning after
December 31,2004; and (ii) amounts deferred in taxable years beginning before
January 1, 2005 if the plan under which the deferral is made is materially
modified after October 3,2004. Section 409A is effective with respect to
earnings on amounts deferred only to the extent that § 409A is effective with
respect to the amounts deferred. Accordingly, § 409A is not effective with
respect to earnings on amounts deferred before January 1, 2005 unless § 409A
is effective with respect to the amounts deferred.
(b) Date of deferral for effective date purposes. For purposes of determining
whether § 409A is effective with respect to an amount, the amount is co~si~ered
deferred before January 1,2005 if (i) the service provider has a legally bmdlng
right to be paid the amount and (ii) the right to the amount is earned and v~sted.
For purposes of this A-16, a right to an amount is earned and vested only If the

amount is not subject to either a substantial risk of forfeiture (as defined in
§ 1.83-3(c)) or a requirement to perform further services. Accordingly, amounts
to which the service provider does not have a legally binding right before January
1, 2005 (for example because the service recipient retains discretion to reduce
the amount), will not be considered deferred before January 1,2005. In addition,
amounts to which the service provider has a legaly binding right before January
1, 2005, but the right to which is subject to a SUbstantial risk of forfeiture or a
requirement to perform further services after December 31, 2004 are not
considered deferred before January 1, 2005 for purposes of the effective date.
Notwithstanding the foregoing, an amount to which the service provider has a
legally binding right before January 1 , 2005. but for which the service provider
must continue performing services to retain the right only through the completion
of the payroll period (as defined in Q&A 4) which includes December 31. 2004.
shall not be treated as subject to a requirement to perform further services (or a
substantial risk of forfeiture) for purposes of the effective date.

Q-17 For purposes of the effective date, how is the amount of
compensation deferred under a nonqualified deferred compensation plan
before January 1, 2005 determined?
A-17 (a) Nonaccount balance plans. The amountof compensation deferred
before January 1. 2005 under a nonqualified deferred compensation plan that is
a nonaccount balance plan (as defined in § 31.3121 (v)(2)-1 (c)(2)(i)) equals the
present value as of December 31, 2004 of the amount to which the participant
would be entitled under the plan if the partiCipant voluntarily terminated services
without cause on December 31 of that taxable year, and received a full payment
of benefits from the plan on the earliest possible date allowed under the plan
following the termination of services, to the extent the right to the benefit is
earned and vested (as defined in Q&A 16) as of December 31,2004. For
purposes of determining the present value of the benefit, the actuarial
assumptions contained within the plan are used provided such assumptions are
reasonable; otherwise, reasonable actuarial assumptions must be used.
Amounts to which the participant would not be entitled upon termination, such as
early retirement subsidies for which the participant would not have attained
sufficient service if he or she terminated services on December 31,2004, are not
includible as compensation deferred under the plan as of December 31,2004.
(b) Account balance plans. The amount of compensation deferred before
January 1 , 2005 under a nonqualified deferred compensation plan that is an
account balance plan (as defined in § 31.3121(v)(2)-1(c)(1)(ii)) equals the portion
of the participant's account balance as of December 31.2004 the right to which
is earned and vested (as defined in Q&A 16) as of December 31,2004.
(c) Equity-based compensation plans. For purposes of determining the amounts
deferred before January 1,2005 under an equity-based compensation plan, the
rules of paragraph (b) governing account balance plans are applied except that

the account balance is deemed to be the amount of the payment available to the
participant on December 31,2004 (or that would be available to the participant if
the right were immediately exercisable) the right to which is earned and vested
(as defined in Q&A 16) as of December 31,2004. For this purpose, the payment
available to the participant excludes any exercise price or other amount which
must be paid by the participant.
(d) Earnings. Earnings on amounts deferred under a plan before January 1,
2005 include only income (whether actual or notional) attributable to the amounts
deferred under a plan as of December 31,2004 or such income. For example,
notional interest earned under the plan on amounts deferred in an account
balance plan as of December 31, 2004 generally will be treated as earnings on
amounts deferred under the plan before January 1,2005. Similarly, an increase
in the amount of payment available under a stock option, stock appreciation right
or other equity-based compensation above the amount of payment available as
of December 31, 2004, due to appreciation in the underlying stock after
December 31,2004, is treated as earnings on the amount deferred. In the case
of a nonaccount balance plan, earnings include the increase, due solely to the
passage of time, in the present value of the future payments to which the service
provider has obtained a legally binding right, the present value of which
constituted the amounts deferred under the plan before January 1, 2005. Thus,
for each year, there will be an increase (determined using the same interest rate
used to determine the amounts deferred under the plan before January 1,2005)
resulting from the shortening of the discount period before the future payments
are made, plus, if applicable, an increase in the present Vc3lue resulting from the
service provider's survivorship during the year. However, an increase in the
potential benefits under a nonaccount balance plan due to, for example, an
application of an increase in compensation after December 31 , 2004 to a final
average pay plan or subsequent eligibility for an early retirement subsidy, does
not constitute earnings on the amounts deferred under the plan before January 1 ,
2005.
(e) Definition of plan. For purposes of this A-17, the term plan has the same
meaning provided in Q&A 9, except that the provisions treating all nonaccount
balance plans under which compensation is deferred as a single plan does not
apply for purposes of the actuarial assumptions used in paragraph (b).
Accordingly, different reasonable actuarial assumptions may be used to calculate
the amounts deferred by a participant in two different arrangements each of
which constitutes a nonaccount balance plan.

Q-18 When is a plan materially modified?
A-18 (a) In general. Except as otherwise provided in this A-18 and Q&A 19, a
modification of a plan is a material modification if a benefit or right existing as of
October 3,2004 is enhanced or a new benefit or right is added. Such benefit
enhancement or addition is a material modification whether it occurs pursuant to

an amendment or the service recipient's exercise of discretion under the terms of
the plan. For example, an amendment to a plan to add a provision that
payments may be allowed upon request if participants are required to forfeit 10
percent of the amount of the payment (a "haircut") would be a material
modification to the plan. Similarly, a material modification would occur if a
service recipient exercised discretion to accelerate vesting of a benefit under the
plan to a date on or before December 31,2004. However, it is not a material
modification for a service recipient to exercise discretion over the time and
manner of payment of a benefit to the extent such discretion is provided under
the terms of the plan as of October 3, 2004. Also, it is not a material modification
to change a notional investment measure to, or to add, an investment measure
that qualifies as a predetermined actual investment within the meaning of
§ 31.3121 (v)(2)-1 (d)(2). It is not a material modification for a participant to
exercise a right permitted under the plan as in effect on October 3, 2004. The
amendment of a plan to bring the plan into compliance with the provisions of
§ 409A will not be treated as a material modification. However, a plan
amendment or the exercise of discretion under the terms of the plan that
enhances an existing benefit or right or adds a new benefit or right will be
considered a material modification even if the enhanced or added benefit would
be permitted under § 409A. For example, the addition of a right to a payment
upon an unforeseeable emergency would be considered a material modification.
The reduction of an existing benefit is not a material modification. For example,
the removal of a "haircut" provision generally would not constitute a material
mod ification.
(b) Adoption of new arrangement. It is presumed that the adoption of a new
arrangement or the grant of an additional benefit under an existing arrangement
after October 3, 2004 will constitute a material modification of a plan. However,
the presumption may be rebutted by demonstrating that the adoption of the
arrangement or grant of the additional benefit is consistent with the service
recipient's historical compensation practices. For example, the presumption that
the grant of a stock appreciation right on November 1, 2004 is a material
modification of a plan may be rebutted by demonstrating that the grant was
consistent with the historic practice of granting substantially similar stock
appreciation rights (both as to terms and amounts) each November for a
significant number of years. Notwithstanding paragraph (a) and this paragraph
(b), the grant of an additional benefit under an existing arrangement that consists
solely of a deferral of additional compensation not otherwise provided under the
plan as of October 3, 2004 will be treated as a material modification of the plan
only as to the additional deferral of compensation, if the plan explicitly identifies
the additional deferral of compensation and provides that the additional deferral
of compensation is subject to § 409A. A plan may be amended to comply with
the provisions of the preceding sentence in accordance with the rules of Q&A 19.
(c) Suspension or termination of a plan. Amending a n arrangement to stop
future deferrals thereunder is not a material modification of the arrangement or

the plan. Amending an arrangement on or before December 31,2005 to
terminate the arrangement and distribute the amounts of deferred compensation
thereunder will not be treated as a material modification, provided that all
amounts deferred under the plan are included in income in the taxable year in
which the termination occurs.
(d) Equity-based compensation. Provided that the cancellation and reissuance
occurs on or before December 31, 2005, it will not be a material modification to
replace a stock option or stock appreciation right otherwise providing for a
deferral of compensation under Q&A 4 with a stock option or stock appreciation
right that would not have constituted a deferral of compensation under § 409A if it
had been granted upon the original date of grant of the replaced stock option or
stock appreciation right. The preceding sentence only applies if (i) the number of
shares which form the basis of the new stock option or new stock appreciation
right corresponds directly to the number of shares subject to the original stock
option or stock appreciation right; and (ii) the new stock option or new stock
appreciation right does not provide any additional benefit to the service recipient
(other than the benefit directly due to a change in form of the award to a form not
treated as a deferral of compensation). A replacement stock option or
replacement stock appreciation right will be treated as meeting the requirements
of clause (i) of the preceding sentence if the new grant is made in accordance
with the principles of § 1.424-1 (a)(5) except to the extent necessary to ensure
that the new grant does not violate § 409A. For example, a stock option
originally issued with an exercise price discounted below the value of the shares
subject to the option on the date of grant could be amended, without causing a
material modification of the option, to be excluded from the definition of deferral
of compensation by eliminating the discount on the exercise price below the
value of the shares subject to the option on the original date of grant. Similarly, a
stock appreciation right could be converted to a stock option or stock
appreciation right that, based on its terms, would be excluded from the definition
of deferral of compensation.
(e) Definition of plan. For purposes of this A-18, the term plan has the same
meaning provided in Q&A 9, except that the proviSion treating all account
balance plans under which compensation is deferred as a single plan, all
nonaccount balance plans under which compensation is deferred as a separate
single plan, and all other nonqualified deferred compensation plans as a
separate Single plan, does not apply.

Q-19 Under what conditions maya plan adopted before December 31, 2005
be operated and amended without violating the requirements of section
409A(a)(2), (3) and (4)?
A-19 (a) In general. A plan adopted before December 31,2005 will not be
treated as violating § 409A(a)(2), (3) or (4) only if (i) the plan is operated in good
faith compliance with the provisions of § 409A and this notice during the calendar

year 2005, and (ii) the plan is amended on or before December 31, 2005 to
conform to the provisions of § 409A with respect to amounts subject to § 409A.
(b) Good faith compliance. A plan will be treated as operated in good faith
compliance during the calendar year 2005 if it is operated in accordance with the
terms of this notice and, to the extent an issue is not addressed in this notice, a
good faith, reasonable interpretation of § 409A, and, to the extent not
inconsistent therewith, the plan's terms, provided that the plan sponsor does not
exercise discretion under the terms of the plan, or that a participant does not
exercise discretion with respect to that participant's benefits, in a manner that
causes the plan to fail to meet the requirements of § 409A. For example, if an
employer retains the discretion under the terms of the plan to delay or extend
payments under the plan and exercises such discretion, the plan will not be
considered to be operated in good faith compliance with § 409A with regard to
any plan participant. However, an exercise of a right under the terms of the plan
by a plan participant solely with respect to that participant's benefits under the
plan, in a manner that causes the plan to fail to meet the requirements of § 409A,
will not be considered to result in the plan failing to be operated in good faith
compliance with respect to othe r participants. For example, the request for and
receipt of a n immediate payment permitted under the terms of the plan if the
participant forfeits 10% of the participant's benefits (a "haircut") will be
considered a failure of the plan to meet the requirements of § 409A with respect
to that partiCipant, but not with respect to all participants under the plan.
(c) Payment elections. With respect to amounts subject to § 409A, the plan may
be amended to provide for new payment elections with respect to amounts
deferred prior to the election and the election will not be treated as a change in
the form and timing of a payment under § 409A(a)(4) provided that the plan is so
amended and the participant makes the election on or before December 31,
2005. Similarly, a n outstanding stock option or stock appreciation right that
provides for a deferral of compensation subject to § 409A may be amended to
provide for fixed payment terms consistent with § 409A, or to permit holders of
such rights to elect fixed payment terms consistent with § 409A, and such
amendment or election will not be treated as a change in the form and timing of a
payment under § 409A( a)(4), provided that the option or right is so amended and
any elections are made, on or before December 31, 2005.
(d) Severance plans. Provided that the plans are otherwise amended in
compliance with paragraph (a), a plan that provides severance pay benefits, and
that is either (i) a collectively bargained plan or (ii) covers no service providers
who are key employees (as defined in § 416(i) and the regulations thereunder), is
not required to meet the requirements of § 409A during the calendar year 2005
with respect to such severance pay benefits. Benefits that are provided under a
severance pay arrangement (within the meaning of § 3(2)(B)(i) of ERISA (29
U.S.C. § 1002(2)(8)(i)) that satisfies the conditions in 29 CFR § 2510.3-2(b)(1)(i)
through (iii) are considered severance pay for purposes of this paragraph (d).

Benefits provided under a severance pay arrangement (within the meaning of

§ 3(2)(B)(i) of ERISA) are in all cases severance pay within the meaning of this
paragraph (d) if the benefits payable under the plan upon an employee's
termination of employment are payable only if that termination is involuntary.

Q·20 Under what conditions maya plan adopted before December 31, 2005
provide a participant a right to terminate participation in the plan, or cancel
an outstanding deferral election with regard to amounts subject to § 409A,
and receive a payment of amounts subject to the termination or
cancellation, without violating the requirements of § 409A(a)(2), (3) and (4)?
A-20 (a) Plan amendment. A plan adopted before December 31,2005 may be
amended to allow a participant during all or part of the calendar year 2005 to
terminate participation in the plan or cancel a deferral election with regard to
amounts deferred subject to § 409A, without causing the plan to fail to conform to
the provisions of § 409A(a)(2), (3) or (4) with respect to amounts deferred after
December 31, 2004, provided that (i) the amendment is enacted and effective on
or before December 31,2005, and (ii) the amounts subject to the termination or
cancellation are includible in income of the participant in the taxable year in
which the amounts are earned and vested (as defined in Q&A 16). Solely for
purposes of effecting the relief provided in this A-20, neither the availability of the
election to the participant nor the making of the election by the participant will be
treated as resulting in a violation of the requirements of § 409A(a)(2), (3) or (4) or
causing amounts the participant continues to defer to be includible in income
under § 451 or the doctrine of constructive receipt (although these provisions
may still apply for other reasons). There is no requirement that the opportunity to
terminate participation in a plan or to cancel a deferral election be granted, or
that if granted, be granted to all plan participants. A termination or cancellation
may be made with respect to elective or nonelective deferred compensation and
may be undertaken by the service recipient or at the election of the participant. A
termination or cancellation under this paragraph may apply in whole or in part to
one or more plans in which a participant participates and to one or more
outstanding deferral elections the participant has made with regard to amounts
subject to § 409A.
(b) Payments. Provided that the plan amendment is adopted in accordance with
paragraph (a), a provision permitting a payment to a participant during calendar
year 2005 or, if later, the taxable year in which the amount is earned and vested
(as defined in Q&A 16), upon a termination of participation in the plan or the
cancellation of a deferral election with regard to amounts subject to § 409A, will
not be treated as causing a plan to violate the provisions of § 409A(a)(2), (3) or
(4), and a payment from a plan pursuant to such an amendment will not be
treated as a violation of the provision of § 409A(a)(2), (3) or (4), provided that the
full amount of the distribution is included in the participanfs income in calendar
year 2005 or, if later, the participant's taxable year in which the amount is earned
and vested (as defined in Q&A 16).

(c) Partial terminations and cancellations. For purposes of this Q&A 20, the
termination of participation in the plan or the cancellation of an outstanding
deferral election with regard to amounts subject to § 409A includes a termination
or cancellation that results in a lower amount of deferrals for the period, without a
complete elimination of the deferrals.
(d) Definition of plan. For purposes of this A-20, the definition of plan under
Q&A 9 applies, except that the rule requiring the aggregation of all account
balance plans, all nonaccount ba lance plans, and all other plans does not apply.

Q-21 Under what conditions will deferral elections under a plan in
existence on or before December 31,2004, made with respect to deferrals
relating all or in part to services performed on or before December 31,
2005, be exempt from the requirements of § 409A(a)(4)(8) relating to the
timing of elections?
A-21 With respect to deferrals subject to § 409A that relate all or in part to
services performed on or before December 31, 2005, the requirements of
§ 409A(a)(4)(8) relating to the timing of elections will not be applicable to any
elections made on or before March 15,2005, provided that (a) the amounts to
which the deferral election relate have not been paid or become payable at the
time of election, (b) the plan under which the deferral election is or was made
was in existence on or before December 31,2004, (c) the elections to defer
compensation are made in accordance with the terms of the plan in effect on or
before December 31 , 2005 (other than a req uirement to make a deferral election
after March 15, 2005), (d) the plan is otherwise operated in accordance with
§ 409A with respect to deferrals subject to § 409A and (e) the plan is amended to
comply with the requirements of § 409A in accordance with Q&A 19. For
purposes of this A-21 , a nonqualified deferred compensation plan will be treated
as in existence before December 31,2004 only if a written plan document (a)
identifies a specific amount or type of compensation that is subject to the plan
and not otherwise payable at the time of the deferral election, and (b) provides
that a participant in the plan may elect to defer the compensation beyond the
taxable year in which the amount otherwise would have been payable. Solely for
purposes of effecting the relief provided in this A-21, neither the availability of the
election to the participant nor the making of the election by the participant will be
treated as causing amounts the participant defers to be includible in income
under § 451 or the doctrine of constructive receipt.

Q-22 Until additional guidance is issued, under what conditions may
deferral elections be made with respect to bonus compensation?
A-22 Section 409A(a)(4 )(8)(iii) provides that in the case of any performancebased compensation based on services performed over a period of at least 12
months, an election to defer such compensation may be made no later than 6

months before the end of the period. The Treasury Department and the Service
anticipate issuing guidance that sets forth the requirements for compensation to
qualify as performance-based compensation. The Treasury Department and the
Service anticipate that those requirements will be more restrictive than the
requirements outlined in this A-22. Until additional guidance is issued, a deferral
election with respect to bonus compensation based on services performed over a
period of at least 12 months will be treated as meeting the requirements of
§ 409A(a)(4) if the election is made at least 6 months before the end of the
service period. For purposes of this transition relief, the term bonus
compensation refers to compensation where (i) the payment of the compensation
or the amount of the compensation is contingent on the satisfaction of
organizational or individual performance criteria, and (ii) the performance criteria
are not substantially certa in to be met at the time a deferral election is permitted.
Bonus compensation may include payments based upon subjective performance
criteria, but (i) any subjective performance criteria must relate to the performance
of the participant service provider, a group of service providers that includes the
participant service provider, or a business unit for which the participant service
provider provides services (which may include the entire organization); and (ii)
the determination that any subjective performance criteria ha ve been met must
not be made by the participant service provider or a family member of the
participant service provider (as defined in § 267 (c)( 4) applied as if the family of
an individual includes the spouse of any member of the family). Bonus
compensation may also include payments based on performance criteria that are
not approved by a compensation committee of the board of directors (or similar
entity in the case of a non-corporate service recipient) or by the stockholders or
members of the service recipient. Notwithstanding the foregoing, bonus
compensation does not include any amount or portion of any amount that will be
paid either regardless of performance, or based upon a level of performance that
is substantially certain to be met at the time the criteria is established, or that is
based solely on the value of, or appreciation in value of, the service recipient or
the stock of the service recipient.
Q-23 Under what circumstances will payments be permitted based upon
elections under a qualified plan for periods ending on or before December

31,2005.
A-23 For periods ending on or before December 31, 2005, an election as to the
timing and form of a payment under a nonqualified deferred compensation plan
that is controlled by a payment election made by the participant under a qualified
plan will not violate § 409A, provided that the determination of the timing and
form of the payment is made in accordance with the terms of the nonqualified
deferred compensation plan as of October 3, 2004 that govern payments. For
purposes of this paragraph, a qualified plan means a retirement plan qualified
under § 401 (a). For example, where a nonqualified deferred compensation plan
provides as of October 3, 2004 that the time and form of payment to a participant
will be the same time and form of payment elected by the partiCipant under a

related qualified plan, it will not be a violation of § 409A for the plan administrator
to make or commence payments under the nonqualified deferred compensation
plan on or after January 1, 2005 and on or before December 31, 2005 pursuant
to the payment election under the related qualified plan. Notwithstanding the
foregoing, other provisions of the Code and common law tax doctrines continue
to apply to any election as to the timing and form of a payment under a
nonqualified deferred compensation plan.

E. Information Reporting Requirements for Deferred Amounts
Q-24 What information reporting requirements are imposed by § 885(b) of
the Act?
A-24 The Act adds §§ 6041 (g)(1) and 6051 (a)(13), which require that all
deferrals for the year under a nonqualified deferred compensation plan be
separately reported on a Form 1099 (Miscellaneous Income) or a Form W-2
(Wage and Tax Statement), respectively. The Act requires annual reporting of all
compensation deferred under the plan for the year regardless of whether such
compensation is includible in gross income pursuant to § 409A(a)(1 )(A).
However, neither § 6041 (g)(1) nor § 6051 (a)(13) requires the reporting of
deferrals under a nonqualified deferred compensation plan that benefit a person
with respect to whom a Form 1099-MISC or a Form W-2 is not required to be
filed.

Q·25 What constitutes deferrals for the year under a nonqualified deferred
compensation plan for purposes of §§ 6041 (g)(1) and 6051 (a)(13)?
A-25 Deferrals for the year under a nonqualified deferred compensation plan for
purposes of §§ 6041 (g)(1) and 6051 (a)( 13) generally include all deferrals of
compensation within the meaning of § 409A that occur during the year and that
are made under a nonqualified deferred compensation plan within the meaning of
§ 409A(d). See Q&A 4 (definition of a deferral of compensation) and Q&A 3
(definition of a nonqualified deferred compensation plan). The Treasury
Department and the Service anticipate issuing additional guidance that will
provide a method for calculating the amount of deferrals for the year.

Q-26 Do the information reporting requirements imposed by §§ 6041 (g}(1)
and 6051 (a)(13) apply with respect to amounts deferred under a
nonqualified deferred compensation plan that is a nonaccount balance
plan?
A-26 Yes. The information reporting requirements imposed by §§ 6041 (g)(1)
and 6051 (a)(13) generally apply with respect to amounts deferred under a
nonqualified deferred compensation plan that is a nonaccount balance plan (as
defined in § 31.3121(v)(2)-1(c)(2)). However, amounts deferred that are not
reasonably ascertainable (as defined in § 31.3121(v)(2)-1(e)(4)) are not required

to be reported until such deferrals become reasonably ascertainable (regardless
of whether the service provider is an employee). The Treasury Department and
the Service anticipate issuing additional guidance that wi II provide a method for
calculating the amount of deferrals for the year under a nonqualified deferred
compensation plan.
Q·27 Is there a minimum amount of aggregate deferrals for the year with
respect to an individual employee below which the information reporting
requirement imposed by § 6051 (a)(13) does not apply?

A-27 Yes. The Act authorizes the Secretary of the Treasury, through
regulations, to establish a minimum amount of deferrals below which the
information reporting requirement imposed by § 6051(a)(13) does not apply. The
Treasury Department and the Service anticipate providing the authorized
guidance in future regulations. Until such guidance is provided, however,
employers may rely on this notice to exclude from the information reporting
requirement imposed by § 6051 (a)(13) all deferrals for the year with respect to an
individual employee under one or more nonqualified deferred compensation
plans if the aggregate amount of such deferrals does not exceed $600.
Q-28 What is the effective date for the information reporting requirements
imposed by §§ 6041(g)(1) and 6051(a)(13)?

A-28 The information reporting requirements imposed by §§ 6041 (g)(1) and
6051(a)(13) are effective for amounts actually deferred in calendar years
beginning after December 31, 2004. Additionally, such information reporting
requirements apply to income (whether actual or notional) attributable to amounts
actually deferred in calendar years beginning after December 31,2004. For
purposes of §§ 6041(g)(1) and 6051(a)(13), amounts are considered actually
deferred at the time the service provider has a legally binding right to the
compensation as described in Q&A 4. Thus, the information reporting
requirements are not effective for amounts actually deferred in calendar years
beginning before January 1, 2005, (or for income attributable to such amounts)
notwithstanding that § 885(d) of the Act may treat such amounts as having been
deferred in a calendar year beginning on or after such date under the general
effective date provisions.
Q-29 How should an employer report to an employee the total amount of
deferrals for the year under a nonqualified deferred compensation plan as
required by § 6051 (a)(13)?

A-29 An employer should report to an employee the total amount of deferrals for
the year under a nonqualified deferred compensation plan in box 12 of Form W-2
using code Y. The instructions for Form W-2 provide additional information
relating to this reporting requirement. However, see Q&A 38 for interim guidance
with respect to an employer's reporting requirements where the employer

furnishes an expedited Form W-2 prior to the issuance of additional guidance
that will provide a method for calculating the amount of deferrals for the year.
Neither § 6051 (a)(13) nor this notice affect the rules for reporting deferred
compensation in Box 11 of Form W-2.

Q·30 How should a payer report to a nonemployee the total amount of
deferrals for the year under a nonqualified deferred compensation plan as
required by § 6041 (g)(1)?
A-30 A payer should report to a nonemployee the total amount of deferrals for
the year under a nonqualified deferred compensation plan in box 15a of
Form 1099-MISC. The instructions for Form 1099-MISC provide additional
information relating to this reporting requirement. However, the information
reporting requirement imposed by § 6041 (g)( 1) does not apply to deferrals that
are required to be reported under § 6051 (a)(13) (without regard to any de
minimis exception). Additionally, § 6041 (g)(1) does not require the reporting of
deferrals under a nonqualified deferred compensation plan that benefit a person
with respect to whom a Form 1099-MISe is not required to be filed.

F. Wage Withholding for Employees
Q·31 What wage withholding requirements are imposed by § 885(b) of the
Act?
A-31 The Act amends § 3401 (a) (defining wages for income tax withholding
purposes) to provide that the term "wages" includes any amount includible in
gross income of an employee under § 409A. The amount is treated as a
payment of wages in the taxable year in which the amount is includible in the
employee's gross income. The Treasury Department and the Service anticipate
issuing additional guidance that will provide a method for computing the amount
includible in gross income of an employee under § 409A.

Q·32 When are amounts that are includible in gross income under § 409A
treated as a payment of wages for income tax withholding purposes?
A-32 For the calendar year 2005, amounts includible in gross income under
§ 409A but neither actually nor constructively received by an employee may be
treated as having been paid by an employer for income tax withholding purposes
on any date on or before December 31, 2005. However, nothing in § 409A
prevents the inclusion of amounts in gross income and in wages for income tax
withholding purposes under any other provision or rule of law on a date earlier
than December 31 ,2005. Thus, amounts includible in gross income under
§ 409A and either actually or constructively received by an employee during the
calendar year 2005 are considered a payment of wages when received by the
employee for purposes of withholding, depositing, and reporting the income tax
at source on wages.

Q~33 How should an employer report to an employee amounts includible in
gross income under § 409A and in wages under § 3401(a) as required by
§ 6051(a)(3)?

A-33 An employer should report amounts includible in gross income under
§ 409A and in wages under § 3401 (a) in box 1 of Form W-2 as part of the total
wages, tips, and other compensation paid to the employee during the year.
Additionally, an employer should report such amounts in box 12 of Form W-2
using code Z. The amount reported in box 12 using code Z should include all
amounts deferred under the plan for the taxable year and all preceding taxable
years that are currently includible in gross income under § 409A and in wages
under § 3401 (a). The instructions for Form W-2 provide additional information
relating to this reporting requirement. However, see Q&A 38 for interim guidance
with respect to an employer's reporting requirements relating to an employee or
business that is terminated prior to the issuance of additional guidance that will
provide a method for calculating the amounts includible in gross income under
§ 409A and in wages under § 3401 (a).

G. Reporting Nonemployee Compensation
Q·34 What reporting requirements relating to nonemployee compensation
are imposed by § 885(b) of the Act?
A-34 The Act adds § 6041 (g)(2), which requires a payer to report to a
nonemployee any amount includible in gross income under § 409A that is not
treated as wages under § 3401 (a). However, § 6041 (g)(2) does not require the
reporting of amounts includible in gross income under § 409A that are treated as
having been paid to a person with respect to whom a Form 1099-MISC is not
required to be filed.

Q-35 How should a payer report to a nonemployee amounts includible in
gross income under § 409A and not treated as wages under § 3401 (a) as
required by § 6041 (g)(2)?
A-35 A payer should report the amounts includible in gross income under
§ 409A and not treated as wages under § 3401 (a) in box 7 (nonemployee
compensation) of Form 1099-MISC. Additionally, a payer should report such
amounts in box 15b of Form 1099-MISC. The amount reported in box 15b
should include only the amounts includible in gross income under § 409A and not
included in wages under § 3401 (a). The instructions for Form 1099-MISC
provide additional information relating to this reporting requirement.

Q-36 What are the SECA tax consequences of a failure to satisfy the

requirements of § 409A?
A-36 Gross income of a self-employed individual (for example, a non employee
director, partner, or independent contractor) derived by the individual from any
trade or business is generally subject to tax in accordance with the
Self-Employment Contributions Act (SECA) when includible in gross income.
See §§ 1401, 1402(a). Accordingly, an amount derived from an individual's trade
or business that is includible in the self-employed individual's gross income under
§ 409A is generally subject to the application of SECA taxes at the time such
amount is includible in gross income.
Q-37 Does § 885 of the Act affect the imposition of the employee tax and

the employer tax under the Federal Insurance Contributions Act (FICA) with
respect to wages paid and received for employment under a nonqualified
deferred compensation plan within the meaning of § 409A(d)?
A-37 No. Section 885 of the Act does not affect the imposition of the employee
tax and the employer tax under FICA with respect to wages paid and received for
employment under a nonqualified deferred compensation plan within the
meaning of § 409A(d). Thus, remuneration for employment constituting wages
within the meaning of § 3121 (a) is taken into account for FICA tax purposes in
accordance with the rules for wage inclusion under §§ 3121 (a) and 3121 (v)(2).

H. Interim Reporting for Expedited Form W-2
Q-38 What are an employer's withholding and reporting obligations where

an employee is terminated or a business files a final Form 941 prior to the
issuance of further guidance providing methods for calculating the amount
of deferrals for the year and the amounts includible in gross income under
§ 409A and in wages under § 3401 (a)?
A-38 An employer is generally required to issue a Form W-2 reporting
compensation paid during a calendar year no later than January 31 of the
succeeding calendar year. However, if an employee's employment is terminated
before the close of the calendar year, an employer must furnish an expedited
Form W-2 if requested to do so by the employee. Additionally, an employer may,
at its option, furnish a Form W-2 to such an employee at any time after the
termination but no later than January 31 of the succeeding calendar year. See
§ 31.6051-1 (d)(i). In addition, if an employer makes a final return on Form 941,
the employer must furnish expedited Form W-2s to employees and file expedited
Form W-2s with the Social Security Administration. See §§ 31.6051-1 (d)(ii),
31.6071 (a)-1. If an employer furnishes an expedited Form W-2 before the
issuance of additional guidance providing methods for determining the amount of
deferrals for the year or the amounts includible in gross income under § 409A
and in wages under § 3401(a), the employer need not report an amount

described in Q&A-25 (deferrals for the year) or in Q&A-31 (amounts includible in
gross income and wages) on the Form W-2. However, if an employer furnishes
an expedited Form W-2 prior to the issuance of additional guidance that requires
the employer to report a deferral for the year or an amount includible in gross
income and wages, then the employer must subsequently furnish a corrected
Form W-2. See § 31.6051 (c).
IV. Drafting Information
The principal author of this notice is Stephen Tackney of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) and,
regarding the employment tax and information reporting requirements, Neil D.
Shepherd of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities). However, other personnel from the Treasury
Department and the Service participated in its development. For further
information regarding this notice, contact Stephen Tackney (202) 927-9639; or
for further information regarding the employment tax and information reporting
requirements, Neil D. Shepherd (202) 622-6040; or regarding the submission of
comments, contact Lanita Van Dyke (202) 622-7180 (not toll-free calls).

~-r-.t

&
..Ii

~--

"'.

'RESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 21,2004
2004-12-21-10-40-25-19862
U.S. International Reserve Position

The Treasury Department today released US, reserve assets data for the latest week, As indicated in this table, U.S. reserve assets
totaled $86,526 million as of the end of that week, compared to $85,998 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
December 10, 2004

December 17, 2004

85,998

86,526

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

12,076

14,917

26,993

12,131

15,084

27,215

Of which, issuer headquartered in the U.S.

b. Total deposits with
11,841

bJ Other central banks and BIS

2,998

14,839

11,910

3,032

14,942

b.ii. Banks headquartered in the US.

b,ii. Of which. banks located abroad

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

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

19,861

19,982

13,262

13.343

11,043

11.043

2, IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
December 17, 2004

December 10, 2004
Euro
1. Foreign currency loans and securities

Yen

TOTAL

Euro

Yen

TOTAL

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

2.b. Long positions

o
o

3. Other

2.a. Short positions

o
o
o

..~

III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 10, 2004
Euro

1. Contingent liabilities in foreign currency

Yen

December 17, 2004

TOTAL

Euro

Yen

TOTAL

o
o

1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabifities
2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines
3.a. With other central banks

3.b. With banks and other fmancial institutions
Headquartered in the US.

3.c. With banks and other financial institutions
Headquartered outside the US.

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:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2IThe 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 excha nge 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.

31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-2163: u.:partment oftht: Trcasury First and Second Combined Quarterly Update 0 ... Page 1 of2

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print tile PDF conlellt on I/l/S Pdge. (town/oad tile free

, i

December 21 , 2004
JS-2163

Department of the Treasury
First and Second Combined Quarterly Update of the
2004 - 2005 Priority Guidance Plan
Joint Statement by:
Eric Solomon
Deputy Assistant Secretary
(RegUlatory Affairs)
U,S. Department of the Treasury
Mark W, Everson
Commissioner
Internal Revenue Service
Donald L. Korb
Chief Counsel
Internal Revenue Service
On July 26, 2004, we released the 2004 - 2005 Priority Guidance Plan listing 276
projects for the plan year beginning July 1, 2004 and ending June 30, 2005. In our
JOint Statement that accompanied the release of the 2004 - 2005 Priority Guidance
Plan, we emphasized our commitment to increased and more timely published
guidance. We indicated that we would update the plan quarterly to reflect additional
gUidance that we Intend to publish during the plan year. Updating the plan also
provides flexibility to respond to developments arising during the year. On October
22,2004. the American Jobs Creation Act of 2004 (AJCA) was enacted. In order to
take account of the extensive gUidance necessary to implement the AJCA, we have
combined the first and second quarterly updates of the 2004 - 2005 Priority
Guidance Plan in this document. This update includes 33 additional projects
implementing the AJCA.
The attached update sets forth the guidance on the original 2004 - 2005 PriOl'ity
Guidance Plan that we have published. Although the update may indicate that a
particular item on the plan has been completed, It is possible that one or more
additional projects may be completed In the plan year relating to that item. The
update also includes 67 items of additional guidance (including the 33 AJCA-related
projects mentioned above), some of which have already been published
We continue to invite the public to provide us with comments and suggestions as
we identify and write guidance throughout the plan year.
A copy of the update of the 2004 - 2005 PriOl'ity Guidance Plan is attached. The
updated 2004 -2005 Priority GUidance Plan will also be republished on the IRS
website on the Internet
II" q()v) under Tax Professionals, IRS Resources,
Administrative Information and Resources, 2004 - 2005 Priority Guidance Plan.
Copies can also be obtained by calling Treasury's Office of Public Affairs at (202)
622-2960.

http://www.tn:as.gov/press/releases/js.i~63.htm

1/3/2005

JS~2163: Depailment of the Treasury First and Second Combined Quat1erly Update 0...

Page 2 of 2

REPORTS

http://www.treas.gov 1prcss /rcJcascs/j<?163.htm

I/l2005

OFFICE OF TAX POLICY
AND
INTERNAL REVENUE SERVICE
2004·2005 PRIORITY GUIDANCE PLAN
DECEMBER 21,2004 UPDATE
CONSOLIDATED RETURNS

Original PGP Projects:
1.

Guidance under section 1502 regarding transactions involving obligations of
consolidated group members.

Final regulations under section 1502 regarding indebtedness to
nonmembers that is traceable to intercompany obligations.

Guidance under section 1502 regarding rate or discount subsidy payments.

Guidance under section 1502 regarding treatment of member stock.

Guidance under section 1502 regarding application of section 108 to
members of a consolidated group.

Guidance under section 1502 regarding liquidations under section 332 into
multiple members.

CORPORATIONS AND THEIR SHAREHOLDERS

Original PGP Projects:
1.

Guidance regarding redemptions of corporate stock.

Guidance regarding transactions involving the transfer or receipt of no net
equity value.

Guidance regarding selected issues under section 336(e).

Final regulations regarding taxable asset acquisitions and dispositions of
insurance companies.

Guidance regarding the acquisition of businesses having certain
nonqualified settlement funds.

• PUBLISHED 9/16/2004 in FR as TEMP 9158
6.

Guidance under section 355.

Final regulations regarding plan issues under section 355(e).

Guidance regarding predecessors and successors under section 355(e).
? PUBLISHED 11/22/2004 in FR as NPRM REG-145535-02

Guidance regarding the assumption of liabilities.

10. Final regulations under section 358 regarding allocation of basis.
11. Revision of guidelines for estimating stock basis in reorgani zations under
section 368(a)( 1)(B).
12. Guidance regarding the effect of pre-closing changes of acquiror stock
value on continuity of interest.
13. Guidance regarding transfers of assets after putative reorganizations.
14. Guidance regarding statutory mergers .
• PUBLISHED 12/17/2004 in FR as TEMP 9164
15. Guidance under section 368(a)(1)(F).
16. Guidance under section 382.
17. Guidance under section 1374.
EMPLOYEE BENEFITS
A.

Retirement Benefits

Original PGP Projects:
1.

Guidance under sections 106 and 401 on retiree health accounts in a profit
sharing plan.

Guidance on coordination with Puerto Rico law for qualified plans.

Procedural guidance with respect to group trusts.

Guidance under section 401 (a)(4).

Guidance under section 401 (a)(31) on the default rollover of involuntary
distributions.

6.
Guidance under section 401 (b) on the staggered remedial amendment
period.
• PUBLISHED 10/4/2004 in IRS 2004-40 as ANN. 2004-71
(released 9/13/2004)
7.

Guidance under sections 401 (k), 403(b), 415(c)(3), and 457(b) on post
severance elective deferrals.

Final regulations under section 401(k) and (m).

Guidance under section 402 on the valuation of life insurance distributed
from qualified plans.

10. Guidance under section 402A on Roth 401 (k) elective contributions.
11. Additional guidance on the Pension Funding Equity Act of 2004.
• PUBLISHED 9/7/2004 in IRS 2004-36 as NOTICE 2004-59
(released 8/19/2004)
? PUBLISHED 11/29/2004 in IRB 2004-48 as NOTICE 2004-78
(released 11/12/2004)
12. Guidance on the deduction of foreign-sourced dividends by a U.S.
subsidiary under section 404(k).
13. Guidance on IRA abuses.
14. Additional guidance relating to the section 409(p) requirements.
15. Guidance on amendments to suspension of benefits provisions.
16. Final regulations under section 411 (d)(6) for defined benefit plans.
17. Final regulations under section 411 (d)(6)(E).
18. Guidance under section 412 on mortality tables.
19. Proposed reg ulations under section 415.
20. Guidance on electronic communications.
21. Additional guidance on the relative value of optional forms of benefit.

22. Guidance under sections 457(b) and 501 (c)(1) on plans established by
federal credit unions.
23. Guidance on ESOPs.
Additional PGP Projects:
24. Notice on additional relief for certain employee benefits plans as a result of
the Florida storms.
? PUBLISHED 10/4/2004 in IRS 2004-40 as NOTICE 2004-62
(released 9/15/2004)
25. Regulations on phased retirement arrangements.
? PUBLISHED 11/10/2004 in FR as NPRM REG-114726-04
26. Regulations on annuity plans under section 403(b).
? PUBLISHED 11/16/2004 in FR as NPRM REG-155608-02
27. Guidance under section 412 as amended by the Pension Funding Equity
Act of 2004 regarding multiemployer plans.
28. Guidance under section 401(b) on the staggered remedial amendment
period for individually designed plans.
29. Guidance under section 401 (b) on the staggered remedial amendment
period for master and prototype plans and volume submitter plans.
30. Guidance providing the cumulative guidance list for certain defined benefit
plans.
? WILL BE PUBLISHED 12/27/2004 in IRB 2004-52 as NOTICE 2004-84
(released 12/14/2004)

Executive Compensation, Health Care and Other Benefits, and
Employment Taxes

Original PGP Projects:
1. Guidance under section 35 on health care insurance costs of eligible
individuals.
2.

Guidance on secular trusts.

3.
Guidance on the value of term life insurance for split dollar and pension
plans.
4.

Revenue ruling on tool rental.

Guidance under section 79.

Revenue ruling on section 83(b) elections.

7.
8.

Revenue ruling on timing issues under section 83.
Guidance on Health Reimbursement Arrangements (HRAs).

Guidance on the election between taxable and nontaxable benefits.

10. Revenue ruling under section 280G on section 83(b) elections.
11. Guidance under section 419.
12. Guidance under section 419A.
13. Guidance on incentive stock options.
14. Guidance on the application of SECA to Conservation Reserve Program
payments.
15. Guidance on FICA and FUTA tax with respect to incentive stock options
under section 422 and employee stock purchase plans under section 423.
16. Guidance on the employment tax treatment of bonuses paid to employees
on the signing of a collectively bargained agreement.
• PUBLISHED 12/13/2004 in IRB 2004-50 as REV. RUL. 2004-109
(released 11/23/2004)
17. Guidance on tips paid to restaurant employees.
18. Final regulations on the student FICA exception .
• WILL BE PUBLISHED 12/21/2004 in FR as TO 9167
19. Revenue procedure on the student FICA exception.
? WILL BE PUBLISHED 1/1012005 in IRB 2005-2 as REV. PROC. 200511
20. Guidance on flat rate supplemental wage withholding.
21. Guidance under section 3504.
22. Guidance on withholding for domestic workers.
23. Proposed regulations under sections 4980E and 4980G on employer
comparable contributions to HSAs.

24. Final regulations under section 9801.
Additional PGP Projects:
25. Revenue ruling on employer provided parking reimbursement
arrangements.

? PUBLISHED 10/18/2004 in IRB 2004-42 as REV. RUL. 2004-98.
(released 10/1/2004)
26. Announcement on Archer MSA Trustee Reports.
? PUBLISHED 1118/2004 in IRB 2004-45 as ANN. 2004-82.
(released 10/19/2004)
27. Temporary regulations under section 3121 regarding the definition of salary
reduction agreement.
? PUBLISHED 11/16/2004 in FR as TEMP 9159
28. Notice on the effect of the Working Families Tax Relief Act of 2004 on
employer-provided accident or health plans.
? PUBLISHED 12/612004 in IRB 2004-49 as NOTICE 2004-79
(released 11/17/2004)
29. Revenue ruling on the income and employment tax treatment of amounts
paid to an employee as consideration for cancellation of an employment
contract and relinquishment of contract rights.
? PUBLISHED 12113/2004 in IRB 2004-50 as REV. RUL. 2004-110
(released 11/23/2004)
30. Guidance under section 409A as added by the American Jobs Creation Act
of 2004 regarding the treatment of nonqualified deferred compensation
plans.
? WILL BE PUBLISHED 1/10/2005 in IRS 2005-2 as NOTICE 2005-1
(released 12/20/2004)
31. Notice on income tax and self-employment tax consequences when a
partnership makes contributions to its partners' HSAs or an S corporation
makes contributions to its 2-percent shareholder-employees' HSAs.

EXCISE TAXES
Original PGP Projects:
1.

Final regulations under section 4051 regarding the definition of highway
vehicle in sections 145.4051 and 48.4061(a)-1.
? CLOSED WITHOUT PUBLICATION

Guidance under section 4051 (a}(2) and (3) regarding suitability for use.

Guidance under section 4081 regarding the entry into the United States of
taxable fuel.

Guidance under section 4221 (e) regarding reciprocal privileges.

Final regulations under section 4252 regarding toll telephone services.

Guidance under section 4261 regarding resellers of air transportation.

Guidance under section 4261(e) regarding the exception for segments to or
from rural airports.

Guidance under section 4291 regarding the duties of the collector of
collected excise taxes.

9.
Proposed regulations under section 6416(a)(4) regarding claims for gasoline
tax.
? CLOSED WITHOUT PUBLICATION
Additional PGP Projects:
10. Guidance under section 4251 regarding the excise tax on communications
services.
• PUBLISHED 8/30/2004 in IRB 2004-35 as NOTICE 2004-57
(released 8/9/2004)
11. Guidance providing relef from the penalty under section 6715 for highway
use of dyed diesel fuel in the state of Florida.
• PUBLISHED 9/27/2004 in IRS 2004-39 as ANN. 2004-70
(released 9/3/2004)
• PUBLISHED 10112/2004 in IRS 2004-41 as ANN. 2004-77
(released 9/17/2004)
12.

Guidance regarding various excise tax provisions added or amended by the
American Jobs Creation Act of 2004.
• WILL BE PUBLISHED 1/10/2005 in IRB 2005-2 as NOTICE 2005-4
(released 12/15/2004)

EXEMPT ORGANIZATIONS
Original PGP Projects:
1.

Guidance on downpayment assistance organizations.

2. Guidance on low-income housing partnerships and section 501 (c)(3)
participation.
3.

Guidance under sections 501 (c)(3) and 4958 on revocation standards.

Guidance under section 501 (c)(15).
• PUBLISHED 10/12/2004 in IRB 2004-41 as NOTICE 2004-64
(released 9/24/2004)

Guidance concerning the internet and unrelated business income tax.
? PUBLISHED 12/20/2004 in IRB 2004-51 as REV. RUL. 2004-112
(released 12/1/2004)

Regulations under section 529 regarding qualified tuition programs.

Additional PGP Projects:
7.

Announcements on suspension of tax exempt status.
? PUBLISHED 10/4/2004 in IRS 2004-40 as ANN. 2004-74
(released 9/17/2004)
? PUBLISHED 11/8/2004 in IRS 2004-45 as ANN. 2004-87
(released 10/18/2004)

FINANCIAL INSTITUTIONS AND PRODUCTS

Original PGP Projects:
1.

Guidance for RIGs and REITs concerning section1 (h).

Guidance addressing the accrual of interest on nonperforming loans.

Final regulations under section 263(g).

Final regulations on notional principal contracts.

Proposed regulations addressing valuation under section 475.

Final regulations under sections 475(e) and (f).

Proposed regulations on the flow through of foreign tax credits for regulated
investment companies.

Guidance on the application to foreign currency gains of the income and
asset tests for real estate investment trusts.

Guidance on interest-only REMIC regular interests.

10. Regulations on the application of the TEFRA partnership audit procedures
to REMles.
11. Proposed regulations addressing foreign holders of REMIC residual
interests.
12. Guidance under section 1256 on the definition of a dealer in securities
futures contracts.
• PUBLISHED 9/20/2004 in IRS 2004-38 as REV. RUL. 2004-94
• PUBLISHED 9/20/2004 in IRS 2004-38 as REV. RUL. 2004-95
13. Guidance on credit card transactions.
14. Regulations regarding accruals for certain REMIC regular interests.
15. Guidance on system upgrade payments made to electric utilities.
16. Proposed regulations under section 7872.
Additional PGP Projects:
17. Guidance under section 1286(f) as added by the American Jobs Creation
Act of 2004 regarding treatment of stripped interests in bond and preferred
stock funds.
18. Guidance under section 1256 regarding over-the-counter foreign currency
options.
19. Update of Rev. Proc. 2003-32 under section 851 regarding the application
of the diversification test with respect to investments in eligible tax-exempt
partnerships.
20. Guidance under sections 852 and 854, a nd section 871 (k) as added by the
American Jobs Creation Act of 2004, regarding dividend designations by
RICs.

GENERAL TAX ISSUES
Original PGP Projects:
1.

Proposed regulations under section 21 regarding the credit for household
and dependent care expenses.

Notice under section 23 regarding the credit for adoption expenses.

Guidance under section 32.

Proposed regulations under section 41 regarding internal use software.

Regulations under section 41 regarding the computation of the research
credit in a controled group.

Guidance under section 41 regarding gross receipts for purposes of
computing the group credit under section 41 (f).

Guidance under section 42 regarding the low income housing credit.
• PUBLISHED 8/30/2004 in IRB 2004-35 as REV. RUL. 2004-82
(released 7/30/2004)

Guidance under section 42(h) regarding qualified contracts.

Guidance under section 44 regarding the disabled access credit for eligible
sma" businesses.

10. Guidance under section 45 regarding state credit offsets.
11. Guidance under section 45D regarding the new markets tax credit.
12. Regulations under sections 46 and 167 relating to normalization.
13. Final regulations under section 59(e) regarding elections.
14. Revenue ruling regarding disaster relief payments to businesses.
15. Guidance regarding the tax treatment of repayments of Commodity Credit
Corporation loans.
16. Revenue ruling under sections 61 and 162 on the proper treatment of
Medicaid rebates paid by pharmaceutical companies.
17. Guidance regarding the treatment of employee relocation costs.
18. Revenue ruling under sections 121 and 1031 regarding like-kind exchanges
of a principal residence.
19. Guidance under section 152 regarding the release of a claim for exemption
for a child of divorced or separated parents.

20. Revenue ruling regarding the treatment of payments made by a tax-exempt
organization upon its conversion to a taxable entity to satisfy its publicbenefit obligations.
21. Final regulations under section 163(d) regarding the qualified dividend
income election.
22. Regulations under section 167 regarding the income forecast method.
23. Final regulations under section 168 relating to like-kind exchanges.
24. Final regulations under sections 168 and 1400L regarding the special
depreciation allowance.
25. Guidance under section 168 on asset classes and activity classes under
Rev. Proc. 87-56.
26. Final regulations under section 168 regarding changes in classification of
property.
27. Guidance under section 170.
28. Guidance under section 172 regarding specified liability losses.
29. Guidance under section 174 regarding the treatment of inventory property.
30. Guidance under section 174 regarding changes in method of accounting.
31. Final regulations under section 179 regarding elections.
32. Guidance under section 469 regarding the limitation on losses and credits
relating to passive activities.
33. Final regulations under section 1031 regarding the use of SIC codes in likekind exchanges of depreciable tangible property.
34. Revenue ruling under section 1241 on the cancellation of lease or distributor
agreements.
35. Guidance on corporations chartered under Indian tribal law.
Additional PGP Projects:
36. Guidance under section 199 regarding the deduction for income attributable
to domestic production activities.

37. Guidance under section 42 regarding relief from certain low income housing
credit requirements for taxpayers affected by various hurricanes.
• PUBLISHED 10/18/04 in IRB 2004-42 as NOTICE 2004-66
(released 9/16/04)
• PUBLISHED 11/29/04 in IRB 2004-48 as NOTICE 2004-74
(released 11/04/04)
• PUBLISHED 11129/04 in IRB 2004-48 as NOTICE 2004-75
(released 11/04/04)
• PUBLISHED 11129/04 in IRB 2004-48 as NOTICE 2004-76
(released 11/04/04)
38. Revenue procedure under section 1400L(c) regarding the election out of the
5-year recovery period for depreciation of certain leasehold improvements.
39. Guidance under section 168 regarding property eligible for the extended
placed-in-service date for the special depreciation allowance.
40. Guidance relating to payments made in termination of tobacco marketing
quotas and related price supports under the American Jobs Creation Act of
2004.
41. Guidance under section 164(b)(5) as added by the American Jobs Creation
Act of 2004 regarding the deduction for state and local sales taxes.
42. Guidance under section 170(m) as added by the American Jobs Creation
Act of 2004 regarding the treatment of charitable contributions of patents
and similar property.
43. Guidance under section 170(f)(12) as added by the American Jobs Creation
Act of 2004 regarding charitable contributions of used motor vehicles, boats
and airplanes.
44. Guidance under section 274(e) as amended by the American Jobs Creation
Act of 2004.
45. Guidance under section 1301 (a) as amended by the American Jobs
Creation Act of 2004 regarding farmer and fisherman income averaging.
GIFTS, ESTATES AND TRUSTS
Original PGP Projects:
1.

Update revenue procedures under section 664 containing sample charitable
remainder unitrust provisions.

Final regulations under section 664 regarding dividends and capital gains
for charitable remainder trusts.

Guidance under section 664 regarding the partial or complete termination of
a charitable remainder unitrust.

Final regulations under section 671 regarding the reporting requirements for
widely-held fixed investment trusts.

Guidance regarding family trust companies.

Guidance under section 691 regarding income in respect of a decedent and
deferred annuity contracts.

Final regulations under section 2032 regarding section 301.9100 relief.

Guidance under section 2036 regarding transfers with retained life estates.

9. Guidance under section 2053 regarding post-death events.
10. Guidance under section 2056 regarding qualified terminable interest
property.
11. Guidance under section 2518 regarding qualified disclaimers.
12. Final regulations under section 2632 regarding election out of the deemed
allocation of the generation-skipping transfer tax exemption.
13. Final regulations under section 2642 regarding qualified se\erance.
14. Final regulations under section 2651 regarding the predeceased parent rule.
15. Final regulations under section 2702 regarding qualified interests.
16. Guidance under section 2704 regarding the liquidation of an interest.

INSURANCE COMPANIES AND PRODUCTS
Original PGP Projects:
1.

Final regulations under section 817 on life insurance and annuity contracts.

Guidance on the application of the diversification look-through rule under
section 817 to tiered investment companies.

Guidance on the 2001 CSO mortality tables.
• PUBLISHED 10/12/2004 in IRB 2004-41 as NOTICE 2004-61

Additional PGP Projects:
4.

Guidance concerning producer owned reinsurance companies as listed
transactions.
• PUBLISHED 10/12/2004 in IRS 2004-41 as NOTICE 2004-65

Revenue ruling regarding qualified additional benefits under section 7702.

Guidance regarding captive insurance companies.

INTERNATIONAL ISSUES
A.

Subpart F/Deferral

Original PGP Projects:
1.

Regulations on the allocation of subpart F income.

2.
3.

Regulations under section 959 on previously taxed earnings and profits.
Guidance on the PFIC provisions.

Inbound Transactions

Original PGP Projects:
1.

Final regulations on the treatment of portfolio stock in a U.S. insurance
branch.

Guidance under section 1441 .
• PUBLISHED 10/18/2004 in IRS 2004-42 as REV. PROC. 2004-59
(released 9/29/2004)

Guidance on securities lending.

Guidance on the treatment of certain financial products for withholding
purposes.

Final regulations under section 1446.

Regulations relating to the reporting of bank deposit interest.

Outbound Transactions

Original PGP Projects:

Regulations on the application of section 304 in transactions involving
foreign corporations.

Regulations relating to the carryover of tax attributes in certain international
reorganizations.

Regulations on mergers involving foreign corporations.

Other guidance on international restructurings.
• PUBLISHED 10/25/2004 in IRS 2004-43 as NOTICE 2004-68
(released 1017/2004)

Foreign Tax Credits

Original PGP Projects:
1.

Regulations on the change of taxable year and foreign tax credits.

Regulations on the allocation of foreign taxes.

3.
4.

Regulations on the look-through treatment for 10/50 company dividends
(see Notice 2003-5).
Guidance under section 905(c).

Transfer Pricing

Original PGP Projects:
1.

Regulations on the treatment of cross-border services.

Regulations on cost sharing under section 482.

Regulations and other guidance on global dealing.

Other guidance under section 482 .
• PUBLISHED 12/13/2004 in IRS 2004-50 as ANN. 2004-98
(released 12/10/2004)

Sourcing and Expense Allocation

Original PGP Projects:
1.

Guidance on interest expense apportionment.

Regulations on the allocation and apportionment of charitable contributions.

Regulations and other guidance relating to the treatment of fringe benefits.

Guidance on the source of income from the cross-border use of property.

Regulations under sections 863(d) and (e).

Guidance on interest expense allocable to effectively connected income.

Treaties

Original PGP Project:
1.

Guidance on reporting and other issues under treaties.
• WILL BE PUBLISHED 1/10/2005 in IRS 2005-2 as ANN. 2005-3
(released 12/10/2004)

Other

Original PGP Projects:
1.

Regulations and other guidance under section 1(h)(11) on the taxation of
dividends from certain foreign corporations received by individuals.
• PUBLISHED 11/1/2004 in IRB 2004-44 as NOTICE 2004-70
(released 10/8/2004)
• PUBLISHED 1118/2004 in IRB 2004-45 as NOTICE 2004-71
(released 10/22/2004)

Regulations under section 269B.

Guidance on cross-border banking and insurance issues.
• PUBLISHED 9/27/2004 in IRB 2004-39 as REV. RUL. 2004-97

Guidance on possessions issues.

5.
Regulations and other guidance concerning the treatment of currency gain
or loss.
6.

Regulations under section 1503(d).

Guidance on cross-border information reporting issues.
• PUBLISHED 9/15/2004 in FR as TD 9161

Additional PGP Projects:
8.

Update of Rev. Rul. 95-63 regarding countries described in section
901 U)(2)(A).

• PUBLISHED 11/8/2004 in IRS 2004-45 as REV. RUL. 2004-103
(released 10/20/2004)
9.

Guidance under theAmerican Jobs Creation Act of 2004 regarding the
repeal of the exclusion for extraterritorial income.

10. Guidance under section 1354 as added by theAmerican Jobs Creation Act
of 2004 regarding the election to determine the corporate tax on certain
international shipping activities using the per ton rate.
11. Guidance under the American Jobs Creation Act of 2004 regarding the lookthrough treatment for 10/50 company dividends.
12. Guidance under section 904( d)(2)(H)(ii) as added by the American Jobs
Creation Act of 2004 regarding the election concerning the treatment of
income tax base differences.
13. Guidance under section 986{ a) as amended by the American Jobs Creation
Act of 2004 regarding the translation of foreign income taxes.
14. Guidance under the American Jobs Creation Act of 2004 regarding the
treatment of certain RIC dividends for withholding tax purposes.
15. Guidance under section 954(c) as amended by the American Jobs Creation
Act of 2004 regarding the treatment of aircraft leasing and shipping income.
16. Guidance under section 965 as added by the American Jobs Creation Act of
2004 regarding the temporary dividends received deduction for foreign
earnings reinvested in the United States.
17. Guidance under the American Jobs Creation Act of 2004 regarding the
delayed effective date for Treas. Regs. sections 1.883-1 through 1.883-5.
18. Guidance under section 7874 as added by the American Jobs Creation Act
of 2004 regarding the treatment of expatriated entities and their foreign
parents.
19. Guidance under the American Jobs Creation Act of 2004 regarding the
revision of the tax rules on expatriation of individuals.
20. Guidance under section 72(w) as added by the American Jobs Creation Act
of 2004 regarding the application of the basis rules to nonresident aliens.
21. Guidance under section 937 as added by the American Jobs Creation Act of
2004 regarding the residence and source rules involving possessions.

PARTNERSHIPS

Original PGP Projects:
1.

Guidance regarding partnership transactions under section 337(d).

Final regulations under section 704(b) regarding the allocation of foreign tax
credits.

Guidance under section 704(b )(2) regarding whether partnership allocations
have substantial economic effect.

Final regulations under section 704(c) regarding installment sales.

Guidance under section 706(d) regarding the determination of distributive
share when a partner's interest changes.

Guidance under section 707 regarding disguised sales.
• PUBLISHED 11/26/2004 in FR as NPRM REG-149519-03

Guidance under section 707(c) regarding guaranteed payments.

Proposed regulations under section 721 regarding partnership interests
issued for services and the treatment of compensatory partnership options.
Update of the section 751 regulations.

10. Final regulations under section 752 regarding the assumption of partner
liabilities.
11. Guidance under section 752 where a general partner is a disregarded entity.
12. Final regulations regarding the application of section 1045 to certain
partnership transactions.
13. Final regulations under section 6031 regarding the reporting requirements of
tax-exempt bond partnerships.
14. Final regulations under section 7701 regarding disregarded entities and
collection issues.
Additional PGP Projects:
15. Notice regarding the amendments to sections 704,734,743, and 6031 that
were enacted as part of the American Jobs Creation Act of 2004 relating to
the partnership basis adjustments and electing investment partnerstips.

SUBCHAPTER S

Original PGP Projects:
1.

Guidance under section 678 regarding trusts that hold shares of a
Subchapter S corporation.

Guidance under section 1363(d) regarding the treatment of LIFO recapture.

3. Guidance under section 1367 regarding adjustments in basis of
indebted ness.
4.

Final regulations under section 7701 on deemed corporate entity elections
for electing S corporations.

TAX ACCOUNTING

Original PGP Projects:
1.

Regulations under sections 162 and 263 regarding the deduction and
capitalization of expenditures for tangible assets.

Regulations under section 263(a) regarding the subsequent treatment of
capitalized transaction costs.

Update of Rev. Proc. 2004-23 regarding method of accounting cranges for
intangibles .
• WILL BE PUBLISHED 1/10/2005 in IRB 2005-2 as REV. PROC. 2005-9
(released 12/13/2004)

Revenue ruling regarding the deduction and capitalization of costs incurred
by utilities to maintain assets used to generate power.

Regulations under section 263A regarding the simplified service cost and
simplified production methods.

Guidance under section 263A regarding "negative" additional section 263A
costs.

Guidance regarding the treatment of post-production costs under section
263A.

Final regulations under section 263A(f}.

Regulations under section 381 regarding changes in method of accounting.

10. Revenue procedure under section 446 regarding changes in method of
accounting for rotable spare parts.
11. Regulations under section 446 regarding methods of accounting.
12. Final regulations under section 448 regarding nonaccrual of certain amounts
by service providers.
13. Revenue ruling under section 461 regarding the proper year for the
deduction of payroll taxes on deferred compensation by accrual method
taxpayers.
14. Guidance under section 4688 regarding the tax treatment of a singleclaimant qualified settlement fund.
15. Regulations under section 4688 regarding certain escrow funds.
16. Guidance on the tax treatment of vendor allowances.
17. Revenue procedure regarding the valuation of parts inventory by heavy
equipment distributors.
18. Guidance regarding the permissibility of a moving average cost method for
valuing inventory.
19. Guidance under section 1.472-8 regarding the inventory price index
computation (IPIC) method.
Additional PGP Projects:
20. Guidance under section 248 as amended by the American Jobs Creation
Act of 2004 regarding the period allowed for deducting organizational
expenditures of a corporation.
21. Revenue procedure providing an extension of time for filing the statement
required by Rev. Proc. 2004-23 to obtain automatic consent to accounting
method change for capitalizing amounts paid for intangible assets.
• PUBLISHED 9/20/2004 in IR8 2004-38 as REV. PROC. 2004-57
(released 9/1/2004)
TAX ADMINISTRATION

Original PGP Projects:
1.

Annual compilation of tax shelter listed transactions under section 6011.
• PUBLISHED 10/12/2004 in IRB 2004-41 as NOTICE 2004-67

(released 9/24/2004)
2.

Proposed regulations under section 6012 regarding the filing requirements
for Subchapter T Cooperatives.

Guidance regarding information reporting under section 6041 for
commissions paid to insurance agents.

Final regulations under section 6045(f) regarding the reporting of gross
proceeds to attorneys.

Revenue procedure under section 6050S regarding changes in method of
information reporting by eligible educational institutions for qualified tuition
and related expenses.
• PUBLISHED 10/12/2004 in IRB 2004-41 as NOTICE 2004-63
(released 9/17/2004)

Final regulations under section 6081 regarding the signature requirement to
request an extension of time to file information returns .
• PUBLISHED 12/7/2004 in FR as TD 9163

Proposed regulations under section 6103 regarding the disclosure of
unrelated third party tax information in tax proceedings.

Temporary regulations under section 6103 regarding disclosures to the
Department of Commerce.

Proposed regulations under section 6103 regarding disclosures to
subcontractors.
10. Final regulations authorizing the imposition and collection of reproduction
fees for furnishing section 6104 information.

11. Proposed regulations under section 6159 regarding installment agreements.
12.

Update of Rev. Ruls. 75-365, 366 and 367 regarding interests in real estate
held by a decedent.

13. Guidance under section 6213 regarding math error assessments based on
a Form W-2.
14. Revenue ruling regarding the classification of items and the statute of
limitations under the TEFRA partnership provisions.
15. Proposed regulations under sections 6320 and 6330 regarding collection
due process.

16. Revenue procedure regarding the Collection Appeals Program.
17. Final regulations under section 6334 regarding the seizure of a principal
residence.
18. Revenue ruling regarding the limitations on setoff.
19. Revenue ruling regarding setoff with respect to a taxpayer in bankruptcy.
20.

Revenue ruling under section 6404 regarding the application of the interest
suspension provisions when a taxpayer files an amended return.

21. Revenue procedure under section 6404 regarding the remedies available to
taxpayers with respect to the interest suspension rules.
22.

Proposed regulations under section 6502 regarding the extension of the
statute of limitations on collection.

23.

Final regulations under section 6503 regarding the suspension of the period
of limitations for noncompliance with a designated summons.

24. Withdrawal of the regulations under former section 6015 regarding the
declaration of estimated tax by individuals.
25.

Regulations under section 6655 regarding estimated tax payments by
corporations.

26. Revenue ruling regarding the definition of "pending" under section 6658.
27.

Withdrawal of the regulations under former section 6661 regarding the
substantial understatement penalty.

28. Regulations under section 6664 amending the definition of a qualified
amended return.
29.

Update of Rev. Proc. 94-69 regarding qualified amended returns for C IC
taxpayers.

30. Guidance necessary to facilitate electronic tax administration.
31. Revenue ruling under section 7426 regarding refund suits by third parties.
32. Revenue ruling under section 7426 regarding refund claims in lieu of
wrongful levy claims.

33. Proposed regulations under section 7430 regarding miscellaneous changes
made by TRA 97 and RRA 98.
34. Proposed regulations under section 7477 regarding declaratory judgments
relating to gift tax valuations.
35.

Proposed regulations under section 7502 regarding the timely
mailing/delivery of documents.
• PUBLISHED 9/21/2004 in FR as NPRM REG-138176-02

36. Final regulations under section 7602 regarding the designation of IRS
officers or employees to take summoned testimony or receive summoned
information.
37.

Revenue procedure regarding the early examination of questionable
transactions.

38. Proposed regulations regarding third party and John Doe summonses.
39. Revisions to Circular 230 regarding practice before the IRS.
• PUBLISHED 12/20/2004 in FR as TO 9165
• PUBLISHED 12/20/2004 in FR as NPRM REG-159824-04
40. Revenue procedure expanding the prefiling agreement program.
41. Final regulations regarding testimony authorizations and requests for IRS
information.
42. Guidance regarding frivolous arguments used by taxpayers in an attempt to
avoid or evade tax.

Additional PGP Projects:
43. Final regulations under section 6302 regarding the minimum threshold for
depositing FUTA taxes.
• PUBLISHED 12/1/2004 in FR as TO 9162
44. Guidance under section 6043A as added by the American Jobs Creation Act
of 2004 regarding the information reporting requirements relating to taxable
mergers and acquisitions.
45. Guidance under section 6707 A as added by the American Jobs Creation Act
of 2004 regarding the penalty for failure to disclose reportable transactions.

46. Notice under section 6662A as added by the American Jobs Creation Act of
2004 regarding the accuracy-related penalty relating to understatements
with respect to reportable transactions.
47. Guidance under section 6501 as amended by the American Jobs Creation
Act of 2004 regarding the extension of the statute of limitations for
assessment relating to failures to report required information concerning
listed transactions.
48. Notice regarding sections 6111, 6112 and 6708 as amended by the
American Jobs Creation Act of 2004 relating to the disclosure of reportable
transactions and the maintenance of lists of advisees.
• PUBLISHED 12/13/2004 in IRB 2004-50 as NOTICE 2004-80
(released 11/16/2004)
49. Guidance under section 6603 as added by the American Jobs Creation Act
of 2004 regarding deposits made to suspend the running of interest on
potential underpayments.
50. Guidance under section 6050L as amended by the American Jobs Creation
Act of 2004 regarding the information reporting requirements relating to
certain donated property.
51.

Guidance updating Rev. Rul. 82-29 regarding the use of facsimile
signatures on certain forms.

52. Guidance under section 6011 regarding alternative methods of disclosing
transactions reportable under the book/tax difference category of reportable
transactions.
• PUBLIS HED 8/2/04 in IRB 2004-31 as REV. PROC. 2004-45
(released 7/7/04)
53. Guidance under section 6011 regarding the exception from the reporting
requirement in section 1.6011-4(b)(4) of the regulations for certain
contractual protection transactions.
• PUBLISHED 12/13/04 in IRS 2004-50 as REV. PROC. 2004-65
(released 11/16/04)
54. Guidance under section 6011 regarding the exception from the reporting
requirement in section 1.6011-4(b)(5) of the regulations for certain loss
transactions.
• PUBLISHED 12/13/04 in IRB 2004-50 as REV. PROC. 2004-66
(released 11/16/04)
55. Guidance under section 6011 regarding the exception from the reporting

requirement in section 1.60114(b)(6) of the regulations for certain book-tax
transactions .
• PUBLISHED 12/13/04 in IRB 2004-50 as REV. PROC. 2004-67
(released 11/16/04)
56. Guidance under section 6011 regarding the exception from the reporting
requirement in section 1.6011-4(b)(7) of the regulations for certain brief
asset holding period transactions .
• PUBLISHED 12/13/04 in IRB 2004-50 as REV. PROC. 2004-68
(released 11/16/04)
TAX EXEMPT BONDS

Original PGP Projects:
1.

Final regulations under section 141 on refundings.

Proposed regulations under section 141 regardirg allocation and accounting
provisions.

Final regulations under section 143 regarding mortgage insurance fees.

4. Revenue procedure under section 143 regarding average area purchase
price.
5.

Guidance on UBOR-based swap transactions.

Guidance on arbitrage.

7. Final regulations under section 1397E regarding qualified zone academy
bonds.

Additional PGP Projects:
8.

Guidance under section 142 as amended by the American Jobs Creation
Act of 2004 regarding the Brownfields demonstration program.

APPENDIX - Regularly Scheduled Publications
JULY 2004
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42, 382, 1274, 1288 and
7520.
• PUBLISHED 7/6/2004 in IRB 2004-27 as REV. RUL. 2004-66

Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in July 2004.
• PUBLISHED 7/26/2004 in IRB 2004-30 as NOTICE 2004-51
(re/eased 717/2004)

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.
• PUBLISHED 8/9/2004 in IRS 2004-32 as REV. RUL. 2004-81

AUGUST 2004

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382, 1274, 1288 and
7520.
• PUBLISHED 8/91.2004 in IRB 2004-32 as REV. RUL. 2004-84

Revenue procedure providing the amounts of unused housing credit
carryover allocated to qualified states under section 42(h )(3)(0) for the
calendar year.
• PUBLISHED 8123/2004 ;n IRS 2004-34 as REV. PROC.2004-52

Notice providing the inflation adjustment factor to be used in determining the
enhanced oil recovery credit under section 43 for tax years beginning in the
calendar year.
• PUBLISHED 7126/2004 in IRB 2004-30 as NOTICE 2004-49

Notice providing the applicable percentage to be used in determining
percentage depleting for marginal properties under section 613A for the
calendar year.
• PUBLISHED 7/26/2004 in IRS 2004-30 as NOTICE 2004-48

Revenue ruling setting forth the terminal charge and the standard industry
fare level (SIFL) cents-per-mile rates for the second half of 2004 for use in
valuing personal flights on employer-provided aircraft.
• PUBLISHED 9/13/2004 in IRB 2004-37 as REV. RUL. 2004-70

Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in August 2004.
• PUBLISHED 8/30/2004 in IRB 2004·35 as NOTICE 2004.56
(released 814/2004)

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.
• PUBLISHED 8/30/2004 in IRB 2004·35 as REV. RUL. 2004·91

SEPTEMBER 2004

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382, 1274, 1288 and
7520.
• PUBLISHED 91112004 in IRB 2004-36 as REV. RUL. 2004-69

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low·income buildings or interests therein
during the period July through September 2004.
• PUBLISHED 8/23/2004 in IRB 2004·34 as REV. RUL. 2004-89

Revenue ruling under section 6621 regarding the applicable interest rates
for overpayments and underpayments of tax for the period October through
December 2004.
• PUBLISHED 9/13/2004 in IRB 2004-37 as REV. RUL. 2004-92
(released 8/30/2004)

Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in September
2004.
• PUBLISHED 10/4/2004 in IRS 2004-40 as NOTICE 2004·60
(released 9/312004)

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.
• PUBLISHED 9/1312004 in IRB 2004-37 as REV. RUL. 2004-93

Revenue procedure under section 62 regarding the deduction and deemed
substantiation of federal standard mileage amounts.
• PUBLISHED 12/6/2004 in IRB 2004-49 as REV. PROC. 2004-64
(released 11/17/2004)

Revenue procedure under section 62 regarding the deduction and deemed
substantiation of federal travel per diem amounts.
• PUBLISHED 10/18/2004 in IRB 2004-42 as REV. PROC. 2004-60
(released 10/1/2004)

Update of Notice 2002-62 to add approved applicants for designated private
delivery service status under section 7502(f). Will be published only if any
new applicants are approved.
• WILL BE PUBLISHED 12/27/2004 in IRS 2004-52 as NOTICE 2004-83

OCTOBER 2004

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382,1274,1288 and
7520.
• PUBLISHED 10/12/2004 in IRB 2004-41 as REV. RUL. 2004-96

Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in October
2004.
• PUBLISHED 10125/2004 in IRB 2004-43 as NOTICE 2004-69
(released 10/6/2004)

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.
• PUBLISHED 11/1/2004 in IRB 2004-44 as REV. RUL. 2004-101

Revenue procedure under section 1 and other sections of the Code
regarding the inflation adjusted items for 2005.
• PUBLISHED 12/13/2004 in IRB 2004-50 as REV. PROC. 2004-71
(released 11/19/2004)

Revenue procedure providing the loss payment patterns and discount
factors for the 2004 accident year to be used for computing unpaid losses
under section 846.
• PUBLISHED 12/612004 in IRB 2004-49 as REV. PROC. 2004-69

Revenue procedure providing the salvage discount factors for the 2004
accident year to be used for computing discounted estimated salvage
recoverable under section 832 .
• PUBLISHED 12/6/2004 in IRS 2004-49 as REV. PROC. 2004-70

Update of Rev. Proc. 2004-13 listing the tax deadlines that may be
extended by the Commissioner under section 7508A in the event of a
Presidentially-declared disaster or terrorist attack.

NOVEMBER 2004
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382, 1274, 1288 and
7520.
• PUBLISHED 11/8/2004 in IRB 2004-45 as REV. RUL. 2004-102

Revenue ruling providing the "base period T-Bill rate" as required by section
995(f)(4).
• PUBLISHED 11/1/2004 in IRB 2004-44 as REV. RUL. 2004-99

Revenue ruling setting forth covered compensation tables for the 2005
calendar year for determining contributions to defined benefit plans and
permitted disparity.
• PUBLISHED 11/15/2004 in IRS 2004-46 as REV. RUL. 2004-104

Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in November
2004.
• PUBLISHED 11/22{2004 in IRS 2004-47 as NOTICE 2004-77
(released 11/5/2004)

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use In valuing inventories.
• PUBLISHED 11/29/2004 in IRB 2004-48 as REV. RUL. 2004·105

Update of Rev. Proc. 2003-77 regarding adequate disclosure for purposes
of the section 6662 substantial understatement penalty and the section
6694 preparer penalty.
• PUBLISHED 12120/2004 in IRB 2004-51 as REV. PROC. 2004-73

News release setting forth cost-of living adjustments effective January 1.
2005, applicable to the dollar limits on benefits under qualified defined
benefit penSion plans and other provisions affecting certain plans of
deferred compensation.
• PUBLISHED 11/15/2004 in IRB 2004-46 as NOTICE 2004-72
(released 10/20/2004 as IR-2004-127)

DECEMBER 2004
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382,1274, 1288 and
7520.

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein
during the period October through December 2004.

Revenue ruling under section 6621 regarding the applicable interest rates
for overpayments and underpayments of tax for the period January through
March 2005.
? PUBLISHED 12/20/2004 in IRS 2004-51 as REV. RUL. 2004-111
(released 12/2/2004)

Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in December
2004.
? PUBLISHED 12120/2004 in IRB 2004-51 as NOTICE. 2004-82
(released 12/3/2004)

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.

Revenue procedure setting forth, pursuant to section 1397E, the maximum
face amount of Qualified Zone Academy Bonds that may be issued for each
state during 2005.
? WILL BE PUBLISHED 12/27/2004 in IRS 2004-52 as REV. PROC.
2004-74
(released 12110/2004)

Federal Register notice on Railroad Retirement Tier 2 tax rate.
? PUBLISHED 12/7/2004 in FR as FRNT REG-161713-04.

JANUARY 2005
1.

Revenue procedure updating the procedures for issuing private letter
rulings, determination letters, and information letters on specific issues
under the jurisdiction of the Chief Counsel.
• WILL BE PUBLISHED 1/3/2005 in IRB 2005-1 as REV. PROC. 2005-1

Revenue procedure updating the procedures for furnishing technical advice,
including technical expedited advice, to certain IRS offices. in the areas
under the jurisdiction of the Chief Counsel.
• WILL BE PUBLISHED 1/3/2005 in IRS 2005-1 as REV. PROC. 2005-2

Revenue procedure updating the previously published list of "no-rule" issues
under the jurisdiction of certain Associates Chief Counsel other than the
Associate Chief Counsel (International) on which advance letter rulings or
determination letters will not be issued.

• WILL BE PUBLISHED 1/3/2005 in IRB 2005-1 as REV. PROC. 2005-3
4.

Revenue procedure updating the previously published list of "no-rule" issues
under the jurisdiction of the Associate Chief Counsel (International) on
which advance leUer rulings or determination letters will not be issued.
• WILL BE PUBLISHED 1/3/2005 in IRB 2005-1 as REV. PROC. 2005-7

Revenue procedure updating procedures for furnishing letter rulings,
general information letters, etc. in employee plans and exempt organization
matters relating to sections of the Code under the jurisdiction of the Office
ofthe Commissioner. Tax Exempt and Government Entities Division.
• WILL BE PUBLISHED 1/3/2005 in IRS 2005-1 as REV. PROC. 2005-4
Revenue procedure updating procedures for furnishing technical advice in
employee plans and exempt organization matters under the jurisdiction of
the Commissioner, Tax Exempt and Government Entities Division.
• WILL BE PUBLISHED 1f3/2005 in IRB 2005-1 as REV. PROC. 2005-5

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382. 1274, 1288 and
7520.

Revenue ruling setting forth the prevailing state assumed interest rates
provided for the determination of reserves under section 807 for contracts
issued in 2004 and 2005.

Revenue ruling providing the dollar amounts, increased by the 2004 inflation
adjustment, for section 1274A.
• PUBLISHED 11/22/2004 in IRB 2004-47 as REV. RUL. 2004·107

10. Revenue ruling setting forth the amount that section 7872 permits a
taxpayer to lend to a qualified continuing care facility without incurring
imputed interest, adjusted for inflation.
• PUBLISHED 11/22/2004 in IRB 2004-47 as REV. RUL. 2004-108

11. Revenue procedure providing procedures for limitations on depreciation
deductions for owners of passenger automobiles first placed in service
during the calendar year; amounts to be included in income by lessees of
passenger automobiles first leased during the calendar year; and the
maximum allowable value of employer-provided automobiles first made
available to employees for personal use in the calendar year.
12. Revenue procedure providing the domestic assetlliability percentages and
the domestic investment ~eld percentages for taxable years beginning after
December 31.2004, for foreign companies conducting insurance business
in the U.S.

13. Revenue procedure updating procedures for issuing determination letters on
the qualified status of employee plans under sections 401 (a), 403(a), 409,
and 4975 .
• Will BE PUBLISHED 1/3/2005 in IRB 2005-1 as REV. PROC. 2005-6
14. Revenue procedure updating the user fee program as it pertains to requests
for letter rulings, determination letters, etc. in employee plans and exempt
organizations matters under the jurisdiction of the Office of the
Commissioner, Tax Exempt and Government Entities Division.
• WILL BE PUBLISHED 1/3/2005 in IRB 2005-1 as REV. PROC. 2005-8
15. Notice setting forth the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in January
2005.
16. Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.
FEBRUARY 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382,1274,1288 and
7520.

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.

MARCH 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42, 382, 1274, 1288 and
7520.

Notice providing resident population of the states for determining the
calendar year state housing credit ceiling under section 42(h}, the private
activity bond volume cap under section 146, and the qualified public
educational facility bond volume cap under section 142(k).

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein
during the period January through March 2005.

Revenue ruling under section 6621 regarding the applicable interest rates
for overpayments and underpayments of tax for the period April through
June 2005.

Revenue ruling setting forth the terminal charge and the standard industry
fare level (SIFL) cents-per-mile rates for the first half of 2005 for use in
valuing personal flights on employer-provided aircraft.

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.

Notice providing a tentative determination under section 809 of the
differential earnings rate for 2004 for use by mutual life insurance
companies to compute their income tax liabilities for 2004.
APRIL 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42, 382, 1274, 1288 and
7520.

Revenue ruling providing the average annual effective interest rates
charged by each Farm Credit Bank District.

Notice providing the inflation adjustment factor, nonconventional fuel source
credit, and reference price for the calendar year that determines the
availability of the credit for producing fuel from a nonconventional source
under section 29.

Revenue procedure providing a current list of countries and the dates those
countries are subject to the section 911 (d)(4) waiver and guidance to
individuals who fail to meet the eligibility requirements of section 911 (d)(1)
because of adverse conditions in a foreign country.

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.

MAY 2005

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382,1274,1288 and
7520.

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.

Revenue procedure providing guidance for use of the national and area
median gross income figures by issuers of qualified mortgage bonds and
mortgage credit certificates in determining the housing cosUincome ratio
under section 145.

JUNE 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates
for the current month for purposes of sections 42,382,1274,1288 and
7520.

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein
during the period April through June 2005.

Revenue ruling under section 6621 regarding the applicable interest rates
for overpayments and underpayments of tax for the period July through
September 2005.

Notice providing the calendar year inflation adjustment factor and reference
prices for the renewable electricity production credit under section 45.

Notice setting forth the weighted average interest rate and the resulting
permisSible range of interest rates used to calculate current liability and to
determine the required contribution for plan years beginning in June 2005.

Revenue ruling under section 472 providing the Bureau of Labor Statistics
price indexes that department stores may use in valuing inventories.

JS-2164: U.S. TrcMUIY Designates Two Individuals with Ties total Qaida, UBL<B...

Page 1 on

P'{LSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
December 21.2004
JS-2164
U.S. Treasury Designates Two Individuals with
Ties to al Qaida, UBl
Former BIF leader and al-Qaida Associate

Named Under E.O. 13224
The U.S Department of the Treasury today announced the designation of Adel
Abdul Jalil Batterjee and Saad Rashed Mohammad al-Faqih for providing financial
and material support to al Qaida and Usama bin Laden (UBL).
The U.S. is submitting both names to the United Nations 1267 Committee, which
will consider adding them to the consolidated list of terrorists tied to al Qaida, UBl
and the Taliban. Batterjee and al-Faqih are not linked \0 each other.
Today's action was taken pursuant to Executive Order 13224. The United States
has now designated 396 individuals and entities as terrorists. their financiers or
facilitators since September 2001. In addition. the global community has frozen
over $144 million in terrorist-related assets.
Adel Abdul Jalil Batterjee served as the Executive Director and a member of the
Board of Directors of Benevolence International Foundation (BIF). which was
designated as a Specially Designated Global Terrorist (SDGT) by the Treasury in
November 2002 for its support to al Qaida and UBL.
"Adel Batterjee has ranked as one of the world's foremost terrorist financiers, who
employed his private wealth and a network of charitable fronts to bankroll the
murderous agenda of al Qaida. A worldwide asset freeze. including in his home
country of Saudi Arabia. will deal a serious blow to this key terrorist facilitator." said
Stuart Levey, Treasury's Under Secretary for the Office of Terrorism and Financial
Intelligence (TFI).
In the late 1980s. Batterjee founded the precursor to BIF, Lajnat ai-Birr al-Islamiah
(lBI), in Saudi Arabia and Pakistan. LBI provided financial and operational support
to mujahideen elements in Afghanistan and around the world. including fighters
associated with UBL and Gulbuddin Hekmatyer. who was named a SDGT by the
Treasury on February 18.2003. LSI was affiliated with Maktab AI-Khidamat (MK),
which was co-founded and financed by UBL and is the precursor organization of al
Qalda. LBI later joined al Qaida upon the dissolution of MK.
In the early 19905. lSI began operating under the name Benevolence International
Foundation (BIF) in an effort to widen its appeal to the general public and increase
its credibility with other governments. BIF and LBI remained one organization with
interchangeable assets under Batterjee's control.
In 1993, Batterjee incorporated BIF in the United States. where it also provided
financial and operational support to mujahideen fighters worldwide, including
members of al Qaida in Afghanistan, the Sudan, Bosnia-Herzegovina and
Chechnya. At one paint. UBl confirmed to an associate that BIF was one of the
non-governmental organizations providing funds to al Qaida,
According to information available to the U.S. Government. it was around that time
that a BIF employee in the Sudan traveled to Saudi Arabia attempting to meet
Batterjee. Instead. the employee reported he was detained and questioned by
Saudi authorities regarding BIF links to UBL. Once released, he returned to the
Sudan where he met with UBl and informed him of his detainment. As a result. BIF
operations were curtailed for a period of time.

http://wwW..treas.gov/press/releases/js2164.htm

11312005

JS-2164: U.S. TrcaslllY Designates Two Individuals with Ties to al Qaida, UBL<B...

Page 2 of 3

Batterjee subsequently resigned as Director of SIF and personally selected UBL
confidant Enaam Arnaout to serve as the organization's head. Documents obtained
by the U.S. Government demonstrate that Arnaout, while employed with LSI and
BIF, worked with members of al Qaida to procure weapons for use in al Oaida
training camps. While employed by Batterjee at LBI, Arnaout reported directly to
Ba\terjee, which was outside the usual chain of command.
Batterjee remained active in BIF despite tlaving officially reSigned as Director.
EVidence shows that Arnaout made an effort to conceal BatterJee's continued
involvement ill BIF. In 2002, when Arnaout learned that US authorities were
scrutinizing SIF's activities, he warned Batterjee through an intermediary against
transferring funds to any BIF offices.
EVidence of BIF's lies to al Oaida surfaced in March 2002 searches by Bosnian
authonties of the organization's Sarajevo offices These searches uncovered
numerous handWritten documents detailing the origin and history of the al Qaida
organization. Among the recovered files was a copy of a 1988 handwritten draft
listing wealthy finanCiers of UBL's mUJahideen operations in Afghanlst<ln, referred to
within al Oaida as the "Golden Chain."
ThiS list contains 20 names with a parenthetical after each name, likely Indicating
the person who received funds from the specified donor. "Usama" appears after
seven of the listings and "Baterji" appears after an addilional SIX listings.
Also uncovered from the Bosnian raid were photographs of Arnaout with UBL and
an administrative diagram of UBL's close associates, along With cover names and
aSSignments within al Qalda of mujahideen trained in Afghanistan.
In October 2002, Arnaout was indicted In the United States for operating BIF as a
racketeering enterpnse and providing material support to organizations, including al
Oaida, that are engaged In Violent actiVities. Batterjee was named as an unindicted co-conspirator in the Indictment. On February 10, 2003, Arnaout pled guilty
to criminal racketeering conspiracy for diverting BIF funds to pay for supplies to
arrned jihadists in Bosnia and Chechnya.

Identifying Information
ADEL ABDUL JALIL BATTERJEE
AKAs:
Adel Abdul Jalil Batarjee
'Add AI-Battarjee
Adel Batterjee
'AdiiAbd al Jalil Batarji
DOB:
POB:

Nationality:
Address:

July 1,1946
Jeddah, Saudi Arabia
Saudi Arabian
2 Helmi Kutbi Street, Jeddah. Saudi Arabia

Saad Rashed Mohammad al-Faqlh has maintained associations with the al Oaida
network since the mld-1990s, Including an individual associated With the 1998 East
Africa embassy bombings.
AI·Faqih has had contact with both UBL and Khaled al Fawwaz, who acted as
UBL's de facto representative In the UK According to informalion available to the
U.S. Government, al-Faqih and al Fawwaz shared an office in the late 19905, and
al-Faqih worked with and provided assistance to al Fawwaz, who served as the
intermediary between UBL and al-Faqih.
Following the 1998 East African embassy bombings, al Fawwaz was arrested in the
U~lted Kingdom under an extradition request from the United States. At the U.S.
trial of the East African embassy bombers, prosecutors provided evidence that alFaqih paid for a satellite phone that al Fawwaz passed on to UBL, wtlO allegedly
used it to help carry out the attacks.
According to information available to the US. Government, al-Faqih was also
associated with al Qaida member and fugitive Abu Musab al-Suri, a.k.a. Mustafa
Nasar

http://www.treas.gov/press/releaSt);/js2164.htm

1/3/2005

JS-21 M: U.S. Treasury Designates Two Individuals with Ties to al Qaida, UBL<B...

Page 3 of 3

AI-Faqih is head of the non-governmental organization Movement for Islamic
Reform in Arabia (MIRA). Extremists utilize a website controlled by al-Faqih and
MIRA to post al Qaida-related statements and images While MIRA has Issued
disclaimers warning users to not attribute postings on MIRA message boards to al
Qaida, information available to the U.S. and UK Governments shows that the
messages are Intended to provide ideological and financial support to al-Qaida
affiliated networks and potential recruits AQ-affiliated author, Lewis Attlyatullah.
whose statements have been published on MIRA's website, has been directly
associated with AI-Faqih for several years
Identifier Information
SAAD RASHED MOHAMMAD AL-FAQIH
AKAs: Sa'd AL-FAQIH
Sa'ad AL-FAQIH
Saad ALFAGIH
Sa'd AL-FAQI
Sa ad AL FAQIH
Saad AL-FAGIH
Saad AL-FAKIH
Abu Uthman
DOS: February 1, 1957
POS: Zubair, Iraq
Nationality:
Saudi Arabian
Address:
London, UK
Batterjee and al-Faqih were designated today pursuant to Executive Order 13224
chiefly pursuant to paragraphs (d)(i) and (d)(il) based on a determination that they
assist in. sponsor or provide finanCial, matenal, or technological support for, or
financial or other services to or in support of, or are otherwise associated with,
persons listed as subject to E .0. 13224. The individuals also meet the stancard for
Inclusion In the UN 1267 Sanctions Committee's consolidated list because of the
support provided to UBL, al Qalda or the Taliban.
Inclusion on the 1267 Committee's list triggers international obligations on all
member countries, requirlllg them to freeze the assets and prevent the travel of
listed individuals and to block the sale of arms and military equipment. Publicly
identifying these supporters of terrorism is a critical part of the international
campaign to counter terrorism. Additionally, other organizations and Individuals are
put on notice that they are prohibited from doing business with them.
Blocklllg actions are critical to combating the financing of terrorism. When an
action is put into place, any assets eXisting in the formal financial system at the time
of the order are to be frozen. Blocking actions serve additional functions as well,
acting as a deterrent for non-designated parties who might otherwise be Willing to
finance terrorist activity; exposing terrorist financing "money trails" that may
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 move terrorist-related assets: forClIlg terrorists to use alternative, more costly and
higher-risk means of financing their actiVities; and engendering international
cooperation and compliance With obligations under UN Security Council
Resolutions.

http://www.treas.gov/pressirele3.Se.s/js2164.htm

1/3/2005

JS-2164: U.S. Treasury lJesignates Two individuals with Ties to al Qaida, UBL Fonner ElF... Page 1 of 4

PHLSS fi00M

FROM THE OFFICE OF PUBLIC AFFAIRS

December 21. 2004
JS-2164
U.S. Treasury Designates Two Individuals with
Ties to al Qaida, UBL
Former BIF Leader and al-Qaida Associate
Named Under E.O. 13224

The U.S Department of the Treasury today announced the designation of Adel
Abdul Jalil Batterjee and Saad Rashed Mohammad al-Faqih for providing financial
and material support to al Qaida and Usama bin Laden (UBL).
The U.S. is submitting both names to the United Nations 1267 Committee, which
will consider adding them to the consolidated list of terrorists tied to al Qaida, UBL
and the Taliban. Batterjee and al-Faqih are not linked to each other.
Today's action was taken pursuant to Executive Order 13224. The United States
has now deSignated 396 individuals and entities as terrorists, their financiers or
facilitators since September 2001. In addition, the global community has frozen
over $144 million in terrorist-related assets.
Adel Abdul Jalil Batte~ee served as the Executive Director and a member of the
Board of Directors of Benevolence International Foundation (BIF). which was
designated as a Specially DeSignated Global Terrorist (SDGT) by the Treasury in
November 2002 for its support to al Qaida and UBL.
"Adel Batterjee has ranked as one of the wor1d's foremost terrorist financiers, who
employed his private wealth and a network of charitable fronts to bankroll the
murderous agenda of al Qaida. A worldwide asset freeze, including in his home
country of Saudi Arabia, will deal a seriOUS blow to Ihis key terrorist facilitator: said
Stuart Levey, Treasury's Under Secretary for the Office of Terrorism and Financial
Intelligence {TFI}.
In the late 1980s, Batte~ee founded the precursor to BIF. Lajnat ai-Birr al-Islamiah
(LBI), in Saudi Arabia and Pakistan. LBI provided financial and operational support
to mujahideen elements in Afghanistan and around the world. including fighters
associated with UBL and Gulbuddin Hekmatyer, who was named a SDGT by the
Treasury on February 18, 2003. LBI was affiliated with Maktab AI-Khidamat (MK).
which was co-founded and financed by UBL and is the precursor organization of al
Qaida. LBllater joined al Qaida upon the dissolution of MK.
In the early 1990s, LBI began operating under the name Benevolence International
Foundation (BIF) in an effort to widen its appeal to the general public and increase
its credibility with other governments. BIF and LBI remained one organization with
interchangeable assets under Batte~ee's control.
In 1993, 8atte~ee incorporated BIF in the United States. where it also provided
financial and operational support to mujahideen fighters worldwide. including
members of al Qaida in Afghanistan. the Sudan, Bosnia-Herzegovina and
Chechnya. At one point, UBL confirmed to an associate that BIF was one of the
non-governmental organizations providing funds to al Qaida.
According to information available to the U.S. Government, it was around that time

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that a BIF employee in the Sudan traveled to Saudi Arabia attempting to meet
Batterjee. Instead, the employee reported he was detained and questioned by
Saudi authorities regarding BIF links to UBL. Once released, he returned to the
Sudan where he met with UBL and informed him of his detainment. As a result, BIF
operations were curtailed for a period of time.
Batterjee subsequently resigned as Director of BIF and personally selected UBL
confidant Enaam Arnaout to serve as the organization's head. Documents obtained
by the U.S. Government demonstrate that Arnaout, while employed with LBI and
BIF, worked with members of al Qaida to procure weapons for use in al Qaida
training camps While employed by Batterjee at LBI, Amaout reported directly to
Batterjee, which was outside the usual chain of command.
Batterjee remained active in BIF despite having officially resigned as Director.
Evidence shows that Arnaout made an effort to conceal Batterjee's continued
involvement in BIF. In 2002, when Arnaout learned that U.S. authorities were
scrutinizing B/F's activities, he warned Batterjee through an intermediary against
transferring funds to any B/F offices.
Evidence of BIF's ties to al Qaida surfaced in March 2002 searches by Bosnian
authorities of the organization's Sarajevo offices. These searches uncovered
numerous handwritten documents detailing the origin and history of the al Qaida
organization. Among the recovered files was a copy of a 1988 handwritten draft
listing wealthy financiers of UBL's mujahideen operations in Afghanistan. referred to
within al Qaida as the "Golden Chain."
This list contains 20 names with a parenthetical after each name, likely indicating
the person who received funds from the specified donor. "Usama" appears after
seven of the listings and "Baterji" appears after an additional six listings.
Also uncovered from the Bosnian raid were photographs of Arnaout with UBL and
an administrative diagram of UBL's close associates, along with cover names and
assignments within al Qaida of mujahideen trained in Afghanistan.
In October 2002, Amaout was indicted in the United States for operating BIF as a
racketeering enterprise and providing material support to organizations, including al
Qaida, that are engaged in violent activities. Batterjee was named as an unindicted co-conspirator in the indictment. On February 10, 2003, Arnaout pled guilty
to criminal racketeering conspiracy for diverting BIF funds to pay for supplies to
armed jihadists in Bosnia and Chechnya.

Identifying Information

ADEL ABDUL JALIL BATTERJEE
Adel Abdul Jali\ Batarjee
AKAs:
.Adil Al-Battarjee
Adel Batterjee
. Adil . Abd al Jalil Batarji

DaB:
POB:
Nationality:

Address:

July 1. 1946
Jeddah. Saudi Arabia
Saudi Arabian
2 Helmi Kutbi Street, Jeddah, Saudi Arabia

Saad Rashed Mohammad al-Faqih has maintained associations with the al Qaida
network since the mid-1990s, including an individual associated with the 1998 East
Africa embassy bombings.
AI-Faqih has had contact with both UBL and Khaled al Fawwaz,. who acted as
UBL's de facto representative in the U.K. According \0 mformatlon avaIlable to the
U.S. Government, al-Faqlh and al Fawwaz shared an office in the late 1990s, and
a/-Faqih worked with and provided assistance to 81 Fawwaz, who served as the
intermediary between UBL and al-Faqih.

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FO~lowin~ the 1998 East African embassy bombings, al Fawwaz was arrested in the
U!,lted Kingdom u~der an extradition request from the United States. At the U.S.
tnal of the East African embassy bombers. prosecutors provided evidence that alFaqih. paid for a satellite phone that al Fawwaz passed on to UBL. who allegedly
used It to help carry out the attacks.
ACcor~ing to !nfOrmat~on available to the U.S. Government, al-Faqih was also
associated with al Qalda member and fugitive Abu Musab al-Suri, a.k.a. Mustafa
Nasar

AI-Faqih is head of the non-governmental organization Movement for Islamic
Reform in Arabia (MIRA). Extremists utilize a website controlled by al-Faqih and
MIRA to post al Oaida-related statements and images. While MIRA has issued
disclaimers warning users to not attribute postings on MIRA message boards to al
Oaida. information available to the U.S. and UK Governments shows that the
messages are intended to provide ideological and financial support to al-Qaida
affiliated networks and potential recruits. AQ-affiliated author, Lewis Attiyatullah,
whose statements have been Published on MIRA's website, has been directly
associated with AI-Faqih for several years.
Identifier Information
SAAD RASHED MOHAMMAD AL-FAQIH
AKAs: Sa'd AL -F AQIH
Sa'ad AL-FAQIH
Saad ALFAGIH
Sa'd AL-FAOI
Saad AL FAQIH
Saad AL-FAGIH
Saad AL-FAKIH
Abu Uthman

DOB: February 1. 1957
POB: Zubair. Iraq
Nationality:
Address:

Saudi Arabian
London, UK

Batterjee and al-Faqih were designated today pursuant to Executive Order 13224
chiefly pursuant to paragraphs (d}(i) and (d)(ii) based on a determination that they
assist in, sponsor or provide financial, material, or technological support for. or
financial or other services to or in support of. or are otherwise associated with.
persons listed as subject to E.O. 13224. The individuals also meet the standard for
inclusion in the UN 1267 Sanctions Committee's consolidated list because of the
support provided to UBL, al Qaida or the Taliban.
Inclusion on the 1267 Committee's list triggers international obligations on all
member countries, requiring them to freeze the assets and prevent the travel of
listed individuals and to block the sale of arms and military equipment. Publicly
identifying these supporters of terrorism is a critical part of the international
campaign to counter terrorism. Additionally, other organizations and individuals are
put on notice that they are prohibited from doing business with them.
Blocking actions are critical to combating the financing of terrorism. When an
action is put into place, any assets eXisting in the formal financial system at the time
of the order are to be frozen. Blocking actions serve additional functions as well,
acting as a deterrent for non-designated parties who might otherwise be willing to
finance terrorist activity; exposing terrorist financing "money trails" that may
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 move terrorist-related assets; forCing terrorists to use alternative, more costly and
higher-risk means of financing their activities; and engenderin.9 interna~ional
cooperation and compliance with obligations under UN Security CounCil
Resolutions.

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JS-216)' Treasury and IRS Issue Final Regulations on Student Exception from Emp\... Page I of 1

..
FROM THE OFFICE OF PUBLIC AFFAIRS
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December 21,2004
JS-2165

Treasury and IRS Issue Final Regulations on
Student Exception from Employment Taxes
-- Today. the Department of the Treasury and Internal Revenue Service issued final
regulations on the exception from employment taxes for services provided by
students when those services are performed for a school, college or university The
regulations were issued earlier this year in proposed form and a hearing was held
on June 16.
Although wages paid to students for working for a school, college or university are
subject to income tax, a special exception excludes the wages for such services
from FICA and FUTA taxes if certain requirements are met. Questions have arisen
regarding whether the exception is available in situations where the employment
aspects of the student worker's relationship to the school, college or university
predominate, especially in the case of medical residents receiving training in
connection with the provision of health care services. These regulations address
those questions.
The final regulations provide standards for determining whether an employer
qualifies as a school, college, or university, and whether an employee is a studenl
for purposes of exception from employment taxes. The final regulations also
provide that full-time employees are not students for purposes of the exception, and
outline relevant factors to be taken into account in determining if the exception
applies to the services provided by other employees.
In addition to the final regulations, the Treasury and the IRS are issuing a revenue
procedure providing a safe harbor for the student FICA exception. The revenue
procedure replaces Rev. Proc. 98-16, 1998-1 C.B. 403; the new revenue procedure
modifies tile Rev. Proc. 98-16 safe harbor standards to be consistent with the final
regulations.

REPORTS

htto:llwww.treas_2ov/nress/releases/is.\?165.htm

1/3/2005

[4830-01-P]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TO 9167]
RIN 1545-8C81
Student FICA Exception
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final Regulation
SUMMARY: This document contains final regulations providing guidance
regarding the employment tax exceptions for student services. These
regulations affect schools, colleges, and universities and their employees.
DATES: Effective date: December 21,2004.
Applicability date: These regulations are applicable for services
performed on or after April 1, 2005.
FOR FURTHER INFORMATION CONTACT: John Richards of the Office of
Associate Chief Counsel (Tax Exempt and Government Entities), (202) 622-6040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:

Background
This document contains amendments to 26 CFR part 31 under sections
3121(b)(10) and 3306(c)(10)(8) of the Internal Revenue Code (Code). These
sections except from "employment" for Federal Insurance Contributions Act
(FICA) and Federal Unemployment Tax Act (FUTA) purposes, respectively,

service performed in the employ of a school, college, or university by a student
who is enrolled and regularly attending classes at such school, college, or
university. In addition, this document contains amendments to 26 CFR part 31
under section 3121(b)(2). This section excepts from employment for FICA
purposes domestic service performed in a local college club, or local chapter of a
college fraternity or sorority, by a student who is enrolled and is regularly
attending cases at a school, college, or university.
Proposed regulations under sectiors 3121(b)(2), 3121 (b)(10), and
3306(c)(10)(B) were published in the Federal Register on February 25, 2004 (69
FR 8604,2004-10 I.R.B. 571). Written and electroniC comments responding to
the notice of proposed rulemaking were received. A public hearing was held on
June 16, 2004. After consideration of all the comments, the proposed
regulations are adopted as amended by this Treasury decision. The revisions
are discussed below.

Explanation of Provisions and Summary of Comments
The final regulations provide rules for determining whether an organization
is a school, college, or university (SCU) and whether an employee is a student
for purposes of sections 3121(b}(10), 3121{b)(2). and 3306(c)(10)(8) of the
Code. Many comments were received on the proposed regulations and several
witnesses testified at the hearing which was held June 16, 2004. After
consideration of the comments and testimony, the Treasury department and the
IRS decided to make several significant changes described below.
1. School. College, or University

The exceptions from employment for student services apply only if the
employee is a student enrolled and regularly attending classes at a SCU. Under
the proposed regulations. whether an organization is a SCU is determined with
reference to the organization's primary function. An organization whose primary
function is to carry on educational activities qualifies as a SCU for purposes of
the student exceptions from employment.
A few commentators suggested that an organization, such as a teaching
hospital. that has embedded within it a division or function that carries on
educational activities should be treated as a SCU for purposes of the student
exceptions from employment.
The final regulations retain the primary function standard as described in
the proposed regulations. As discussed in the preamble to the proposed
regulations, the primary function standard is based upon the existing statutory
and regulatory language under section 3121(b)(10), as well as the legislative
history relating to the student exception from employment under section
3121(b)(10).
2. Enrolled and Regularly Attending Classes
The exceptions from employment for student services require that an
employee be "enrolled and regularly attending classes" in order to have the
status of a student. Under the proposed regulations, "a class is an instructional
activity led by a knowledgeable faculty member for identified students following
an established curriculum. u
Commentators requested clarification regarding whether an instructional
activity must be led by a regular faculty member in order to be considered a

class, or whether an activity led by an adjunct faculty member, graduate teaching
assistant, or other qualified individual hired to lead the activity could be
considered a class.
The final regulations clarify that a class is an instructional activity led by a
faculty member "or other qualified individua1' following an established curriculum.
Thus, an instructional activity led by an adjunct faculty member, graduate
assistant, or other qualified individual can qualify as a class for purposes of the
student exceptions from employment.
3. Student Status
The existing student FICA regulations provide that an employee whose
services are incident to and for the purpose of pursuing a course of study has the
status of a student. §31.3121(b)(10)-2(c). The proposed regulations provide that
in order for an employee's services to be considered incident to and for the
purpose of pursuing a course of study, the educational aspect of the relationship
between the employee and the employer, as compared to the service aspect,
must be predominant. Under the proposed regulations, if an employee is a
"career employee," then the service aspect of the employee's relationship with
the employer is considered predominant, and thus the employee's services are
not considered incident to and for the purpose of pursuing a course of study.
The proposed regulations provide that the following employees are considered
career empbyees: (1) employees who regularly perform services 40 hours or
more per week; (2) professional employees; (3) employees who receive certain
employment benefits; and (4) employees required to be licensed to work in the
field in which the employees are performing services. The IRS requested

comments on the criteria used to identify employees having the status of a career
employee.
Commentators expressed concern about using these criteria to make
certain employees automatically ineligible for the student FICA exception.
Rather, according to commentators, whether an employee's services are incident
to and for the purpose of pursuing a course of study should be based upon all the
relevant facts and circumstances.
The final regulations provide that the educational and service aspects of
an employee's relationship with the employer are generally evaluated for an
academic term based upon all the relevant facts and circumstances. Similar
criteria to those identified in the proposed regulations are described in the final
regulations as relevant factors, not dispositive criteria, in determining whether the
educational or service aspect of an employee's relationship with the employer is
predominant. Nevertheless, under the final regulations, if an employee is a ''fulltime employee," then the employee's services are not incident to and for the
purpose of pursuing a course of study. In addition, based upon comments

received, the criteria identified in the proposed regulations have been modified as
described below.
A. Full-Time Employee and Hours Worked
The proposed regulations provide that an employee who "regularly
performs services 40 hours or more per week" is a career employee, and is thus
ineligible for the student exception from employment. Commentators expressed
concern that the 40 hour criterion would be administratively impracticable
because it would be difficult to monitor an employee's actual hours worked during

an academic term. In addition, commentators expressed concern that the
meaning of "regularly" is unclear, making it difficult to assess the effect of
changes in hours worked from week to week. Commentators also requested
clarification on whether an employee's number of hours worked during academic
breaks is considered in determining whether the employee is eligible for the
student FICA exception.
The final regulations modify the hours worked criterion. The final
regulations provide that the services of a "full-time employee" are not incident to
and for the purpose of pursuing a course of study. Under the final regulations, a
full-time employee is an employee who is considered a full-time employee based
upon the employer's standards and practices, except that an employee whose
"normal work schedule is 40 hours or more per week" is considered a full-time
employee. This standard is intended to improve administrability for employers.
Whether an employee is a full-time employee based upon the employer's
standards and practices, or based upon the employee's normal work schedule,
should be determinable by employers at the start of an academic term, thus
reducing instances where an employee's status shifts from student to nonstudent during an academic term. An employee's normal work schedule does
not change, for example, based upon changes in work demands that are
unforeseen at the start of an academic term causing the employee to work
additional hours beyond his normal work schedule. In addition, time spent
performing services that have an educational or instructional aspect is
considered in determining an employee's normal work schedule. Finally, the final
regulations provide that an employee's work schedule during an academic break

is not considered in determining whether the employee's normal work schedule is
40 hours or more per week.
The final regulations provide that if an employee does not have the status
of a full-time employee, then the employee's normal work schedule and actual
number of hours worked per week are relevant factors in determining whether
the service aspect or educational aspect of the employee's relationship with the
employer is predominant. Thus, if an employee is normally scheduled to work 20
hours per week, but consistently works more than 40 hours per week, the
amount of time actually worked is taken into account in determining whether or
not the employee qualifies as a student.
B. Professional Employee and Licensure
1. Professional Employee
The proposed regulations provide that a "professional employee" is a
career employee, and is thus ineligible for the student exception from
employment. Under the proposed regulations, a professional employee is an
employee who performs work: (1) requiring knowledge of an advanced type in a
field of science or learning, (2) requiring the consistent exercise of discretion and
judgment, and (3) that is predominantly intellectual and varied in character.
Commentators expressed concern that the professional employee
criterion would inappropriately disqualify the services of many graduate research
and teaching assistants from eligibility for the student exceptions from
employment. Commentators maintained that graduate research and teaching
assistants are primarily students, and thus their services should not automatically

be ineligible for the student exceptions based upon the professional employee
criterion.
The final regulations provide that whether an employee is a professional
employee is a relevant factor, not a dispositive criterion, in evaluating the service
aspect of the employee's relationship with the employer. Under the final
regulations, if an employee has the status of a professional employee, then that
suggests the service aspect of the employee's relationship with the employer is
predominant. Whether a professional employee is a student will depend upon al
the facts and circumstances. Thus, under the final regulations, those graduate
assistants and other employees whose work is described under the professional
employee standard are not automatically ineligible for the student exception.
2. Licensure
The proposed regulations provide that an employee who is required to be
licensed under state or local law to work in the field in which the employee
performs services is a career employee, and is thus ineligible for the student
exception. The preamble to the proposed regulations requested comments on
the licensure criterion and whether this criterion should be further refined or
clarified.
Commentators expressed concern that the licensure criterion under the
proposed regulations is overly broad because it would cause employees licensed
for health and safety reasons, such as van drivers and life guards, to be ineligible
for student status.
Under the final regulations, an employee's licensure status is not a
dispositive criterion. Instead, the final regulations provide if an employee is a

professional employee, then whether the employee is licensed is a relevant
factor in determining whether the service aspect of the employee's relationship
with the employer is predominant. The final regulations provide that if an
employee has the status of a licensed, professional employee, then that fact
further suggests that the service aspect of the employee's relationship with the
employer is predominant. However, a worker who is a licensed, professional
employee could be considered a student based upon all the relevant facts and
circumstances.
C. Employment Benefits
The proposed regulations provide that an employee who is eligible to
receive certain employment benefits is considered a career employee, and is
thus ineligible for the student exception.
Commentators expressed concern that eligibility to receive employment
benefits should not disqualify an individual from the student exception.
Commentators noted that some state statutes make student employees eligible
for retirement and other benefits, meaning that student employees in those states
could not qualify as students under the proposed regulations. In addition,
commentators noted that many colleges and universities permit student
employees to make elective contributions to section 403(b) arrangements.
Under the proposed regulations, offering this benefit would prohibit student
employees from qualifying as students for purposes of the student exceptions
from employment.
The final regulations provide that eligibility to receive employment benefits
is a relevant factor, not a dispositive criterion, in determining whether the service

aspect of an employee's relationship with the employer is predominant. Thus, an
employee who is eligible for employment benefits can still qualify as a student for
purposes of the student exceptions from employment. In addition, the final
regulations provide that eligibility to receive health insurance benefits is not
considered in determining whether the service aspect is predominant, and
eligibility for benefits mandated by state or local law is given less weight in
determining whether the service aspect is predominant.
4. Effective Date

Commentators objected to the proposed effective date of February 25,
2004, asserti ng that it would take some time to adjust to the new rules set forth in
the proposed regulations. In response to these comments. the final regulations
are applicable with respect to services performed on or after April 1, 2005.
5. Revenue Procedure Replacing Rev. Proc.98-16
When the IRS issued the proposed regulations. it also issued Notice 200412 (2004-10 I.R.B. 556) suspending Rev. Proc. 98-16 (1998-1 C.B. 403) and
proposing to replace it with a revenue procedure that is consistent with the
proposed regulations. The IRS solicited comments on the proposed revenue
procedure. Comments were received and considered in conjunction with the
comments on the proposed regulations. The proposed revenue procedure has
been modified in response to comments, ard in order to provide guidance that is
consistent with the final regulations, is being issued in final form in Rev. Proc.
2005-11 (to be published in I.R.B. 2005-2) modifying and superseding Rev. Proc.
98-16. Rev. Proc. 2005-11 is applicable with respect to services performed on or

after April 1, 2005. Taxpayers may rely upon Rev. Proc. 98-16 with respect to
services performed prior to April 1, 2005.
Special Analyses

It has been determined that these final regulations are 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, In addition, because no collection of information is imposed on small
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply, and, therefore, a Regulatory Flexibility Analysis is not required.
Pursuant to section 7B05(f) of the Code, the proposed regulations preceding
these regulations were submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on the impact on small business.
Drafting Information

The principal author of these proposed regulations is John Richards of the
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CfR Part 31

Employment taxes and collection of income tax at source.
Adoption of Amendment to the Regulations

Accordingly, 26 CFR part 31 is amended as follows:
Part 31--EMPLOYMENT TAXES

Paragraph 1. The authority citation for part 31 continues to read in part,
as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 31.3121(b)(2)-1, paragraph (d) is revised to read as follows:
§ 31.3121(b)(2)-1 Domestic service performed by students for certain college

organizations.
*****

(d) An organization is a school. college, or university within the meaning
of section 3121(b)(2) if its primary function is the presentation offormal
instruction, it normally maintains a regular faculty and curriculum, and it normally
has a regularly enrolled body of students in attendance at the place where its
educational activities are regularly carried on. See section 170(b)( 1)(A)(ii) and
the regulations thereunder.
*****

Par. 3. Section 31.3121 (b)( 10)-2 is amended by:
1. Revising paragraphs (a), (b), (c) and (d).
2. RedeSignating paragraph (e) as (g).
3. Adding paragraphs (e) and (f).
The revisions and additions read as follows:
§ 31.3121(b)(10}-2 Services performed by certain students in the employ of a

school, college. or university, or of a nonprofit organization auxiliary to a school,
college, or university.
(a) General rule. (1) Services performed in the employ of a school,
college, or university within the meaning of paragraph (c) of this section (whether

or not the organization is exempt from income tax) are excepted from
employment, if the services are performed by a student within the meaning of
paragraph Cd) of this section who is enrolled and is regularly attending classes at
the school, college, or university.
(2) Services performed in the employ of an organiza tion which is(i) Described in section 509(a)(3) and §1.S09(a)-4;
(ii) Organized, and at all times thereafter operated, exclusively for the

benefit of, to perform the functions Of. or to carry out the purposes of a school,
college, or university within the meaning of paragraph (c) ofthis section; and
(iii) Operated, supervised. or controlled by or In connection with the

school. college, or university; are excepted from employment, if the services are
performed by a student who is enrolled and regula rly attending classes within the
meaning of paragraph (d) of this section at the school. college, or university. The
preceding sentence shall not apply to services performed in the employ of a
school. college, or university of a State or a political subdivision thereof by a
student referred to in section 218(c)(5) of the Social Security Act (42 U.S.C.
418(c)(5» if such services are covered under the agreement between the
Commissioner of Social Security and such State entered into pursuant to section
218 of such Act. For the definitions of ·operated, supervised, or controlled by".
"supervised or controlled in connection with", and "operated in connection with",
see paragraphs (g), (h). and (i), respectively, of §1.509(a}4.
(b) Statutory tests. For purposes of this section, If an employee has the
status of a student within the meaning of paragraph (d) of this section, the
amount of remuneration for services performed by the employee, the type of

services performed by the employee, and the place where the services are
performed are not material. The statutory tests are:
(1) The character of the organization in the employ of which the services
are performed as a school, college, or university within the meaning of paragraph
(c) of this section, or as an organization described in paragraph (a)(2) of this
section, and
(2) The status of the employee as a student enrolled and regularly
attending classes within the meaning of paragraph (d) of this section at the
school, col/ege, or university within the meaning of paragraph (c) of this section
by which the employee is employed or with which the employee's employer is
affiliated within the meaning of paragraph (a)(2) of this section.
(c) School, College, or University. An organization is a school. college, or
university within the meaning of section 3121(b)(10) if its primary function is the
presentation of formal instruction, it normally maintains a regular faculty and
curriculum, and it normally has a regularly enrolled body of students in
attendance at the place where its educational activities are regularly carried on.
See section 170(b)( 1)(A)(ii) and the regulations thereunder.
(d) Student Status-general rule. Whether an employee has the status of
a student performing the services shall be determined based on the relationship
of the employee with the organization employing the employee. In order to have
the status of a student, the employee must perform services in the employ of a
school, college, or university within the meaning of paragraph (c) of this section
at which the employee is enrolled and regularly attending classes in pursuit of a
course of study within the meaning of paragraphs (d)(1) and (2) of this section.

In addition, the employee's services must be incident to and for the purpose of
pursuing a course of study within the meaning of paragraph (d)(3) of this section
at such school, college, or university. An employee who performs services in the
employ of an affiliated organization within the meaning of paragraph (a)(2) of this
section must be enrolled and regularly attending classes at the affiliated school,
college, or university within the meaning of paragraph (c) of this section in pursuit
of a course of study within the meaning of paragraphs (d)(1) and (2) of this
section. In addition, the employee's services must be incident to and for the
purpose of pursuing a course of study within the meaning of paragraph (d)(3) of
this section at such school, college, or university.
(1) Enrolled and regularly attending classes. An employee must be
enrolled and regularly attending classes at a school, college, or university within
the meaning of paragraph (c) of this section at which the employee is employed
to have the status of a student within the meaning of section 3121 (b)(1 0). An
emplo~e is enrolled within the meaning of section 3121(b)(1 0) if the employee is

registered for a course or courses creditable toward an educational credential
described in paragraph (d)(2) of this section. In addition, the employee must be
regularly attending classes to have the status of a student. For purposes of this
paragraph (d)(1), a class is an instructional activity led by a faculty member or
other qualified individual hired by the school, college, or university within the
meaning of paragraph (c) of this section for identified students following an
established curriculum. Traditional classroom activities are not the sale means of
satisfying this requirement. For example, research activities under the
supervision of a faculty advisor necessary to complete the requirements for a

Ph.D. degree may constitute classes within the meaning of section 3121(b)(10).
The frequency of these and similar activities determines whether an employee
may be considered to be regularly attending classes.
(2) Course of study. An employee must be pursuing a course of study in
order to have the status of a student. Acourse of study is one or more courses
the completion of which fulfills the requirements necessary to receive an
educational credential granted by a school, college, or university within the
meaning of paragraph (c) of this section. For purposes of this paragraph, an
educational credential is a degree, certificate, or other recognized educational
credential granted by an organization described in paragraph (c) of this section.
A course of study also includes one or more courses at a school, college or
university within the meaning of paragraph (c) of this section the completion of
which fulfills the requirements necessary for the employee to sit for an
examination required to receive certification by a recognized organization in a
field.
(3) Incident to and for the purpose of pursuing a course of study. (i)
General rule. An employee's services must be incident to and for the purpose of
pursuing a course of study in order for the employee to have the status of a
student. Whether an employee's services are incident to and for the purpose of
pursuing a course of study shall be determined on the basis of the relationship of
the employee with the organization for which such services are performed as an
employee. The educational aspect of the relationship between the employer and
the employee, as compared to the service aspect of the relationship, must be
predominant in order for the employee's services to be incident to and for the

purpose of pursuing a course of study. The educational aspect of the
relationship is evaluated based on all the relevant facts and circumstances
related to the educational aspect of the relationship. The service aspect of the
relationship is evaluated based on all the relevant facts and circumstances
related to the employee's employment. The evaluation of the service aspect of
the relationship is not affected by the fact that the services performed by the
employee may have an educational, instructional, or training aspect. Except as
provided in paragraph (d)(3)(iii) of this section, whether the educational aspect or
the service aspect of an employee's relationship with the employer is
predominant is determined by considering all the relevant facts and
circumstances. Relevant factors in evaluating the educational and service
aspects of an employee's relationship with the employer are described in
paragraphs (d)(3)(iv) and (v) of this section respectively. There may be facts and
circumstances that are relevant in evaluating the educational and service aspects
of the relationship in addition to those described jn paragraphs (d)(3)(iv) and (v)
of this section.
(ii) Student status determined with respect to each academic term.
Whether an employee's services are incident to and for the purpose of pursuing
a course of study is determined separately with respect to each academic term.
If the relevant facts and circumstances with respect to an employee's relationship
with the employer change Significantly during an academic term, whether the
employee's services are incident to and for the purpose of pursuing a course of
study is reevaluated with respect to services performed during the remainder of
the academic term.

(iii) Full-time employee. The services of a full-time employee are not
incident to and for the purpose of pursuing a course of study. The determination
of whether an employee is a full-time employee is based on the employer's
standards and practices, except regardless of the employer's classification of the
employee, an employee whose normal work schedule is 40 hours or more per
week is considered a full-time employee. An employee's nonnal work schedule
is not affected by increases in hours worked caused by work demands
unforeseen at the start of an academic term. However, whether an employee is
a full-time employee is reevaluated for the remainder of the academic term if the
employee changes employment positions with the employer. An employee's
work schedule during academic breaks is not considered in determining whether
the employee's normal work schedule is 40 hours or more per week. The
determination of an employee's normal work schedule is not affected by the fact
that the services performed by the employee may have an educational,
instructional, or training aspect.
(iv) Evaluating educational aspect. The educational aspect of an
employee's relationship with the employer is evaluated based on all the relevant
facts and circumstances related to the educationa I aspect of the relationship.
The educational aspect of an employee's relationship with the employer is
generally evaluated based on the employee's course workload. Whether an
employee's course workload is sufficient in order for the employee's employmert
to be incident to and for the purpose of pursuing a course of study depends on
the particular facts and circumstances. A relevant factor in evaluating an
employee's course workload is the employee's course workload relative to a full-

time course workload at the school, college or university within the meaning of
paragraph (c) of this section at which the employee is enrolled and regularly
attending classes.
(v) Evaluating service aspect. The service aspect of an employee's
relationship with the emplo yer is evaluated based on the facts and circumstances
related to the employee's employment. Services of an employee with the status
of a full-time employee within the meaning of paragraph (d)(3)(iii) of this section
are not incident to and for the purpose of pursuing a course of study. Relevant
factors in evaluating the service aspect of an employee's relationship with the
employer are described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
(A) Normal work schedule and hours worked. If an employee is not a fulltime employee within the meaning of paragraph (d)(3)(iii) of this section, then the
employee's normal work schedule and number of hours worked per week are
relevant factors in evaluating the service aspect of the employee's relations hip
with the employer. As an employee's normal work schedule or actual number of
hours worked approaches 40 hours per week, it is more likely that the service
aspect of the employee's relationship with the employer is predominant. The
determination of an employee's normal work schedule and actual number of
hours worked is not affected by the fact that some of the services performed by
the employee may have an educational, instructional, or training aspect.
(8) Professional employee.

ill If an employee has the status of a professional employee, then that
suggests the service aspect of the employee's relationship with the employer is
predominant. A professional employee is an employee--

ill Whose primary duty consists of the performance of work requiring
knowledge of an advanced type in a field of science or learning
customarily acquired by a prolonged course of specialized intellectual
instruction and study, as distinguished from a general academic
education, from an apprenticeship, and from training in the performance of
routine mental, manual, or physical processes;

ill) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(iii) Whose work is predominantly intellectual and varied in character (as

opposed to routine mental, manual, mechanical, or physical work) and is
of such character that the output produced or the result accomplished
cannot be standardized in relation to a given period of time.

ill

Licensed, professional employee. If an employee is a licensed,

professional employee, then that further suggests the service aspect of
the employee's relationship with the employer is predominant. An
employee is a licensed, professional employee if the employee is required
to be licensed under state or local law to work in the field in which the
employee performs services and the employee is a professional employee
within the meaning of paragraph (d)(3)(v)(8)(1) of this section.
(C) Employment Benefits. Whether an employee is eligible to receive
one or more employment benefits is a relevant factor in evaluating the service
aspect of an employee's relationship with the employer. For example, eligibility
to receive vacation, paid holiday, and paid sick leave benefits; eligibility to
participate in a retirement plan or arrangement described in sections 401(a),

403(b). or 457(a); or eligibility to receive employment benefits such as reduced
tuition (other than qualified tuition reduction under section 117{d)(5) provided to a
teaching or research assistant who is a graduate student). or benefits under
sections 79 (life insurance). 127 (qualified educational assistance), 129
(dependent care assistance programs). or 137 (adoption assistance) suggest
that the service aspect of an employee's relationship with the employer is
predominant. Eligibility to receive health insurance employment benefits is not
considered in determining whether the service aspect of an employee's
relationship with the employer is predominant. The weight to be given the fact
that an employee is eligible for a particular employment benefit may vary
depending on the type of benefit. For example, eligibility to participate in a
retirement plan is generally more significant than eligibility to receive a
dependent care employment benefit. Additional weight is given to the fact that
an employee is eligible to receive an employment benefit if the benefit is
generally provided by the employer to employees in positions generally held by
non-students. Less weight is given to the fact that an employee is eligible to
receive an employment benefit if eligibility for the benefit is mandated by state or
loeallaw.
(e) Examples. The following examples illustrate the principles of
paragraphs (a) through (d) of this section:
Example 1. (i) Employee C is employed by State University T to provide
services as a clerk in T's administrative offices, and is enrolled and regularly
attending classes at T in pursuit of a B.S. degree in biology. C has a course
workload during the academic term which constitutes a full-time course workload
at T. C is considered a part-time employee by T during the academic term, and
C's normal work schedule is 20 hours per week, but occasionally due to work
demands unforeseen at the start of the academic term C works 40 hours or more

during a week. C is compensated by hourly wages, and receives no other
compensation or employment benefits.
(ii) In this example, C is employed by T, a school, college, or university

within the meaning of paragraph (c) of this section. C is enrolled and regularly
attending classes at T in pursuit of a course of study. C is not a full-time
employee based on T's standards, and C's normal work schedule does not
cause C to have the status of a full-time employee, even though C may
occasionally work 40 hours or more during a week due to unforeseen work
demands. C's part-time employment relative to C's full-time course workload
indicates that the educational aspect of C's relationship with T is predominant.
Additional facts supporting this conclusion are that C is not a professional
employee, and C does not receive any employment benefits. Thus, C's services
are incident to and for the purpose of pursuing a course of study. Accordingly,
C's services are excepted from employment under section 3121(b)(10).
Example 2. (i) Employee D is employed in the accounting department of
University U, and is enrolled and regularly attending classes at U in pursuit of an
M.B.A. degree. 0 has a course workload which constitutes a half-time course
workload at U. D is considered a full-time employee by U under U's standards
and practices.
(ii) In this example, D is employed by U, a school, college, or university
within the meaning of paragraph (c) of this section. In addition, D is enrolled and
regularly attending classes at U in pursuit of a course of study. However,
because D is considered a full-time employee by U under its standards and
practices, D's services are not incident to and for the purpose of pursuing a
course of study. Accordingly, D's services are not excepted from employment
under section 3121(b)(10).
Example 3. (i) The facts are the same as in Example 2, except that D is
not considered a full-time employee by U, and D's normal work schedule is 32
hours per week. In addition, D's work is repetitive in nature and does not require
the consistent exercise of discretion and judgment, and is not predominantly
intellectual and varied in character. However, D receives vacation, sick leave,
and paid holiday employment benefits, and 0 is eligible to participate in a
retirement plan maintained by U described in section 401(a).
(ii) In this example, D's half-time course workload relative to D's hours
worked and eligibility for employment benefits indicates that the service aspect of
D's relations hip with U is predominant, and thus D's services are not incident to
and for the purpose of pursuing a course of study. Accordingly, D's services are
not excepted from employment under section 3121(b)(10).
Example 4. (i) Employee E is employed by University V to provide patient
care services at a teaching hospital that is an unincorporated division of V.
These services are performed as part of a medical residency program in a

medical specialty sponsored by V. The residency program in which E
participates is accredited by the Accreditation Counsel for Graduate Medical
Education. Upon completion of the program, E will receive a certificate of
completion, and be eligible to sit for an examination required to be certified by a
recognized organization in the medical specialty. E's normal work schedule,
which includes services having an educational, instructional, or training aspect, is
40 hours or more per week.
(ii) In this example, E is employed by V, a school, college, or university
within the meanirg of paragraph (c) of this section. However, E's normal work
schedule calls for E to perform services 40 or more hours per week. E is
therefore a full-time employee, and the fact that some of E's services have an
educational, instructional, or training aspect does not affect that conclusion.
Thus, E's services are not incident to and for the purpose of pursuing a course of
study. Accordingly, E's services are not excepted from employment under
section 3121 (b)(10) and there is no need to consider other relevant factors, such
as whether E is a professional employee or whether E is eligible for employment
benefits.
Example 5. (i) Employee F is employed in the facilities management
department of University W. F has a B.S. degree in engineering, and is
completing the work experience required to sit for an examination to become a
professional engineer eligible for licensure under state or local law. F is not
attending classes at W.
(ii) In this example, F is employed by W, a school, college, or university
within the meaning of paragraph (c) of this section. However, F is not enrolled
and regularly attending classes at W in pursuit of a course of study. F's work
experience required to sit for the examination is not a course of study for
purposes of paragraph (d)(2) of this section. Accordingly. F's services are not
excepted from employment under section 3121(b)(10).
Example 6. (i) Employee G is employed by Employer X as an apprentice
in a skilled trade. X is a subcontractor providing services in the field in which G
wishes to specialize. G is pursuing a certificate in the skilled trade from
Community College C. G is performing services for X pursuant to an internship
program sponsored by C under which its students gain experience, and receive
credit toward a certificate in the trade.
(ii) In this example, G is employed by X. X is not a school, college or
university within the meaning of paragraph (c) of this section. Thus, the
exception from employment under section 3121(b)(10) is not available with
respect to G's services for X.
Example 7. (i) Employee H is employed by a cosmetology school Y at
which H is enrolled and regularly attending classes in pursuit of a certificate of
completion. V's primary function is to carry on educational activities to prepare

its st~dents t~ work in the fi~ld of cosmetology. Prior to issuing a certificate, Y
requ.lres that Its students garn experience in cosmetology services by performing
services for the general public on V's premises. H is scheduled to work and in
fact works significantly less than 30 hours per week. H's work does not require
knowledge of an advanced type in a field of science or learning. nor is it
predominantly intellectual and varied in character. H receives remuneration in
the form of hourly compensation from Y for providing cosmetology services to
clients of Y, and does not receive any other compensation and is not eligible for
employment benefits provided by Y.
(ii) In this example, H is employed by Y, a school, college or university
within the meaning of paragraph (c) of this section, and is enrol/ed and regularly
attending classes at Y in pursuit of a course of study. Factors indicating the
educational aspect of H's relationship with Y is predominant are that H's hours
worked are significantly less than 30 per week, H is not a professional employee,
and H is not eligible for employment benefits. Based on the relevant facts and
circumstances, the educational aspect of H's relationship with Y is predominant.
Thus, H's services are incident to and for the purpose of pursuing a course of
study. Accordingly, H's services are excepted from employment under section
3121(b)(10).
Example 8. (i) Employee J is a graduate teaching assistant at University
Z. J is enrolled and regularly atte nding classes at Z in pursuit of a graduate
degree. J has a course workload which constitutes a full-time course workload at
Z. J's normal work schedule is 20 hours per week, but occasionally due to work
demands unforeseen at the start of the academic term J works more than 40
hours during a week. J's duties include grading quizzes and exams pursuant to
guidelines set forth by the professor, providing class and laboratory instruction
pursuant to a lesson plan developed by the professor, and preparing laboratory
equipment for demonstrations. J receives a cash stipend and employment
benefits in the form of eligibility to make elective employee contributions to an
arrangement described in section 403(b). In addition, J receives qualified tuition
reduction benefits within the meaning of section 117(d)(5) with respect to the
tuition charged for the credits earned for being a graduate teaching assistant.
(ii) In this example, J is employed by Z, a school, college, or university
within the meaning of paragraph (c) of this section, and is enrolled and regularly
attending classes at Z in pursuit of a course of stUdy. J's full-time course
workload relative to j's normal work schedule of 20 hours per week indicates that
the educational aspect of J's relationship with Z is predominant. In addition, J is
not a professional employee because J' S work does not require the consistent
exercise of discretion and judgment in its performance. On the other hand, the
fact that J receives employment benefits in the form of eligibility to make elective
employee contributions to an arrangement described in section 403(b) indica~es
that the employment aspect of J's relationship wi~h Z is predomin~nt. B~lancl.ng
the relevant facts and circumstances, the educational aspect of J s relationship
with Z is predominant. Thus, J's services are incident to and for the purpose of

pursuing a course of study. Accordingly, J services are excepted from
employment under section 3121(b)(10).
(f) Effective date. Paragraphs (a), (b), (c), (d) and (e) ofthis section apply
to services performed on or after April 1, 2005.
****

Par. 4. In §31.3306(c)(10)-2:
1. Paragraph (c) is revised.
2. Paragraphs (d) and (e) are added.
The revision and addition read as follows:
§ 31.3306(c)(10)-2 Services of student in employ of a school. college. or

university.
*****

(c) General rule. (1) For purposes of this section, the tests are the
character of the organization in the employ of which the services are performed
and the status of the employee as a student enrolled and regularly attending
classes at the school, college, or university described in paragraph (c)(2) ofthis
section, in the employ of which the employee performs the services. If an
employee has the status of a student within the meaning of paragraph (d) of this
section, the type of services performed by the employee, the place where the
services are performed, and the amount of remuneration for services performed
by the employee are not material.
(2) School. college. or university. An organization is a school. college. or
universitywithin the meaning of section 3306(c)(10}(B) if its primary function is
the presentation of formal instruction, it normally maintains a regular faculty and

curriculum, and it normally has a regularly enrolled body of students in
attendance at the place where its educational activities are regularly carried on.
See section 170(b)(1 )(A)(ii) and the regulations thereunder.
(d) Student Status--general rule. Whether an employee has the status of
a student within the meaning of section 3306(c)(1 0)(8) performing the services
shall be determined based on the relationship of the employee with the
organization for which the services are performed. In order to have the status of
a student within the meaning of section 3306(c)(10)(8), the employee must
perform services in the employ of a school, college, or university described in
paragraph (c)(2) of this section at which the employee is enrolled and regularly
attending classes in pursuit of a course of study within the meaning of
paragraphs (d)(1) and (2) of this section. In addition, the employee's services
must be incident to and for the purpose of pursuing a course of study at such
school, college, or university within the meaning of paragraph (d)(3) of this
section.
(1) Enrolled and regularly attending classes. An employee must be
enrolled and regularly attending classes at a school, college, or university within
the meaning of paragraph (c)(2) of this section at which the employee is
employed to have the status of a student within the meaning of section
3306(c)(10)(8). An employee is enrolled within the meaning of section
3306(c)(1 0)(8) if the employee is registered for a course or courses creditable
toward an educational credential described in paragraph (d)(2) of this section. In
addition, the employee must be regularly attending classes to have the status of
a student. For purposes of this paragraph (d)(1), a class is a n instructional

activity led by a faculty member or other qualified individual hired by the school,
college, or university within the meaning of paragraph (c)(2) of this section for
identified students following an established curriculum. The frequency of these
and similar activities determines whether an employee may be considered to be
regularly attending classes.
(2) Course of study. An employee must be pursuing a course of study in
order to have the status of a student within the meaning of section
3306(c)(10)(B). A course of study is one or more courses the completion of
which fulfills the requirements necessary to receive an educational credential
granted by a school, college, or university within the meaning of paragraph (c)(2)
of this section. For purposes of this paragraph, an educational credential is a
degree, certificate, or other recognized educational credential granted by an
organization described in paragraph (c)(2) of this section. In addition, a course of
study is one or more courses at a school, college or university within the meaning
of paragraph (c)(2) of this section the completion of which fulfills the
requirements necessary for the employee to sit for an examination required to
receive certification by a recognized organization in a field.
(3) Incident to and for the purpose of pursuing a course of study. (i)
General rule. An employee's services must be incident to and for the purpose of
pursuing a course of study in order for the employee to have the status of a
student. Whether an employee's services are incident to and for the purpose of
pursuirg a course of study shall be determined on the basis of the relationship of
the employee with the organization for which such services are performed as an
employee. The educational aspect of the relationship between the employer and

the employee, as compared to the service aspect of the relationship, must be
predominant in order for the employee's services to be incident to and for the
purpose of pursuing a course of study. The educational aspect of the
relationship is evaluated based on all the relevant facts and circumstances
related to the educational aspect of the relationship. The service aspect of the
relationship is evaluated based on all the relevant facts and circumstances
related to the employee's employment. The evaluation of the service aspect of
the relationship is not affected by the fact that the services performed by the
employee may have an educational, instructional, or training aspect. Except as
provided in paragraph (d)(3)(iii) of this section, whether the educational aspect or
the service aspect of an employee's relationship with the employer is
predominant is determined by considering all the relevant facts and
circumstances. Relevant factors in evaluating the educational and service
aspects of an employee's relationship with the employer are described in
paragraphs (d)(3)(iv) and (v) of this section respectively. There may be facts and
circumstances that are relevant in evaluating the educational and service aspects
of the relationship in addition to those described in paragraphs (d)(3)(iv) and (v)
of this section.
(ii) Student status determined with respect to each academic term.

Whether an employee's services are incident to and for the purpose of pursuing
a course of study is determined separately with respect to each academic term.
If the relevant facts and circumstances with respect to an employee's relationship
with the employer change significantly during an academic term, whether the
employee's services are incident to and for the purpose of pursuing a course of

study is reevaluated with respect to services performed during the remainder of
the academic term.
(iii) Full-time employee. The services of a full-time employee are not
incident to and for the purpose of pursuing a course of study. The determination
of whether an employee is a full-time employee is based on the employer's
standards and practices, except regardless of the employer's classification of the
employee, an employee whose normal work schedule is 40 hours or more per
week is considered a full-time employee. An employee's normal work schedule
is not affected by increases in hours worked caused by work demands
unforeseen at the start of an academic term. However, whether an employee is
a full-time employee is reevaluated for the remainder of the academic term if the
employee changes employment positions with the employer. An employee's
work schedule during academic breaks is not considered in determining whether
the employee's normal work schedule is 40 hours or more per week. The
determination of the employee's normal work schedule is not affected by the fact
that the services performed by the individual may have an educational,
instructional, or training aspect.
(iv) Evaluating educational aspect. The educational aspect of an
employee's rela tionship with the employer is evaluated based on all the relevant
facts and circumstances related to the educational aspect of the relationship.
The educational aspect of an employee's relationship with the employer is
generally evaluated based on the employee's course workload. Whether an
employee's course workload is sufficient in order for the employee's employment
to be incident to and for the purpose of pursuing a course of study depends on

the particular facts and circumstances. A relevant factor in evaluating an
employee's course workload is the employee's course workload relative to a fulltime course workload at the school, college or university within the meaning of
paragraph (c)(2) of this section at which the employee is enrolled and regularly
attending classes.
(v) Evaluating service aspect. The service aspect of an employee's
relationship with the employer is evaluated based on the facts and circumstances
related to the employee's employment. Services of an employee with the status
of a full-time employee within the meaning of paragraph (d)(3)(iii) of this section
are not incident to and for the purpose of pursuing a course of study. Relevant
factors in evaluating the service aspect of an employee's relationship with the
employer are described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
(A) Normal work schedule and hours worked. If an employee is not a fulltime employee within the meaning of paragraph (d)(3)(iii) of this section, then the
employee's normal work schedLJe and number of hours worked per week are
relevant factors in evaluating the service aspect of the employee's relationship
with the employer. As an employee's normal work schedule or actual number of
hours worked approaches 40 hours per week, it is more likely that the service
aspect of the employee's relationship with the employer is predominant. The
determination of the employee's normal work schedule and actual number of
hours worked is not affected by the fact that some of the services performed by
the individual may have an educational, instructional, or training aspect.
(8) Professional employee.

Wlf an employee has the status of a professional employee, then that suggests
that the service aspect of the employee's relationship with the employer is
predominant. A professional employee is an employee--

ill Whose primary duty consists of the performance of work requiring
knowledge of an advanced type in a field of science or learning
customarily acquired by a prolonged course of specialized intelectual
instruction and study, as distinguished from a general academic
education, from an apprenticeship, and from training in the performance of
routine mental, manual, or physical processes;

illi Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(iii) Whose work is predominantly intellectual and varied in character (as
opposed to routine mental, manual, mechanical, or physical work) and is
of such character that the output produced or the result accomplished
cannot be standardized in relation to a given period of time.

Licensed, professional employee. If an employee is a licensed,

professional employee, then that further suggests the service aspect of the
employee's relationship with the employer is predominant. An employee is a
licensed, professional employee if the employee is required to be licensed under
state or loeallaw to work in the field in which the employee performs services
and the employee is a professional employee within the meaning of paragraph
(d)(3)(v)(B)(1) of this section.
(C) Employment Benefits. Whether an employee is eligible to receive
employment benefits is a relevant factor in evaluating the service aspect of an

employee's relationship with the employer. For example, eligibility to receive
vacation, paid holiday, and paid sick leave benefits; eligibility to participate in a
retirement plan described in section 401 (a); or eligibility to receive employment
benefits such as reduced tuition, or benefits under section 79 (life insurance),
127 (qualified educational assistance), 129 (dependent care assistance
programs), or 137 (adoption assistance) suggest that the service aspect of an
employee's relationship with the employer is predominant. Eligibility to receive
health insurance employment benefits is not considered in determining whether
the service aspect of an employee's relationship with the employer is
predominant. The weight to be given the fact that an employee is eligible for a
particular benefit may vary depending on the type of employment benefit. For
example, eligibility to participate in a retirement plan is generally more significant
than eligibility to receive a dependent care employment benefit. Additional
weight is given to the fact that an employee is eligible to receive an employment
benefit if the benefit is generally provided by the employer to employees in
positions generally held by non-stUdents.

(e) Effective date. Paragraphs (c) and (d) of this section apply to services
performed on or after April 1,2005.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: December 15, 2004
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.

js-2166: CUfTolJ aml Solomon Assume Leadership Roles for Treasury Tax Policy

1-' f, L S S Ii ()

Page I of I

c· M
FROM THE OFFICE OF PUBLIC AFFAIRS

December 22. 2004
js-2166
Carroll and Solomon Assume Leadership Roles for Treasury Tax Policy

WASHINGTON. DC - The U.S Treasury Department today annoullced that Deputy
Assistant Secretary for Tax AnalysIs Robert Carroll and Deputy Assistant Secretary
for Regulatory Affairs Eric Solomon will assume leadership roles for Treasury tax
policy until a new Assistant Secretary for Tax Policy is named. Carroll will provide
economic advice and analysis with regard to tax policy issues on behalf of the
Department. Solomon will continue to direct the regulatory guidance process in his
role as Deputy Assistant Secretary for Regulatory Affairs and also serve as the
acting Deputy Assistant Secretary for Tax Policy.

http://w\~w.treas.gov/press/release~/js2166.htm

113/2005

js-2167: TreasUlY and IRS AnllOlInce Final ReguJations Regarding The New Market... Page] of I

I-'HLSS HOOM

FROM THE OFFICE OF PUBLIC AFFAIRS
TO view or print the PDF contetll on this Pclge. download the free \" .,,,

.\., : .. ,/

j:,

.111. :

December 23.2004
js-2167
Treasury and IRS Announce Final Regulations
Regarding The New Markets Tax Credit

The Department of the Treasury today announced that the Treasury Department
and Internal Revenue Service have issued final regulations regarding the New
Markets Tax Credit (NMTC).
The NMTC provides a tax credit to investors who make qualified equity investments
in privately-managed investment vehicles called "Community Development
Entities," or "CDEs." The CDEs are required to invest substantially all of the
proceeds of the qualified equity investments in low-income communities.
The final regulations amend temporary regulations that were promulgated in
December of 2001 and March of 2004. The final regulations clarify the applicalion
of the substantially-all requirement: establish a six-month cure period for correcting
noncompliance: provide guidance on when a distribution by a CDE to an investor
will not be treated as a redemption requiring the investor to recapture credits
previously taken; and clarify when a business, or a portion of a business, will be
eligible for NMTC financing.

- 30REPORTS

http://www.treas.gov/presslreleasr.s/js21 67.htrn

1/3/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602

TO 9171
RINs 1545-AY87; 1545-BC03
New Markets Tax Credit
AGENCY: Internal Revenue Service (IRS). Treasury.
ACTION: Final regulations.
SUMMARY: These regulations finalize the rules relating to the new markets tax credit
under section 450 and replace the temporary regulations which expire on December 23.
2004. A taxpayer making a qualified equity investment in a qualified community
development entity that has received a new markets tax credit allocation may claim a
5-percent tax credit with respect to the qualified equity investment on each of the first 3
credit allowance dates and a 6-percent tax credit with respect to the qualified equity
investment on each of the remaining 4 credit allowance dates.
DATES: Effective Date: These regulations are effective December 22.2004.
Date of Applicability: For date of applicability see §1.45D-1 (h).
FOR FURTHER INFORMATION CONTACT: Paul F. Handleman or Lauren R. Taylor,
(202) 622-3040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

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Paperwork Reduction Act
The collection of information contained in these final regulations 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 1545-1765. Responses to this
collection of information are mandatory so that a taxpayer may claim a new markets tax
credit on each credit allowance date during the 7-year credit period and report compliance
with the requirements of section 450 to the Secretary.
An agency may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection of information displays a valid control
number assigned by the Office of Management and Budget
The estimated annual burden per respondent varies from 15 minutes to 5 hours,
depending on individual circumstances, with an estimated average of 2.5 hours.
Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, SE:W:CAR:MP:T:T:SP Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by 26 U.S.C.
6103.

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Background
This document amends 26 CFR part 1 to provide rules relating to the new markets
tax credit under section 45D of the Internal Revenue Code (Code). On
December 26, 2001, the IRS published in the Federal Register temporary and proposed
regulations (the 2001 temporary regulations) (66 FR 66307, 66 FR 66376). On March 11,
2004. the IRS published in the Federal Register temporary and proposed regulations
revising and clarifying the 2001 temporary regulations (the 2004 temporary regulations) (69
FR 11507; 69 FR 11561). On March 14,2002, and June 2, 2004, the IRS and Treasury
Department held public hearings on the 2001 temporary regulations and the 2004
temporary regulations, respectively. Written and electronic comments responding to the
temporary regulations and notices of proposed rulemaking were received. After
consideration of all the comments, the proposed regulations are adopted as amended by
this Treasury decision, and the corresponding temporary regulations are removed. The
revisions are discussed below.
Section 450 was added to the Code by section 121(a) of the Community Renewal
Tax Relief Act of 2000 (Pub. L. 106-554). The Secretary has delegated certain
administrative, application, allocation, monitoring, and other programmatic functions
relating to the new markets tax credit program to the Under Secretary (Domestic Finance),
who in turn has delegated those functions to the Community Development Financial
Institutions Fund.
Sections 221 and 223 of the American Jobs Creation Act of 2004 (Pub. L. 108357) amended the definition of a low-income community under section 45D(e). This

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document does not provide guidance on these amendments. The IRS and Treasury
Department are studying the amendments for guidance in the near future.
Explanation of Provisions

General Overview
Taxpayers may claim a new markets tax credit on a credit allowance date in an
amount equal to the applicable percentage of the taxpayer's qualified equity investment in
a qualified community development entity (CDE). The credit allowance date for any
qualified equity investment is the date on which the investment is initially made and each of
the 6 anniversary dates thereafter. The applicable percentage is 5 percent for the first 3
credit allowance dates and 6 percent for the remaining credit allowance dates.
A COE is any domestic corporation or partnership if: (1) the primary mission of the
entity is serving or providing investment capital for low-income communities or low-income
persons; (2) the entity maintains accountability to residents of low-income communities
through their representation on any governing board of the entity or on any advisory board
to the entity; and (3) the entity is certified by the Secretary for purposes of section 450 as
being a COE.
The new markets tax credit may be claimed only for a qualified equity investment in
a COE. A qualified equity investment is any equity investment in a COE for which the COE
has received an allocation from the Secretary if, among other things, the CDE uses
substantially all of the cash from the investment to make qualified low-income community
investments. Under a safe harbor, the substantially-all requirement is treated as met if at

- 5-

least 85 percent of the aggregate gross assets of the CDE are invested in qualified lowincome community investments.
Qualified low-income community investments consist of: (1) any capital or equity
investment in, or loan to, any qualified active low-income community business; (2) the
purchase from another CDE of any loan made by such entity that is a qualified low-income
community investment; (3) financial counseling and other services to businesses located in,
and residents of, low-income communities; and (4) certain equity invesbllents in, or loans
to, a CDE.
In general, a qualified active low-income community business is a corporation or a
partnership if for the taxable year: (1) at least 50 percent of the total gross income of the
entity is derived from the active conduct of a qualified business within any low-income
community; (2) a substantial portion of the use of the tangible property of the entity is within
any low-income community; (3) a substantial portion of the services performed for the entity
by its employees is performed in any low-income community; (4) less than 5 percent of the
average of the aggregate unadjusted bases of the property of the entity is attributable to
certain collectibles; and (5) less than 5 percent of the average of the aggregate unadjusted
bases of the property of the entity is attributable to certain nonqualified financial property.
A recapture event requiring an investor to recapture credits previously taken occurs
for an equity investment in a CDE if the CDE: (1) ceases to be a CDE; (2) ceases to use
substantially all of the proceeds of the equity investment for qualified low-income
community investments; or (3) redeems the investor's equity investment. In addition, the

-6-

investor's basis in any qualified equity investment is reduced by the amount of the new
markets tax credit.
Substantially All
As indicated above, a CDE must use substantially all of the cash from a qualified
equity investment to make qualified low-income community investments.
Section 1.4SD-1T(c)(S)(i) provides that the substantially-all requirement is treated as
satisfied for an annual period jf either the direct-tracing calculation under
§1.45D-1T(c)(5)(ii), or the safe harbor calculation under §1.45D-1T(c)(5)(iii), is performed
every six months and the average of the two calculations for the annual period is at least
85 percent. The final regulations clarify that a CDE may choose the same two testing
dates for all qualified equity investments regardless of the date each qualified equity
investment was initially made. To conform the annual testing requirement with the 12month time limit for making qualified Jaw-income community investments, the final
regulations provide that for the first annual period, the substantially-all calculation may be
performed on a single testing date. The final regulations also amend the beginning of the
12-month period for making qualified low-income community invesbnents to provide that
the 12-month period begins on the same date as the beginning of the first annual period of
the 7-year credit period.
Section 1.45D-1T(d)(3) provides that reserves (not in excess of 5 percent of the
taxpayer's cash investment under§1.45D-1T(b)(4)) maintained by the COE for loan losses
or for additional investments in existing qualified low-income community investments are
treated as invested in a qualified low-income community investment. In response to

-7comments, the final regulations provide that reserves include fees paid to third parties to
protect against loss of all or a portion of the principal of, or interest on, on a loan that is a
qualified low-income community investment.
Qualified Active Low-Income Community Business
As indicated above, qualified low-income community investments include any
capital or equity investment in, or loan to, any qualified active low-income community
business. Under §1.45D-1T(d)(4)(i)(B), an entity is a qualified active low-income
community business only if, among other requirements, at least 40 percent of the use of the
tangible property of such entity (whether owned or leased) is within any low-income
community. In response to comments, the final regulations provide an example of how the
tangible property test applies to property that is used both outside and inside a low-income
community. The example demonstrates that use is measured based on the entity's
business hours of operation and does not include non-business hours.
Under section 45D(d)(2)(C), a qualified active low-income community business
includes any trade or business that would qualify as a qualified active low-income
community business if such trade or business were separately incorporated.
Commentators requested clarification of how this rules applies.
The final regulations provide that a CDE may treat any trade or business (or portion
thereof) as a qualified active low-income community business if the trade or business (or
portion thereof) would meet the requirements to be a qualified active low-income
community business if the trade or business (or portion thereof) were separately
incorporated and a complete and separate set of books and records is maintained for that

-8trade or business (or portion thereof). The final regulations further provide, however, that
under this rule a CDE's capital or equity investment or loan is not a qualified low-income
community investment to the extent the proceeds of the investment or loan are not used for
the trade or business (or portion thereof) that is treated as a qualified active low-income
community business.
Section §1.45D-1T(d)(4)(iv) provides that an entity will be treated as engaged in the
active conduct of a trade or business if, at the time the CDE makes a capital or equity
investment in, or loan to, the entity, the CDE reasonably expects that the entity will generate
revenues (or, in the case of a nonprofit corporation, receive donations) within 3 years after
the date the investment or loan is made. The final regulations amend this rule with respect
to a nonprofit corporation by providing that the nonprofit corporation must be engaged in an
activity that furthers its purpose as a nonprofit corporation within the 3-year period.
Under §1.45D-1T(d)(4)(i)(E), an entity is a qualified active low-income community
business only if, among other requirements, less than 5 percent of the average of the
aggregate unadjusted bases of the property of such entity is attributable to nonqualified
financial property (as defined in section 1397C(e)). Section 1397C(e)(1) contains an
exception to the definition of nonqualified financial property for reasonable amounts of
working capital held in cash, cash eqUivalents, or debt instruments with a term of 18
months or less. The final regulations provide that, for these purposes, the proceeds of a
capital or equity investment or loan by a CDE that will be expended on construction of real
property within 12 months after the date the investment or loan is made qualify as a
reasonable amount of working capita/.

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Section 450{d)(3}{A) provides that the rental to others of real property located in
any low-income community is treated as a qualified business only if, among other
requirements, there are substantial improvements located on such property.
Commentators requested clarification of the term substantial improvements. The final
regulations provide that the term substantial improvements means improvements the cost
basis of which equals or exceeds 50 percent of the cost basis of the land on which the
improvements are located and the costs of which are incurred after the date the CDE
makes the investment or loan. In addition, the final regulations provide that a CDE's
investment in or loan to a business engaged in the rental of real property is not a qualified
low-income community investment to the extent any lessee of the real property is not a
qualified business.
Recapture
As indicated above, there is a recapture event with respect to an equity investment
in a COE if such investment is redeemed by the CDE. Commentators requested
clarification of when distributions by a COE to its investors will be treated as redemptions.
The final regulations provide guidance on when a distribution by a COE that is a
corporation for Federal tax purposes will be treated as a redemption.
Some commentators suggested that in the case of a CDE that is treated as a
partnership for Federal tax purposes, a redemption should be limited to purchases by the
COE of a partner's capital interest. Alternatively, commentators requested guidance on
how to distinguish between a return of capital and a distribution of profits if a return of
capital is treated as a redemption. In response to comments, the final regulations provide

- 10a safe harbor under which cash distributions by a partnership will not be treated as a
redemption. Under the safe harbor, a pro rata cash distribution by the CDE to its partners
based on each partner's capital interest in the CDE during the taxable year will not be
treated as a redemption if the distribution does not exceed the CDE's operating income
(as defined in the final regulations) for the taxable year. In addition, a non-pro rata de
minimis cash distribution by a COE to a partner or partners during the taxable year will be
not treated as a redemption. A non-pro rata de minimis cash distribution may not exceed
the lesser of 5 percent of the CDE's operating income for that taxable year or 10 percent of
the partner's capital interest in the CDE.
Commentators suggested that cure periods be provided to enable COEs to correct
any noncompliance with the requirements under section 450. One commentator
suggested that a cure period be provided to allow an investment that no longer qualifies as
a qualified low-income community investment to be replaced with a qualifying investment
by the end of the calendar year following the year the original investment lost its status as a
qualified low-income community investment. Other commentators suggested that, if a
qualified equity investment fails the substantially-all requirement, the failure should not be a
recapture event if the CDE corrects the failure within 6 months after the date the CDE
discovers (or reasonably should have discovered) the failure. The final regulations provide
that, if a qualified equity investment fails the substantially-all requirement, the failure is not a
recapture event jf the CDE corrects the failure within 6 months after the date the CDE
becomes aware (or reasonably should have become aware) of the failure. Only one
correction is permitted for each qualified equity investment during the 7-year credit period.

-11 Other Issues
Section 450(i)(1) authorizes the Secretary to prescribe regulations as may be
appropriate to carry out section 450 including regulations that limit the new markets tax
credit for investments that are directly or indirectly subsidized by other Federal tax benefits
(including the low-income housing credit under section 42 and the exclusion from gross
income under section 103). The final regulations do not prohibit a CDE from purchasing
tax-exempt bonds because tax-exempt financing provides a subsidy to borrowers and not
bondholders. However, the final regulations provide that if a CDE makes a capital or
equity investment or loan with respect to a qualified low-income building under section 42.
the investment or loan is not a qualified low-income community investment to the extent the
building's eligible basiS under section 42(d) is financed by the proceeds of the investment
or loan.

Effective Dates
The final regulations are effective December 22,2004, and may be applied by
taxpayers before December 22, 2004. However, both the definition of the term substantial
improvements and the requirement that each lessee be a qualified business apply to
qualified low-income community investments made on or after February 22, 2005.

-12Special 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. It is hereby certified that the
collection of information in these regulations will not have a significant economic impact on
a substantial number of small entities. This certification is based upon the fact that any
burden on taxpayers is minima/. Accordingly, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f)
of the Code, the notices of proposed rulemaking preceding these regulations were
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information

The principal author of these regulations is Paul F. Handleman, Office of the
Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other
personnel from the IRS and Treasury Department participated in their development.
List of Subjects

26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations

-13Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.450-1 also issued under 26 U.S.C. 450(i); 1r 11 11
Par. 2. Section 1.45D-1 is added to read as follows:
§ 1.450-1 New markets tax credit

(a) Table of contents. This paragraph lists the headings that appear in §1.450-1.
(a) Table of contents.
(b) Allowance of credit
(1) In general.
(2) Credit allowance date.
(3) Applicable percentage.
(4) Amount paid at original issue.
(c) Qualified equity investment.
(1) In general.
(2) Equity investment.
(3) Equity investments made prior to allocation.
(i) In general.
(ii) Exceptions.
(A) Allocation applications submitted by August 29, 2002.
(8) Other allocation applications.
(iii) Failure to receive allocation.
(iv) Initial investment date.
(4) Limitations.
(i) In general.
(ii) Allocation limitation.
(5) Substantially all.
(i) In general.
(ii) Direct-tracing calculation.
(iii) Safe harbor calculation.
(iv) Time limit for making investments.
(v) Reduced substantially-all percentage.
(vi) Examples.
(6) Aggregation of equity investments.

- 14(7) Subsequent purchasers.
(d) Qualified low-income community investments.
(1) In general.
(i) Investment in a qualified active low-income community business.
(ii) Purchase of certain loans from COEs.
(A) In general.
(B) Certain loans made before CDE certification.
(C) Intermediary COEs.
(0) Examples.
(iii) Financial counseling and other services.
(iv) Investments in other COEs.
(A) In general.
(8) Examples.
(2) Payments of, or for, capital, equity or principal.
(i) In general.
(ii) Subsequent reinvestments.
(iii) Special rule for loans.
(iv) Example.
(3) Special rule for reserves.
(4) Qualified active low-income community business.
(i) In general.
(A) Gross-income requirement.
(8) Use of tangible property.
(1) In general.
(~) Example.
(C) Services performed.
(0) Collectibles.
(E) Nonqualified financial property.
(1) In general.
(~) Construction of real property.
(ii) Proprietorships.
(iii) Portions of business.
(A) In general.
(8) Examples.
(iv) Active conduct of a trade or business.
(A) Special rule.
(8) Example.
(5) Qualified business.
(i) In general.
(ii) Rental of real property.
(iii) Exclusions.
(A) Trades or businesses involving intangibles.
(8) Certain other trades or businesses.

-15(C) Farming.
(6) Qualifications.
(i) In general.
(ii) Control.
(A) In general.
(B) Definition of control.
(C) Disregard of control.
(7) Financial counseling and other services.
(8) Special rule for certain loans.
(i) In general.
(ii) Example.
(e) Recapture.
(1) In general.
(2) Recapture event.
(3) Redemption.
(i) Equity investment in a C corporation.
(ii) Equity investment in an S corporation.
(iii) Capital interest in a partnership.
(4) Bankruptcy.
(5) Waiver of requirement or extension of time.
(i) In general.
(ii) Manner for requesting a waiver or extension.
(iii) Terms and conditions.
.
(6) Cure period.
(7) Example.
(f) Basis reduction.
(1) In general.
(2) Adjustment in basis of interest in partnership or S corporation.
(g) Other rules.
(1) Anti-abuse.
(2) Reporting requirements.
(i) Notification by CDE to taxpayer.
(A) Allowance of new markets tax credit.
(8) Recapture event.
(ii) COE reporting requirements to Secretary.
(iii) Manner of claiming new markets tax credit.
(iv) Reporting recapture tax.
(3) Other Federal tax benefits.
(i) In general.
(ii) Low-income housing credit.
(4) Bankruptcy of CDE.
(h) Effective dates.
(1) In general.

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(2) Exception for certain provisions.
(b) Allowance of credit--(1) In general. For purposes of the general business credit
under section 38, a taxpayer holding a qualified equity investment on a credit allowance
date which occurs during the taxable year may claim the new markets tax credit
determined under section 450 and this section for such taxable year in an amount equal to
the applicable percentage of the amount paid to a qualified community development entity
(CDE) for such investment at its original issue. Qualified equity investment is defined in
paragraph (c) of this section. Credit allowance date is defined in paragraph (b )(2) of this
section. Applicable percentage is defined in paragraph (b)(3) of this section. A COE is a
qualified community development entity as defined in section 4S0(c). The amount paid at
original issue is determined under paragraph (b)(4) of this section.
(2) Credit allowance date. The term credit allowance date means, with respect to
any qualified equity investment-(i) The date on which the investment is initially made; and
Oi) Each of the 6 anniversary dates of such date thereafter.
(3) Applicable percentage. The applicable percentage is 5 percent for the first 3
credit allowance dates and 6 percent for the other 4 credit allowance dates.
(4) Amount paid at original issue. The amount paid to the CDE for a qualified
equity investment at its original issue consists of all amounts paid by the taxpayer to, or on
behalf of, the COE (including any underwriter's fees) to purchase the investment at its
original issue.

- 17 (c) Qualified equity investment--( 1) In general. The term qualified equity
investment means any equity investment (as defined in paragraph (c)(2) of this section) in a
COE if-(i) The investment is acquired by the taxpayer at its original issue (directly or
through an underwriter) solely in exchange for cash;
(ii) Substantially all (as defined in paragraph (c)(5) of this section) of such cash is

used by the COE to make qualified low-income community investments (as defined in
paragraph (d)(1) of this section); and
(iii) The investment is designated for purposes of section 450 and this section by
the COE on its books and records using any reasonable method.
(2) Equity investment. The term equity investment means any stock (other than
nonqualified preferred stock as defined in section 351 (g)(2)) in an entity that is a
corporation for Federal tax purposes and any capital interest in an entity that is a
partnership for Federal tax purposes. See §§301. 7701-1 through 301.7701-3 of this
chapter for rules governing when a business entity, such as a business trust or limited
liability company, is classified as a corporation or a partnership for Federal tax purposes.
(3) Equity investments made prior to allocation--(i) In general. Except as provided
in paragraph (c )(3)(ii) of this section, an equity investment in an entity is not eligible to be
designated as a qualified equity investment if it is made before the entity enters into an
allocation agreement with the Secretary. An allocation agreement is an agreement
between the Secretary and a COE relating to a new markets tax credit allocation under
section 45D(f)(2).

-18-

(ii) Exceptions. Notwithstanding paragraph (c)(3)(i) of this section, an equity
investment in an entity is eligible to be designated as a qualified equity investment under
paragraph (c)(1 )(iii) of this section if(A) Allocation applications submitted by August 29,2002.
(1) The equity investment is made on or after April 20, 2001;
(~) The designation of the equity investment as a qualified equity investment is

made for a credit allocation received pursuant to an allocation application submitted to the
Secretary no later than August 29, 2002; and
@) The equity investment otherwise satisfies the requirements of section 450 and
this section; or
(B) Other allocation applications.
(1) The equity investment is made on or after the date the Secretary publishes a

Notice of Allocation Availability (NOAA) in the Federal Register;
(~)

The designation of the equity investment as a qualified equity investment is

made for a credit allocation received pursuant to an allocation application submitted to the
Secretary under that NOM; and
(~)

The equity investment otherwise satisfies the requirements of section 450 and

this section.
(iii) Failure to receive allocation. For purposes of paragraph (c)(3)(ii}(A) of this
section, if the entity in which the equity investment is made does not receive an allocation
pursuant to an allocation application submitted no later than August 29,2002, the equity
investment will not be eligible to be designated as a qualified equity investment. For

-19purposes of paragraph (c)(3)(ii)(B) ofthis section, if the entity in which the equity
investment is made does not receive an allocation under the NOAA described in
paragraph (c)(3)(ii)(B)(1) of this section, the equity investment will not be eligible to be
designated as a qualified equity investment.
(iv) Initial investment date. If an equity investment is deSignated as a qualified
equity investment in accordance with paragraph (c)(3)(ii) of this section, the investment is
treated as initially made on the effective date of the allocation agreement between the
CDE and the Secretary.
(4) Limitations--(i) In general. The term qualified equity investment does not
include-(A) Any equity investment issued by a CDE more than 5 years after the date the
CDE enters into an allocation agreement (as defined in paragraph (c)(3)(i) of this section)
with the Secretary; and
(B) Any equity investment by a CDE in another CDE, if the COE making the
investment has received an allocation under section 45D(f)(2).
(ii) Allocation limitation. The maximum amount of equity investments issued by a
COE that may be designated under paragraph (c)(1 )(iii) of this section by the CDE may not
exceed the portion of the limitation amount allocated to the COE by the Secretary under
section 450(f)(2).
(5) Substantiallyall--(i) In general. Except as provided in paragraph (c)(5)(v) of this
section, the term substantially all means at least 85 percent. The substantially-all
requirement must be satisfied for each annual period in the 7-year credit period using

- 20-

either the direct-tracing calculation under paragraph (c)(5)(ii) of this section, or the safe
harbor calculation under paragraph (c)(5)(iii) of this section. For the first annual period, the
substantially-all requirement is treated as satisfied if either the direct-tracing calculation
under paragraph (c)(5)(ii) of this section, or the safe-harbor calculation under paragraph
(c)(5)(iii) of this section, is performed on a single testing date and the result of the
calculation is at least 85 percent. For each annual period other than the first annual period,
the substantially-all requirement is treated as satisfied if either the direct-tracing calculation
under paragraph (c)(5)(ii) of this section, or the safe harbor calculation under paragraph
(c)(5)(iii) of this section, is performed every six months and the average of the two
calculations for the annual period is at least 85 percent. For example, the CDE may
choose the same two testing dates for all qualified equity investments regardless of the
date each qualified equity investment was initially made under paragraph (b)(2)(i) of this
section, provided the testing dates are six months apart. The use of the direct-tracing
calculation under paragraph (c)(5)(ii) of this section (or the safe harbor calculation under
paragraph (c)(5)(iii) of this section) for an annual period does not preclude the use of the
safe harbor calculation under paragraph (c)(5)(iii) of this section (or the direct-tracing
calculation under paragraph (c)(5)(ii) of this section) for another annual period, provided
that a CDE that switches to a direct-tracing calculation must substantiate that the
taxpayer's investment is directly traceable to qualified low-income community investments
from the time of the CDE's initial investment in a qualified low-income community
investment. For purposes of this paragraph (c)(5)(i), the 7-year credit period means the
period of 7 years beginning on the date the qualified equity investment is initially made.

- 21 See paragraph (c)(6) of this section for circumstances in which a CDE may treat more than
one equity investment as a single qualified equity investment.
(ii) Direct-tracing calculation. The substantially-all requirement is satisfied if at

least 85 percent of the taxpayer's investment is directly traceable to qualified low-income
community investments as defined in paragraph (d)(1) of this section. The direct-tracing
calculation is a fraction the numerator of which is the CDE's aggregate cost basis
determined under section 1012 in all of the qualified low-income community investments
that are directly traceable to the taxpayer's cash investment, and the denominator of which
is the amount of the taxpayer's cash investment under paragraph (b )(4) of this section. For
purposes of this paragraph (c)(5)(ii), cost basis includes the cost basis of any qualified
low-income community investment that becomes worthless. See paragraph (d)(2) of this
section for the treatment of amounts received by a CDE in payment of, or for, capital,
equity or principal with respect to a qualified low-income community investment.
(iii) Safe harbor calculation. The substantially-all requirement is satisfied if at least
85 percent of the aggregate gross assets of the CDE are invested in qualified low-income
community investments as defined in paragraph (d)(1) of this section. The safe harbor
calculation is a fraction the numerator of which is the CDE's aggregate cost basis
determined under section 1012 in all of its qualified low-income community investments,
and the denominator of which is the CDE's aggregate cost basis determined under section
1012 in all of its assets. For purposes of this paragraph (c)(5)(iii), cost basis includes the
cost basis of any qualified low-income community investment that becomes worthless.
See paragraph (d}(2) of this section for the treatment of amounts received by a CDE in

- 22payment of, or for. capital. equity or principal with respect to a qualified low-income
community investment.
(iv) Time limit for making investments. The taxpayer's eash investment received by
a COE is treated as invested in a qualified low-income community investment as defined in
paragraph (d)( 1) of this section only to the extent that the cash is so invested within the 12month period beginning on the date the cash is paid by the taxpayer (directly or through an
underwriter) to the CDE.
(v) Reduced substantiallv-all percentage. For purposes of the substantially-all
requirement (including the direct-tracing calculation under paragraph (c)(5)(ii) of this
section and the safe harbor calculation under paragraph (c)(5)(iii) of this section),
85 percent is reduced to 75 percent for the seventh year of the 7-year credit period (as
defined in paragraph (c)(5)(i) of this section).
(vi) Examples. The following examples illustrate an application of this
paragraph (c){5):
Example 1. X is a partnership and a COE that has received a $1 million new
markets tax credit allocation from the Secretary. On September 1, 2004. X uses a line of
credit from a bank to fund a $1 million loan to Y. The loan is a qualified 10w-income
community investment under paragraph (d)(1) of this section. On September 5.2004. A
pays $1 million to acquire a capital interest in X. X uses the proceeds of A's equity
investment to payoff the $1 million line of credit that was used to fund the loan to Y. XiS
aggregate gross assets consist of the $1 million loan to Y and $100,000 in other assets.
A's equity investment in X does not satisfy the substantially-all requirement under
paragraph (e)(5)(i) of this section using the direct-tracing calculation under paragraph
(c)(5)(ii) of this section because the cash from A's equity investment is not used to make
XiS loan to Y. However, A's equity investment in X satisfies the substantially-all requirement
using the safe harbor calculation under paragraph (c)(5)(iii) of this section because at
least 85 percent of XiS aggregate gross assets are invested in qualified low-income
community investments.

- 23Example 2. X is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On August 1,2004, A pays $100,000 for a capital
interest in X. On August 5,2004, X uses the proceeds of A's equity investment to make an
equity investment in Y. X controls Y within the meaning of paragraph (d)(6)(ii)(8) of this
section. For the annual period ending July 31, 2005, Y is a qualified active low-income
community business (as defined in paragraph (d)(4) of this section). Thus, for that period,
A's equity investment satisfies the substantially-all requirement under paragraph (c)(5)(i) of
this section using the direct-tracing calculation under paragraph (c)(5)(ii) of this section.
For the annual period ending July 31, 2006, Y no longer is a qualified active low-income
community business. Thus, for that period, A's equity investment does not satisfy the
substantially-all requirement using the direct-tracing calculation. However, during the entire
annual period ending July 31,2006, X's remaining assets are invested in qualified lowincome community investments with an aggregate cost basis of $900,000. Consequently,
for the annual period ending July 31, 2006, at least 85 percent of X's aggregate gross
assets are invested in qualified low-income community investments. Thus, for the annual
period ending July 31,2006, A's equity investment satisfies the substantially-all
requirement using the safe harbor calculation under paragraph (c)(5)(iii) of this section.
Example 3. X is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On August 1,2004, A and B each pay $100,000 for a
capital interest in X. X does not treat A's and B's equity investments as one qualified
equity investment under paragraph (c)(6) of this section. On September 1,2004, X uses
the proceeds of A's equity investment to make an equity investment in Y and X uses the
proceeds of B's equity investment to make an equity investment in Z. X has no assets
other than its investments in Y and Z. X controls Y and Z within the meaning of paragraph
(d)(6)(ii)(B) of this section. For the annual period ending July 31,2005, Y and Z are
qualified active low-income community businesses (as defined in paragraph (d)(4) of this
section). Thus, for the annual period ending July 31,2005, A's and S's equity investments
satisfy the substantially-all requirement under paragraph (c)(5)(i) of this section using either
the direct-tracing calculation under paragraph (c)(5)(ii) of this section or the safe harbor
calculation under paragraph (c)(5)(iii) of this section. For the annual period ending July 31,
2006, Y, but not Z, is a qualified active low-income community business. Thus, for the
annual period ending July 31,2006-(1) X does not satisfy the substantially-all requirement using the safe harbor
calculation under paragraph (c)(5)(iii) of this section;
(2) A's equity investment satisfies the substantially-all requirement using the directtracing calculation because A's equity investment is directly traceable to Y; and
(3) S's equity investment does not satisfy the substantially-all requirement because
B's equity investment is traceable to Z.

- 24Example 4. X is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On November 1,2004, A pays $100,000 for a capital
interest in X. On December 1,2004,8 pays $100,000 for a capital interest in X. On
December 31,2004, X uses $85,000 from A's equity investment and $85,000 from 8's
equity investment to make a $170,000 equity investment in Y, a qualified active lowincome community business (as defined in paragraph (d)(4) of this section). X has no
assets other than its investment in Y. X determines whether A's and 8's equity investments
satisfy the substantially-all requirement under paragraph (c)(5)(i) of this section on
December 31,2004. The calculation for A's and 8's equity investments is 85 percent
using either the direct-tracing calculation under paragraph (c)(5)(ii) of this section or the
safe harbor calculation under paragraph (c)(5)(iii) of this section. Therefore, for the annual
periods ending October 31,2005, and November 30,2005, A's and 8's equity
investments, respectively, satisfy the substantially-all requirement under paragraph (c)(5)(i)
of this section. For the subsequent annual period. X performs its calculations on
December 31,2005, and June 30,2006. The average of the two calculations on
December 31, 2005, and June 30, 2006, is 85 percent using either the direct-tracing
calculation under paragraph (c)(5)(ii) of this section or the safe harbor calculation under
paragraph (c)(S)(iii) of this section. Therefore, for the annual periods ending October 31,
2006, and November 30,2006, A's and S's equity investments, respectively, satisfy the
substantially-all requirement under paragraph (c)(S)(i) of this section.
(6) Aggregation of equity investments. A CDE may treat any qualified equity
investments issued on the same day as one qualified equity investment. If a CDE
aggregates equity investments under this paragraph (c)(6), the rules in this section shall be
construed in a manner consistent with that treatment.
(7) Subsequent purchasers. A qualified equity investment includes any equity
investment that would (but for paragraph (c)(1 )(i) of this section) be a qualified equity
investment in the hands of the taxpayer if the investment was a qualified equity investment
in the hands of a prior holder.
(d) Qualified low-income community investments--(1) In general. The term qualified
low-income community investment means any of the following:

- 25-

(i) Investment in a qualified active low-income community business. Any capital or
equity investment in, or loan to, any qualified active low-income community business (as
defined in paragraph (d)(4) of this section).
(ii) Purchase of certain loans from CDEs--(A) In general. The purchase by a CDE
(the ultimate CDE) from another CDE (whether or not that CDE has received an allocation
from the Secretary under section 45D(f)(2)) of any loan made by such entity that is a
qualified low-income community investment. A loan purchased by the ultimate CDE from
another CDE is a qualified low-income community investment if it qualifies as a qualified
low-income community investment either--

(1J At the time the loan was made; or
(~)

At the time the ultimate CDE purchases the loan.

(S) Certain loans made before CDE certification. For purposes of
paragraph (d)(1 )(ii)(A) of this section, a loan by an entity is treated as made by a CDE,
notwithstanding that the entity was not a CDE at the time it made the loan, if the entity is a
CDE at the time it sells the loan.
(C) Intermediary CDEs. For purposes of paragraph (d)(1 )(ii)(A) of this section, the
purchase of a loan by the ultimate CDE from a CDE that did not make the loan (the second
CD E) is treated as a purchase of the loan by the ultimate CDE from the CDE that made
the loan (the originating CDE) if-(1) The second CDE purchased the loan from the originating CDE (or from another

CDE); and
(~J Each entity that sold the loan was a CDE at the time it sold the loan.

- 26(D) Examples. The following examples illustrate an application of this
paragraph (d)(1)(ii):
Example 1. X is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. Y, a corporation, made a $500,000 loan to Z in 1999.
In January of 2004, Y is certified as a CDE. On September 1,2004, X purchases the loan
from Y. At the time X purchases the loan, Z is a qualified active low-income community
business under paragraph (d)(4 )(i) of this section. Accordingly, the loan purchased by X
from Y is a qualified low-income community investment under paragraphs (d)(1 )(ii)(A) and
(B) of this section.
Example 2. The facts are the same as in Example 1 except that on
February 1,2004, Y sells the loan to Wand on September 1,2004, W sells the loan to X.
W is a CDE. Under paragraph (d)(1 )(ii)(C) of this section, X's purchase of the loan from W
is treated as the purchase of the loan from Y. Accordingly, the loan purchased by X from W
is a qualified low-income community investment under paragraphs (d)(1 )(ii)(A) and (C) of
this section.
Example 3. The facts are the same as in Example 2 except that W is not a CDE.
Because W was not a CDE at the time it sold the loan to X, the purchase of the loan by X
from W is not a qualified low-income community investment under paragraphs (d)(1 )(ii)(A)
and (C) of this section.
(iii) Financial counseling and other services. Financial counseling and other
services (as defined in paragraph (d)(7) of this section) provided to any qualified active
low-income community business, or to any residents of a low-income community (as
defined in section 450(e)).
(iv) Investments in other CDEs--(A) In general. Any equity investment in, or loan to,
any COE (the second CDE) by a CDE (the primary CDE), but only to the extent that the
second CDE uses the proceeds of the investment or loan-(1) In a manner-([) That is described in paragraph (d)(1 )(i) or (iii) of this section; and

- 27 -

(li) That would constitute a qualified low-income community investment if it were
made directly by the primary CDE;
(~) To make an equity investment in, or loan to, a third CDE that uses such

proceeds in a manner described in paragraph (d)(1 )(iv)(A)(l) of this section; or
(~) To make an equity investment in, or loan to, a third CDE that uses such

proceeds to make an equity investment in, or loan to, a fourth CDE that uses such
proceeds in a manner described in paragraph (d)(1 )(iv)(A)(l) of this section.
(B) Examples. The following examples illustrate an application of paragraph
(d)(1)(iv)(A) of this section:
Example 1. X is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On September 1, 2004, X uses $975,000 to make an
equity investment in Y. Y is a corporation and a CDE. On October 1, 2004, Y uses
$950,000 from X's equity investment to make a loan to Z. Z is a qualified active lowincome community business under paragraph (d)(4)(i) of this section. Of X's equity
investment in Y, $950,000 is a qualified low-income community investment under
paragraph (d)( 1)(iv)(A)(l) of this section.
Example 2. W is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On September 1,2004, W uses $975,000 to make an
equity investment in X. On October 1,2004, X uses $950,000 from W's equity investment
to make an equity investment in Y. X and Yare corporations and COEs. On
October 5,2004, Y uses $925,000 from XiS equity investment to make a loan to Z. Z is a
qualified active low-income community business under paragraph (d)(4)(i) of this section.
Of W's equity investment in X, $925,000 is a qualified low-income community investment
under paragraph (d)(1 )(iv)(A)(~) of this section because X uses proceeds of W's equity
investment to make an equity investment in Y, which uses $925,000 of the proceeds in a
manner described in paragraph (d)(1 )(iv)(A)(1) of this section.
Example 3. U is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On September 1, 2004, U uses $975,000 to make an
equity investment in V. On October 1,2004, V uses $950,000 from U's equity investment
to make an equity investment in W. On October 5, 2004, W uses $925,000 from V's equity
investment to make an equity investment in X. On November 1, 2004, X uses $900,000
from W'S equity investment to make an equity investment in Y. V, W, X, and Yare

- 28corporations and CDEs. On November 5, 2004, Y uses $875,000 from X's equity
investment to make a loan to Z. Z is a qualified active low-income community business
under paragraph (d)(4 )(i) of this section. U's equity investment in V is not a qualified lowincome community investment because X does not use proceeds of W's equity investment
in a manner described in paragraph (d)(1)(iv)(A)(1) of this section.
(2) Payments of. or for. capital. equity or principa~(i) In general. Except as
otherwise provided in this paragraph (d)(2), amounts received by a CDE in payment of, or
for, capital, equity or principal with respect to a qualified low-income community investment
must be reinvested by the CDE in a qualified low-income community investment no later
than 12 months from the date of receipt to be treated as continuously invested in a qualified
low-income community investment. If the amounts received by the CDE are equal to or
greater than the cost basis of the original qualified low-income community investment (or
applicable portion thereof), and the CDE reinvests, in accordance with this paragraph
(d)(2)(i), an amount at least equal to such original cost basis, then an amount equal to such
original cost basis will be treated as continuously invested in a qualified low-income
community investment. In addition, if the amounts received by the CDE are equal to or
greater than the cost basis of the original qualified low-income community investment (or
applicable portion thereof), and the CDE reinvests, in accordance with this paragraph
(d)(2)(i), an amount less than such original cost basis, then only the amount so reinvested
will be treated as continuously invested in a qualified low-income community investment. If
the amounts received by the CDE are less than the cost basis of the original qualified lowincome community investment (or applicable portion thereof), and the CDE reinvests an
amount in accordance with this paragraph (d)(2)(i), then the amount treated as continuously
invested in a qualified low-income community investment will equal the excess (if any) of

- 29-

such original cost basis over the amounts received by the CDE that are not so reinvested.
Amounts received by a CDE in payment of, or for, capital, equity or principal with respect
to a qualified low-income community investment during the seventh year of the 7-year credit
period (as defined in paragraph (c)(5)(i) of this section) do not have to be reinvested by the
CDE in a qualified low-income community investment in order to be treated as continuously
invested in a qualified low-income community investment.
(ii) Subsequent reinvestments. In applying paragraph (d)(2)(i) of this section to
subsequent reinvestments, the original cost basis is reduced by the amount (if any) by
which the original cost basis exceeds the amount determined to be continuously invested
in a qualified low-income community investment.
(iii) Special rule for loans. Periodic amounts received during a calendar year as

repayment of principal on a loan that is a qualified low-income community investment are
treated as continuously invested in a qualified low-income community investment if the
amounts are reinvested in another qualified low-income community investment by the end
of the following calendar year.
(iv) Example. The application of paragraphs (d)(2)(i) and (ii) of this section is
illustrated by the following example:
Example. On April 1, 2003, A, B, and C each pay $100,000 to acquire a capital
interest in X, a partnership. X is a CDE that has received a new markets tax credit
allocation from the Secretary. X treats the 3 partnership interests as one qualified equity
investment under paragraph (c)(6) ofthis section. In August 2003, X uses the $300,000 to
make a qualified low-income community investment under paragraph (d)(1) of this section.
In August 2005, the qualified low-income community investment is redeemed for
$250,000. In February 2006, X reinvests $230,000 of the $250,000 in a second qualified
low-income community investment and uses the remaining $20,000 for operating
expenses. Under paragraph (d)(2)(i) of this section, $280,000 of the proceeds of the

- 30qualified equity investment is treated as continuously invested in a qualified low-income
community investment. In December 2008, X sells the second qualified low-income
community investment and receives $400,000. In March 2009, X reinvests $320,000 ofthe
$400,000 in a third qualified low-income community investment. Under paragraphs
(d)(2)(i) and (ii) of this section, $280,000 of the proceeds of the qualified equity investment
is treated as continuously invested in a qualified low-income community investment
($40,000 is treated as invested in another qualified low-income community investment in
March 2009).
(3) Special rule for reserves. Reserves (not in excess of 5 percent of the taxpayer's
cash investment under paragraph (b)( 4) of this section) maintained by the CDE for loan
losses or for additional investments in existing qualified low-income community
investments are treated as invested in a qualified low-income community investment under
paragraph (d)(1) of this section. Reserves include fees paid to third parties to protect
against loss of all or a portion of the principal of, or interest on, a loan that is a qualified
low-income community investment.
(4) Qualified active low-income community business--(i) In general. The term
qualified active low-income community business means, with respect to any taxable year, a
corporation (including a nonprofit corporation) or a partnership engaged in the active
conduct of a qualified business (as defined in paragraph (d)(5) of this section), if the
requirements in paragraphs (d)(4 )(i)(A), (B), (e), (0), and (E) of this section are met.
Solely for purposes of this section. a nonprofit corporation will be deemed to be engaged
in the active conduct of a trade or business if it is engaged in an activity that furthers its
purpose as a nonprofit corporation.
(A) Gross-income requirement. At least 50 percent of the total gross income of
such entity is derived from the active conduct of a qualified business (as defined in

- 31 paragraph (d)(5) of this section) within any low-income community (as defined in
section 45D(e)). An entity is deemed to satisfy this paragraph (d)(4 )(i)(A) if the entity
meets the requirements of either paragraph (d)(4)(i)(B) or (C) of this section, if
"50 percent" is applied instead of 40 percent. In addition, an entity may satisfy this
paragraph (d)(4)(i)(A) based on all the facts and circumstances. See paragraph (d)(4)(iv)
of this section for certain circumstances in which an entity will be treated as engaged in the
active conduct of a trade or business.
(8) Use of tangible propertv--UJ In general. At least 40 percent of the use of the
tangible property of such entity (whether owned or leased) is within any low-income
community. This percentage is determined based on a fraction the numerator of which is
the average value of the tangible property owned or leased by the entity and used by the
entity during the taxable year in a low-income community and the denominator of which is
the average value of the tangible property owned or leased by the entity and used by the
entity during the taxable year. Property owned by the entity is valued at its cost basis as
determined under section 1012. Property leased by the entity is valued at a reasonable
amount established by the entity.
(2) Example. The application of paragraph (d)(4)(i)(8)(1) of this section is

illustrated by the following example:
Example. X is a corporation engaged in the business of moving and hauling scrap
metal. X operates its business from a building and an adjoining parking lot that X owns.
The building and the parking lot are located in a low-income community (as defined in
section 45D(e». X's cost basis under section 1012 for the building and parking lot is
$200,000. During the taxable year, X operates its business 10 hours a day, 6 days a
week. X owns and uses 40 trucks in its business, which, on average, are used 6 hours a
day outside a low-income community and 4 hours a day inside a low-income community

- 32(including time in the parking lot). The cost basis under section 1012 of each truck is
$25,000. During non-business hours, the trucks are parked in the lot. Only X's 10-hour
business days are used in calculating the use of tangible property percentage under
paragraph {d)(4 )(i)(8)(1) of this section. Thus, the numerator of the tangible property
calculation is $600,000 (4/10 of $1 ,000,000 (the $25,000 cost basis of each truck times 40
trucks) plus $200,000 (the cost basis ofthe building and parking lot)) and the denominator
is $1,200,000 (the total cost basis of the trucks, building, and parking lot), resulting in
50 percent of the use of X's tangible property being within a low-income community.
Consequently, X satisfies the 40 percent use of tangible property test under paragraph
(d)(4)(i)(B)(1) of this section.
(C) Services performed. At least 40 percent of the services performed for such
entity by its employees are performed in a low-income community. This percentage is
determined based on a fraction the numerator of which is the total amount paid by the entity
for employee services performed in a low-income community during the taxable year and
the denominator of which is the total amount paid by the entity for employee services during
the taxable year. If the entity has no employees, the entity is deemed to satisfy this
paragraph (d)(4)(i)(C), and paragraph (d)(4)(i)(A) of this section, if the entity meets the
requirement of paragraph (d)(4 )(i)(8) of this section if "85 percent" is applied instead of 40
percent.
(0) Collectibles. Less than 5 percent of the average of the aggregate unadjusted

bases of the property of such entity is attributable to collectibles (as defined in
section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the
ordinary course of business.
(E) Nonqualified financial propertt-(1) In general. Less than 5 percent of the
average of the aggregate unadjusted bases of the property of such entity is attributable to
nonqualified financial property. For purposes the preceding sentence, the term

- 33nonqualified financial property means debt, stock, partnership interests, options, futures
contracts, forward contracts, warrants, notional prinCipal contracts, annuities, and other
similar property except that such term does not include-(i) Reasonable amounts of working capital held in cash, cash equivalents, or debt

instruments with a term of 18 months or less (because the definition of nonqualified
financial property includes debt instruments with a term in excess of 18 months, banks,
credit unions, and other financial institutions are generally excluded from the definition of a
qualified active low-income community business); or
(ii) Debt instruments described in section 1221(a)(4).
(~)

Construction of real property. For purposes of paragraph (d)(4 )(i)(E)(1)(i) of this

section, the proceeds of a capital or equity investment or loan by a CDE that will be
expended for construction of real property within 12 months after the date the investment or
loan is made are treated as a reasonable amount of working capital.
(ii) Proprietorships. Any business carried on by an individual as a proprietor is a
qualified active low-income community business if the business would meet the
requirements of paragraph (d)(4)(i) of this section if the business were incorporated.
(iii) Portions of business--(A) In general. A COE may treat any trade or business

(or portion thereof) as a qualified active low-income community business if the trade or
business (or portion thereof) would meetthe requirements of paragraph (d)(4)(i) of this
section if the trade or business (or portion thereof) were separately incorporated and a
complete and separate set of books and records is maintained for that trade or business
(or portion thereof). However, the COE's capital or equity investment or loan is not a

- 34-

qualified low-income community investment under paragraph (d)(1 )(i) of this section to the
extent the proceeds of the investment or loan are not used for the trade or business (or
portion thereof) that is treated as a qualified active low-income community business under
this paragraph (d)(4)(iii)(A).
(8) Examples. The following examples illustrate an application of paragraph
(d)(4)(iii) of this section:
Example 1. X is a partnership and a CDE that receives a new markets tax credit
allocation from the Secretary. A pays $1 million for a capital interest in X. Z is a
corporation that operates a supermarket that is not in a low-income community (as defined
in section 45D(e)). X uses the proceeds of A's equity investment to make a loan to Z that Z
will use to construct a new supermarket in a low-income community. Z will maintain a
complete and separate set of books and records for the new supermarket. The proceeds
of X's loan to Z will be used exclusively for the new supermarket. Assume that Z'S new
supermarket in the low-income community would meet the requirements to be a qualified
active low-income community business under paragraph (d)(4)(i) of this section if it were
separately incorporated. Pursuant to paragraph (d)(4)(iii)(A) of this section, X treats Z's
new supermarket as the qualified active low-income community business. Accordingly, X's
loan to Z is a qualified low-income community investment under paragraph (d)(1 )(i) of this
section.
Example 2. X is a partnership and a CDE that receives a new markets tax credit
allocation from the Secretary. A pays $1 million for a capital interest in X. Z is a
corporation that operates a liquor store in a low-income community (as defined in section
450{e)). A liquor store is not a qualified business under paragraph (d)(5)(iii)(8) of this
section. X uses the proceeds of A's equity investment to make a loan to Z that l will use to
construct a restaurant next to the liquor store. Z will maintain a complete and separate set
of books and records for the new restaurant. The proceeds of X's loan to Z will be used
exclusively for the new restaurant. Assume that Zs restaurant would meet the requirements
to be a qualified active low-income community business under paragraph (d)(4)(i) of this
section if it were separately incorporated. Pursuant to paragraph (d)(4)(iii) of this section,
X treats l'S restaurant as the qualified active low-income community business.
Accordingly, X's loan to Z is a qualified low-income community investment under paragraph
(d)(1)(i) of this section.
Example 3. X is a partnership and a CDE that receives a new markets tax credit
allocation from the Secretary. A pays $1 million for a capital interest in X. Z is a
corporation that operates an insurance company in a low-income community (as defined in

- 35section 450(e». Five percent or more of the average of the aggregate unadjusted bases
of Z's property is attributable to nonqualified financial property under paragraph (d)(4){i)(E)
of this section. Z's insurance operations include different operating units including a claims
processing unit. X uses the proceeds of A's equity investment to make a loan to Z for use
in l's claims processing operations. Z will maintain a complete and separate set of books
and records for the claims processing unit. The proceeds of X's loan to Z will be used
exclusively for the claims processing unit. Assume that l's claims processing unit would
meet the requirements to be a qualified active low-income community business under
paragraph (d)(4)(i) of this section if it were separately incorporated. Pursuant to paragraph
(d)(4)(iii) ofthis section, X treats l's claims processing unit as the qualified active lowincome community business. Accordingly, X's loan to l is a qualified low-income
community investment under paragraph (d)(1 )(i) of this section.
(iv) Active conduct of a trade or business--(A) Special rule. For purposes of
paragraph (d){4)(i) of this section, an entity will be treated as engaged in the active conduct
of a trade or business if, at the time the CDE makes a capital or equity investment in, or
loan to, the entity, the COE reasonably expects that the entity will generate revenues (or, in
the case of a nonprofit corporation, engage in an activity that furthers its purpose as a
nonprofit corporation) within 3 years after the date the investment or loan is made.
(8) Example. The application of paragraph (d)(4)(iv)(A) of this section is illustrated
by the following example:
Example. X is a partnership and a CDE that receives a new markets tax credit
allocation from the Secretary on July 1, 2004. X makes a ten-year loan to Y. Y is a newly
formed entity that will own and operate a shopping center to be constructed in a lowincome community. Y has no revenues but X reasonably expects that Y will generate
revenues beginning in December 2005. Under paragraph (d)(4)(iv)(A) of this section, Y is
treated as engaged in the active conduct of a trade or business for purposes of paragraph
(d)(4)(i) of this section.
(5) Qualified business--(i) In general. Except as otherwise provided in this
paragraph (d)(5), the term qualified business means any trade or business. There is no

- 36-

requirement that employees of a qualified business be residents of a low-income
community.
(ii) Rental of real property. The rental to others of real property located in any lowincome community (as defined in section 450(e» is a qualified business if and only if the
property is not residential rental property (as defined in section 168(e)(2)(A)} and there are
substantial improvements located on the real property. For purposes of the preceding
sentence. the term substantial improvements means improvements the cost basis of which
equals or exceeds 50 percent of the cost basis of the land on which the improvements are
located and the costs of which are incurred after the date the CDE makes the investment
or loan. However, a CDE's investment in or loan to a business engaged in the rental of real
property is not a qualified low-income community investment under paragraph (d)(1 )(i) of
this section to the extent any lessee of the real property is not a qualified business under
this paragraph (d){5).
(iii) Exclusions--(A) Trades or businesses involving intangibles. The term qualified

business does not include any trade or business consisting predominantly of the
development or holding of intangibles for sale or license.
(8) Certain other trades or businesses. The term qualified business does not

include any trade or business conSisting of the operation of any private or commercial golf
course, country club, massage par/or, hot tub faality, suntan facility, racetrack or other
facility used for gambling. or any store the principal business of which is the sale of
alcoholic beverages for consumption off premises.

- 37(C) Farming. The term qualified business does not include any trade or business
the principal activity of which is farming (within the meaning of section 2032A(e)(5)(A) or
(8)) if, as of the close of the taxable year of the taxpayer conducting such trade or business,
the sum of the aggregate unadjusted bases (or, if greater, the fair market value) of the
assets owned by the taxpayer that are used in such a trade or business, and the aggregate
value of the assets leased by the taxpayer that are used in such a trade or business,
exceeds $500,000. For purposes of this paragraph (d)(5)(iii)(C), two or more trades or
businesses will be treated as a single trade or business under rules similar to the rules of
section 52(a) and (b).
(6) Qualifications--(i) In general. Except as provided in paragraph (d)(6)(ii) of this
section, an entity is treated as a qualified active low-income community business for the
duration of the CDE's investment in the entity if the CDE reasonably expects, at the time
the CDE makes the capital or equity investment in, or loan to, the entity, that the entity will
satisfy the requirements to be a qualified active low-income community business under
paragraph (d)(4lei) of this section throughout the entire period of the investment or loan.
(ii) Control-(A) In general. If a COE controls or obtains control of an entity at any
time during the 7-year credit period (as defined in paragraph (c)(5}(i) of this section), the
entity will be treated as a qualified active low-income community business only if the entity
satisfies the requirements of paragraph (d){4)(i) of this section throughout the entire period
the COE controls the entity.
(8) Definition of control. Control means, with respect to an entity, direct or indirect
ownership (based on value) or control (based on voting or management rights) of more

- 38than 50 percent of the entity. For purposes of the preceding sentence, the term
management rights means the power to influence the management policies or investment
decisions of the entity.
(C) Disregard of control. For purposes of paragraph (d)(6)(ii)(A) of this section, the
acquisition of control of an entity by a CDe is disregarded during the 12-month period
following such acquisition of control (the 12-month period) if(j) The CDE's capital or equity investment in, or loan to, the entity met the

requirements of paragraph (d)(6)(i) of this section when initially made;
(Z) The CDE's acquisition of control of the entity is due to financial difficulties of the

entity that were unforeseen at the time the investment or loan described in paragraph
(d)(6)(ii)(C)(!) of this section was made; and
(~)

If the acquisition of control occurs before the seventh year of the 7-year credit

period (as defined in paragraph (c)(5)(i) of this section). either(i) The entity satisfies the requirements of paragraph (d)(4) of this section by the

end of the 12-month period; or

ill)

The CDE sells or causes to be redeemed the entire amount of the investment or

loan described in paragraph (d)(6)(ii)(C)(!) of this section and. by the end ofthe 12-month
period. reinvests the amount received in respect of the sale or redemption in a qualified
low-income community investment under paragraph (d){ 1) of this section. For this purpose
the amount treated as continuously invested in a qualified low-income community
investment is determined under paragraphs (d)(2)(i) and (ii) of this section.

- 39-

(7) Financial counseling and other services. The term financial counseling and
other services means advice provided by the CDE relating to the organization or operation
of a trade or business.
(8) Special rule for certain loans--(i) In general. For purposes of paragraphs
(d)(1 )(i), (ii), and (iv) of this section, a loan is treated as made by a CDE to the extent the
CDE purchases the loan from the originator (whether or not the originator is a CDE) within
30 days after the date the originator makes the loan if, at the time the loan is made, there is
a legally enforceable written agreement between the originator and the CDE which-(A) Requires the CDE to approve the making of the loan either directly or by
imposing specific written loan underwriting criteria; and
(B) Requires the CDE to purchase the loan within 30 days after the date the loan is
made.

(ii) Example. The application of paragraph (d)(8)(i) ofthis section is illustrated by
the following example:
Example. (i) X is a partnership and a CDE that has received a new markets tax
credit allocation from the Secretary. On October 1, 2004, Y enters into a legally
enforceable written agreement with W. Y and Ware corporations but only Y is a CDE. The
agreement between Y and W provides that Y will purchase loans (or portions thereof) from
W within 30 days after the date the loan is made by W, and that Y will approve the making
of the loans.
(ii) On November 1, 2004, W makes a $825,000 loan to Z pursuant to the
agreement between Yand W. Z is a qualified active low-income community business
under paragraph (d)(4) of this section. On November 15, 2004, Y purchases the loan from
W for $840,000. On December 31,2004, X purchases the loan from Y for $850,000.
(iii) Under paragraph (d)(8)(i) of this section, the loan to Z is treated as made by Y.
Vs loan to Z is a qualified low-income community investment under paragraph (d)(1 )(i) of

- 40this section. Accordingly, under paragraph (d)(1 )(ii)(A) of this section, X's purchase of the
loan from Y is a qualified low-income community investment in the amount of $850,000.
(e) Recapture--( 1) In general. If, at any time during the 7-year period beginning on
the date of the original issue of a qualified equity investment in a CDE, there is a recapture
event under paragraph (e )(2) of this section with respect to such investment. then the tax
imposed by Chapter 1 of the Internal Revenue Code for the taxable year in which the
recapture event occurs is increased by the credit recapture amount under
section 45D(g)(2). A recapture event under paragraph (e)(2) of this section requires
recapture of credits allowed to the taxpayer who purchased the equity investment from the
CDE at its original issue and to all subsequent holders of that investment.
(2) Recapture event. There is a recapture event with respect to an equity
investment in a CDE if-(i) The entity ceases to be a CDE;
(ii) The proceeds of the investment cease to be used in a manner that satisfies the
substantially-all requirement of paragraph (c)(1 )(ii) of this section; or

(iii) The investment is redeemed or otherwise cashed out by the CDE.
(3) Redemption--(i) Equity investment in a C corporation. For purposes of
paragraph (e)(2)(iii) of this section, an equity investment in a CDE that is treated as a
C corporation for Federal tax purposes is redeemed when section 302(a) applies to
amounts received by the equity holder. An equity investment is treated as cashed out when
section 301 (c)(2) or section 301 (c)(3) applies to amounts received by the equity holder.

- 41 -

An equity investment is not treated as cashed out when only section 301 (c)(1) applies to
amounts received by the equity holder.
(ii) Equity investment in an S corporation. For purposes of paragraph (e)(2)(iii) of
this section, an equity investment in a CDE that is an S corporation is redeemed when
section 302(a) applies to amounts received by the equity holder. An equity investment in
an S corporation is treated as cashed out when a distribution to a shareholder described in
section 1368(a) exceeds the accumulated adjustments account determined under

§ 1.1368-2 and any accumulated earnings and profits of the S corporation.
(iii) Capital interest in a partnership. In the case of an equity investment that is a
capital interest in a CDE that is a partnership for Federal tax purposes, a pro rata cash
distribution by the CDE to its partners based on each partner's capital interest in the COE
during the taxable year will not be treated as a redemption for purposes of paragraph
(e )(2)(iii) of this section if the distribution does not exceed the COE's operating income for
the taxable year. In addition, a non-pro rata de minimis cash distribution by a COE to a
partner or partners during the taxable year will not be treated as a redemption. A non-pro
rata de minimis cash distribution may not exceed the lesser of 5 percent of the CDE's
operating income for that taxable year or 10 percent of the partner's capital interest in the
CDE. For purposes of this paragraph (e)(3)(iii), with respect to any taxable year, operating
income is the sum of:
(A) The CDE's taxable income as determined under section 703, except that-(1) The items described in section 703(a)(1) shall be aggregated with the non-

separately stated tax items of the partnership; and

- 42(2) Any gain resulting from the sale of a capital asset under section 1221(a) or
section 1231 property shall not be included in taxable income;
(B) Deductions under section 165, but only to the extent the losses were realized
from qualified low-income community investments under paragraph (d)(1) of this section;
(C) Deductions under sections 167 and 168, including the additional first-year
depreciation under section 168(k);
(D) Start-up expenditures amortized under section 195; and
(E) Organizational expenses amortized under section 709.
(4) Bankruptcy. Bankruptcy of a CDE is not a recapture event.
(5) Waiver of requirement or extension of time--(i) In general. The Commissioner
may waive a requirement or extend a deadline if such waiver or extension does not
materially frustrate the purposes of section 450 and this section.
(ii) Manner for requesting a waiver or extension. A CDE that believes it has good
cause for a waiver or an extension may request relief from the Commissioner in a ruling
request. The request should set forth all the relevant facts and include a detailed
explanation describing the event or events relating to the request for a waiver or an
extension. For further information on the application procedure for a ruling, see Rev. Proc.
2005-1 (2005-1 I.R.B. 1) or its successor revenue procedure (see §601.601 (d)(2) of this
chapter).
(iii) Terms and conditions. The granting of a waiver or an extension to a CDE
under this section may require adjustments of the CDE's requirements under section 450
and this section as may be appropriate.

- 43(6) Cure period. If a qualified equity investment fails the substantially-all
requirement under paragraph (c)(5)(i) of this section, the failure is not a recapture event
under paragraph (e)(2)(ii) of this section if the CDE corrects the failure within 6 months
after the date the CDE becomes aware (or reasonably should have become aware) of the
failure. Only one correction is permitted for each qualified equity investment during the 7year credit period under this paragraph (e)(6).
(7) Example. The application of this paragraph (e) is illustrated by the following
example:
Example. In 2003, A and B acquire separate qualified equity investments in X, a
partnership. X is a CDE that has received a new markets tax credit allocation from the
Secretary. X uses the proceeds of A's qualified equity investment to make a qualified lowincome community investment in Y, and X uses the proceeds of B's qualified equity
investment to make a qualified low-income community investment in Z. Y and Z are not
COEs. X controls both Y and Z within the meaning of paragraph (d)(6)(ii)(B) of this section.
In 2003, Y and Z are qualified active low-income community businesses. In 2007, Y, but
not Z, is a qualified active low-income community business and X does not satisfy the
substantially-all requirement using the safe harbor calculation under paragraph (c)(5)(iii) of
this section. A's equity investment satisfies the substantially-all requirement of paragraph
(c)(1 )(ii) of this section using the direct-tracing calculation of paragraph (c)(5)(ii) of this
section because A's equity investment is traceable to Y. However, B's equity investment
fails the substantially-all requirement using the direct-tracing calculation because B's equity
investment is traceable to Z. Therefore, under paragraph (e)(2)(ii) of this section, there is a
recapture event for B's equity investment (but not A's equity investment).

(f) Basis reduction--(1) In general. A taxpayer's basis in a qualified equity
investment is reduced by the amount of any new markets tax credit determined under
paragraph (b )(1) of this section with respect to the investment. A basis reduction occurs on
each credit allowance date under paragraph (b)(2) of this section. This paragraph (f) does
not apply for purposes of sections 1202, 1400B, and 1400F.

- 44(2) Adjustment in basis of interest in partnership or S corporation. The adjusted
basis of either a partner's interest in a partnership, or stock in an S corporation, must be
appropriately adjusted to take into account adjustments made under paragraph (f)( 1) of this
section in the basis of a qualified equity investment held by the partnership or S
corporation (as the case may be).
(g) Other rules--(1) Anti-abuse. If a principal purpose of a transaction or a series of
transactions is to achieve a result that is inconsistent with the purposes of section 45D and
this section, the Commissioner may treat the transaction or series of transactions as
causing a recapture event under paragraph (e)(2) ofthis section.
(2) Reporting requirements--(i) Notification by CDE to taxpayer-(A) Allowance of
new markets tax credit. A CDE must provide notice to any taxpayer who acquires a
qualified equity investment in the CDE at its original issue that the equity investment is a
qualified equity investment entitling the taxpayer to claim the new markets tax credit. The
notice must be provided by the CDE to the taxpayer no later than 60 days after the date the
taxpayer makes the investment in the CDE. The notice must contain the amount paid to
the CDE for the qualified equity investment at its original issue and the taxpayer
identification number of the CDE.
(8) Recapture event. If, at any time during the 7-year period beginning on the date
of the original issue of a qualified equity investment in a CDE, there is a recapture event
under paragraph (e)(2) of this section with respect to such investment, the CDE must
provide notice to each holder, including all prior holders, of the investment that a recapture

-45event has occurred. The notice must be provided by the CDE no later than 60 days after
the date the CDE becomes aware of the recapture event.
(ii) CDE reporting requirements to Secretary. Each COE must comply wHh such

reporting requirements to the Secretary as the Secretary may prescribe.
(iii) Manner of daiming new markets tax credit A taxpayer may claim the new
markets tax credit for each applicable taxable year by completing Form 8874, "New
Markets Credit," and by filing Form 8874 with the taxpayer's Federal income tax return.
(iv) Reporting recapture tax. If there is a recapture event with respect to a
taxpayer's equity investment in a COE, the taxpayer must include the credit recapture
amount under section 450(g)(2) on the line for recapture taxes on the taxpayer's Federal
income tax return for the taxable year in which the recapture event under paragraph (e)(2)
of this section occurs (or on the line for total tax, if there is no such line for recapture taxes)
and write NMCR (new markets credit recapture) next to the entry space.
(3) Other Federal tax benefits--(i} In general. Except as provided in paragraph
(g)(3)(ii) of this section, the availability of Federal tax benefits does not IimH the availability
of the new markets tax credit. Federal tax benefits that do not limit the availability of the
new markets tax credit include, for example:
(A) The rehabilitation credit under section 47;
(8) All deductions under sections 167 and 168, including the additional first-year
depreciation under section 168(k), and the expense deduction for certain depreciable
property under section 179; and

-46(C) All tax benefits relating to certain designated areas such as empowerment
zones and enterprise communities under sections 1391 through 13970. the District of
Columbia Enterprise Zone under sections 1400 through 1400B, renewal communities
under sections 1400E through 1400J, and the New York Liberty Zone under section 1400L.
(ii) Low-income housing credit. If a CDE makes a capital or equity investment or a

loan with respect to a qualified low-income building under section 42, the investment or
loan is not a qualified low-income community investment under paragraph (d)(1) of this
section to the extent the building's eligible basis under section 42(d) is financed by the
proceeds of the investment or loan.
(4) Bankruptcy of CDE. The bankruptcy of a CDE does not preclude a taxpayer
from continuing to claim the new markets tax credit on the remaining credit allowance
dates under paragraph (b)(2) of this section.
(h) Effective dates--(1) In general. Except as provided in paragraph (h )(2) of this
section. this section applies on or after December 22. 2004, and may be applied by
taxpayers before December 22, 2004. The provisions that apply before
December 22,2004, are contained in §1.45D-1T (see 26 CFR part 1 revised as of
April 1, 2003, and April 1, 2004).
(2) Exception for certain provisions. Paragraph (d)(5)(ii) of this section as it relates
to the definition of the tellTl substantial improvements and the requirement that each lessee
must be a qualified business applies to qualified low-income community investments made
on or after February 22, 2005.
§1.450-1T [Removed]

- 47Par. 3 Section 1.45D-1 T is removed.

-48PART 602-0MS CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is amended by removing the entry for "1.45011" from the table.

Par. 6. In §602.101. paragraph (b) is amended by adding an entry to the table in
numerical order to read as follows:
§602.101 OMS Control numbers.

*****
(b)** *

CFR part or section where
identified and described

CurrentOMB
control No.

*****

1.450-1 ..........................................................................................................1545-1765
*****

Mark E. Mathews,
Deputy Commissioner for Services and Enforcement.
Approved: December 21. 2004.
Eric Solomon,

Acting Deputy Assistant Secretary of the Treasury.

PR£SS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS

December 28. 2004
2004-12-28-12-55-27-17604
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 $87.534 million as of the end of that week. compared to $86.526 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

December 17, 2004

December 24, 2004

86,526

87,534

TOTAL

1. Foreign Currency Reserves '

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

12.131

15.084

27.215

12.359

15.176

27,535

Of which,

issuer headquartered in the U.S.

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

11.910

3.032

14.942

12.130

3.050

15,180

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

bjL Of which. banks located abroad

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

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

2. IMF Reserve Position 2

19.982

20,210

3. Special Drawing Rights (SDRs) 2

13.343

13,566

4. Gold Stock 3

11.043

5. Other Reserve Assets

II. Predetermined Short·Term Drains on Foreign Currency Assets

December 24. 2004

December 17. 2004

Euro

Yen

TOTAL

Euro

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

2.b. Long poSitions

3. Other

Yen

TOTAL

o
o
o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 17, 2004
Euro

Yen

December 24. 2004

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines

a
a

1. Contingent liabilities in foreign currency
1a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities

3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the US.
3.c. With banks and other financial institutions
Headquartered outside the US.

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:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The e

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